India Spectrum

*connectedthinking

Tax and Regulatory Services

Be in the know* July 2009 Vol. 2 Issue 12

EditorialI am delighted once again to present the monthly issue of India Spectrum.

The budget announcements are expected on 6 July 2009 and, as always, the Government is carrying the aspirations of a billion Indians. Since India has voted for stability, we can expect the new Government to lay out a bold but positive path for the country.

I remember the famous words of renowned jurist late Nani Palkhivala – “The cardinal error of our times is to mistake amendment for improvement and change for progress”. With budget after budget we have seen numerous amendments to the Income-tax Act, yet the pace of litigation in India refuses to slow and the grievances of Indian taxpayers refuse to be calmed. I am hopeful that the forthcoming budget will

bring change that supports progress and forward thinking, encourages economic activity and reduces litigation.

Clearly, special times require special approaches. Considering the recessionary environment the world over, there is a strong case for giving support to Indian corporates in the form of fiscal and tax benefits to ensure that they continue to stand tall against the global wind of pessimism and stagnated growth.

Time and again, we have seen various industry sectors and associations voice their wish lists to the Government. Be it the request for an extension of tax holidays for the IT / ITES sector, or the removal of multiple levies for the telecom sector, I am sure we all are keeping our fingers crossed as we wait

to see what the Finance Minister will pull out of the bag.

It is also expected that some clarity will be provided by the Government on Limited Liability Partnership (“LLP”) taxation which should act as a catalyst in hastening the transition of a partnership firm / small company structure to an LLP structure. Increasing the exemption slab for individuals would also be a step welcome to the Indian public.

Let me end my remarks about the budget with another quote from Nani Palkhivala – “More is lost to the State by way of damage to taxpayers’ morale, which is a valuable but fragile national asset, than is gained by arbitrary and whimsical taxation”. Let us hope that this budget gives every taxpayer a reason to cheer.

As always, PwC will be coming out with its much sought after budget booklet which will be sent to all our clients. The readers may also like to reach out to their respective PwC contacts to ensure that they are in possession of the budget booklet which should provide excellent reading and analysis.

We trust you will enjoy this issue of India Spectrum. We would, as always, welcome your suggestions, if any, to improve the newsletter.

Thank you

Dinesh KanabarLeader–TRS Practice

Contents

Corporate Tax 1Case Law 1

Notifications / Circulars 4

Corporate Tax – Financial Services 5Case Law 5

Regulatory Developments 7

Personal Taxes 8Case Law 8

Mergers & Acquisitions 10Case Law 10

Regulatory Developments 10

Transfer Pricing 13Case Law 13

International Developments 13

Indirect Taxes 15Value Added Tax / Sales Tax 16

CENVAT 16

Service Tax 16

Customs / Foreign Trade Policy 17

AAR Authority for Advance Ruling

CENVAT Rules The CENVAT Credit Rules, 2004

CESTATCentral Excise and Service Tax Appellate Tribunal

CIT(A) Commissioner of Income-tax (Appeals)

CSA Cost Sharing Agreement

DTA Domestic Tariff Area

EO Export Obligation

EOU Export Oriented Undertaking

EPCG Export Promotion Capital Goods

ESOs Employee Stock Options

IRS Internal Revenue Service

LO Liaison Office

NBFC Non-banking Financial Company

NBFC-ND-SISystematically Important Non-deposit taking Non-Banking Financial Company

PA Public Announcements

PAN Permanent Account Number

PE Permanent Establishment

PLI Profit Level Indicator

R & D Research and Development

RBI Reserve Bank of India

SE Stock Exchange

SEBI The Securities Exchange Board of India

TDS Tax Deducted at Source

The Act The Income-tax Act, 1961

The TOCThe SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997

TNMM Transactional Net Margin Method

TO Tax Officer

TPO Transfer Pricing Officer

TRU Tax Research Unit

UAE United Arab Emirates

Glossary

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India Spectrum*

Case Law

Assessment Proceedings

In case of additions / disallowance penalty under section 271(1)(c) to be calculated after allowing deduction under 10A / 10B

The assessee was engaged in the development and maintenance of computer software, development and sale and export of software services and provision of technical consultancy services. During the year under consideration, the assessee had three units in operation, eligible for deduction under sections 10A / 10B of the Income-tax Act, 1961 (“the Act”) .

The Tax Officer (“TO”) disallowed certain expenditure which resulted in a higher amount being assessed as the profits of the eligible units which further resulted in higher deduction under sections 10A / 10B. Ultimately, the increase in income consequent

to the disallowance was offset by the increase in deduction under section 10A / 10B. Consequently, the net result was that there was no increase in the returned income. The TO, however, levied a penalty in respect of the aforesaid disallowance which was confirmed by the Commissioner of Income-tax (Appeals) [“CIT(A)”].

Setting aside the order of the CIT(A), who had affirmed the penalty levied by the TO, the Tribunal directedthe TO to consider the claim of the assessee that once deduction under section 10A has been granted to the extent claimed by the assessee, there can be no addition warranting the levy of the penalty under section 271(1)(c) of the Act. Hence, the penalty under section 271(1)(c) of the Act, if at all chargeable with respect to

Corporate Taxadditions / disallowances made, should be computed on the profits remaining after giving effect to the deduction under sections 10A / 10B of the Act.

Argued by PwC Tax Litigation Team

ATOS Origin (India) Pvt. Ltd. v. ACIT [2009-TIOL-352-

ITAT-MUM]

No penalty leviable for non-furnishing of PANs of deductees in the TDS return

The assessee filed its quarterly statement of withholding tax or tax deducted at source (“TDS”) in Form No. 26Q for the period ending the fourth quarter of financial year 2006-07. The TO observed that the assessee had not quoted the Permanent Account Number (“PAN”) of the deductee as required by section 139A(5B) of the Act. Section 139A(5B) inter alia provides that every person deducting tax at source shall quote the PAN of the deductee in its quarterly statements furnished to the tax department. Accordingly, the TO levied a penalty under section 272B of the Act on account of the PAN not having been provided in its quarterly statement for the relevant quarter.

The assessee contended that it had not quoted the PAN due to the fact that they were not available. However, subsequently it had collected the PAN and quoted it in its next

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In case of additions, penalty under section 271(1)(c) to be calculated after allowing deduction under 10A / 10B

2

quarterly return. Furthermore, the assessee contended that it had no statutory right or power to compel the deductee to furnish its PAN.

