Raj Kapadia's Indian Tax Blog

Assessments Relating to Agricultural Income -- 49th REPORT of Public Accounts Committee of Indian Parliament

2022-04-11T17:17:00.000+05:30

The Public Accounts Committee ("PAC") of India's Parliament has, on 5th April, 2022, tabled ts 49th Report on "Assessments Relating to Agricultural Income".

Meaning of “engaged in the same or similar activities under the same or similar conditions” [Article 8(2) of the 1976 UK-Ireland Double Taxation Avoidance Convention] ― Irish Bank Resolution Corp Ltd v HMRC [2020] EWCA Civ 1128

2020-10-12T19:15:00.000+05:30

In Irish Bank Resolution Corp Ltd v HMRC [2020] EWCA Civ 1128, the UK Court of Appeal handed down on 28^th August, 2020, a decision which could have a far-reaching effect on the determination of the profits of permanent establishments, at least in the UK.

Facts

2. The taxpayers, being UK non-resident banks registered in the Republic of Ireland, carried on business in the UK through branches, which branches constituted UK Permanent Establishments (“PEs” or “PE”) of the taxpayer banks.

3. In assessments made on the banks in respect of the profits of the PEs, HMRC,
in exercise of the powers conferred upon it by Sec 11AA of the Income and Corporation Taxes Act 1988 (“TA 1988”), disallowed a part of the interest which the banks claimed to deduct as expenses of the borrowings made by the branches in order to finance their lending businesses. Sec 11AA was couched in the following terms :

“

(1) This section provides for determining for the purposes of corporation tax the amount of the profits attributable to a permanent establishment in the United Kingdom of a company that is not resident in the United Kingdom (“the non-resident company”).

(2) There shall be attributed to the permanent establishment the profits it would have made if it were a distinct and separate enterprise, engaged in the same or similar activities under the same or similar conditions, dealing wholly independently with the non-resident company.

(3) In applying subsection (2) ―

(a) it shall be assumed that the permanent establishment has the same credit rating as the non-resident company, and

(b) it shall also be assumed that the permanent establishment has such equity and loan capital as it could reasonably be expected to have in the circumstances specified in that subsection.

No deduction may be made in respect of costs in excess of those that would have been incurred on those assumptions

”

4. In making the disallowance, HMRC applied a Capital Attribution Tax Adjustment (“CATA”) which included attributing to the PEs, notional additional free capital in cases where it was said that a PE operating as a distinct and separate enterprise in the manner contemplated by Sec 11AA(2) would have had a higher amount of free capital and therefore a correspondingly lower amount of borrowed capital. The effect of the Adjustment was to attribute a lower interest cost to the PEs, resulting in a disallowance of part of the interest actually incurred by them.

5. The Court of Appeal acknowledged that the taxpayers’ appeals were “primarily concerned with s.11AA(3)(b).” (emphases supplied).

Rival Contentions

6. The essence of the taxpayers’ argument (represented by Mr Philip Baker, QC), however, was that the reference in Article 8(2) of the 1976 UK-Ireland Double Taxation Avoidance Convention (“DTAC”) to the PE being treated as a distinct and separate enterprise “engaged in the same or similar activities under the same or similar conditions” required an assumption to be made, ―

(i) not only that the PEs were engaged in the same or similar type of business to the one actually carried on by them,

(ii) but also that the PEs should be taken to have traded with the same ratio of free to borrowed capital as they actually employed during the relevant accounting period.

On this basis, it was contended by Mr Baker that, having regard to the mandate of Sec 788(3) of TA 1988 [to the effect that the arrangements contained in a DTAC, once confirmed by Order in Council, have effect in relation to income tax and corporation tax “notwithstanding anything in any enactment”], Sec 11AA(3)(b) could not be given effect to, inasmuch as its application would have the effect of disallowing part of the interest expended by the PEs, which effect would be contrary to Art 8(2) of the UK-Ireland DTAC and, consequently, Sec 788(3). Mr Baker’s further submission was that Sec 11AA(3)(b) could have been available to the Revenue if the UK and Ireland had effected a substantive amendment of Art 8 by incorporating therein the amendments carried out by the OECD in Art 7 of its 2010 Model Tax Convention. HMRC’s counter to this submission was that the amended 2008 OECD Commentary on the Model Tax Convention was confirmation that the approach based on an attribution of capital had long been used by Member States to implement the provisions of Art 7, and was recognised by the OECD as permissible under the terms of Art 7 of the Model Tax Convention in its unamended form.

Decision of the Court of Appeal

Whether the Practice of One Treaty Party Constitutes an Aid to Construction of the Treaty

7. The Court rejected HMRC’s contention that it having for long years applied one or the other form of adjustment to determine the appropriate amount of free capital attributable to PEs of non-resident banks, such a practice constituted material evidencing the construction of the relevant provisions of the concerned DTACs conformably with the manner of their implementation by HMRC. The Court endorsed the conclusion of the Upper Tribunal that the unilateral practice of a contracting party ― even if that practice showed a careful attempt by that party to abide by a treaty ― could not affect the meaning of that treaty or constitute material going to its construction.

Meaning of “engaged in the same or similar activities under the same or similar conditions” [Art 8(2) of the UK-Ireland DTAC]

8. The Court also upheld, for the following reasons, the Upper Tribunal’s rejection of the taxpayers’ construction of Art 8(2) of the UK-Ireland DTAC to the effect that that the PEs should be taken to have traded with the same ratio of free to borrowed capital as they actually employed during the relevant accounting period :

(a) The expression “same or similar provisions” must obviously refer to the business activities actually carried on by or through the PE and the market conditions which prevailed at the relevant time.

(b) In order to operate the hypothesis of a distinct and separate enterprise dealing at arm’s length including with the overseas company of which it is part, it seems necessary to compare the way in which the PE financed and accounted for its business with what it would have done had the PE operated as a separate enterprise. Otherwise the comparator provisions of Article 8(2) cannot work. To construe the phrase “same or similar conditions” as requiring the PE’s actual ratio of free to borrowed capital to be applied would be self-defeating. It would rob Article 8(2) of any real ability to depart from the accounting treatment of the PE which the overseas company might choose to adopt and it would make the application of a uniform test of attribution impossible.

(c) The taxpayers’ construction of Art 8(2) was not compelled by the ordinary meaning of the words used when read in their context, for which reason also it was liable to be rejected.

(d) The provisions of Art 7 of the Model Tax Convention going back to 1963 have never been intended to lay down precise or exhaustive sets of rules and have always given contacting states a measure of flexibility in deciding how to implement them. They are umbrella provisions. It would be inconsistent with this approach to interpret “same or similar conditions” in the way in which the taxpayers have suggested.

3 Foreign Cases Cited on behalf of Taxpayers

9. Although the Court was inclined to dismiss the taxpayers’ appeals for the foregoing reasons, it nonetheless felt compelled, for the sake of completeness and out of deference to the foreign courts concerned, to deal with them. The Court’s rulings on the applicability of the rationes of each of those cases were as set out below :

(1) National Westminster Bank plc v The United States

The United States Court of Federal Claims upheld the taxpayer’s claim that the formula used in the concerned Treasury Regulation to calculate deductible interest in the hands of the US branch of a UK bank was inconsistent with Article 7 of the 1975 US-UK Tax Treaty, for, inter alia, the reason that the Regulation treated the branch as a unit of the bank rather than as a separate entity and applied the formula without regard to the actual assets and liabilities shown on the books of the branch.

