Merely suspecting on borrowing capacity cannot be ground for addition u/s 68

section 68 addition, addition based on suspicious, income tax survey 

Mumbai ITAT in its very short judgement but made very important observations and held that section 195, is a vicarious liability and its survival entirely depends on survival of the primary tax liability of income, embedded in the related payments, in the hands of the recipient. Once that primary liability stands quashed, as in this case, the very foundation of tax withholding demands under section 195 ceases to hold good in law.
 
In this case the counsel of the assessee pointed out that the very taxability of payments, in respect of which impugned tax withholding demands are raised, have been negated in the hands of the recipient, i.e. Braitrim UK Ltd., by a coordinate bench. A copy of the related order dated 21st August 2019 (in Braitrim UK Ltd. vs. DCIT; ITA Nos. 1750 to 1753/Mum/2015).
 
The full judgment is reproduced as under:
 
Judgment / Order
 
Pramod Kumar, Vice President And Ravish Sood, Member (J)
 
For the Appellant : Vasanti Patel
 
For the Respondents : S.S. Iyangar
 
ORDER
 
Pramod Kumar, Vice President
 
1. By way of these appeals, the assessee appellant has challenged corrections of consolidated order dated 30th January 2014 in the matter of tax withholding demands under section 201 r.w.s. 195 of the Income Tax Act 1961, for the assessment years 2005-06 to 2012-13
 
2. When these appeals came up for hearing, learned counsel for the assessee pointed out that the very taxability of payments, in respect of which impugned tax withholding demands are raised, have been negated in the hands of the recipient, i.e. Braitrim UK Ltd., by a coordinate bench. A copy of the related order dated 21st August 2019 (in Braitrim UK Ltd. vs. DCIT; ITA Nos. 1750 to 1753/Mum/2015) was also placed before us. In this order, the coordinate bench has, inter alia, observed as follows:-
 
13. We have carefully considered the rival submissions and perused the material on record. We find that the assessee is required to give a rebate/discount to the retailers based on the volume/units of sales to garment suppliers achieved by the Braitrim group. Subsequently, the proportionate share of rebate/discount is recovered by the assessee from its group companies, including BIPL, based on the relative sales of those group companies to the respective retailers. The assessee has, accordingly entered into a reimbursement agreement with BIPL, whereby BIPL has acknowledged its obligation to reimburse its proportionate share of the discount/rebate to the assessee based on sale volumes/units achieved by it. As per the Cost Reimbursement Agreement (CRA), such reimbursements are depicted as 'Administration charges' by BIPL in its books of account.
 
14. We find it relevant to refer to the following clauses of the Cost Reimbursement Agreement (CRA) in order to appreciate the nature and characterisation of the amount of reimbursements:-
 
i) that the title to the agreement is described as 'Cost Reimbursement Agreement';
 
ii) that the preamble to the agreement mentions the fact of payment of administration charges by the Assessee to the customer companies in respect of goods supplied by worldwide entities of Braitrim group including BIPL and the purpose of the agreement is to recover such charges by the assessee from BIPL;
 
iii) that Article 3 requires BIPL to compensate the assessee towards the proportionate administration charges in respect of goods supplied to the customer companies/suppliers;
 
iv) that Article 4 prescribes the method of computation of the proportionate share of the administration charges to be borne by BIPL determined as proportion of its sale to customer companies to the total worldwide sales of the Braitrim group; and,
 
v) that Article 5 stipulates that the payments made under the agreement represent reimbursement of administration charges borne by the assessee.
 
15. Therefore, so far as the understanding of the parties to the CRA is concerned, the same has been understood to be in the nature of reimbursement of the rebate/discount passed on by the assessee to the retailers. Factually speaking, it has also been established that there is no mark-up retained by the assessee while recovering from BIPL the rebate/discount given to the retailers. It is also clear that BIPL has also made sales to other independent parties for which no discount/rebate or administrative charges are payable to the assessee company. The aforesaid undisputed features of the arrangement clearly bring out that the transaction in question cannot be construed to be 'royalty' as understood by the income-tax authorities. This becomes even more pertinent once the nature of such payments by BIPL to the assessee has been admitted as such in the assessment of BIPL for assessment year 2007-08
 
16. Pertinently, the assessee stated that the transaction for reimbursement of administrative charges by BIPL to the assessee was subject to transfer pricing proceedings during the assessment year 2007-08, wherein the TPO questioned the commercial expediency of the transaction of payment for administration charges and determined the arm's length price as 'Nil', which was effectuated accordingly by Assessing Officer in the draft assessment order.
 
17. Before the DRP, BIPL raised objections against the draft assessment order, which was based on the order of the Transfer Pricing Officer. The DRP held as under:-
 
"The DRP has carefully considered the order of the TPO, submissions of the taxpayer and objections of the taxpayer. The main issue here is that the assessee has paid to its AEs an amount of ₹ 1,87,30,339 slating that these charges are paid as administration charges. However, as accepted by the taxpayer, these expenses are nothing but reimbursement of expenses incurred by the AE for the discounts to be passed on to the retailers by Braitrim UK. After considering the arguments of the assessee it can be inferred that Braitrim UK negotiates globally with various garment retailers to use the hangers manufactured by Braitrim group companies all over the world. As part of these arrangements/agreements Braitrim UK agreed to pass on the discount at the rate 1% of sale of hangers by Braitrim group of companies to the retailers. As rightly stated by the assessee because of this arrangement the taxpayer is getting business without much effort on advertisement and marketing as evidenced by no expenses on marketing or advertisement debited in the profit and loss account for the FY 2006-07. The Braitrim group companies supply the hangers to the garment manufacturers, which in turn supply to the ultimate retailers in the form of pre-hanged clothes. The assessee also supplied hangers to garment manufacturers within and outside India. Based on the sale of these hangers by the assessee Braitrim UK has to pay to the retailers at the rate of 1% on these sales made by the taxpayer to retailers through garment manufacturers. Before the DRP, the taxpayer also produced invoices raised by third party retailers against Braitrim UK to show that the said discount @ 1% on sale of hangers by the Indian entity was passed on to the retailers.....In view of the above discussion, we are satisfied that the discount given by the AE, Braitrim UK to the retailers is helping the tax payer to get the business without much marketing effort, for which the taxpayer is reimbursing the AE at the rate of 1% of sale of hangers in India, which was ultimately passed on to the retailers by the AE."
 
However, the DRP revised the arm's length price as computed by the TPO on account of the timing difference between the recognition of administration charges/rebate in the books of account of BIPL, vis-&agrave;-vis the amount recognized by the assessee in its accounts; and, accordingly, the assessment was finalised. When BIPL filed appeal before the Tribunal, the Tribunal, while accepting the payments to be reimbursements, restored the issue to the file of the DRP for examination of the reconciliation of invoices raised by the assessee and the invoices recorded by BIPL. The TPO, in response to the remand report called for by the DRP, as directed by this Tribunal, had accepted the contentions of BIPL and found the same to be in order.
 