The Tribunal held that the assessee should have been provided with an opportunity to make good the deficiency and no penalty under section 272B of the Act should have been levied for non-furnishing the PAN in the quarterly return since there was no mechanism available to the assessee to compel the deductee to give its PAN. In this regard, it placed reliance upon the Ahmedabad Tribunal judgment in the case of Financial Co-operative Bank Ltd. v. ITO [2007] 308 ITR 236 (Ahm)(AT) where it was held that the Income-tax Rules, 1962 and the provisions of the Act did not cast an obligation on the manager of the bank to ensure that Form No. 60, filed by the customer, was duly filled-in. This was held on the grounds that since the incomplete filling-in of information was done on the part of the customer and not the bank, responsibility for the failure to comply with the provisions of section 139A, as envisaged in section 272B(1) of the Act, was on the customer and not on the bank. M/s. D V Stell Corpn and Smt. Aruna Gowri A Shah v.

ITO [2009-TIOL-370-ITAT-BANG]

Business Expenditure

Actual liability existing at the time of preparing books of account allowable as expenditure

The assessee had claimed a deduction for the provision of a gratuity in the return of income filed. The TO observed that the approved gratuity liability as on 31 March 1981 and 31 March 1980 was Rs. 55.35 million and Rs. 51.97 million respectively. Hence, the amount

payable as contribution to the fund was only Rs. 3.38 million. Accordingly the TO disallowed the excess deduction claim of Rs. 4.48 million.

The Tribunal held that expenditure towards a liability actually existing at the time is deductible for income-tax purposes, but money set apart because it might become expenditure on the happening of a later event is not expenditure. In this regard, the Tribunal relied on the Supreme Court’s judgment in the case of Shree Sajjan Mills Ltd. v. CIT [2001] 156 ITR 585 (SC) where it was held that contingent liability does not constitute expenditure and cannot be the subject of deduction even under the mercantile system of accounting. Rajalakshmi Mills Ltd. v. ITO [2009-TIOL-317-ITAT-

MAD-SB]

Deemed Dividend

Provisions of ‘deemed dividend’ cannot be invoked in case of a non-shareholder

The assessee company had received advances from its group company. The TO made additions of the advances to total income of the assessee treating it as ‘deemed dividend’ in terms of section 2(22)(e) of the Act. The addition was made on the ground that the shareholder-director of the assessee company was also one of the directors holding substantial shares in four other group companies. The TO also observed that there was frequent borrowing and lending of funds between the group companies. The TO rejected the claim

of the assessee that the advances were made for the purposes of business and were hence not covered by the provisions of section 2(22)(e) of the Act.

The assessee contended that though one of its directors was also a director-shareholder in other group companies, at the same time none of the companies were the shareholder of the assessee company. It was also contended that dividend income can be received only by a shareholder, and as the assessee was not a shareholder of other group companies, the advance could not be treated as deemed dividend. In this regard, reliance was placed on the Mumbai Tribunal Special Bench’s decision in the case of ACIT v. Bhaumik Colour Pvt. Ltd. [2009] 27 SOT 270 (Mum)(SB) and the Rajasthan High Court judgment in the case of CIT v. Hotel Hilltop [ 2008 ] 217 CTR 527 (Raj).

The Tribunal held that since the assessee was not holding shares in the other group companies, the provisions of section 2(22)(e) could not be invoked. Accordingly, the TO was directed to delete the addition made on account of deemed divided. Interventional Technologies (P.) Ltd. v. ACIT [ITA No.

6182 / Mum / 2008, Order dated 27 February 2009]

Disallowance of Expenditure

Reimbursement of salary for the services of seconded personnel is in the nature of salary and not fees for technical services

‘Deemed dividend’ provisions cannot be invoked in case of a non-shareholder

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Corporate Tax

The assessee, a UK based company, had entered into a contract with ONGC for drilling operations in the offshore waters of India. In order to complete the contract the assessee had also entered into a contract with Alfa Crew A.S. (“ACAS”), a Norway based entity, for procuring, drilling and marine crew for the operation of a rig. The crew members were the employees of the assessee and the assessee discharged its obligation by way of reimbursement of the payment of all crew members’ salaries / expenses. Even the appointment letters were issued by the assessee and the assessee was responsible for providing work permits to them.

The TO disallowed the payment made towards reimbursement of the salary of the crew, fixed fees and handling charges to ACAS for the supply of crew members under section 40(a)(i) of the Act, on the grounds that the assessee did not withhold tax under section 195 of the Act.

The assessee contended that salary paid to the crew through ACAS was reimbursement of salary payable to the crew employees. Furthermore, the reimbursement so made was not income of ACAS. Hence, tax was required to be withheld under section 192 and not under section 195 of the Act. ACAS had seconded personnel to the assessee and the assessee had issued appointment letters to the seconded personnel. Hence, there was an employer-employee relationship between the assessee and the crew members. The stay of some of the crew members was not more than 89 days, and hence, they were not liable to tax in India in view of the provisions of section 10(6)(viii) of the Act. The assessee had deducted the tax at source after taking into account the income

of the crew under section 10(6)(viii) of the Act and deposited the same, wherever applicable, in the Government account.

The Tribunal held that the payments by way of the reimbursement of salary or expenses of crew members employed by the assessee could not be treated as “fees for technical services” but were remittances of salaries chargeable to tax under the head “salaries”, in respect of which tax was deductible at source under section 192 of the Act and not under section 195 of the Act. Since the tax found to be payable in India, on ‘salaries’ paid to crew members, was already withheld under section 192 of the Act, and the assessee was not liable to withhold tax under section 195 of the Act, no disallowance was to be made under sections 40(a)(iii) and 40(a)(i) of the Act.Dolphin Drilling Ltd. v. ACIT [2009] 29 SOT 612 (Del)

Permanent Establishment

Liaison office held not to be a permanent establishment

The applicant had set-up a Liaison Office (“LO”) in India with Reserve Bank of India (“RBI”) permission. The LO undertook to support and do auxiliary work for its head office. It had entered into a separate agreement with an Indian telecommunication company and a Korea-based telecommunication company to provide certain services to each other. Under the agreement, the applicant was to bear the investment costs of connecting facilities in its network. The applicant sought an advance ruling on whether the LO would constitute a permanent establishment (“PE”) in India.