Court of Appeals’s Ruling

[Refer to the ruling against the case at Sr No 2 below]

(1-A) “Nat West 2”

The US Federal Court of Claims in this case upheld the taxpayer’s contention that the requirement of Art 7 of the 1975 US-UK Tax Treaty of treating the US Branch of NatWest
(a non-resident bank registered in the UK) as a “separate and distinct enterprise” did not mean that the branch should be treated as if it were "separately-incorporated,"; instead, "separate and distinct," meant separate and distinct from the rest of the bank of which it was a part. There was nothing in the plain words of the Treaty that allowed the government to adjust the books and records of the branch to reflect "hypothetical" infusions of capital based upon banking and market requirements that did not apply to the branch.

This decision was upheld by the US Federal Court of Appeals, which held as follows.
The US Branch was not required to maintain any minimal amount of capital. Therefore, because the corporate yardstick would essentially recharacterize loans that bear an interest expense as equity capital infusions based on regulatory and domestic market requirements that did not apply to the US Branch, the corporate yardstick ignored the real facts of the US Branch's situation and violated the 1975 Treaty as informed by the 1963 Draft Convention.

Court of Appeals’s Ruling

[For both, this case, as well as the one at Sr No 1 above]

The US Court of Appeal’s consideration of whether capital could be notionally attributed to the branch really turned on the argument of the IRS that the branch should be regarded as a US bank. The Court did not therefore have to consider a more nuanced approach to this question such as that embodied in s.11AA(3)(b) of TA 1988 and its denial of the IRS motion for reconsideration meant that one does not know what its reaction would have been to some other form of CATA. There was nothing in the decision to the effect that any form of capital attribution was precluded by the phrase “same or similar conditions” which was the argument the Court of Appeal had to consider. Nor, of course, did the US Court of Appeals have the benefit of the later OECD publications which have illuminated much of the thinking behind the provisions of Art 7 of the Model Tax Convention.

(2) Re Bayerische Hypo and Verinbank AG

[18 ITLR 1 ]

In this case, the French Conseil d'État was considering the taxation of the French branches of foreign banks. The branches obtained loans from their parent banks at very high rates of interest and sought to deduct the interest as an expense. This was disallowed up to the level of capital that the branches would have required had they been subsidiary banks registered in France. The Conseil d'État held that this tax treatment contravened Article 4 of the France-Germany Double Taxation Convention which was in similar terms to Article 8(2) of the 1976 UK-Ireland Convention. It held that it was not appropriate, in interpreting the provisions of Art 4(2) of the Convention, to refer to the Commentaries of the OECD on Art 7 of the Model Tax Convention, since those Commentaries were subsequent to the adoption of the provisions at issue.

Court of Appeals’s Ruling

As in the NatWest case, the argument centred on whether the branches should be treated as if they were French registered banks. The Conseil d'État did not seem to have based its decision on the “same or similar conditions” wording and perhaps, most important of all, refused to have regard to later OECD publications such as the 2008 Commentary regardless of whether they were merely confirmatory of the existing effect of the provisions of the Model Tax Convention. The decision was therefore of limited assistance in the present case.

(3) ING DIRECT v Central Court for Economic and Administrative Matters [18 ITLR 680 ]

In this matter, the Spanish Audencia Nacional was concerned with the taxation of the Spanish branch of a Dutch bank. The Spanish tax authorities attributed free capital to the PE in proportion to the transactions it carried out and made an adjustment to its tax return, which they said complied with the 1971 Spain-Netherlands Double Taxation Treaty. As in the other foreign cases, they did so on the basis of treating the branch as an independent company. Art 7 of the 1971 Treaty was in the same form as Art 7 of the Model Tax Conventions up to 2010. The Spanish court held that it could not construe Art 7 with the assistance of what was said in the 2008 Commentary because in their view, that and indeed, some of the earlier commentaries, in articulating the development of the principles of attribution, had made substantive changes to the framework of the model conventions which could not be applied retrospectively.

Court of Appeals’s Ruling

The Court of Appeal disagreed with this decision. It held that the structure of Art 7 of the Model Tax Convention leaves a wide degree of flexibility as to how the test it lays down should be implemented and the 2008 Commentary is an articulation of various methods of attributing capital that have long been in operation by states which have adopted the wording of the Model Tax Convention.

In sum, the Court held each of the 3 decisions to be inapplicable to the instant case.

Singh LJ’s Separate but Concurring Judgment

10. In a separate but concurring judgment, Singh LJ has made some telling points about the interplay between treaty provisions and domestic statute. He makes the point that, despite Parliament having itself enacted Sec 788(3) of TA 1988, a UK court would, nonetheless, be obliged to give effect to Sec 11AA of TA 1988, since the latter provision was brought onto the Statute Book later in time, in view of which Sec 788(3) would be deemed impliedly to have been repealed. While any student of the law would salivate at the opportunity of being instructed on this point, one wonders why Patten LJ did not reject the taxpayers’ case on the short ground that Sec 11AA(3)(b) prevailed over Sec 788(3) in view of the latter’s implied repeal.

TEST Post

2010-05-14T15:22:00.001+05:30

TEST Post

CIT v Gujarat Siddhi Cement Ltd (SC) - Investment Allowance under Sec 32-A of IT Act, 1961 Allowable on Subsequent Years' Cost Increases Attributable to Foreign Exchange Rate Fluctuations

2008-10-22T11:55:00.001+05:30

In CIT v Gujarat Siddhi Cement Ltd (SC), the taxpayer had acquired Plant and Machinery, the price of which was payable in foreign exchange. During the previous year relevant to the Assessment Year 1993-94 (being a year subsequent to the year of installation of the Plant and Machinery), consequent to an adverse fluctuation in the rate of exchange, the cost of the Plant and Machinery stood increased, pursuant to the provisions of Section 43-A of the Income-tax Act, 1961 ("Act"). The taxpayer claimed the Investment Allowance under Section 32-A of the Act, in respect of the increase in the cost of the Plant and Machinery. This claim was negatived by the Assessing Officer for the reason that the Plant and Machinery had been installed in an earlier year and not in the year in which the increase in its cost had occurred. In appellate proceedings, while the Commissioner(Appeals) upheld the disallowance, the Appellate Tribunal and the High Court directed acceptance of the taxpayer's claim.

Upon the Revenue preferring an appeal to the Supreme Court, the Court held that its decision in CIT v Arvind Mills (1992 Supp (2) SCC 190) was concerned with the allowability of the Development Rebate under Section 33 and not the Investment Allowance under Section 32-A and that, at the relevant time, sub-section (2) of Section 43-A (omitted subsequently) specifically disentitled a taxpayer from claiming the Development Rebate in respect of cost increases attributable to foreign exchange rate fluctuations. In effect, the Court held that the ratio of Arvind Mills (supra) had no application to the Investment Allowance under Section 32-A and that, accordingly, the Investment Allowance could not be denied in respect of the increased cost, even if such increased cost occurred in a year different from the year of installation of the relevant asset.

Vijay Ship Breaking Corpn & Ors v CIT (SC) -- Shipbreaking entitled to Deductions under Sections 80-HH & 80-I; Usance Interest NOT Subject to TDS under Section 195

2008-10-18T16:35:00.001+05:30

By a judgment delivered on October 1, 2008, in Vijay Ship Breaking Corpn and Ors v CIT, the Supreme Court of India has held as follows :

(1) Profits derived from Shipbreaking are eligible for deductions under Sections 80-HH and 80-I of the Income-tax Act, 1961 ("Act").

(2) Usance Interest paid to a non-resident is NOT subject to deduction therefrom of income-tax at source ("TDS") under Section 195 of the Act.