18. From the aforesaid, it follows that for the assessment year 2007-08 there is a concurrent acceptance of the claim of BIPL that the payments are in the nature of reimbursement by all the authorities, viz. the TPO, the DRP and the Tribunal. Therefore, in the face of such concurrent acceptance of the nature of payment as being a mere reimbursement, it is untenable for the Revenue to contend in the captioned cases that the nature of the amount is otherwise. Therefore, what follows is that the expenses have been incurred by the assessee on behalf of BIPL and the same were merely reimbursed to the assessee. Ostensibly, the contractual responsibility of the rebates to be paid to retailers lies with the assessee. However, since the sales are made by BIPL, the commercial prudence postulates that BIPL bears the ultimate responsibility of such rebates in respect of India sales, and thus the payment of such reimbursements. Admittedly, the liability is definite and crystallised in the books of BIPL, and it merely represents normal discount. Thus, we are inclined to uphold the grievance of the assessee that the payments qualify as a pure reimbursement of expenses and accordingly, not taxable in India. The reimbursements received by the assessee are in respect of specific and actual expenses incurred by the assessee and do not involve any mark-up and the assessee has furnished sufficient evidence to demonstrate the incurrence of expenses. There is thus no good reason to make any addition to income in respect of these reimbursements of expenses. The action of the Assessing Officer, as the learned counsel rightly contends, is on pure surmises and conjectures.
 
19. Here, we would also like to refer to the judgment in the case of AP Moller (supra). Facts of that case were that the assessee was a foreign company engaged in shipping business and was a tax resident of Denmark; that it had agents working for it, who booked cargo and acted as clearing agents for the assessee; and, that in order to help all its agents across the globe, the assessee had set up and maintained a global telecommunication facility called Maersk net system which was a vertically integrated communication system. The agents would pay for the system on pro rata basis. According to the assessee, it was merely a system of cost sharing and the payments received by the assessee from its agents in India were in the nature of reimbursement of expenses. The Assessing Officer, however, did not accept this contention and held that the amount paid by these three agents to the assessee were FTS rendered by the assessee and held them taxable in India under Article 13(4) of the Double Taxation Avoidance Agreement (DTAA) between India and Denmark and brought them to tax at 20% u/s. 115A of the Act. The CIT(A) dismissed the assessee's appeal, but the Tribunal allowed its further appeal. The Hon'ble High Court dismissed the Department's appeal holding that the Tribunal had rightly observed that the Maersknet-communication-system was an automated software based communication system which did not require the assessee to render any technical services; that it was merely a cost sharing arrangement between the assessee and its agents to efficiently conduct its shipping business; and, that it was part of the shipping business and could not be captured under any other provisions except under the DTAA. The Hon'ble Supreme Court, dismissing the appeal held as under:-
 
"....... the facts that the assessee had its information technology system, that the assessee had appointed agents in various countries for booking of cargo and servicing customers in those countries, preparing documentation, etc., through these agents, that for the sake of convenience of all these agents, a centralised system was maintained to avoid unnecessary cost, that the system comprised booking and communication software, hardware and a data communications network and was, thus, an integral part of the international shipping business of the assessee and ran on a combination of mainframe and non-mainframe servers located in Denmark, that the expenditure incurred for running this business was shared by all the agents and that the systems enabled the agents to co-ordinate cargos and ports of call for its fleet were findings of fact. Once these were accepted, by no stretch of imagination, could the payments made by the agents be treated as fees for technical services. The payments were in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. Neither the Assessing Officer nor the Commissioner (Appeals) had stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Once the character of the payment was in the nature of reimbursement of the expenses, it could not be income chargeable to tax. Moreover, freight income generated by the assessee in the assessment years in question was accepted as not chargeable to tax as it arose from the operation of ships in international waters in terms of article 9 of the DTAA. Once that was accepted and it was also found that the Maersk net system was an integral part of the shipping business which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, and the business could not be conducted without it, it could not be treated as any technical services provided to the agents."
 
20. Quite clearly, payments by way of reimbursement of expenses incurred on behalf of the payer cannot be construed as income chargeable to tax in the hands of the payee, a proposition which is approved by the Hon'ble Bombay High Court in the case of Siemens Aktiengesellschaft (supra). In view of the above discussion, we direct the Assessing Officer not to treat any part of reimbursement of expenses received by the assessee as income of the assessee. The assessee gets the relief accordingly on Ground No. 2 of the aforesaid appeal.
 
3. It is thus submitted that once the primary liability of the recipient has come to an end, vicarious liability of the payer cannot survive. We are urged to quash the impugned demands for this short reason alone.
 
4. Learned Departmental Representative does not dispute the facts stated by the learned counsel, but relies on the orders of the authorities below nevertheless.
 
5. The plea of the learned counsel is indeed well taken. A tax withholding liability, particularly under section 195, is a vicarious liability and its survival entirely depends on survival of the primary tax liability of income, embedded in the related payments, in the hands of the recipient. Once that primary liability stands quashed, as in this case, the very foundation of tax withholding demands under section 195 ceases to hold good in law. We, therefore, quash the impugned demands under section 201(1) r.w.s. 195 as well. The assessee gets the relief accordingly.
 
6. As we part with the matter, we make it clear that the present appeals are disposed of for short reasons discussed above. All other issues raised by the assessee have become infructuous, and are, therefore, dismissed as such.
 
7. In the result, all the appeals are allowed in the terms indicated above. Pronounced in the open court today on the 21st May, 2021.

Once the primary liability of the recipient has come to an end, vicarious liability of the payer cannot survive

section 195 tds, tax on non resident, tds on non resident NRI Taxation

<h2>Facts of the Case</h2>
 
The assessee company is engaged in the business of manufacturing machine tools, textile machines, air conditioning and refrigeration work, casting and job work for air conditioning and humidification, air control equipment and trading in engineering. The original return of income was filed by the assessee on 26/09/2013 and revised return was filed on 14/05/2014 declaring loss of Rs.4,65,01,710/- under the normal provisions of the Act and book profit of Rs.61,77,000/- u/s.115JB of the Act.
 
The assessee company owned a constructed building on a plot of land in the city of Coimbatore. The said land along with the super structure was acquired by the company vide sale deed dated 15.04.1967. During the Financial Year 2012-13 relevant to Asst Year 2013-14, the assessee company proposed to sell the said land along with its super structure and therefore entered into negotiations with various parties. During the negotiations, the company became aware of the fact that post acquisition of the land and the constructed building, the Development Control Regulations Rules (DCR) in the city of Coimbatore had undergone a change. Consequently, the company engaged the services of Dadbhawala Architects, Engineers and Valuers Pvt. Ltd., to examine the amendments in the DCR and furnish a report giving the fair market value of the land, the constructed building and the additional FSI, if any.
 
In the meanwhile, the negotiations for sale of the immovable property in Coimbatore, culminated in an understanding on 15.09.2012 when the prospective purchasers visited the premises of the company. A letter of understanding was executed on the said date by the purchasers. The purchasers agreed on a total consideration of Rs.11,14,00,000/-. Further, the said consideration based on discussions and negotiations was broken up as Rs.5,72,84,600/- for the land, Rs.64,90,400/- for the constructed building and Rs.4,76,25,000/- for the additional FSI. The valuers also submitted three reports giving the fair market value of the land constructed building and the additional FSI on 21.09.2012. As per the report submitted by the valuers, the company had obtained an additional benefit of 0.8 by way of additional FSI. The valuers arrived at a fair market value of Rs. 5,01,79,800/- in respect of additional FSI of 0.8 whereas, the company had arrived at a negotiated price with prospective purchasers‟ for the additional FSI of Rs.4,76,25,000/-.
 