The Authority for Advance Ruling (“AAR”) held that the LO had not performed any ‘core business activity’ and had confined itself to preparatory and auxiliary activities only. Under the Tax Treaty between India and Korea, the LO is allowed only to undertake activities supporting, aiding or auxiliary to the main function of its head office. Furthermore, the RBI had granted an extension to its LO status on the basis of activities undertaken by it and these activities were only auxiliary in nature. Hence the LO cannot be regarded as having a PE in India under the exclusionary provisions of Article 5(4) of the Tax Treaty.

The AAR also held that if the activities of the LO were enlarged beyond the parameters fixed by the RBI, or if the TO had any concrete material which substantially impacted on the veracity of the applicant’s version of facts, it would be open to the department to take the appropriate steps under the law.K.T. Corporation, In re [2009-TIOL-12-ARA-IT]

Special Tax Rates

Interest in connection with debt owed by the Indian party in foreign currency taxable at 20 per cent

The assessee had agreed to provide certain technical services which also involved the transfer of technology to assist an Indian company in the construction / development and operation of a fabrication yard used for the fabrication of offshore platform structures. The assessee was to receive the amount in foreign currency. Certain disputes arose between the appellant and the party. The appellant discharged its obligation under the agreement, but the party declined to make any payment. The matter went to litigation

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and was eventually referred to the International Court of Arbitration. The arbitrators awarded a certain sum to be taxable to the assessee along with interest. The assessee offered to tax the interest (as awarded by the arbitration) received as debt owed under section 115A(1)(a)(ii) at the rate of 20 per cent. The TO taxed the entire amount, including the interest, at the rate of 30 per cent.

The Tribunal held that the sum awarded was on account of interest as determined by the arbitration in connection with debt owned by an Indian party in foreign currency. Hence, such interest income was to be taxed in terms of the provisions of section 115A(1) at the rate of 20 per cent.DCIT v. Mcdermott International Inc. [2009-TIOL-336-

ITAT-DEL]

Withholding Tax

Withholding tax not applicable under section 195 for software purchased bundled with hardware

The assessee was an information technology company. It had purchased software bundled with hardware (a laptop) from a non-resident. The TO was of the view that payment towards the purchase of such software constituted a royalty under the provisions of section 9(1)(vi) of the Act and that tax should have been withheld by the assessee under the provisions of section 195 of the Act. Since the assessee had not withheld tax, the TO held that the assessee was an ‘assessee-in-default’ in terms of the

provisions of sections 201(1) and 201(1A) of the Act.

The Tribunal held that the purchase of readymade, shrink wrapped or off the shelf, packaged software would tantamount to purchase and would not constitute a royalty as defined by Explanation 2 to section 9(1)(vi) of the Act read with Article 12 of Tax Treaty between India and USA. Since the payment did not fall under the purview of section 195 of the Act, the assessee could not be deemed to be an assessee-in-default in terms of the provisions of section 201(1) of the Act.ITO v. Lenovo (India) Pvt. Ltd. [2009-TIOL-340-ITAT-

BANG]

Notifications / Circulars

Deemed pronouncement of the order

The Appellate Tribunal has amended Rule 34(4) of the Income-tax (Appellate Tribunal) Rules, 1963. It is provided in the amended rule that where the Bench is not functioning, or for any other good reason the pronouncement of order(s) in the Court is not possible, a list of orders duly signed by the Bench Members showing the results of the appeals should be put on the notice board of the Bench and deemed as pronouncement of the orders.Notification - F. No. 71-AD (AT) 2009 dated 1 June 2009

Recognition granted to MCX Stock Exchange Ltd.

The Central Government has announced that MCX Stock Exchange Ltd. is a recognised stock exchange with effect from the date of publication of the notification in the official gazette, by exercising the powers conferred by clause (ii) in the Explanation to clause (d) of the proviso to section 43(5) of the Act.

The derivative transactions of commodities traded through MCX Stock Exchange after the date of this notification shall thus be treated as normal business transactions and not speculative transactions. Notification No. 46 / 2009 dated 22 May 2009

Interest on debt owed by Indian party in foreign currency taxable at 20 per cent

Withholding tax not applicable under section 195 for software purchased bundled with hardware

5

India Spectrum*

Case Law

Penalty under section 271(1)(c) in context of a NBFC

The assessee is registered as an non-banking financial company (“NBFC”) and is engaged in the business of financing vehicles and equipments. The assessee claimed depreciation on leased motor cars at 25% instead of the eligible rate of 20% on the basis of judicial precedents and made appropriate disclosures for it. Furthermore, it claimed provision for doubtful debts as a deduction and made adequate disclosures.

The tax authorities reversed the claim and levied a penalty under section 271(1)(c) on both grounds.

The Tribunal held that there had been no deliberate act of concealment or of furnishing inaccurate particulars of income and hence the penalty under section 271(1)(c) could not be levied.

DCIT v. Ford Credit Kotak Mahindra Ltd. [2009-TIOL-

319-ITAT-MUM]

Taxability of broken period interest

The assessee credited the interest receivable on its investments, accrued up to 31 March, though a portion of the interest was not due for payment during the year of account. However, it was not offered to tax. The TO sought to tax the broken period interest by holding that the assessee had followed the mercantile system of accounting.

The Tribunal held relying on various judicial precedents that the broken period interest had not accrued to the assessee during the year. Furthermore, the assessee had offered interest pertaining to the preceding year which had fallen due in the current previous year. Hence, it was held that the assessee had complied with the provisions of section 145 of the Act and had

Corporate Tax – Financial Servicesconsistently followed the method of accounting. ACIT v. M/s State Bank of Mysore [2009-TIOL-339-

ITAT-BANG]

Taxability under the Interest-tax Act, 1974, of interest earned in a finance lease transaction

The assessee earned income from lease transactions. The TO opined that the lease transactions were pure financing arrangements and hence sought to tax the interest element under the Interest-tax Act, 1974.

The assessee argued that it was not covered by the definition of the term “finance company” under the Interest-tax Act, 1974, and also that the income it received was not covered by the definition of “interest”.

The Tribunal held that the substance of the transaction had to be considered and not the nomenclature given to it. Such transactions were in the nature of finance / loan transactions and hence, the interest element in the income from them would be taxable under the Interest-tax Act,1974.Maruti Countrywide Auto Financial Services Ltd. v. ITO

[2009] 29 SOT 151 (Del)

Derivatives transactions prior to 1 April 2006

The assessee had incurred a loss on dealing in futures and options (derivatives). The TO concluded that the loss claimed was speculative in nature and not allowable as a set-off against other business income.