Claiming My Blog on CPABlogs.com

2007-10-17T16:19:00.001+05:30

This post is being made in order to enable me to claim my blog on CPABlogs.com

http://www.cpablogs.com/Listing.asp?key=88

CIT v Baby Marine Exports (SC) - Export House Premium Recd by Supporting Manufacturer Eligible for Sec 80-HHC Deduction

2007-03-31T17:05:00.001+05:30

After what appears to be an eternity, there is some good news on the tax front for Indian exporters. In a judgment delivered on March 30, 2007 in the case of CIT v Baby Marine Exports [in Civil Appeals No 281-284 and 286 of 2006], the Supreme Court of India has held that "export house premium", received by a supporting manufacturer from a Trading House or an Export House which has exported goods manufactured by such supporting manufacturer, constitutes part of the profits derived by such supporting manufacturer from the sale of goods or merchandise to such Trading House or Export House, "..... because it is an integral part of business operation of the respondent which consists of sale of goods by the respondent to the export house.". Consequently, a supporting manufacturer is entitled to a deduction under Section 80-HHC in respect of such "export house premium".

Even more important are the following important determinations of the Court :

"Section 80HHC was incorporated with the object of granting incentive to earners of foreign exchange. This Court in Sea Pearl Industries v. CIT Cochin (2001) 2 SCC 33 also observed that the object of Section 80HHC is to grant incentive to earners of foreign exchange. In IPCA Laboratory Ltd. v. Dy. Commissioner of Income Tax, Mumbai reported in (2004) 12 SCC 742 this Court has taken the same view. This Court in the said judgment observed that Section 80HHC has been incorporated with a view to provide incentive to export houses and this Section must receive liberal interpretation.

In Bajaj Tempo Ltd. v. Commissioner of Income Tax, Bombay reported in (1992) 3 SCC 78, this Court while interpreting Section 15-C of the Income Tax Act, 1922 observed that the Section, read as a whole, was a provision, directed towards encouraging industrialization by permitting an assessee setting up a new undertaking to claim benefit of not paying tax to certain extent on the capital employed. Similarly, Section 80 HHC has also been incorporated to give incentive for the earners of the foreign exchange. We must always keep the object of the Act in view while interpreting the Section. The legislative intention must be the foundation of the court's interpretation."

Full Text

OECD's Report on "Improving the Resolution of Tax Treaty Disputes"

2007-02-08T11:25:00.000+05:30

The Organisation for Economic Co-operation and Development ("OECD")'s Committee on Fiscal Affairs has, on January 30, 2007, adopted a Report titled "Improving the Resolution of Tax Treaty Disputes".

Full Text
(PDF)

CIT v Ralson Industries Ltd -- Supreme Court's Judgment on Sections 154 and 263 of Income-tax Act, 1961

2007-01-06T05:35:00.000+05:30

By its judgment delivered on January 4, 2007 in the case of CIT v Ralson Industries Ltd [ Appeal (Civil) No 10 of 2007 ], the Supreme Court of India has pronounced upon the validity of a revision initiated by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961 for revising the Assessment Order made under Section 143(3) by the Assessing Officer, after the Assessing Officer has initiated and completed proceedings for rectification under Section 154 of that Assessment Order on the very points on which the revision has been initiated by the Commissioner.

2. The facts of the case may now briefly be adverted to. In computing deductions claimed by it under Section 80-HHC and Section 80-I, the taxpayer apparently took into consideration transport receipts amounting to Rs 27,62,982 and interest receipts of Rs 1,41,878. The deductions so claimed were allowed by the Assessing Officer in his Assessment Order made under Section 143(3). Subsequently, the Assessing Officer issued a Notice to the taxpayer under Section 154, apparently proposing exclusion of the said two items of receipt in computing the two deductions. However, in the Order under Section 154, the Assessing Officer, after considering the taxpayer's response to the said Notice, did not disturb the deductions allowed in the Assessment Order. After the Order under Section 154 was made by the Assessing Officer, the Commissioner, by an Order made under Section 263, revised the Assessment Order by directing the Assessing Officer to exclude the said two items of receipt in computing the two deductions aforesaid.

3. The taxpayer thereupon preferred an appeal to the Income-tax Appellate Tribunal against the Commissioner's Order under Section 263. The Tribunal allowed the appeal of the taxpayer, for the following reasons :

(i) The matter had to be decided against the Revenue in view of the judgment of the jurisdictional Madhya Pradesh High Court in CIT v Vippy Solvex Products Pvt Ltd [1997] 228 ITR 587 (MP).

(ii) The Order under Section 154 having been made upon due consideration of the assessee's explanation for having included the said two items of receipt in computing the said two deductions, the Commissioner lacked jurisdiction to make any order under Section 263.

4. A reference to the Madhya Pradesh High Court at the instance of the Revenue was answered against the Revenue, the High Court holding, on the basis of its decision in Chunnilal Onkarmal Pvt Ltd [1997] 224 ITR 233 (MP), that no substantial question of law arose out of the order of the Appellate Tribunal.

5. Upon the Revenue carrying the matter in appeal to the Supreme Court, the Supreme Court held as follows :

(i) "The scope and ambit of a proceeding for rectification of an order under Section 154 and a proceeding for revision under Section 263 are distinct and different...... When different jurisdictions are conferred upon different authorities to be exercised on different conditions, both may not be held to be overlapping with each other. An order of assessment may or may not be rectified. If an order of rectification is passed by the Assessing Authority, the rectified order shall be given effect to. However, only because an order of assessment has undergone recification at the hands of the Assessing Officer, in our opinion, the same would not mean that revisional authority shall be denuded of exercising its revisional jurisdiction. Such an interpretation, in our opinion, would run counter to the scheme of the Act." (emphasis supplied)

(ii) The Appellate Tribunal's reliance on Vippy Solvex Products's Case (supra) was misplaced.

(iii)"The decision of the Madhya Pradesh High Court in Chunnilal Onkarmal (supra) is also not apposite. Initiation of a proceeding under Section 263 of the Act cannot be held to have become bad in law only because an order of rectification was passed. No such hard and fast rule can, in our opinion, be laid down. Each case is required to be considered on its own facts. In a given situation, the High Court may be held to be entitled to set aside both orders and remit the matter for consideration of the matter afresh. But in our opinion, it would not be correct to contend that only because a proceeding for rectification was initiated subsequently, the revisional jurisdiction could not have been invoked under any circumstances whatsoever. If such a proceeding was initiated, in our opinion, the contesting parties could bring the same to the notice of the Commissioner so as to enable him to take into consideration the subsequent events also. It goes without saying that if and when the Commissioner of Income Tax takes up for consideration a subsequent event, the assessee would be entitled to make its submission also in regard thereto." (emphasis supplied)

6. The judgment of the High Court was, accordingly, set aside by the Supreme Court, with the rider that the interests of justice would be met if the Commissioner was directed to have a fresh look at matter in the light of the the order of rectification passed by the Assessing Officer.

TaxProf Blog : IRS Issues Transfer Pricing Regs on Treatment of Services

2006-08-02T22:37:00.000+05:30

TaxProf Blog: IRS Issues Transfer Pricing Regs on Treatment of Services

Digest of UK's Double Taxation Treaties - April 2006 Issue

2006-04-29T14:35:00.000+05:30

The Digest of Double Taxation Treaties (April 2006 Issue) of the United Kingdom has recently been made available on the Net by the Centre for Non-Residents of Her Majesty's Revenue and Customs.

Technorati Tags : united kindom uk her majesty's revenue and customs centre for non-residents uk's tax treaties digest of uk's double taxation treaties tax treaties avoidance of double taxation raj raj kapadia tax indian tax international taxation raj kapadia's indian tax blog mumbai bombay maharashtra india

33rd Report of Indian Parliamentary Standing Committee on Finance on WIDENING OF TAX BASE AND EVASION OF TAX

2006-03-25T19:35:00.000+05:30

The 33rd Report of the Indian Parliamentary Standing Committee on Finance on "Widening of Tax Base and Evasion of Tax" has recently been posted on the Net.