While filing the return of income, the company excluded the sum of Rs.4,76,25,000/- received towards additional FSI from its total income computed under normal provisions of the Act, treating the same as a capital receipt. However, while computing its book profit u/s.115JB of the Act, the said sum of Rs.4,76,25,000/- was included in the book profit.
 
<h2>During the assessment proceeding</h2>
 
The AO observed that FSI attached to the land is neither separable from the said land nor could be treated independently;
 
The availability of increase in FSI is merely a value addition to the land provided by the Government; that any buyer, while purchasing the land will also take over the FSI and that the purchase price is determined by the benefits attached to the land 
 
He further observed that the assessee has neither maintained the land with it and transferred the FSI to a third party nor has transferred the land and FSI to different people.
 
He also observed that FSI is fastened to the land and is not separable there from, except in circumstances where only the FSI is permitted to be sold out by maintaining the title of land with the owner.
 
Accordingly, the AO brought the amount of Rs.4,76,25,000/- shown under the head "transfer of FSI" to tax under the head long term capital gain.
 
<h2>Before the CIT(A)</h2>
 
The ld. CIT(A) observed that assessee had sold the land, super structure situated in the said land and the FSI in lock, stock and barrel to only one purchaser for a total consideration of Rs.11,14,00,000/-. However, taking the help of the valuer, the same was broken into three parts and thereafter, sale consideration to the extent of Rs.4,76,25,000/- has been attributed on account of sale of additional FSI by the assessee.
 
The said additional FSI has not been sold separately as TDR and there has been no separate document for the same.
 
The inseparable FSI had been sold in one single deal by the assessee to the same party.
 
CIT(A) Distinguished the reliance placed on the decision of the Hon'ble Jurisdictional High Court in 370 ITR 325 supra by stating that in that case, the TDR was sold separately by the society after completion of construction as per the available FSI.
 
CIT(A) also observed that in that case, the land and building earlier in possession of the assessee continued to remain with it and even after the transfer of the right or additional FSI, the position did not undergo any change. Whereas, in the instant case, the land and building have been transferred together with additional FSI within a single deal to a single purchaser. 
 
With these observations, the ld. CIT(A) upheld the action of the ld. AO.
 
<h2>Before the ITAT</h2>
 
The Tribunal Observed that &ldquo;the bifurcation of the total sale consideration into land, building and additional FSI is not in dispute. What is in dispute before us is only whether the said sum of Rs.4,76,25,000/- received by the assessee on sale of additional FSI could be treated as a capital receipt and thereby making it nonexigible to tax both under normal provisions as well as in the computation of book profits u/s.115JB of the Act&rdquo;
 
In the instant case, we find that the Development Control Regulations in the city of Coimbatore had undergone a change which had admittedly conferred a benefit or by virtue of which the assessee got vested with additional benefit of 0.8 by way of additional FSI.
 
Hence, the issue now boils down to the fact that when there is no cost incurred by the assessee for obtaining any additional benefit of 0.8 by way of additional FSI, then, whether any sum received by the assessee pursuant to a sale of such additional FSI could be brought to tax under the head &ldquo;income from capital gains&rdquo;. We hold that assessee could not have pre-empted any change in the Development Control Regulation Rules in the city of Coimbatore at the time of purchase or before the sale.
 
Admittedly no cost was incurred by the assessee for getting such benefit by way of additional FSI. Hence, it could be safely concluded that the additional benefit derived by the assessee by way of getting vested with additional FSI on the land and building owned by the assessee is only a wind fall gain by operation of law, and which had not costed the assessee any money.
 
The tribunal followed the judgment of Jurisdictional High Court in the case of Commissioner of Income Tax vs. Kailash Jyoti No.2 CHS Ltd., in Income Tax Appeal No.1607 of 2013 and held that the sum received by the assessee in the sum of Rs.4,76,25,000/- on sale of additional FSI, is not exigible for long term capital gains.
 
The tribunal also held that the sum of Rs.4,76,25,000/- being a capital receipt from its inception, is to be excluded while computing book profits u/s.115JB of the Act and also on the ground that it does not form part of operational working results of the company by relying assessee&rsquo;s own case in ITA No.5428/Mum/2015 for A.Y.2011- 12.
 
<h2>Citation</h2>
 
ITA No.6228/Mum/2017, Dated 21/05/2021

Neither capital gain tax nor MAT on sum received towards Additional FSI

MAT, additional fsi, tax on capital gain additional fsi

<h2>Facts of the Case</h2>
 
The A.O. noticed that during the year under consideration, the assessee society had deposited a sum of Rs. 83,95,000/- in its bank account maintained with Axis bank Ltd., Sikar. The assessee society has not filed its return of income for the year under consideration. Notice U/s 148 of the Act was issued to the assessee.
 
In compliance of the notices issued, the assessee filed its return of income on 28/09/2017 declaring NIL income.
 
Assessing Officer completed the assessment after due consideration and examination of allthe issues specifically related to the corpus donation and he was satisfied with the evidences andsubmissions of the assessee as well as the manner in which it was shown in the accounts of theassessee. He mentioned his satisfaction in the office note attached with the assessment order, which isthe part of the assessment order. The copy of the certified copy of office note is attached herewith forready reference at Page No. 12 of Paper book. The relevant portion of the office note is reproducedhere under-
 
<blockquote class="wp-block-quote">
"(ii) Issue of Corpus donation has been examined carefully and satisfying with evidence produced by the assessee during the course of hearing, no adverse inference has beendrawn on this issue."
</blockquote>
 
<h2>Findings of the CIT(E)</h2>
 
The ld. CIT(E) in his order has observed that the assessee has no details of donors and whenever this detail is sought, it comes up with a story to avoid it.
 
The ld. CIT(E) further observed that in the order sheet, the A.O. has noted that corpus donations have been examined, he has not made any of requisite inquiries regarding identity and address of the claimed donors, particularly when all these donations were received in cash, therefore, the ld. CIT(A) has held that the order passed by the A.O. is deemed to be erroneous in so far as it is prejudicial to the interest of revenue within the meaning of Explanation 2(a) r.w. Section 263 of the Act.
 
Against the order of the ld. CIT(E), the assessee is in further appeal before the ITAT..
 
<h2>Grounds of the Assessee</h2>
 
<blockquote class="wp-block-quote">
the order of CIT(E) is illegal and against the law because the Ld. Assessing officer has examined and considered the matter involved in this order. 
the donation so received was received for a specific purpose and use, hence it was Corpus Donation. The corpus donation cannot be treated as part of Income and Expenditure account.
the order of the CIT(E) is otherwise unjustified because the assessee submitted the sufficient and proper explanation during the course of assessment proceedings and accepted by the Ld. Assessing officer
</blockquote>
 
<h2>ITAT held</h2>
 
The tribunal held that assessment order under consideration does not fall in any of the limb mentioned in the explanation 2 of the Section 263(2) of the Act, therefore the assessment is proper and cannot be said as erroneous and prejudicial to the interest of the revenue.
 