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6

The terms ‘accrued’ and ‘due’ are synonymous for the purpose of accounting interest income

Liaison Office engaged in dispatch of money transfer instruments from UAE to India not a PE

The Tribunal held that dealing in derivatives was not speculative and the newly inserted proviso under section 43(5)(d) was clarificatory in nature, and therefore, it had retrospective operation. P. S. Kapur v. ACIT [2009] 29 SOT 587 (Jaipur)

Income from letting out property is in the nature of business income

The assessee was in the business of buying property or taking properties on lease, furnishing them and then letting them out. The assessee earned income from letting out properties as well as from properties let out to him.

The TO held that since the assessee was not the owner of the property leased to him, the income on sub-letting such property would be taxable as “income from other sources”. The CIT(A) and the Tribunal were not in agreement with the TO’s contentions and concluded in favour of the assessee. As a result, the revenue appealed before the High Court.

The High Court held that income from letting out property would be taxable as business income since the primary objective of the assessee was to purchase, develop, take in exchange or on lease or otherwise, land, houses etc. and to let / lease the same to any person. Also, in the assessee’s own case, in preceding years’ assessments, such receipts were accepted as business income. CIT v. D S Promoters & Developers Pvt. Ltd.

[2009-TIOL-222-HC-DEL-IT]

The terms ‘accrued’ and ‘due’ are synonymous for the purpose of accounting income

The assessee bank earns interest income from securities. The TO observed that the assessee had offered its income to tax on a due basis and not on an accrual basis and was of the view that the words accrue and due had two distinct meanings. The TO accordingly made an addition on account of interest accrued but not due during the relevant year.

The CIT(A) did not agree with the TO’s contention and concluded that offering interest income from securities on a ‘due’ basis was the same as offering it on an ‘accrual’ basis, and that this amounted to following the mercantile system of accounting. The CIT(A) held that the words ‘accrue’ and ‘due’ were synonymous in this case.

The Tribunal upheld the CIT(A)’s order and held that that the words ‘accrue’ and ‘due’ represented one and same event in terms of time scale i.e. they both referred to the point in time when the assessee acquired the right to receive interest income. In this regard, it placed reliance upon the Supreme Court’s judgment in the case of E.

D. Sassoon & Company Ltd. v. CIT [1954] 26 ITR 27 (SC). ACIT v. Tamilnad Mercentile Bank Ltd. [2009-TIOL-

332-ITAT-MUM]

LO engaged in dispatch of money transfer instruments from UAE to India not a PE

The assessee, a limited liability company based in the United Arab Emirates (“UAE”), offered remittance services to various non-resident Indians for transferring money from the UAE to individuals in India. The remittance was made electronically by way of telegraphic transfer through banking channels or on the request of the remitter by way of the dispatch of instruments / cheques though the Indian liaison office of the UAE entity to the designated beneficiaries. The contracts for providing remittance services were executed in the UAE.

On the issue of the taxability of the UAE entity in India, the AAR held that as regards the activity of using physical instruments for the transfer of funds, the liaison office played an enhanced role in downloading online data regarding the amount to be remitted along with the relevant names and addresses, and printing the cheques / drafts and dispatching them to the designated beneficiaries. It observed that this effectively formed part of the core activity carried out by the UAE entity, and accordingly, ruled that the UAE entity had a fixed place PE in India.

On a writ petition filed by the UAE

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India Spectrum*

entity, the Delhi High Court held that the role played by the liaison office was purely an aid to support the main activity carried out by the UAE entity. The activities did not contribute directly or indirectly to the earning of profits or gains by the UAE entity as every aspect of the transaction was concluded in the UAE. The High Court accordingly concluded that the UAE entity did not have a PE in India.U.A.E Exchange Centre Ltd. v. UOI [2009] 313 ITR 94 (Del)

Regulatory Developments

Investment by Mutual Funds in Indian Depository Receipts

The Securities Exchange Board of India (“SEBI”) has clarified that mutual funds are permitted to invest in Indian Depositary Receipts as defined in the Companies (Issue of Indian Depositary Receipts) Rules, 2004 subject to compliance with SEBI (Mutual Funds) Regulations, 1996 and the guidelines issued in relation to it, specifically the investment restrictions specified in the Seventh Schedule of the Regulations.SEBI / IMD / CIR No. 1 / 165935 / 2009 dated 9 June 2009

Allocation methodology for applying debt investment limits to Foreign Institutional Investors

SEBI has clarified that the unutilised investment limits for Government debt shall be allocated in a similar manner specified in SEBI circular no. IMD / FLL & C / 37 / 2009 dated 6 February 2009. In partial amendment to the above circular, no single entity shall be allocated more than Rs. ten

thousand million, i.e, the Government debt investment limit.SEBI / IMD / FII & C / 2009 / dated 12 May 2009

Monthly returns by NBFCs-ND-SI

All NBFCs with an asset size of Rs. one thousand million and above and not accepting / holding public deposits are required to submit monthly returns and statements of certain financial parameters, capital adequacy and credit concentration and to adhere to disclosure norms. It has been clarified that once a Systematically Important Non-deposit taking Non-Banking Financial Company (“NBFC-ND-SI”) reaches an asset size of Rs. one thousand million, it also comes under these reporting requirement.

If the asset size of an NBFC falls below Rs. one thousand million in a given month which may be due to temporary fluctuations and not actual downsizing, such a company may continue to submit monthly returns till the submission of its next audited balance sheet to the RBI.RBI / 2008-09 / 491 dated 4 June 2009

Mutual funds permitted to invest in Indian Depositary Receipts

Corporate Tax – Financial Services

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Case Law

Salary / Perquisite

Expenditure disallowed in the hands of an employer company not taxable as perquisite in the hands of the employee

The assessee was a director of a company. The TO while framing its assessment of the company, disallowed expenses incurred by the company on account of foreign travel of the assessee on the grounds that the company could not demonstrate that the expenses were incurred for business purposes. The TO observed that the assessee was paid salary as an employee of the company, and hence, the provisions of section 17(2)(iv) of the Act should have applied. It was further contended by the TO that the onus was on the assessee to prove that the foreign travel was for the purpose of business and was not personal in nature. The assessee contended that since the expenditure had already been disallowed in

the hands of the company as non-business expenditure, it could not be added as a perquisite in the hands of the director as this would amount to taxing it twice. On first appeal, the CIT(A) confirmed the order of the TO.