2. The "RECOMMENDATIONS/OBSERVATIONS" of the Report are to be found in paragraphs 149 to 187 of the Report. Among the notable recommendations/observations are the following :

(i) "The Committee hope that the objective of eliminating the deficits as envisaged under the FRBM Act would be put back on track by reclaiming the ground lost in reducing the fiscal deficit due to pressing of the 'pause' button." (Paragraph 151)

(ii) "..... the Committee reiterate the need for urgently reducing the exemption provisions under the Tax Laws and rationalizing the same." (Paragraph 155)

(iii) "The Committee note that filing of Annual Information Returns has commenced and the data would be available to the authorized officers of the field formations for selecting scrutiny cases and for detection of evasion from April 2006 onwards. However, it is seen from the information furnished that unlike the other entities, the sub-registrars are either not compliant or are slow in filing the returns. This, being an area where a lot of concealment of actual transaction money is perceived to take place, the Committee urge upon the Government to pursue the matter with State Governments, so as to ensure that the sub-registrars file the AIRs in a time bound manner." (Paragraph 160).

(iv) "..... The Committee are particularly concerned to note that as per the Government’s own admission, atleast 27 lakh cases of issue of multiple PAN involving 11 lakh entities have been detected. What is worrisome in this regard is that holding multiple PANs may be used as a means for evading tax and also lead to scams or irregularities such as the one relating to IPOs witnessed recently where multiple PANs were reported to have been used for opening a number of Demat Accounts by the same individuals. The Committee, therefore, urge upon the Government to give focused attention in overcoming this problem and ensure a foolproof system of allotment/issue of PAN to the applicants. The Committee also expect the Government to ensure strong punitive action against persons identified to have willfully obtained multiple PANs." (Paragraph 161)

(v) "It is also seen that about 61 per cent of the financial transactions are to compulsorily include PAN and the rest are not required to meet this stipulation. This, the Committee feel warrants attention as tracing of such non-PAN transactions may not be easy. The Committee, therefore, feel the need to impress on the Government to consider making it compulsory to quote PAN in all types of financial transactions." (Paragraph 162)

(vi) "It is seen from the data furnished by the Government that the number of electronic TDS returns received from the Corporates has gone down in the year 2004-05. This is in spite of the increase registered in the number of transactions that are covered under the scheme over the years. This being indicative of lower compliance with the provisions of electronic filing of TDS returns, the Committee want the Government to probe into the matter and furnish a note on the issue at the earliest." (Paragraph 163)

(vii) "The Committee have also been impressed upon the need for creating an Ombudsman scheme on lines similar to that of Banking Ombudsman, for enabling redressal of the grievances of the tax assessees. The Committee note that though a ‘Tax Ombudsman’ scheme is presently prevalent in two places, a proposal for strengthening the mechanism has been worked out, which is awaiting approval. The Committee desire that the reworked and strengthened Tax Ombudsman scheme be made operational at the earliest, which would contribute in redressing the grievances of the taxpayers." (Paragraph 166)

(viii) "The unanimous view expressed before the Committee is that the time has come to bring all the services barring the basic and essential ones in the tax net. The Committee, therefore, reiterate their earlier recommendation that all the services, barring the essential or basic ones, should be brought under the tax net in one go. With the facility of availing CENVAT credit paid on the manufactured input utilised in a service and vice-versa, the comprehensive extension of tax on all services, though may be difficult, may not be an impossible task to achieve. ..... The Committee also express the need for coming out with a separate legislation for service tax, with clear definition of what constitutes the service component so as to avoid possible disputes between the Centre and State tax authorities and prevent `double taxation of the same instance under State VAT as well as Service Tax." (Paragraphs 167 and 168)

(ix) "The Committee are concerned about the reported evasion of tax by persons involved in non-agricultural activities in rural areas. The representatives of the Government too have agreed during submissions to the Committee that income from non-agricultural activities like money lending, trading in agricultural produce etc. was often passed of as agricultural income. The Committee are of the opinion that activities like private money lending need
to be discouraged by stronger measures. The Committee, therefore, impress upon the Government to look into the matter and have a focused survey to identify such evaders and take appropriate action. This, the Committee feel, could be done in coordination with the State Governments. With specific reference to persons having income from both agricultural and non-agricultural sources, the Committee are of the opinion that, perhaps, the time has come for the Government to seriously consider fixing, in consultation with the State Governments, a threshold limit beyond which, the income of such persons from agricultural sources could be brought under the tax net." (emphasis supplied) (Paragraph 169)

(x) "However, there exist certain general problems like exemptions, and specific problems like lack of information on high-spending and predominant use of cash as a mode of payment for high value items. Moreover, the Government are in agreement with the concept that high income tax payers with greater capacity to pay must pay more. Keeping in mind all the concerns, the Committee advise the Government to bring all such dealers who deal with such high-cost items as well as the persons with very high regular spending, under Section 285BA of the Income Tax to mandatorily file Annual Information Returns." (Paragraph 170)

(xi) "The data furnished on instances of misuse of various export promotion schemes reveals that the amount involved in the show cause notices (SCNs) issued during 2002-03 to 2004-05 totals to an enormous figure of Rs. 3,442 crores. The aspect of blatant misuse of various export promotion schemes resulting in loss of thousands of crores of revenue to the exchequer is evident from the fact that the Government have decided to withdraw the Target Plus Scheme following the advice of a Committee of Secretaries. Further, the Committee also note that as a follow up of the revelations made by the DRI, some of the schemes have been revamped. The Committee are, therefore, of the view that there is an urgent need to review all the existing export promotion schemes, after obtaining necessary inputs from DGFT, DRI, DGCIS etc. so as to make them evasion proof. ..... With specific reference to import of luxury cars etc. which is, inter alia permitted under the EPCG Scheme, the Committee note that of the 499 vehicles imported till date, as many as 61 have been identified to have been misused by way of ‘Third Party Transfer’ of the vehicles in violation of the ‘Actual User Condition’. What is particularly disturbing to note is that import licenses have been reported to have been issued to non existent or fictitious firms. The Committee’s examination of the issues relating to instances of misuse of Export Promotion Schemes inter alia reveal that there is a strong element of lack of proper co-ordination between the various agencies viz., Department of Revenue, DRI and DGFT. The Committee, therefore, strongly express the need for taking stringent action against the erring parties and also have a re-look at the mechanisms of co-ordination between the agencies/departments with a view to curb instances of misuse of the Schemes. ..... As regards Central Excise duty, the Committee note that while Pan Masala/Gutka and Iron and Steel are identified as commodities prone to evasion, certain others, including cigarettes, polyester yarn etc., which were earlier considered as evasion prone are no longer perceived to be so. The Committee recommend that the reasons for the proneness of these commodities to evasion be looked into in detail and appropriate remedial measures taken. ..... Real estate transactions are believed to be a major area for creation of black money. The high rate of stamp duty levied by the States is also perceived to be a reason for resorting to undervaluation of property transactions. The Committee, therefore, urge the Government to impress upon the State Governments to bring in a rationalized and uniform rates of Stamp Duty on lines similar to the one that paved the way for arriving at uniform VAT system in the States." (emphases supplied) (Paragraphs 172 to 175)