The assessee replied the queries raised by the assessing officer during the course of assessment _proceedings. After examination of the records and submissions found him satisfied and complete the assessment. Therefore, it could not be said the assessing officer has not examined the issue raised in the show cause notice under consideration. It is also reveals from the certified copies of the order sheet that the issue which is limited issue related to the cash deposited into bank, in spite of that he went beyond mandate and examined the entire issues, which is also without getting permission of the Commissioner. Hence it cannot be said that the assessment was without any enquiry or investigation.
 
The issue was already examined, discussed and considered by the then Assessing officer and issue of show cause notice by the CIT(E) on the very same issue is amounts to change of opinion
 
The ld AR of the assessee apart from the other grounds as discussed by us in detail, has also submitted before us that the notice issued by the ld. CIT(E) was on the basis of proposal of subsequent ITO, therefore, this act does not provide such powers to the ITO U/s 263 of the Act. The ld AR also submitted that as per provisions of Section 263 of the Act, the Pr.CIT/CIT may call for and examine the proceedings under this Act if he considers that any order passed therein by the A.O. is erroneous in so far as it is prejudicial to the interest of the revenue but in the present case, the proposal was sent by the subsequent A.O. to the CIT(E) on the basis of which a show cause notice was issued which is against the provisions of the Act. However, on this proposition, our view is not in favour of the ld AR as we convinced with the arguments of the ld. CIT-DR who had submitted that there is no prohibition U/s 263 of the Act for the Commissioner to act on the basis of proposal by the A.O. if other conditions under the said Section are satisfied. In this regard, the ld. CIT-DR has relied on the decision in the case of Apollo Tyres Ltd. Vs ACIT (1998) 65 ITD 263 (Delhi) and Stewarts and Lloyds of India Ltd. Vs CIT (2016) 67 taxmann.com 41, therefore, we reject this contention raised by the assessee.
 
<h2>Conclusion</h2>
 
The Tribunal allowed the appeal of the assessee and quash the revisionary proceedings u/s 263 initiated by issuing impugned show cause notice.
 
<h2>Citation</h2>
 
Swami Keshwanand Sikshan Sansthan Versus C.I.T. (Exemption) , Jaipur (Rajasthan) ITA No. 273/JP/2020 (Assessment Year: 2010-11) Dated 18 January 2021

No revision u/s 263 on Change of Opinion even though proposal was sent by the subsequent AO to the CIT

<h2>1.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Introduction</h2>
 
<ol type="1">
<li>This article provides the complete insight of the Acquisition and transfer of immovable property in India by-</li>
<li>Non-Resident Indian (NRI),</li>
<li>Overseas Citizen of India Card Holders (OCI) and</li>
</ol>
 
as per the provisions of the Foreign Exchange Management Act, 1999 (FEMA) and rules / regulations made thereunder.
 
<ol type="1">
<li>The acquisition and transfer of immovable property in India by PROI (Person Resident of India) and by some other specified persons (such as Long Term Visa (LTV) Holders, Foreign Embassies or Diplomats or Consulate Generals etc.) is not discussed in this article and the same will be discussed in upcoming article. Further, the conceptual clarity and difference between NRI, OCI, PROI, PRI, Citizen etc. is separate topic. This requires in depth understanding, therefore, the same will be discussed in separate article. The link of upcoming relevant articles will be shared in comment section for ease of reference.</li>
</ol>
 
<h2>2.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Historical Background</h2>
 
<ul>
<li>[Before the enactment of FEMA] As we know, before the enactment of FEMA, there was Foreign Exchange Regulation Act, 1973 (Repealed by FEMA) and section 31(1) of said Act provided that &ldquo;No person who is not a citizen of India and no company (other than a banking company) which is not incorporated under any law in force in India shall, except with the previous general or special permission of the Reserve Bank, acquire or hold or transfer or dispose of by sale, mortgage, lease, gift, settlement or otherwise an immovable property situate in India.&rdquo;</li>
<li>[After the enactment of FEMA] The FEMA classifies each foreign transaction in two categories viz: Current Account Transaction and Capital Account Transaction. The Current account transactions are generally permitted unless prohibited and capital account transactions are generally prohibited unless specifically permitted. The Central Government has an exclusive jurisdiction to regulate current account transactions and Reserve Bank of India (RBI) had exclusive jurisdiction to regulate capital account transactions. Accordingly, as per the provisions of section 6(3)(i) (now omitted), the RBI had exclusive jurisdiction to prohibit, restrict or regulate the acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India</li>
<li>[Amendment by Finance Act 2015 in FEMA] Later on,the Finance Act, 2015 amended the section 6 of the FEMA and classifies the capital account transactions in two categories: viz capital account transactions, involving debt instruments and capital account transactions, not involving debt instruments. Further, it has been provided that the term &ldquo;debt instruments&rdquo; shall mean, such instruments as may be determined by the Central Government in consultation with the Reserve Bank.</li>
<li>[Current Position] As discussed above, by the Finance Act 2015, the capital account transactions were further classified in two categories: viz capital account transactions, involving debt instruments and capital account transactions, not involving debt instruments. The power to regulate the capital account transactions, involving debt instruments is with the RBI and the power to regulate the capital account transactions, not involving debt instruments is with Central Government.</li>
<li>Summary of Above Discussion: The above discussion is summarized as under:</li>
</ul>
 
<figure class="wp-block-image size-large"><img class="wp-image-362" src="https://harchandanica.files.wordpress.com/2021/06/fema-1.png?w=625" alt="" /></figure>
 
<h2>3.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Important Terms</h2>
 
<ul>
<li>[Immovable Property]The term Immovable Property neither has been defined in the FEMA nor in rules / regulations. Therefore, the meaning of same can be borrowed from the General Clause Act, 1897. Section 3(26) of the said Act provides that &ldquo;immovable property&rdquo; shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth;Apart from the above, the Transfer of Property Act, 1882, Registration Act, 1908 and Real Estate (Regulation and Development) Act, 2016 also contain the definition of immovable property. However, in substance, all these enacts highlight similar view while defining &ldquo;immovable property&rdquo;.</li>
</ul>
 
<ul>
<li>[Acquire]The term acquire is not defined in the Rules or Act. Generally, it means &ldquo;to gain possession or control of; to get or obtain.&rdquo;</li>
</ul>
 
<ul>
<li>[Transfer]Transfer is Defined in FEMA. Section 2(ze) define [&ldquo;transfer&rdquo; includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien.]</li>
</ul>
 
<h2>4.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; FEMA Provisions &amp; Relevant Rules</h2>
 
<ul>
<li>Section 6(2A) and 46(2)(ab) empower the Central Government to notify or make rules with respect to the permissible classes of capital account transactions (not involving debt instrument), the limits of admissibility of foreign exchange, and the prohibition, restriction or regulation of such transactions.</li>
</ul>
 