On further appeal, the Tribunal held that it is the settled proposition of law that an amount could be taxed only once and not twice. Since the amount had already been taxed in the hands of the company by disallowing it as allowable expenditure, it could not be added in the hands of the director as a benefit or perquisite attracting the provisions of section 2(24)(iv) or 17(2)(iv) or 28(iv) of the Act. The Tribunal set aside the order of the CIT(A) and allowed the assessee’s appeal.Mrs. Bakhtawar B Dubash v. DCIT [2009-TIOL-288-

ITAT-MUM]

Overseas maintenance allowance reimbursed to employees is not salary

The assessee’s employees were assigned to render services abroad and were paid overseas maintenance allowance on a fixed per day basis. The Tribunal, on an appeal by the department, accepted the assessee’s contentions that a number of eateries, hotels and vendors abroad used cash registers. Instead of insisting on detailed bills and verification of expenditure incurred by its employees, out of commercial expediency and business interest, the assessee decided to pay the overseas maintenance allowance to cover daily expenses. Though it could not produce individual confirmations or declarations, it was held that these amounts, being towards the reimbursement of expenses on a fixed per day basis did not form part of the salaries in the hands of the recipients, and therefore, the question of the application of section 40(a)(iii) of the Act did not arise. It was further held that even otherwise, such payments being the reimbursement of expenses would squarely fall under clause (b) of Rule 2BB(1) of the Income-tax Rules, 1962, and therefore, the assessee was not under any obligation to deduct tax at source.ITO v. Information Architects [2009] 123 TTJ 35 (Mum)

Personal Taxes

Expenditure disallowed in the hands of employer company not taxable as perquisite in the hands of employee

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India Spectrum*

Capital Gains

Exemption allowed under section 54F in the case of cancellation of agreement and purchase of new asset

The assessee HUF sold shares on different dates and earned capital gains in January 1996. The assessee entered into an agreement with a builder for the purchase of a row house in August 1996. The assessee later cancelled the agreement with the builder due to a demolition drive and received the whole amount back from the builder. Subsequently, it entered into an agreement with a company, which was engaged in the construction of a building, in March 1998. It purchased a ‘block of shares’ in the company and became entitled to a flat.

The TO considered the investment in the row house as an investment in the purchase of a new asset under section 54F of the Act in order to claim exemption and held that the cancellation of the purchase within the lock-in period of three years amounted to a violation of section 54F(3) of the Act.

On first appeal, the CIT(A) held that the assessee had purchased the shares in the company building the flats after two years and thus the exemption was not available, as it was only available in cases of the purchase of a new asset within a period of two years, or the construction of an asset within a period of three years. Furthermore, the CIT(A) held that assessee had not utilised the capital gains for the purchase or construction of a new asset before filing the return under section 139 of the Act.

On further appeal to the Tribunal, it was held that the assessee was eligible for exemption under section 54F of the Act as the building was under construction, and thus, the time limit of three years was applicable. It was further held that the cancellation of the agreement to purchase the row house fell within the ambit of caveat emptor (buyer beware) and was thus legally justified. Hence, the lock-in period under section 54F(3) did not apply to the present case. Furthermore, as the assessee had already parted with the capital gains before the filing of the return as it had invested in the row house, the restriction under section 54F(4) of the Act was not applicable. Mukesh G. Desai (HUF) v. ITO [2009] 312 ITR 302

(Mum)

Personal Taxes

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Case Law

Assessment of income on the amalgamating company post-merger is null and void

The assessee company was engaged in the business of software services. By virtue of a Scheme of Amalgamation, the assessee (i.e. the amalgamating company) was merged with another company and the appointed date of the merger was 1 April 2004. For assessment year 2003-04, the assessee furnished its return of income on 28 November 2003 returning a loss. However, while computing book profit for the purpose of minimum alternate tax under section 115JB of the Act there was a positive figure of profit. The assessee had notified the TO about the amalgamation.

The return was processed under section 143(1) of the Act, and subsequently subjected to scrutiny assessment which resulting into an

enhanced assessed total income above the amount of income returned by the assessee. The assessment was made on the assessee by the TO who held jurisdiction over the company before amalgamation.

The assessee contended that the assessee had amalgamated with effect from 1 April 2004 and as such it was dissolved without winding-up in terms of the Scheme of Amalgamation. The assessment had therefore been made on a company which no longer existed. The TO was well aware of the amalgamation having been notified of it by the assessee. Hence, the TO, who passed the impugned order, did not have jurisdiction over the amalgamated company. Accordingly,

Mergers & Acquisitionsthe assessment was to be treated as null and void.

The Tribunal held that assessment of an amalgamating company’s income could not be made on the amalgamating company after the merger as it was no longer in existence after the appointed date of the Scheme of Amalgamation, since a company which was no longer in existence could not be treated as an assessee by any stretch of the imagination. Accordingly, such an assessment would be null and void and without jurisdiction. Argued by PwC Tax Litigation Team

Intel Technology India Pvt. Ltd. v. ACIT [2009-TIOL-

342-ITAT-BANG]

Regulatory Developments

Delisting Regulations for equity shares

The SEBI has promulgated the SEBI (Delisting of Equity Shares) Regulations, 2009 (“the Regulations”) with effect from 10 June 2009, governing the delisting procedure for equity shares.

I Highlights of voluntary delisting (in the case of exit opportunity)

• Holdersofequitysharesinphysical form can participate in the bidding process.

Assessment of income on amalgamating company post-merger is null and void

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India Spectrum*

• Adelistingresolutioncanbemade through postal ballot only. Previously, it was to be obtained in a shareholders’ meeting.

• Adelistingresolutioncanbeactedupon only if public shareholders’ votes in favour are at least twice the number of the votes cast against it by them.

• Priorin-principleapprovalofa stock exchange (“SE”) is additionally provided. The SE is required to dispose of the application within 30 working days.