(xii) "In their interim report, the Committee had, inter-alia expressed concern on the manner in which Government cases were represented at various judicial fora and called for overhauling the processes involved in appointment of Government counsels. From the information furnished, the Committee are deeply concerned to note that the success rate of both the CBDT and CBEC in pursuing cases, particularly at the higher levels of the judiciary does not speak well of the departments. For instance, in the case of CBDT, 42.69% of the appeals filed in the High Court and 77.50% of appeals filed in the Supreme Court are informed to have been decided against the department. Similarly, the success rate in representing cases pertaining to customs and excise duties has only been to the extent of 23% and 28% in the Supreme Court in the year 2003-04. These figures give credence to the opinion often expressed that Government cases are represented in a routine manner in the higher levels of the judiciary. The Revenue Secretary too admitted before the Committee that there were problems at the departmental level in enabling effective pursuance of cases, for overcoming which, appropriate steps are said to have been taken. These, as informed to the Committee, include, putting in place a system for ensuring expeditious movement of data to the law officers; and identification and selection of lawyers with proven expertise in taxation matters for representing the Government. The Committee expect the Government to address the problems relating to representing its cases in various judicial fora expeditiously. ..... The Committee also note from the information furnished that though the field formations of the CBDT have been empowered to engage special counsels to represent important cases involving complex legal issues, similar powers have been denied to the CBEC. The Committee expect the Government to resolve the matter expeditiously, so as to enable the field formations of CBEC also to engage special counsels for representing complex cases in the Tribunals, High Courts and the Supreme Court." (emphases supplied) (Paragraphs 176 to 177)

(xiii) "The data furnished shows that the amount of arrears of revenue relating to the CBDT as on 1.4.2005 stands at a whopping Rs. 98,614 crores, amounting to almost three fourths of the total direct tax revenue realized during the year 2004-05. The Committee are at a loss to find that, out of this amount, only an amount of Rs. 5,486 crore is reported to be free from any serious difficulty in enabling recovery. The Committee expect that, at least, this amount
be recovered at the earliest. ..... The Committee also observe from the data furnished by the CBDT that out of the total arrears pending at various levels, around 50 per cent of the cases are pending at the level of Commissioner (Appeals) and around 46 per cent at the level of the Tribunal. This, in the opinion of the Committee, warrants effective, innovative and quick attention. They feel that the efforts that are being made are not effective enough. The Committee also recommend that the Government should set up a departmental committee to study the cases, concerning specific kinds of offences and other contraventions, that have been regularly decided against the department by the Tribunals, High Courts and the Supreme Court , and prevent further filing of cases of similarnature." (emphasis supplied) (Paragraphs 180 and 181)

(xiv) "The Committee, taking note of the fact that ostentatious display of wealth is done through extravagant spending of money on personal functions like marriages and high value luxury articles, recommended that the same has to be followed up effectively to detect concealment of wealth and evasion of tax. However, from the data furnished by the Government it is seen that only 75 enquiries into such spending have been conducted from the year 2001-02 to 2003-04 which resulted in disclosure of Rs. 43.58 crore. Further, it is also observed from the data on searches that the number of searches in the years 2003-04 and 2004-05 have gone down by more than half of that conducted in the year 2002-03 with the value of seizures during the years also going down by more than fifty per cent. Reduction in the number of searches has actually resulted in greater reduction in the value of seizures made. The Committee do not agree with the policy of the Government to merely reduce the number of searches. Instead, they are of the view that the number of searches should be enhanced with added emphasis on the quality of searches. They, therefore, recommend that the number of searches conducted should be increased which should be of high quality and based on solid evidences of evasion. ..... It is further recommended that the data obtained through the surveys/enquiries conducted by the department on various forms of luxurious indulgence, should be passed on to the assessing officer within a prescribed timeframe, so as to make the effort an effective deterrent on tax evasion." (emphases supplied) (Paragraphs 183 and 184)

(xv) " ..... Leaving a large percentage of tax returns left unassessed, may prompt the assessees to take a calculated risk in concealing their actual income. Hence, a need arises to ensure a fair percentage of assessment with a view to, on the one hand, increase the detection of evasion, and on the other hand, to act as a deterrent to reduce such risk taking by those who file their tax returns. In view of the above as well as the large scale computerization of various aspects of tax administration and the resultant efficient functioning of the department, the Committee recommend that the percentage of scrutiny should be raised suitably." (emphasis supplied) (Paragraph 185)

(xvi) "Further, in order to avoid the practice of the assessing officer making arbitrary additions in the returns filed without having material evidence, the Committee suggest creation of a mechanism to fix responsibility and accountability on the assessing officers for making such false additions." (emphasis supplied) (Paragraph 186)

(xvii) "The Committee observe that huge amounts are being sanctioned as interest on refunds every year and the same are not treated by the Government as an expenditure but as reduction in revenue. This procedure of making adjustments to circumvent the need for approval of Parliament to expenditure on interest element is neither correct nor healthy, as it allows for complicity between tax officials and assesses. The Committee are not in agreement with the Government’s contention that it is not possible to estimate the refund amount for a year in advance and obtain budgetary sanctions accordingly. In a related matter, the Committee note that budgetary provisions are made for compensation for the loss that may accrue to State Governments in implementing State level VAT, which is similar in nature. Further, the Committee feel that provisioning for the interest paid on refunds in the Demands for Grants will be in the interest of better Parliamentary scrutiny of the Demands of the Government. Therefore, the Committee recommend that the Government should take up the matter by keeping the above concerns of the Committee in view. Further, they desire that complete details of interest paid on refunds involving interest amount of Rupees one lakh and above, inter-alia furnishing names of individual/corporate assessees along with the amount of interest paid to each one of them, during the preceding three financial years (year-wise) be furnished to them. (emphases supplied) (Paragraph 187)

Technorati Tags : standing committee on finance parliamentary standing committee on finance indian parliamentary standing committee on finance 33rd report widening of tax base evasion of tax widening of tax base and evasion of tax raj raj kapadia tax indian tax raj kapadia's indian tax blog mumbai bombay maharashtra india

Union Budget of India 2006-2007 - Presented by P Chidambaram, Union Finance Minister on February 28, 2006

2006-02-28T16:48:00.000+05:30

The Union Budget of India for the Financial Year (Fiscal Year) 2006-07 was presented to the Parliament of India by the Indian Union Minister for Finance, Mr Chidambaram, on February 28, 2006.

2. A recording of the WebCast of the Speech of Mr Chidambaram can be viewed here.

3. The full text of the complete set of the Budget Papers can be accessed here. They consist of the following documents :

Key to the Budget Documents

Budget Highlights

Budget Speech

Budget at a Glance

Annual Financial Statement

Finance Bill, 2006

Memorandum Explaining Provisions in the Finance Bill, 2006

Receipt Budget

Expenditure Budget

Customs, Central Excise and Service Tax Notifications

Statement on Status of Implementation of Previous Budget Announcements

Macro-Economic Framework Statement

Medium Term Fiscal Policy Statement

Fiscal Policy Strategy Statement

Technorati Tags : indian budget union budget union budget of india union budget 2006-07 budget papers p chidambaram finance minister raj raj kapadia indian tax raj kapadia's indian tax blog mumbai bombay maharashtra india

Non-Discrimination Clause in US-France Tax Treaty of 1967 - Square D Co & Subsidiaries v Commissioner of IRS (US Court of Appeals - 7th Circuit)

2006-02-23T22:32:00.000+05:30

In Square D Company and Subsidiaries v Commissioner of the Internal Revenue Service, the 7th Circuit of the United States Court of Appeal had occasion to deal, inter alia, with the Non-Discrimination Clause in the US-France Tax Treaty of July 28, 1967.

Facts

2. Square D Company, a US Corporation with a French parent, claimed to deduct certain amounts of interest payable by Square D to its French parent, in the years in which such amounts accrued, i.e., in 1991 and 1992, in the face of Treasury Regulation § 1.267(a)-3, which provides for the cash method of accounting for deductions for payments to foreign related persons.