<ul>
<li>Therefore, in Oct. 2019, the Central Government notifies <a>Foreign Exchange Management (Non-debt Instruments) Rules, 2019</a> by suppressing the previous regulations made by RBI viz: Foreign Exchange Management (Transfer of Issue of Security by a Person Resident outside India) Regulations, 2017 and the Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2018.</li>
</ul>
 
<ul>
<li>Chapter IX of Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (&ldquo;Rules&rdquo;) contain the provisions regarding acquisition and transfer of immovable property in India.</li>
</ul>
 
<h2>5.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; General (Rules applicable in all cases)</h2>
 
<ul>
<li>[All transactions should be done only through banking channel in India and subject to payment of applicable tax]
<ul>
<li>Any transaction involving acquisition or transfer of immovable property shall be undertaken through banking channels in India and subject to payment of applicable taxes and other duties or levies in India (e.g. Stamp Duty, Registration Fees, Applicable Income Tax etc.)</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Prior approval of RBI required by citizens of certain countries]
<ul>
<li>Prior permission of the RBI required to acquire or transfer of immovable property in India (other than lease not exceeding five years) by the person who is citizen or legal person (company, LLP, Firm, Trust etc.) of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau or Democratic People&rsquo;s Republic of Korea (DPRK).</li>
<li>Please note that this rule links the condition of prior approval of the RBI with the citizenship (including legal person incorporated in those countries), therefore, even if such citizens become Person Resident in India by virtue of provisions of Section 2(v), then still, they must obtain the prior approval of the RBI.</li>
<li>Now suppose, there are two persons being husband and wife and any of them is citizen of above country and another is citizen of India and both desires to purchase the property in joint name, then, in the opinion of author, still prior approval of RBI is must.</li>
<li>However, this prohibition is not applicable to OCI card holder (i.e. a person who is holding OCI card and is citizen of any of above mentioned country)</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Prior approval of RBI is must in case of any deviation or non fulfilment of any condition]
<ul>
<li>Any transaction, which is not specified in Chapter IX of Rules or in case of any deviation or non fulfilment of any conditions, requires prior approval of RBI before the execution of such transaction.</li>
</ul>
<ul>
<li>In case if person fails to obtain prior approval, wherever required, and execute the transaction, then this may attract the adjudication or person have to file compounding application for compounding of offence before the RBI.</li>
</ul>
</li>
</ul>
 
<h2>6.&nbsp;&nbsp;&nbsp;&nbsp;&nbsp; Rules for NRI and OCI</h2>
 
<ul>
<li>[Acquisition other than gift or inheritance]
<ul>
<li>NRI and OCI can acquire any immovable property other than an agricultural land or farm house or plantation property</li>
</ul>
<ul>
<li>Permitted mode of payment: (i) funds received in India through banking channels by way of inward remittance from any place outside India or (ii) funds held in any non-resident account maintained in accordance with the provisions of the Act, rules or regulations framed thereunder (such as NRE / FCNR / NRO account). However, property acquired by utilizing funds of NRO account cannot be repatriate outside India (see para 7 of this article).</li>
</ul>
<ul>
<li>Prohibited mode of payment: payment made through traveller&rsquo;s cheque or by foreign currency notes or by any other mode other than those specifically permitted.</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Acquisition by way of gift]
<ul>
<li>NRI and OCI can acquire any immovable property in India (other than agricultural land or farm house or plantation property) by way of gift from a person who is either person resident in India or NRI or OCI.</li>
</ul>
<ul>
<li>Further, such donor (who is giving gift of immovable property) should be relative of such NRI / OCI with the meaning of section 2(77) of the Companies Act, 2013.</li>
</ul>
<ul>
<li>Section 2(77) of Companies Act, 2013 define relative as under;</li>
</ul>
</li>
</ul>
 
<blockquote class="wp-block-quote">
(77) "relative", with reference to any person, means any one who is related to another, if&mdash;
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed (following relations are prescribed)
(1) Father (includes step-father)
(2) Mother (includes the step-mother)
(3) Son (includes step son)
(4) Son&rsquo;s wife.
(5) Daughter.
(6) Daughter&rsquo;s husband.
(7) Brother (includes step brother)
(8) Sister (includes the step-sister)
</blockquote>
 
<ul>
<li>[Acquisition by way of inheritance]
<ul>
<li>Sub-section (5) of section 6 of FEMA provides that</li>
<li>A person resident outside India</li>
<li>may hold, own, transfer or invest</li>
<li>in Indian currency, security or any immovable property situated in India</li>
<li>if such currency, security or property was acquired, held or owned by such person</li>
<li>when he was resident in India or inherited from a person who was resident in India.</li>
</ul>
</li>
<li>Section 6(5) of FEMA allows the PROI to hold any immovable property situated in India property if such property was acquired by such person when he was resident in India or inherited from a person who was resident in India. However, this section does not allow to acquire new property by PROI out of fund accumulated during the period when he was resident or funds received in inheritance and this can be appreciated from the reading of the part of the provision (may hold, own, transfer or invest) which does not contain acquire.</li>
<li>NRI and OCI can acquire any property (including agricultural land or farm house or plantation property) by way of inheritance from a person resident outside India who has</li>
</ul>
 
(a.) acquired such immovable property in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these rules; or
 
(b.) from a person resident in India.
 
<ul>
<li>[Transfer of any property by NRI and OCI]
<ul>
<li>NRI and OCI can transfer any property (including agricultural land or farm house or plantation property) to a person resident in India.</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Joint acquisition by the spouse of a NRI / OCI]
<ul>
<li>PROI, not being an NRI / OCI, who is a spouse of an NRI or OCI may acquire ONE immovable property (other than agricultural land or farm house or plantation property), jointly with his or her NRI or OCI spouse subject to following conditions:</li>
<li>Consideration for transfer, shall be made out of (i) funds received in India through banking channels by way of inward remittance from any place outside India; or (ii) funds held in any non-resident account maintained in accordance with the provisions of the Act and the regulations made by the RBI</li>
<li>No payment for any transfer of immovable property shall be made either by traveller&rsquo;s cheque or by foreign currency notes or by any other mode other than those specifically permitted as above</li>
<li>The marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the acquisition of such property</li>
<li>Such non-resident spouse is not otherwise prohibited from such acquisition (e.g. suppose if the Spouse is Citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau or Democratic People&rsquo;s Republic of Korea (DPRK), then prior approval of RBI is mandatory)</li>
</ul>
</li>
</ul>
 
<ul>
<li>[Summary]
<ul>
<li>The above discussion is summarized as under:</li>
</ul>
</li>
</ul>
 
<figure class="wp-block-image size-large"><img class="wp-image-363" src="https://harchandanica.files.wordpress.com/2021/06/fema-2.png?w=626" alt="" /></figure>
 