• Floorpricedeterminationhasbeen brought into line with Regulation 20 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (“the TOC”) except that :

i. Provisions similar to Regulation 20(4) of the TOC apply in cases where equity shares are frequently traded on all exchanges.

ii. Provisions similar to Regulation 20(5) of the TOC apply in cases where equity shares are infrequently traded on all exchanges.

iii. However, in cases where the equity shares are frequently traded on some SEs and infrequently traded on others, the higher of the result of i. or ii. is to be considered.

• PublicAnnouncements(“PA”)canbe made only after receipt of in-principle approval from the SE .

• Asregardsescrowaccounts,the Guidelines allowed Escrow creation either with cash deposit or through Bank Guarantee or

by depositing securities. The Regulations do not allow the deposit of securities.

• ALetterofOffermustbesenttothe public shareholders within 45 days of the PA and should reach them five days before the opening of bidding.

• Forthesuccessoftheoffer,a number of shares must be acquired such that post-offer, the promoter’s shareholding reaches the higher of:

i. 90 per cent; or ii. the aggregate percentage of

pre-offer promoter shareholding plus 50 per cent of the offer

size.

• Withineight days of the closure of the offer, the promoters must make a PA disclosing the success / failure of the offer and whether the promoter accepts / rejects the offer.

• FinalapplicationtotheSEmustbe made within one year from the date of special resolution.

• Theperiodfortenderingequityshares post-closure of offer has been increased from six months to “at least one year from the date of delisting”.

II Special Provisions for the Delisting of Small Companies

A “small company” is defined as a company having a paid-up capital of up to ten million rupees the equity shares of which are not traded on any recognised stock exchange during the year immediately preceding the date of decision. It can also be a company having three hundred

or less public shareholders and in which the aggregate paid-up value of the shares held by such shareholders is not more than ten million rupees.

Special provisions include the following:

• Exitpriceisdecidedinconsultation with a merchant banker;

• Atleast90%ofthepublicshareholders give their positive consent either to sell their shares, or to remain as shareholders, even if the company is delisted.

The major differences in these Regulations compared to voluntary delisting procedures for other companies are as follows:

• Book-buildingprocessandescrow procedures are not required;

• Thedecisionofpublicshareholders not to sell their holdings is not a hurdle for delisting.

III Other provisions

• “Publicshareholding”hasbeendefined under clause 40A of the listing agreement to exclude shares held by custodians against which depository receipts have been issued.

• Thedelistingofequitysharespursuant to a preferential allotment is not allowed.

• Thedelistingofconvertiblesecurities is not allowed.

Mergers & Acquisitions

12

• Thebenefitofacquiringsharesatrightsissuepriceandgettingthesharesdelisted is no longer available.

• Holdersofdepositoryreceiptsissuedoverseasagainstequitysharesheldby a custodian are not allowed to participate in the delisting offer.

• Whereacompanyhasbeencompulsorilydelisted,thecompany,itswhole-time directors, its promoters, and the companies which are promoted by any of them, may not directly or indirectly access the securities market, or seek listing, for any equity shares for a period of ten years from the date of such delisting.

IV Material changes as compared to SEBI (Delisting of Securities) Guidelines, 2003

S. No.

Subject matter

SEBI (Delisting of Securities) Guidelines,

2003

SEBI (Delisting of Equity Shares) Regulations,

2009

Remarks

1 Applicability Applicable to the delisting of “securities” as defined by the Securities Contracts (Regulation) Act, 1956.

Applicable to:

• Delisting of equity shares only

• All public announcements on or after 10 June 2009.

The Regulations do not expressly supercede the Guidelines. Therefore, it seems that the delisting of securities other than equity shares, will continue to be governed by the Guidelines.

2 Application to SE

• Promoters as well as non-promoters can seek delisting

• Promoters / non-promoters must apply to SE.

• Only promoters can seek delisting

• Only companies can apply to the SE.

3 Re-listing of delisted securities / shares

Allowed after two years from the delisting of the securities.

Allowed after

• Five years from delisting in the case of voluntary delisting, and

• ten years from delisting in the case of compulsory delisting.

No such time bar for exists for the re-listing of small companies and re-listings made under the Sick Industrial Companies (Special Provisions) Act, 1985.

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India Spectrum*

Recently, a ruling of the Delhi Tribunal has highlighted the principle of comparability analysis and allowed a depreciation adjustment to be made to render the transactions / entities comparable to each other. This case (Schefenacker Motherson Limited) was represented by PricewaterhouseCoopers and the Tribunal upheld the use of cash profit as a Profit Level Indicator (“PLI”) for defending the use of the Transactional Net Margin Method (“TNMM”) in certain circumstances, with a view to adjusting for material differences in asset profile.

In the meantime, in the US, the Appeals Court has overruled a judgment of the Tax Court, holding that the specific structure of the Cost Sharing Regulations create an exception to the more general arm’s length standard.

Case Law Tribunal ruling on use of cash profit / sales or cash profit / cost as an appropriate PLI

The Tribunal pronounced a ruling in

support of the use of cash profit / sales or cash profit / cost (cash profit means operating profit without depreciation being charged to the results of either the tested party or the comparables) as a PLI for defending the use of the TNMM in certain circumstances.

Schefenacker Motherson Limited (“SML”) was a joint venture company engaged in the manufacture of rear view mirrors and the cable assembly of rear view mirrors for automobile manufacturing companies. The rear view mirrors were supplied to automobile manufacturing companies in India and the cable assemblies were exported outside India to group entities.

SML applied the TNMM to substantiate the arm’s length nature of its pricing and used cash profit / sales as a PLI in order to remove the effect of differences in capacity utilisation, technology used, age of assets used in production and depreciation policies between SML and comparable companies. The Transfer Pricing Officer (“TPO”)

Transfer Pricingrejected the use of cash profit / sales as a PLI and the CIT(A) upheld the order of the TPO.

The Tribunal allowed the exclusion of depreciation while computing operating margin and the use of cash profit as the PLI. It also held that the elements that constituted operating income were to be decided on a case by case basis depending on the facts, circumstances and nature of business involved since there were vast differences in machinery used and in investment in machinery between SML and the comparable companies.Argued by PwC Tax Litigation Team

Schefenacker Motherson Limited v. ITO [2009-TIOL-

376-ITAT-DEL]

International Developments

United States: Xilinx: Ninth Circuit overturns Tax Court’s rejection of arm’s length standard to require cost sharing of stock compensations

Xilinx Inc., a U.S. corporation and Xilinx Ireland entered into a cost sharing agreement (“CSA”) to jointly develop and own technology. Under the terms of the CSA, each party was required to pay a percentage of the research and development (“R & D”) costs in proportion to its anticipated benefits. The parties did not include Employee Stock Options (“ESOs”) in their definition of R&D. The US Internal Revenue Service (“IRS”) contended that the value of the ESOs was included in the definition of R&D costs and therefore should have been shared by the parties.