3. Square D rested its claim on two grounds :

(i) Treas. Reg. § 1.267(a)-3 constituted a flawed interpretation of the statutory mandate contained in Internal Revenue Code ("IRC") § 267(a)(3) and was invalid. [ IRC § 267(a)(3) provides that the "Secretary shall by regulations apply the matching principle of [§ 267(a)(2)] in cases in which the person to whom the payment is to me is not a United States person.". ]

(ii) Alternatively, Treas. Reg. § 1.267(a)-3 violated the Non-Discrimination Clause of the US-France Tax Treaty of July 28, 1967.

[ The Non-Discrimination Clause ran thus :

"A corporation of a Contracting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation which is other or more burdensome than the taxation and connected requirements to which a corporation of that first-mentioned Contracting State carrying on the same activities, the capital of which is wholly owned by one or more residents of the first-mentioned State, is or may be subjected.".

]

Reasoning and Decision

4. Upholding the decision of the Court below (viz., the Tax Court), the 7th Circuit held that the Commissioner properly concluded that Square D had to take deductions for payments to a foreign related party on the cash method, rather than on the accrual method. The 7th Circuit's rulings on the 2 grounds aforesaid raised by Square D are as follows :

(i) On the validity of Treas. Reg. § 1.267(a)-3 :

Treas. Reg. § 1.267(a)-3, on which the Commissioner relied, was a reasonable interpretation of ambiguous statutory provisions and was hence a valid provision.

(ii) On whether Treas. Reg. § 1.267(a)-3 was violative of the Non-Discrimination Clause in the US-France Tax Treaty of 1967 :

"..... In order to violate a nondiscrimination clause in a treaty, the additional burden must be directed at nationality. See Klaus Vogel, Klaus Vogel on Double Taxation Conventions 1290 (3d ed. 1997). Put differently, "discrimination against foreign-owned subsidiaries is all that the nondiscrimination clause at issue protected against." See Union BanCal Corp., 305 F.3d at 986. Such discrimination is absent here. The regulation requires that all interest payments to a foreign related party must use the cash method of accounting without regard to the nationality of the owner. The regulation does not impose the cash method simply because of foreign ownership, which would be prohibited, but rather for payments to a foreign related party. Even if a corporation were owned by a United States parent, it still appears all interest payments to one of these foreign related parties would lead to the use of the cash method. The requirement, therefore, hinges on the nationality of the related party to whom the payment goes and does not fluctuate based on nationality of the ultimate owner. It is merely fortuitous that, in this case, the foreign related party to which the payment was made also happened to be the owner. The regulation does not discriminate based on foreign ownership, and thus, does not violate the nondiscrimination clause.".

(All emphases in the original, except that of the portion commencing with the words "Even if" and ending with the words "ultimate owner".)

Comment : In an opinion which is otherwise extremely carefully crafted, what is intriguing in the portion emphasised by me above, is the employment of the expression "it still appears" and, more particularly, the word "appears". One would have thought that the conclusion from the relevant statutory provisions is clear, i.e., that even a US corporation with a US parent can deduct interest payable to a foreign related party only on the cash basis. However, the employment of the said expression (and in it the word "appears") would indicate that the Court is in some doubt as to the correctness of this conclusion. If, therefore, by employing that expression, the Court is saying that it is possible that a US corporation with a US parent can deduct interest payable to a foreign related party when such interest accrues, then, surely, no clearer case of discrimination between such a corporation and a US corporation with a foreign parent such as Square D can cogently be made out !!

Technorati Tags : non discrimination non discrimination clause tax treaties us-france tax treaty of 1967 square d company us court of appeals 7th circuit raj raj kapadia international taxation

OECD - TAG's Final Report - Are Current Treaty Rules for Taxing Business Profits E-Commerce Compatible ?

2005-12-23T16:17:00.000+05:30

The Technical Advisory Group on Monitoring the Application of Existing Treaty Norms for Taxing Business Profits ("TAG") of the Organisation for Economic Co-operation and Development ("OECD") has just released its Final Report on "Are the Current Treaty Rules for Taxing Business Profits Appropriate for E-Commerce ?"

Marks & Spencer plc v David Halsey (Her Majesty's Inspector of Taxes) (Judgment dated December 13, 2005 of European Court of Justice in Case C-446)

2005-12-14T00:37:00.000+05:30

By a long-awaited judgment delivered on Tuesday, December 13, 2005 in Marks & Spencer plc v David Halsey (Her Majesty's Inspector of Taxes), the European Court of Justice has ruled as follows on the 2 questions raised in the case :

Question No 1 :
1) In circumstances where:
– Provisions of a Member State, such as the United Kingdom provisions on group relief, prevent a parent company which is resident for tax purposes in that State from reducing its taxable profits in that State by setting off losses incurred in other Member States by subsidiary companies which are resident for tax purposes in those States, where such set off would be possible if the losses were incurred by subsidiary companies resident in the State of the parent company;

– The Member State of the parent company:

– subjects a company resident within its territory to corporation tax on its total profits, including the profits of branches in other Member States, with arrangements for the availability of double taxation relief for those taxes incurred in another Member State and under which branch losses are taken account of in those taxable profits;

– does not subject the undistributed profits of subsidiaries resident in other Member States to corporation tax;

– subjects the parent company to corporation tax on any distributions to it by way of dividend by the subsidiaries resident in other Member States while not subjecting the parent company to corporation tax on distributions by way of dividend by subsidiary companies resident in the State of the parent;

– grants double taxation relief to the parent company by way of a credit in respect of withholding tax on dividends and foreign taxes paid on the profits in respect of which dividends are paid by subsidiary companies resident in other Member States;
is there a restriction under Article 43 EC, in conjunction with Article 48 EC? If so, is it justified under Community law ?

Court's Ruling :
59 Accordingly, the answer to the first question must be that, as Community law now stands, Articles 43 EC and 48 EC do not preclude provisions of a Member State which generally prevent a resident parent company from deducting from its taxable profits losses incurred in another Member State by a subsidiary established in that Member State although they allow it to deduct losses incurred by a resident subsidiary. However, it is contrary to Articles 43 EC and 48 EC to prevent the resident parent company from doing so where the non-resident subsidiary has exhausted the possibilities available in its State of residence of having the losses taken into account for the accounting period concerned by the claim for relief and also for previous accounting periods and where there are no possibilities for those losses to be taken into account in its State of residence for future periods either by the subsidiary itself or by a third party, in particular where the subsidiary has been sold to that third party.

Question No 2 :
2) (a) What difference, if any, does it make to the answer to Question 1 that, depending on the law of the Member State of the subsidiary, it is or may be possible in certain circumstances to obtain relief for some or all of the losses incurred by the subsidiary against taxable profits in the State of the subsidiary?

(b) If it does make a difference, what significance, if any, is to be attached to the fact that:

– a subsidiary resident in another Member State has now ceased trading and, although there is provision for loss relief subject to certain conditions in that State, there is no evidence that in the circumstances such relief was obtained;

– a subsidiary resident in another Member State has been sold to a third party and, although there is provision under the law of that State for the losses to be used under certain conditions by a third party purchaser, it is uncertain whether they were so used in the circumstances of the case;

– the arrangements under which the Member State of the parent company takes account of the losses of UK resident companies apply regardless of whether the losses are also relieved in another Member State?

(c) Would it make any difference if there were evidence that relief had been obtained for the losses in the Member State in which the subsidiary was resident and, if so, would it matter that the relief was obtained subsequently by an unrelated group of companies to which the subsidiary was sold?
Court's Ruling :
60 In the light of the answer to the first question, there is no need to answer the second question.