<ul>
<li>Repatriation of sale proceed
<ul>
<li>[Repatriation by person referred in Section 6(5)] PROI or his successor (who acquired immovable property when he was resident in India or inherited from a person who was resident in India) shall not, except with the general or specific permission of the RBI, repatriate outside India the sale proceeds of any immovable property referred to in that sub-section.</li>
</ul>
<ul>
<li>[Repatriation by NRI / OCI] Subject to fulfilment of following conditions NRI / OCI may repatriate the sale proceed outside:</li>
<li>Sale proceed does not relates to agricultural land or farm house or plantation property in India</li>
<li>Such immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition or the provisions of these rules</li>
<li>In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties</li>
<li>The amount for acquisition of the immovable property was paid in foreign exchange received through banking channels or out of funds held in Foreign Currency Non-Resident Account or out of funds held in Non-Resident External Account. (it is apparent that, while acquiring, if funds were utilized from NRO account, then such proceed cannot be repatriate outside India. If funds were utilized partially from the NRO and partially from NRE account? In such case, in the opinion of the author, the prior permission of RBI is must.)</li>
</ul>
</li>
</ul>
 
<ul>
<li>Disclaimer</li>
</ul>
 
The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Neither the author nor the publisher or its affiliates accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
 
<ul>
<li>About Author</li>
</ul>
 
The author, Manish Harchandani (founder of Harchandani &amp; Associates, Chartered Accountants) is practicing Chartered Accountant and he can be reached at <a href="mailto:harchandanimanish@gmail.com">harchandanimanish@gmail.com</a> and at M. +91 9909880111

Acquisition and transfer of immovable property in India by NRI and OCI

On 1st April 2021, the Ministry of Finance notifies India Iran Comprehensive DTAA. The same can access by clicking following link-
<a href="https://www.linkedin.com/posts/mnharchandani_india-iran-dtaa-activity-6783812126868869120-sNMq">https://www.linkedin.com/posts/mnharchandani_india-iran-dtaa-activity-6783812126868869120-sNMq</a>
Earlier, there was Limited DTAA between India and Iran.

Ministry of Finance notifies India Iran DTAA

iran india dtaa, dtaa with iran, India Iran DTAA

UN RELEASED THIRD EDITION (2021) PRACTICAL MANUAL ON TRANSFER PRICING FOR DEVELOPING COUNTRIES.
 
This third edition of the United Nations Practical Manual on Transfer Pricing for Developing Countries (the Manual) is intended to draw upon the experience of the first edition (2013) and the second edition (2017) including feedback on the latter version, but it is also intended to reflect developments in the area of transfer pricing analysis and administration since that time.
 
An important purpose of this Manual is to contribute to a common understanding of how the arm&rsquo;s length principle is to be applied in order to avoid double taxation and prevent or resolve transfer pricing disputes, as highlighted in paragraph 4 of the Commentary on Article 9 of the UN Model Convention.
 
Click below to download pdf file of United Nations (UN) Practical Manual on Transfer Pricing for Developing Countries 2021-
<div class="wp-block-file"><a href="https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2021-04/TP_2021_final_web%20%281%29.pdf">https://www.un.org/development/desa/financing/sites/www.un.org.development.desa.financing/files/2021-04/TP_2021_final_web%20%281%29.pdf</a></div>
<div class="wp-block-file">&nbsp;</div>

United Nations (UN) released Practical Manual on Transfer Pricing for Developing Countries 2021

Hon'ble Madras HC in its recent decision upheld the findings of Tribunal and observe that the only expenditure, which was proved to be incurred in relation to earning of tax free income, could be disallowed and such provision could not be extended to disallow the expenditure, which was assumed to have been incurred for earning tax free income.
 
The AO found that the assessee had invested in SBI Magnum Insta Cash Fund to the tune of Rs.7.25 Crores and secured loans, which were outstanding as on 31.3.2011. The Assessing Officer also found that the assessee incurred finance cost, out of which, a sum of Rs. 12.93 Crores was towards interest on term loan and working capital facilities, that the assessee company made investments in mutual funds, out of which, there was a POSSIBILITY OF EARNING DIVIDEND INCOME. Accordingly, a notice was issued to show cause as to why the disallowance should not be made under Section 14A of the Act.
 
The assessee sent a reply stating that they had not incurred any expenditure for making such investment and that in the absence of any expenditure incurred, the question of disallowance did not arise. However, AO rejected the stand taken by the assessee and made disallowance u/s 14A.
 
The assessee preferred an appeal before the CIT(A) who allowed the appeal by order dated 16.6.2016. The CIT(A) accepted the stand taken by the assessee that the investments were in growth funds and not dividend funds and therefore, did not constitute tax free income. In this regard, the CIT(A) referred to the decision of the Delhi High Court in the case of Cheminvest Ltd. Vs. CIT [reported in (2015) 378 ITR 33] as well as the decision of the Chennai Tribunal in the case of ACIT Vs. M.Baskaran [ITA.No.1717/Mds/2013 dated 31.7.2014] and accordingly set aside the finding rendered by the Assessing Officer. The Tribunal took note of the decision of this Court in the case of Redington India Ltd. Vs. CIT [reported in (2017) 77 Taxmann.com 257] and dismissed the appeal filed by the Revenue.
 
The Hon'ble Madras HC held that "we find that the Tribunal rightly understood the scope of the transaction done by the assessee. The consistent case of the assessee was that they invested a sum of Rs.7.25 crores in SBI Magnum Insta Cash Fund, that the amount was invested on 30.3.2011, that they had not incurred any expenditure in making such investment and that at the year end, the assessee did not earn tax free income from such investments. In terms of Section 14A of the Act, the only expenditure, which was proved to be incurred in relation to earning of tax free income, could be disallowed and such provision could not be extended to disallow the expenditure, which was assumed to have been incurred for earning tax free income."
 
Hon'ble HC also observed that "to apply the provisions of Section 14A of the Act, the Assessing Officer should have recorded a finding as to how SubSection (1) of Section 14A of the Act would stand attracted. In the absence of any such finding, the disallowance made was not justifiable. In fact, the Assessing Officer straightaway proceeded to the second limb of Section 14(2) of the Act, which is impermissible. The Tribunal rightly took note of the decision in the case of Redington India Ltd., wherein it was held that the provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 cannot be made applicable in vacuum i.e in the absence of exempt income. Therefore, we find that the Tribunal was right in deciding the issue against the Revenue and in favour of the assessee."
 
Citation: Tax Case Appeal No.26 of 2018, Madras HC.

Investment in Growth Fund does not attract 14A disallowance

Mutual fund taxation, growth fund, 14A deduction, income tax

The Finance Act, 2020 inserted new provisions related to the TCS on sale, TCS on liberalised remittance scheme and TCS on overseas tour program package, which are going to be applicable for 1st October, 2020.
 
Please <a href="https://www.linkedin.com/posts/mnharchandani_tcs-on-sale-lrs-and-foreign-travel-analysis-activity-6717006959926665216-EAGg" target="_blank" rel="noreferrer noopener">click here</a> to access the analysis on TCS on Sale, LRS and Foreign Travel in presentation mode.