Xilinx petitioned the Tax Court which held that the IRS’s allocation was contrary to the arm’s length standard

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because evidence presented at the trial demonstrated that uncontrolled parties would not agree to share the costs of ESOs.

The IRS appealed against the Tax Court’s ruling to the Ninth Circuit of the Court of Appeals. This reversed the Tax court’s ruling. It held that the company should have included the value of stock option compensation in the pool of costs of a CSA between related companies in developing intangible property despite the finding that such conflicted with the arm’s length standard as these costs were not shared in arm’s length arrangements.

The Court gave two primary reasons for its interpretation of the regulatory requirements. First, it found that the structure of the Regulations supported its conclusion that the Cost Sharing Regulations were a self-contained provision creating an exception to the general arm’s length methodology which governed what costs must be shared [uninformed by] similar agreements made between unrelated parties. Second, the Court reasoned that the more specific cost sharing provisions (providing for the inclusion of all costs related to a CSA) trumped the general arm’s length standard.

United States - President Obama’s proposal to limit shifting of income through intangible property transfers

The Obama administration’s recent budget includes proposals to directly change transfer pricing rules. These proposals apparently seek to eliminate the definitional confusion by broadening the definition of intangible property to specifically include goodwill, going concern value, and assembled workforce as these have given rise to significant high-stakes controversies.

The proposal would also modify the principles used for valuing transferred intangible property permitting the aggregate valuation of transferred intangibles. This change would undoubtedly lead to greater IRS reliance on discounted cash flow valuation models that have the effect of treating all residual value in a business as intangible property to be compensated without the need to associate values with specific assets. At times, the IRS interprets these methods in a manner that reduces the licensee / transferee to the earnings status of a provider of routine contract manufacturing or marketing services. The income method which has controversially been made the cornerstone of intangible property valuation in the cost sharing context might take on even greater importance deviating significantly from the concept of fair market value generally used in valuation contexts.

The proposal also suggests that intangibles would have to be valued according to their highest and best use. While rather vague, this change seems directed at requiring, as do the cost sharing regulations, that taxpayers take into account their reasonably available business opportunities in valuing intellectual property. The proposal may be an attempt to legislate on the IRS desire to disregard observable arm’s length transactions in favour of the results of theoretical models. This could lead to greater controversy with other countries if the IRS prescribes an extreme point in the range of arm’s-length values by stipulating the highest and best use criteria. In fact, depending on its interpretation, the highest and best use standard may well produce a value higher than any observed in the competitive market place owing to the presence of consumer surplus in all market transactions at present.

UK – Tax verdict focuses on appropriate outcome

The UK Special commissioners verdict in the case of DSG Retail Ltd. and others v HMRC shows that taxpayers need a good reason to base a transaction in a low-tax jurisdiction. The case relates to the transfer pricing arrangements between the UK’s biggest electrical retailer (Dixons) and the group’s captive insurer on the Isle of Man (DISL) which, ultimately, bore most or all of the risk on extended warranties and service contracts purchased by customers.

It was observed in the verdict that evidence offered by DSG as to independent contracts being Comparable Uncontrolled Prices was rejected on the basis that the products under warranty were different.

DSG also considered a transactional net margin (or comparable profit) approach using the return on capital of an insurer that specialised in extended warranties or service contracts of this sort. The Special Commissioners agreed that return on capital was an appropriate measure (particularly relevant for the insurance business) but rejected the independent contracts as a comparable, noting a number of differences between them and those of DISL.

The implication of this case is that the Commissioners will apply a high threshold of comparability if the intention is to rely on the Comparable Uncontrolled Price or independent company margins that appeared to give an advantageous result where there was no supporting methodology to explain the similarity of the returns in the other company involved.Courtesy of PricewaterhouseCoopers Pricing

Knowledge Network (PKN)

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India Spectrum*

Case Law

Refund of unutilised CENVAT credit for service tax paid on input services available if used for export of taxable output services

Caliber Point Business Solutions Pvt. Ltd. (“Caliber”) is engaged in providing back office processing services that qualify as export under the service tax legislation. Rule 5 of the CENVAT Credit Rules, 2004 (“the CENVAT Rules”) was amended on 14 March 2006 to allow an exporter of services to claim refunds of unutilised CENVAT credit for service tax paid for the use of inputs / input services. Accordingly, Caliber filed refund claims for unutilised CENVAT credit for the period July 2005 to March 2006. However, the lower authorities passed an order denying the refund claim because as the amendment was made with effect from 14 March 2006, refund claims for service tax paid on inputs / input services should only be allowed for periods subsequent

to 14 March 2006. The contention put forth by the lower authorities was confirmed by the Commissioner (Appeals) and hence Caliber filed an appeal before the Central Excise and Service Tax Appellate Tribunal (“CESTAT”), Mumbai against the order passed by Commissioner (Appeals).

The assessee contended that the refund claims were filed after the date of amendment made to Rule 5 of CENVAT Rules, according to the procedure specified in the amendment, and hence, they should not have been denied on the grounds that the claims pertained to a period prior to the date of amendment. The CESTAT held that a claim filed after 14

Indirect TaxesMarch 2006, even though it pertained to an earlier period, could not be turned down if all the requirements were fulfilled in relation to the claim. In this regard, it placed reliance on the decision in the case of WNS Global Services Pvt. Ltd. v. CCE [2008-TIOL-CESTAT-MUM]Argued by PwC Tax Litigation Team

Caliber Point Business Solutions Ltd. v. Commissioner

of Central Excise [Appeal No. ST / 192 / 07- MUM,

Order dated 16 April 2008]

Rebate benefit cannot be denied on procedural grounds

The Delhi CESTAT held that non-observance of a procedural condition is of a technical nature and cannot be used to deny the substantive concession. It further observed that in respect of exports, a liberal view had to be taken. The non-fulfillment of the procedural conditions could not lead to the denial of the benefit under the beneficial legislation in respect of export. It also held that there could not be two different yardsticks, one for permitting credit and the other for granting rebate. Once the credit had been permitted, it could be utilised. If it could not be utilised, there was a provision for granting a refund / rebate.Argued by PwC Tax Litigation Team