Sanjeev Woollen Mills v CIT (SC) - Valuation of Closing Stock at Market Value - Validity of Tax Officer's Invocation of 1st Proviso to Section 145(1)

2005-11-26T12:02:00.000+05:30

In Sanjeev Woollen Mills v CIT, the question before the Supreme Court of India was whether, in a case in which the taxpayer had valued its closing stock of finished goods at market value, the Assessing Officer had jurisdiction to invoke and apply the first proviso to Section 145(1) of the (Indian) Income-tax Act, 1961 [ i.e., Section 145(1) as it stood prior to its amendment with effect from April 1, 1997 by the Finance Act, 1995 ], on the ground that, in the opinion of the Assessing Officer, the income of the taxpayer could not properly be deduced from such method of valuation.

2. By a judgment dated November 24, 2005, P P Naolekar, J, speaking for the Court, held as follows :

(i) The recognized and settled accounting practice is that closing stock "..... has to be valued on the cost basis or at the market value basis if the market value of the stock is less than the cost value.".

(ii) In the instant case, the taxpayer had not adopted the "established and settled practice" (i.e., the accounting practice aforesaid), inasmuch as the market value of the closing stock had been taken into consideration while arriving at the chargeable income although such market value was greater than the cost thereof.

(iii) Since there was no transfer of the goods constituting the closing stock, having regard to the fact that such closing stock constituted the opening stock of the succeeding year, the "..... profit earned is only notional.".

(iv) Income (i.e., the "notional" profit aforesaid) which has not been "derived at by the assessee" cannot be said to be income chargeable to tax.

(v) Consequently, the "..... rejection of the accounts maintained by the assessee for the valuation of the closing stock by the assessing officer and confirmed by the High Court ....." was in accordance with law.

(vi) Accordingly, the "..... power exercised by the assessing officer under Section 145 (being) as per the principles enunciated by various authorities and the courts .....", there was no good or sufficient reason to interfere with the order passed by the High Court.

3. The Court, therefore, dismissed the taxpayer's appeal.

Sedco Forex International Drill, Inc v CIT (SC) - Salary paid outside India for field break in the UK NOT taxable in India

2005-11-21T00:11:00.000+05:30

           In an important judgment delivered on November 17, 2005 in Sedco Forex International Drill, Inc v CIT, the Supreme Court has, reversing the judgment of the Uttaranchal Pradesh High Court, held that the salaries paid outside India (i.e., in the United Kingdom) by the Appellant-taxpayer to its employees (who were tax residents of the United Kingdom) in respect of periods of "field break(s)" undertaken outside India (i.e., in the United Kingdom) (which employees had, prior to undergoing such "field break(s)", rendered services in India under a wet lease of oil rigs by the Appellant-taxpayer to the Oil and Natural Gas Commission, India) were not chargeable to Indian income-tax in the hands of the concerned employees under Section 9(1)(ii) of the Income-tax Act, 1961 ("Act"), inasmuch as such salaries were not paid for "service rendered in India".

2.           The Supreme Court held that the first clause in the contracts entered into by the Appellant-taxpayer with the concerned employees relating to the payment of salaries for services to be rendered in India was distinct from the second clause relating to the payment of salaries for the "field break(s)". While the first clause clearly fell within the extended meaning given to the words "earned in India" in Section 9(1)(ii) of the Act, the second clause did not; accordingly, since the phrase "earned in India" is part of the statutory fiction created by Section 9(1)(ii), "(t)here is no question of introducing a further fiction by extending the Explanation" (i.e., the Explanation to that Section as such Explanation stood prior to its amendment with effect from April 1, 2000) "to include whatever has a possible nexus with service in India.". (emphases supplied)

3.           Although the High Court had not referred to the 2000 amendment to the Explanation aforesaid, the Supreme Court proceeded to deal with the question of whether such Explanation was clarificatory in nature and hence applicable with retrospective effect from the date on which the provision [Section 9(1)(ii)] to which it was an Explanation came into force, since that question was raised by the Respondent-Revenue. The Court ruled against the Revenue on this issue by holding that "(w)hen the Explanation seeks to give an artificial meaning (to the phrase) 'earned in India' and bring about a change effectively in the existing law and in addition is stated to come into force with effect from a future date, there is no principle of interpretation which would justify reading the Explanation as operating retrospectively.". (emphasis supplied)

Discussion Paper on Tax Avoidance and Section 103 of the (South African) Income Tax Act, 1962 - South African Revenue Service

2005-11-08T18:21:00.000+05:30

The South African Revenue Service ("SARS") has recently posted on its website, a "Discussion Paper on Tax Avoidance and Section 103 of the Income Tax Act, 1962 (Act No 58 of 1962)". The Background to, and the Purpose of, the Discussion Paper are best described in the following extract from the Introduction to the Paper :

"Section 103 of the Income Tax Act, 1962 (Act No. 58 of 1962), contains the Act's General Anti-Avoidance Rule (GAAR). In its current form, the GAAR has proven to be an inconsistent and, at times, ineffective deterrent to the increasingly complex and sophisticated tax "products" that are being marketed by banks, "boutique" structured finance firms, multinational accounting firms and law firms. ..... The pernicious effects of aggressive tax avoidance are manifold. They include not only the obvious short-term revenue loss, but longer term damage to the tax system and economy as well. These other effects include a corrosive effect upon the taxpayer compliance, the uneconomic allocation of resources, upward pressure on marginal tax rates, an unfair redistribution of the tax burden, and a weakening of the ability of Parliament and National Treasury to set and implement economic policy. Both SARS and National Treasury firmly believe that the vast majority of South Africans are honest, hard working and willing to pay their fair share of tax. ..... Unfortunately, those who engage in impermissible tax avoidance pose a problem for everyone else. It is the purpose of this Paper to start a discussion of these issues and of how best to address them on behalf of all South African taxpayers ..... ."
(emphasis supplied)

2. The Discussion Paper is a veritable treasure-trove of resources and materials on Tax Avoidance and has annexed to it, inter alia, the Australian GAAR, the Canadian GAAR, the New Zealand GAAR and the Spanish Anti-Avoidance Rule.

German Remedies Ltd v DyCIT (Bom) - Duty of Authority Granting Sanction under Section 151 of Income-tax Act, 1961

2005-11-05T11:27:00.000+05:30

By a judgment dated October 28, 2005 in the case of German Remedies Ltd v DyCIT (in Writ Petitions No 621 of 2005 and 619 of 2005), the Bombay High Court has held that, while granting sanction under Section 151 of the Income-tax Act, 1961 ("Act") for the issue of a Notice under Section 148 of the Act [ for reopening an income-tax assessment under Section 149(1)(b) of the Act ], it was obligatory on the part of the the sanctioning income-tax authority to --

(i) "..... verify whether there was any failure on the part of the assessee to disclose full and true relevant facts in the return of income filed for the assessment of income of that assessment year ....." and

(ii) "..... consider whether or not power to reopen is being invoked within a period of 4 years from the end of the assessment year to which they relate .....".

2. Since, in the above case, the sanctioning income-tax authority had failed to carry out its obligations aforesaid, the High Court held that such failure was "..... sufficient to justify the contention raised by the petitioner that the approval granted suffers from non-application of mind .....". Accordingly, on account of such failure as also for other reasons, the High Court quashed and set aside the Notices issued under Section 148.