TCS on Sale, LRS and Foreign Travel - Analysis

tcs on sales purchase, tds on sales purchase tcs on LRS

The Hon'ble Supreme Court in it's recent decision in the case of DIT vs. Samsung Heavy Industries (Civil Appeal No. 12183 of 2016) dismissed the appeal of the department and held that project office of the assessee is not permanent establishment within the meaning of the Article 5 of India-Korea DTAA. Although, it is settled position of law that the Project Office is PE (subject to threshold of numbers of days as per relevant DTAA), however, looking the facts of the case, the Hon'ble Supreme Court held that the Project Office in the question is not a PE withing the meaning of the Article 5(1) of DTAA rather it would fall within Article 5(4)(e) of the DTAA. Lets the discuss the facts of the case and findings of the each authority.
 
The critical fact of the case are that the ONGC awarded a &ldquo;turnkey&rdquo; contract to a consortium comprising of the Assessee, i.e. Samsung Heavy Industries Co. Ltd. (a Company incorporated in South Korea), and Larsen &amp; Toubro Limited, being a contract for carrying out the &ldquo;Work&rdquo;, inter alia, of surveys, design, engineering, procurement, fabrication, installation and modification at existing facilities, and start-up and commissioning of entire facilities covered under the &lsquo;Vasai East Development Project&rsquo;
 
The Assessee set up a Project Office in Mumbai, India, which, as per the Assessee, was to act as &ldquo;a communication channel&rdquo; between the Assessee and ONGC in respect of the Project. Accordingly for the AY 2007-08 the assessee filed nil return and claimed the losses.
 
During the assessment proceedings, the AO concluded that "the Project in question is a single indivisible &ldquo;turnkey&rdquo; project, whereby ONGC was to take over a project that is completed only in India. Resultantly, profits arising from the successful commissioning of the Project would also arise only in India."
 
The DRP also concluded that "the Assessing Officer has given a specific finding that the assessee had a project office in India, when it was given the contract. The assessee has not contested the existence of the Project office in India but it has only contested that the project was used merely for preparatory and auxiliary activities. This submission of the assessee does not hold merit because if it wanted to perform only preparatory and auxiliary activities then it could have opened a liaison office. The opening of a project office clearly shows that the assessee was doing something more than what would have been done through liaison office. In any case nature and purport of activities undertaken in India determine the existence of PE. Considering the nature of activities undertaken in India it is clear that PE existed in the case of assessee."
 
During the hearing before the ITAT, the Ld. DR bought on record the resolution of Board of Directors meeting dated 3rd April, 2006. The opening para of said resolution provides that "the company hereby open one project office in Mumbai, India for coordination and execution of Vasai East Development Project for Oil and Natural Gas Corporation (&ldquo;ONGC&rdquo;), India". Based on such resolution, the Ld. DR concluded that these documents make it clear that all the activities to be carried out in respect of impugned contract will be routed through the project office only. However, it is noteworthy to state here that the Ld. DR only reproduce the first para of the Board Resolution, the second para of said resolution provides that "That the Company hereby does make and constitute Mr. Sangsoon Park Yard General Manager of the Company, as the Company&rsquo;s true and lawful representative with full power and authority for the purpose of establishing a project office and coordinating and executing delivery of documents in connection with construction of offshore platform modification of existing facilities for ONGC above."
 
On other hand, the assessee before the ITAT argued that the Project Office was only an auxiliary office, and did not involve itself in any core activity of business, as accounts that were produced would show that there was no expenditure which related to execution of the project. The Hon'ble Tribunal disposed off that argument of the assessee by stating that "the way the terms of the contract are described and the way the work on contract has to proceed clearly describe that in all the activities of contract there will be the role of Mumbai project office as the same has to work as a channel between assessee company and ONGC. If PE of the assessee exists within the meaning of Article 5.1 and 5.2 and assessee claims that despite there being PE in terms of clause 5.1 and 5.2, it falls under exclusionary Article 5.4 then onus is on assessee to prove that activities of its PE are in the nature of preparatory or auxiliary in nature. No material has been brought on record by the assessee to prove the said fact. The arguments put forward in this respect are only by inference such as the accounts maintained by the assessee in India through which it is the argument of the ld. Counsel of the assessee that it does not contain any expenditure relating to execution of the contract. But such argument is not acceptable as the maintenance of account is in the hands of assessee and mere the mode of maintaining the accounts alone cannot determine the character of PE as the role of PE only will be relevant to determine what kind of activities it has carried on." However, the ITAT found that there was a lack of material to ascertain as to what extent activities of the business were carried on by the Assessee through the Mumbai Project Office, and therefore it was considered just and proper to set aside the attribution of 25% of gross revenue earned outside India &ndash; which was attributed as income earned from the Mumbai project office &ndash; the matter being sent back to the Assessing Officer to ascertain profits attributable to the Mumbai project office after examining the necessary facts.
 
Surprisingly, the Hon'ble High Court pronounced its decision on entire different footing. The core grievance of the assessee was regarding considering the PO as PE by the lower authorities looking to the peculiar facts and circumstances of the case. However, the High Court re-framed the question of law as "can it be said that the Agreement permitted the India Taxing Authority to arbitrarily fix a part of the revenue to the permanent establishment of the appellant in India?&rdquo;
 
Accordingly, the Hon'ble High Court held - "that being the situation we allow the appeal, set aside the judgment and order under appeal as well as the assessment order insofar as the same relates to imposition of tax liability on the 25% of the receipt upon the appellant in the circumstances mentioned above, and observe that the questions of law formulated by us, while admitting the appeal, have not, in fact, arisen on the facts and circumstances of the case, but the real question was, whether the tax liability could be fastened without establishing that the same is attributable to the tax identity or permanent establishment of the enterprise situate in India and the same, we think, is answered in the negative and in favour of the appellant."
 
However, the Supreme Court while pronouncing its decision, gone into details and considered the findings of the all lower authorities. The critical findings of the Hon'ble Supreme Court are with regards to documents filed by the assessee before the RBI and which was heavily relied by the ITAT also. The Hon'ble quote the Board Resolution of the assessee company and held that "A reading of the Board Resolution would show that the Project Office was established to coordinate and execute &ldquo;delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC&rdquo;. Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside."
 
The Hon'ble Supreme Court further observe that "Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC."
 
Therefore, it is rightly to conclude here that for the purpose of applying the DTAA, the legal form is not much relevant where the facts says something different. In this case, even the office of the assessee was registered as Project Office with the RBI, however, the Supreme Court went on the facts, considered the actual activities carried out by such office, considered the purpose of such office and concluded that the Project Office in question is not a PE rather it would fall within Article 5(4)(e) of the DTAA, inasmuch as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC.
 
(views are personal, for more details, it is advisable to go through with the order of the SC)

Project Office is not PE; SC affirm substance over legal form

project office, LO PO BO FEMA, Permanent Establishment Income tax

Get the insight of important judicial precedent on Section 36(1)(iii) by clicking on the following link-
 
<h2><a href="https://public.tableau.com/shared/BMY3C6KS7?:display_count=y&amp;:origin=viz_share_link&amp;:showVizHome=no" target="_blank" rel="noreferrer noopener">Tableau Public (Link)</a></h2>
 
Just hover over the chart area, you will get the citation and head note of the case law.
 