CST v. Convergys India Pvt. Ltd. [2009-TIOL-888-

CESTAT-DEL]

Refund of unutilised CENVAT credit for service tax paid on input services available if used for export of taxable output services

15

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Value Added Tax / Sales Tax

Case Law

Subsidy given to dealer for running canteen does not form part of sale price for supply of canteen goods

The Orissa High Court held that a subsidy given to a dealer for running a canteen could not be considered part of the consideration for the sale or supply of goods by the canteen since the subsidy was not directly related to any item of food or goods sold from the canteen.Indian Aluminum Company Ltd. v. State of Orissa

[2009] 22 VST 119 (Orissa)

Exemption from tax for sales made in the course of export cannot be denied on account of non-registration of the dealer effecting the sale

The Kerala High Court held that exemption from tax for sales in the course of export could not be denied on the grounds that the dealer effecting the sale was unregistered.K. J. James v. State of Kerala [2009] 22 VST 165 (Ker)

Stock transfers cannot be construed as inter-state sales merely because the goods have not been unloaded at the receiving location and have been delivered directly to the customer from there

The Madras High Court held that a stock transfer could not be treated as an interstate sale merely on the grounds that the goods had not been unloaded at the receiving depot

of the dealer and that after taking possession of the delivery receipts from the depot, the transporter proceeded to deliver the goods to the purchasing dealer.Associated Cement Companies Ltd. v. Assistant

Commissioner and Others [2009-VIL-25-HC-MAD]

CENVAT

Case Law

No interest is payable on erroneous availment of CENVAT credit if the credit has not been utilised by the manufacturer

The Chennai CESTAT held that no interest was payable on erroneous availment of CENVAT credit if the credit had not been utilised by the manufacturer.CCE v. Superfil Products [2009] 237 ELT 551 (Chennai)

CENVAT credit not admissible on returned goods which are unfit for re-processing or re-making

The Delhi CESTAT held that no CENVAT credit was admissible under Rule 16 of the CE Rules on returned finished goods unfit for re-processing or remaking.U.S. Foods Pvt. Ltd. v. CCE [2009] 236 ELT 719 (Del.)

Service Tax

Case Law

Promotion or marketing of lottery tickets exigible to service tax only with effect from 16 May 2008

The Supreme Court held that the insertion of an Explanation pertaining to the taxability of the promotion or marketing of lottery tickets under the category of Business Auxiliary Services was not clarificatory in nature and hence did not have retrospective application.UOI and Ors. v. Martin Lottery Agencies Ltd. [2009] 20

STT 203 (SC)

Input tax credit admissible on insurance services availed in relation to insurance of plant and machinery

The Mumbai CESTAT held that input tax credit was admissible in the case of insurance services availed in relation to the insurance of plant and machinery, mobile phone services and catering services.Finolex Cables Ltd. v. CCE [2009] 14 STR 303 (Mum)

Value of SIM cards supplied by service providers forms part of a service on which service tax is payable

The Kerala High Court held that SIM Cards do not have an intrinsic value or purpose other than for use in mobile phones, and therefore, the cost of SIM cards supplied by service providers forms part of the value of

Exemption from tax for export sales cannot be denied on account of non-registration of dealer

No interest payable on erroneous availment of CENVAT credit, if credit not utilised

17

India Spectrum*

the service on which service tax is payable. CCE v. Idea Mobile Communications Ltd. [2009] 20

STT 19 (Ker)

Notifications / Circulars

Unconditional exemption from service tax to services consumed wholly within the SEZ

The Central Government has issued a notification amending the earlier Notification No. 9 / 2009 dated 3 March 2009, providing an unconditional exemption from service tax to services consumed wholly within the Special Economic Zone (“SEZ”). This will not apply however to services provided by the Domestic Tariff Area (“DTA”) to developers / units in the SEZ.ST Notification No. 15 / 2009 dated 20 May 2009

Clarificatory circular relating to refund claims for service tax

The Tax Research Unit (“TRU”) of the Central Board of Excise & Customs has issued a circular relating to refund with regard to services not wholly consumed in the SEZ and clarified that several earlier circulars relating to the expeditious approval of refund claims for service taxes would apply in regard to these claims as well. In particular, it clarified that 80% of the claim amount would be sanctioned as an ad hoc refund within 15 days of filing the claim and such claims would typically need to be finalised within a period of 30 days, and in any case, within 45 days of the filing of the claim.ST Circular No. 114 / 08 / 2009 - ST dated 20 May

2009

Customs / Foreign Trade Policy

Case Law

Claim for benefit of an exemption notification is a question of law and can be raised at any stage of the adjudication or appellate process

The Ahmedabad CESTAT held that a claim for the benefit of an exemption notification was a question of law which could be raised at any stage of the adjudication / appellate process.Gopi Chand & Co. v. CC [2009] 237 ELT 112 (Ahd)

Duty paid goods can be used commonly across a 100% EOU and its DTA unit, in the case of partial conversion of the EOU to a DTA unit

The Bangalore CESTAT held that in the event of the partial conversion of a DTA unit to a 100% Export Oriented Undertaking (“EOU”) unit, duty paid goods could be used commonly across the 100% EOU and the DTA units.Titan Energy Systems Ltd. v. CCE [2009] 236 ELT 705

(Bang)

Notifications / Circulars / News

Clarification of EPCG authorisations to 100% EOUs

The Central Government has clarified that in the case of the issuing of Export Promotion Capital Goods (“EPCG”) authorisations to 100% Export Oriented Units (“100% EOUs”)

upon their conversion to DTA units, the export obligation (“EO”) equivalent to six / eight times of the depreciated value of goods shall be computed as follows:

• ifastand-alone100%EOUunitwishes to debond to the EPCG scheme, only additional EO shall be required to be maintained; and,

• inacasewhereoneunitofacompany opts to debond, while other unit(s) are already DTA units, the average EO after the debonding of the unit shall be fixed by excluding the exports made by the debonded unit from the total exports of the company.

DGFT Policy Circular No. 84 (RE-2008) / 2004-09

dated 30 April 2009

Duty paid goods can be used commonly across a 100% EOU and its DTA unit, in case of partial conversion of the EOU unit to a DTA unit

Indirect Taxes

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