Britannia Industries Ltd v CIT (SC) (October 5, 2005) - Guest-House Expenses Disallowable under Section 37(4) - Not Allowable under Sections 30 to 36

2005-10-10T13:01:00.001+05:30

In a judgment delivered on October 5, 2005 in the case of Britannia Industries Ltd v CIT, the Supreme Court of India has given a quietus to the following long-standing controversy in Indian Business Taxation, viz. :

Whether expenditure by way of rent and repairs incurred on the maintenance of, or depreciation allowance relating to, guest-houses are allowable under Sections 30 and 32, respectively, inspite of the provisions of Section 37(4) whereunder all expenditure incurred on such maintenance and depreciation allowance in respect of guest-houses and assets therein are specifically made disallowable ?

The Court (speaking through Altamas Kabir, J) has answered the above question in the negative, i.e., against the taxpayer.

The Pension Fund Regulatory and Development Authority Bill, 2005 - Twenty-First Report of Parliamentary Standing Committee on Finance

2005-08-27T18:59:00.000+05:30

[ Although off-topic, I am nonetheless making this post, in view of the importance of its contents ]

The 21st Report ( of the Parliamentary Standing Committee on Finance) on The Pension Fund Regulatory and Development Authority Bill, 2005 has recently been posted on the Net. The Full Text of the Bill is to be found in the "APPENDIX" to the Report.

The National Tax Tribunal Bill, 2004 - Eleventh Report of Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice

2005-08-27T12:28:00.000+05:30

          The 11th Report (of the Department Related Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice) on The National Tax Tribunal Bill, 2004 has just been published on the Net.

2.           The Committee has taken note of the strong opposition to the Bill of several witnesses who deposed before the Committee as well as of the members of the Committee. The Committee has not bought the explanation of the Secretary, Department of Legal Affairs, Ministry of Law and Justice, Government of India and has proceeded to ".......... place on record reservations regarding the setting up of National Tax Tribunal ..........". Having done so, the Committee states that, ".......... in the event of the Government being very keen to go ahead with this Bill, it should take into consideration the observations/recommendations of the Committe on the clauses of the Bill ..........".

3.           Among the significant recommendations of the Committee on the Bill are the following :
(i)      Clause 6(2) should be modified so that Chief Commissioners of Income-tax are also entitled to become Members of the National Tax Tribunal. [ This recommendation is founded on the Committee's feeling that these Chief Commissioners ".......... should be given encouragement towards the fag end of their career by giving them an opportunity to become Members ..........". This feeling is, in turn, based on the Committee's having noted that these Chief Commissioners ".......... pass appellate orders while adjudicating upon the assessment orders .........." and ".......... take a lot of risk while conducting search and seize operations against the tax evaders." ]

(ii)      Clause 13(1) should be modified so as to ensure that ".......... only qualified persons such as Advocates, Company Secretaries, Chartered Accountants, Cost and Works Accountants may be authorised to appear before the National Tax Tribunal.".

Jurisdiction of (Indian) Income-tax Appellate Tribunal to Sit In On — and Pass On — the Validity of Subordinate Legislation or Executive Decisions

2005-08-20T13:00:00.000+05:30

Until now,  a controversy has raged as to whether the (Indian) Income-tax Appellate Tribunal is empowered to sit in on — or pass on — the validity of subordinate legislation or executive decisions.

2.          The nearest that the Tribunal has come to holding that it has the power to apply the doctrine of  ultra vires  was in  Amar Dye-Chem Ltd v ITO [1983] 3 SOT 384 (Bom)(SB),  in which a 5-Member Special Bench held that if a statutory provision has been declared to be  ultra vires  by a court of competent jurisdiction (i.e.,  any of the High Courts or the Supreme Court),  the Tribunal has to respect the law so laid down by that court,  with the result that  the statutory provision declared to be  ultra vires  has to be ignored by the Tribunal.  In other words,  the Tribunal stopped short of holding that it had jurisdiction to strike down as being  ultra vires,   any statutory provision.

3.          However,  the Mumbai Bench of the Tribunal had recently,  in the case of  Reliance Industries Ltd v DDI (International Taxation) [2005] 3 SOT 501 (Mum),  occasion to consider this issue.  In that case,  the Government of India in its Ministry of Finance had,  vide  a communication of July 21,  1997,  conveyed to the taxpayer —
(i)     its approval of a loan agreement under which the taxpayer had agreed to borrow moneys from sources outside India and
(ii)     that,  consequent to such approval,  the interest,  commission and fees payable by the taxpayer on the moneys so borrowed by it was exempt from withholding tax under Section 10(15)(iv)(f) of the Income-tax Act,  1961.
Subsequently,  vide a letter dated April 12,  1999 addressed by the Deputy Director (ECB) of the  Government of India in its  Ministry of Finance to the taxpayer,  the exemption from withholding tax aforesaid was effectively withdrawn,  in the following terms :

“
          ……….

2.     Further,  it has been noted that the ECB funds raised above had not been utilized for the specified end uses which is one of the essential terms of the ECB approval for availing relevant exemptions under section 10(15)(iv)(f) of Income-tax Act,  1961.  You are,  therefore,  not entitled to any tax benefit in terms of the above provision of the Income-tax Act,  1961.
……….
”

The issue before the Tribunal was whether the executive was empowered to impose a condition (viz.,  the condition of “end use”) not laid down in the statute.  In what can only be described as a path-breaking ruling,  the Tribunal held as follows :

          “
     17.     ……….  On careful reading of the above decisions it is implicit that the Tribunal does have the power to deal with the validity of such rules or notification and by applying the doctrine of “reading down” can strike down such rules if held to be in contradiction with the provisions of the statute itself.  The gist of all the above decisions is that the rules are made only for the purpose of carrying out the provisions of the Act which cannot be taken away or whittle down the effect conferred by the statute.  With the result we hereby agree with the contentions of ld. A.R. that the ITAT has both,  the power and duty,  to deal with such rules or notification and decide whether the same are in agreement with the main provisions of the statute.  In view of above discussion,  in the present appeal,  now we have to decide the validity of the withdrawal of exemption as has been done by the subordinate competent authority.  ……….
”

4.          Consequent to its above ruling,  the Tribunal proceeded to hold,  inter alia,  that,  “considering the totality of the facts,  circumstances,  conditions of the scheme,  evidences of utility of the funds and the legal matrix of the case;  the withdrawal of the exemption was unwarranted”.

5.          Of course,  it might be argued that the above ruling is  obiter,  at least insofar as subordinate legislation is concerned,  having regard to the fact that the issue before the Tribunal was whether the Tribunal was empowered to strike down as invalid,  an executive decision which was inconsistent with the statutory enactment under which such decision was purportedly made.  However,  even if such an argument is upheld,  the ruling will nonetheless strengthen the hands of a future Bench for holding that the Tribunal is invested with the jurisdiction to strike down as  ultra vires,  even subordinate legislation.

17th Report of Indian Parliamentary Standing Committee on Finance on Demands for Grants of Ministry of Finance for Financial Year 2005-06

2005-08-04T22:21:00.000+05:30

The Seventeenth Report of the Standing Committee on Finance of the Parliament of India, which was tabled in both Houses of Parliament on April 20, 2005, has recently been published on the web. While the Report considers - and comments and makes recommendations on - the Demands for Grants of the Ministry of Finance for the Financial Year 2005-06, its most interesting part for me is "ANNEXURE-III" thereto, in which are set out, in extenso, the following Instructions issued by the Central Board of Direct Taxes ("CBDT"), in respect of the monetary limits and other conditions for the filing of Appeals and References by the Revenue :

(i) Instruction No 1979 dated 27th March, 2000
(ii) Instruction 1985 dated 29th June, 2000
(iii) Instruction No 6/2003 dated 17th July, 2003 and
(iv) Instruction No 5/2004 dated 27th May, 2004

The Full Text of the Report can be accessed here (PDF).