Author, Manish Harchandani, CA

Insight of important judicial precedent on Section 36(1)(iii).

judgments on section 36(1)(iii) interest deduction, tax benefit 

A formal Memorandum of Understanding (MoU) was signed today between the CBDT) and the SEBI for data exchange. This will facilitate the sharing of data and information between SEBI and CBDT on an automatic and regular basis. The information will also be shared on request and&nbsp;suo moto&nbsp;basis for the purpose of carrying out their functions under various laws. The formal press release is as under:
https://www.sebi.gov.in/media/press-releases/jul-2020/sebi-signs-mou-with-cbdt_47030.html

CBDT and SEBI sign MoU for data sharing

CBDT Income tax MoU with SEBI, data sharing MoU

Mumbai ITAT allowed the appeal of assessee by relying upon the judgement in the assessee's own cases for the AY 2003-04 to AY 2011-12.
 
During the course of assessment proceedings, it was submitted by the assessee that the Tribunal in its own case for A.Y 2003-04, A.Y 2005-06, A.Y 2006-07, A.Y 2007-08, A.Y 2009-10 &amp; A.Y 2011-12, had held the receipts earned by the assessee under similar fact pattern as its &ldquo;business income&rdquo;, which in the absence of its &ldquo;Permanent Establishment&rdquo; (PE) in India were not taxable in India. Further, the assessee drawing support from the &ldquo;Software Distribution Agreements submitted, that the distributors/resellers sold the shrink-wrap software bought in the fully packaged condition, as received from the assessee to the end users in India i.e without opening the package. It was further submitted by the assessee, that the SolidWorks software was given to the customers in India along with and pursuant to an end user license agreement. Although the end user license agreement was not physically signed, it was buit-in-as a part of the installation process and would &lsquo;pop up&rsquo; on the computer screen, and had to be indispensably &lsquo;accepted&rsquo; by the user, as it was only then the user could operate the software. It was further submitted by the assesee, that the end-user had limited rights to use the software for internal purposes, right to copy the software on hard disk or to make copies for archive purpose. It was the clam of the assessee, that the end-user was divested of any right to transfer the software or reproduce the same, as the same per the terms of the license agreement were specifically prohibited. The assessee also made submissions before the A.O on the scope of the term &lsquo;royalty&rsquo; as per &lsquo;Explanation 2&rsquo; to Sec. 9(1)(vi); the meaning of the term &lsquo;copyright&rsquo; under the Copyright Act, 1957; the amendment introducing &lsquo;Explanation 4&rsquo; below Sec. 9(1)(vi) and its impact on software distributor and on the DTAA; and the definition of &lsquo;royalty&rsquo; under the India-USA tax treaty.
 
A.O after deliberating on the contentions advanced by the assessee, therein observed, that as per the &lsquo;License and Subscription Service Agreement&rsquo;, SolidWorks granted the end-user a non-exclusive nontransferable license to use the software and the printed or electronic documentation. I was observed by the A.O, that in lieu of the single user license which entitled the end-user to use one copy of the software or a multiple user or network license, as the case may be, the end-user would pay license fees. Admittedly, as claimed by the assessee, it was observed by the A.O that the software was owned by SolidWorks and the copyright, trademark and proprietary rights were retained by it and not transferred to the end-user. At the same time, the A.O held a conviction that the software was not goods or tangible property but was an intangible intellectual property, which being similar to patent, invention, design, secret formula etc. would fall within the meaning of &lsquo;process&rsquo; as mentioned in &lsquo;Explanation 2&rsquo; to the definition of &lsquo;royalty&rsquo; under the Act. In support of his aforesaid view, the A.O relied on the CBDT Circular No. 621 of 19/12/1991 to hold that payment for acquisition of software was to be held as &lsquo;royalty&rsquo;. Insofar the claim of the assessee that the issue was covered in its favor by the orders of the Tribunal in its own case for the preceding years, the A.O observed that the same had been assailed by the revenue before the Hon&rsquo;ble High Court, and thus had not yet attained finality.
 
Also, it was observed by the A.O, that the Hon&rsquo;ble High Court of Karnataka in the case of CIT Vs. Samsung Electronic Co. Ltd (2012) 345 ITR 494 (Kar), had concluded, that the payments received by the assessee from the resellers in India for the acquisition of computer software was in the nature of &lsquo;royalty&rsquo;, and thus chargeable to tax. Also, the A.O in order to drive home his aforesaid conviction relied on the amendment to &lsquo;Explanation 4&rsquo; to Sec. 9(1)(vi) of the Act, that was made available on the statute vide the Finance Act, 2012, w.r.e.f 01.06.1976.
 
The Tribunal concluded that the factual situation pertaining to the year under consideration had not witnessed any change as in comparison to the immediately preceding year, therefore, respectfully following the view taken by the Tribunal in the assesses own case for A.Y 2015-16 in ITA No. 7027/Mum/2018, dated 10.01.2020, we herein conclude that the addition made by the A.O by treating the sale receipts of shrink-wrap software as &lsquo;royalty&rsquo; cannot be sustained, and is hereby vacated.
 
Citation: ITA No. 7313/MUM/2019
 
Author, Manish Harchandani, CA
 
Disclaimer:&nbsp;The contents of this article are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. Harchandani &amp; Associates does not accepts any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.

Shrink-wrap software is not Royalty - Mumbai ITAT

tds on software, shrikwrap software, tds on payment for software 

Hon'ble Kolkata ITAT allowed the appeal of the assessee and directed the AO to re-compute the disallowance under Rule 8D(2)(iii) by taking into consideration only the value of investment in shares which actually fetched exempt dividend income to the assessee during the year under consideration.
 
The learned counsel for the assessee had contended that the disallowance u/s 14A read with rule 8D is required to be worked out by taking into consideration only the value of investment in shares which actually fetched the exempt dividend income to the assessee and not the value of entire investment as done by the AO. This contention of the learned counsel for the assessee was duly supported by the decision of Hon'ble Kolkata High Court in the case of REI Agro Ltd. GA No. 3022 of 2013 (ITAT No. 161 of 2013).
 
Citation: ITA No. 2061/Kol/2019
 
Author, Manish Harchandani, CA
 
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Disallowance u/s 14A r.w. rule 8D to be made by taking into consideration only the value of investment in shares which actually fetched exempt income and not the all investments

14A disallowance, Rule 8D, investment in shares 14A disallowance

Delhi ITAT delete the addition made on account of agency commission paid to Foreign Party (Non Resident) - relied on assessee's own case, wherein it was held that
 
<blockquote class="wp-block-quote">
"the assessee-firm&nbsp; made&nbsp; payments&nbsp; of commission&nbsp; to&nbsp; those&nbsp; agents,&nbsp; since&nbsp; those agents had&nbsp; their&nbsp; offices&nbsp; situated&nbsp; abroad&nbsp; and, moreover, services&nbsp; were&nbsp; also&nbsp; rendered&nbsp; by them&nbsp; outside&nbsp; India, assessee&nbsp; was&nbsp; not required&nbsp; to&nbsp; deduct&nbsp; tax&nbsp; at&nbsp; source while making&nbsp; payments&nbsp; in&nbsp; question.&rdquo;
</blockquote>
 
Citation: ITA.No.5959/Del./2017
 
Author,
 
Manish Harchandani, CA
 
https://harchandani.in/

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