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Real Estate bill passed in RS: Five ways it will benefit homebuyers

noreply@blogger.com (Simply Indian Tax) — Thu, 10 Mar 2016 17:22:00 +0530

Real Estate bill passed in RS: Five ways it will benefit homebuyers

The much awaited Real Estate Bill, which aims to protect the interests of buyers and bring more transparency to the sector was on Thursday passed in Rajya Sabha.

The much awaited Real Estate Bill, which aims to protect the interests of buyers and bring more transparency to the sector was on Thursday passed in Rajya Sabha. The bill was first introduced in 2013 and amendments have been made to it by the present government. -

The Finance Ministry in 2012 paper on black money had pointed out that the real estate sector is vulnerable to black money because of under-reporting of transactions.

Homebuyers struggling with inordinate project delays, poor construction quality and others whims of builders will heave a huge sigh of relief. The Rajya Sabha has cleared the the Real Estate (Regulation and Development) Bill after it was introduced by the government in the Upper House today.

The bill, which seeks to protect the interest of buyers and also bring transparency to the real estate sector in India, was first introduced by the erstwhile UPA government in 2013 and the government has brought to the floor of the parliament after some amendments.

Here, we bring you five ways that the new legislation will benefit homebuyers:

Setting up of a regulatory authority

The real estate sector, unorganised so far, has been functioning largely unregulated where buyers are often left at the whims of the developer. The bill seeks to fix this by proposing to set up state-level Real Estate Regulatory Authorities (RERAs) which will regulate transactions related to both residential and commercial projects. The authority will also grade projects in order to facilitate more informed decisions for buyers.

Tackling delayed possession woes

Delayed possession of flats has been the single biggest problem for buyers in today’s market. Builders rarely stick to possession dates and the penalties promised in the Builder-Buyer Agreements on account of delays in construction. Want of funds is also cited as one of the reasons behind delays. The bill mandates builders to keep aside 70 per cent of the money received from buyers in a separate account. This amount can only be used for the project that the money has been paid to the builder. Often, builders deploy the funds received for one project into another.

Making builders accountable

Builders offering delayed possession of projects, sometimes running into years, can no longer shirk accountability. The new bill mandates builders to shell out an equal payment of interest for delayed possessions as compared to the interest it charges buyers on account of delayed payments. Currently, builders pay only 2-3 per cent interest in case of default and delays, while the buyer has to shell out anywhere between 15-18 per cent for defaults. The bill increases the time period a developer can be held accountable for structural defects to 5 years from the existing two year timeframe.

Transparency in information

The builder can no longer take buyers for a ride by promising a particular area and delivering something much lesser. The developers have for long exploited the concept of ‘super area’ to mislead customers. The bill seeks to set this right by disallowing sale of a property on the basis of ‘super area’ which includes both flat area and common area. Violation of this norm can lead to a three-year term for the developer.

More power to the buyer

Contrary to the current practice, the new bill makes it compulsory for developers or builders to muster the consent of two-thirds of the buyers to bring about any changes to the original plan. Builders often resort to tweaking the construction and layout plan of a particular society without the knowledge of buyers. Introduction or modification of any new element in a project which is different from what was shown to the buyer at the time (new tower, school, temple etc) of booking will not be allowed without the consent from two-thirds of the buyers’.Source:http://indianexpress.com

PALAKKARAN BANKERS & CHIT FUNDS vs.DEPUTY COMMISSIONER OF INCOME TAX

noreply@blogger.com (Simply Indian Tax) — Thu, 10 Mar 2016 17:15:00 +0530

PALAKKARAN BANKERS & CHIT FUNDS vs.DEPUTY COMMISSIONER OF INCOME TAX

COCHIN TRIBUNAL

B P JAIN AM & GEORGE GEORGE.K, JM.

IT(SS)A No. 03/Coch/2014

Mar 2, 2016

(2016) 46 cch 0221 CochinTrib

Legislation Referred to

Section 158BFA(2), 273B, 271

Case pertains to

Asst. Year

Decision in favour of:

Assessee

Search and seizure—Suppression of Income—Penalty u/s 158BFA(2)—Assessee was partnership firm consisting of three partners, engaged in business of money lending and chit fund business—Search was conducted in premises of assessee—Subsequently notice was issued to assessee and on basis of statement given by one of partners u/s 132(4) and material seized during course of search, AO determined undisclosed income at Rs.31,00,724—AO observed from books of account seized during course of search that it was clear that unaccounted transactions were carried out— It was further observed that entries recorded were 1/100th of real figures—AO multiplied figures by 100 and arrived at addition of Rs.37,51,374/- on account of unaccounted business—Penalty proceedings were initiated against assessee by issuance of notice u/s 158BFA(2)—AO imposed penalty of Rs.18,60,043/- u/s. 158BF(2) on ground that there was clear case of suppression of income by assessee—CIT(A) dismissed appeal of assessee holding that language of section 158BFA(2) makes it obligatory upon AO to impose penalty on portion of undisclosed income determined—CIT(A) confirmed penalty imposed on assessee—Held, in CIT vs. Becharbhai Parmar (Supra) Guj. High Court held that “Sub-section(2) of Section 158BFA makes it clear that it is well within discretion of AO while framing assessment for block period, whether or not to impose any penalty or not— Words, “may direct” have to be given its normal meaning, leaving discretion to officer— In absence of any special reason word “may” could not be read as “shall”—It was, of course, true that upon satisfying such conditions, that in assessee would get immunity from penalty—Nevertheless, this was not thing as to suggest that in no other case, or on no other ground AO may at his discretion, not impose penalty moment additions under clause (c) of section 158BC were sustained—Penalty u/s 158BFA(2) was not mandatory in nature— It was true that Section 273B which provides that penalty should not be imposed in certain cases on assessee proving that there was reasonable cause for failure to pay tax refers to several provisions such as sections 271, 271A etc., made no mention of Section 158BFA(2)—AO was directed to cancel penalty imposed u/s 158BFA(2) and order of CIT(A) was reversed—Assessee’s Appeal allowed

Held

In the case of CIT vs. Becharbhai Parmar (Supra) the Hon’ble Guj. High Court has held as “Sub-section(2) of Section 158BFA makes it clear that it is well within the discretion of the Assessing Officer while framing the assessment for the block period, whether or not to impose any penalty or not. The words, “may direct” have to be given its normal meaning, leaving discretion to the officer. In absence of any special reason the word “may” cannot be read as “shall”. The contention of the counsel for the Revenue that only upon satisfaction of the conditions contained in proviso to sub-section (2) that the assessee, in case of the block assessment can be spared of the penalty cannot be accepted. It is, of course, true that upon satisfying such conditions that in assessee would get immunity from penalty. Nevertheless, this is not a thing as to suggest that in no other case, or on no other ground the AO may at his discretion, not impose penalty the moment additions under clause (c) of section 158BC are sustained. In other words, the penalty u/s. 158BFA(2) is not mandatory in nature. It is true that Section 273B which provides that penalty shall not be imposed in certain cases on the assessee proving that there was reasonable cause for failure to pay tax refers to several provisions such as sections 271, 271A etc., makes no mention of Section 158BFA(2). This still does not mean that penalty u/s. 158BFA(2) is mandatory.” Considering the totality of the facts more so in view of the fact that additions have been upheld on estimation basis and in view of the decision of the co- ordinate Bench cited hereinabove, ITAT are of the view that no penalty is leviable in the present case. ITAT accordingly direct the AO to delete the penalty.

(Para 14.9)

Assessing Officer to cancel the penalty imposed u/s. 158BFA(2) of the Act and accordingly, the order of the Ld. CIT(A) is reversed. Accordingly, all the grounds raised by the assessee are allowed.

(Para15)

Conclusion

Penalty u/s 158BFA(2) is not mandatory in nature, and section 273B does not mention section 158BFA(2) for imposition of penalty hence penalty imposed u/s 158BFA(2) liable to be quashed

In favour of

Assessee

Cases Referred to

CIT vs. Dodsal Ltd. (2008) 218 CTR 430

ACIT vs. Shri Chandrakant Kashinath Kele in I.T.A. No. 804/PN/2013 dated 13/03/2015

Champaklal J. Khamar vs. ACIT in IT(SS)A No. 340/AHD/2011 dated 18/06/2014

CIT vs. Satyendra Kumar Dosi (2009) 315 ITR 172

Counsel appeared:

R. Krishna Iyer, CA for the Assessee.: K P Gopakumar, Sr DR for the Revenue

B P JAIN, AM.

1. This appeal of the assessee arises from the order of the Ld. CIT(A)-V, Kochi dated 24-09-2014 for the block period ending 28-06-2001.

2. The brief facts of the case are that the assessee is a partnership firm consisting of three partners and is engaged in the business of money lending and chit fund business. On 28th June, 2001, a search u/s. 132 of the Act was conducted in the premises of the assessee. Subsequently notice u/s. 158BC was issued to the assessee on 16/11/2001. On the basis of the statement given by one of the partners u/s. 132(4) of the Act and the material seized during the course of search, the Assessing Officer, vide order dated 27/06/2003 determined the undisclosed income at Rs.31,00,724/-. The Assessing Officer observed from the books of account seized during the course of search that it was clear that the unaccounted transactions were carried out. It was further observed that the entries recorded were 1/100th of the real figures. To determine the addition, the AO multiplied the figures by 100 and arrived at the addition of Rs.37,51,374/- on account of unaccounted business.

3. Similarly, for gold loan business, the Assessing Officer made an addition of Rs.6,28,850/- with respect to unaccounted gold loans. Further, on the basis of statement given u/s. 132(4) and the books of account seized, the undisclosed gold interest income was determined at Rs.6,26,145/-.

4. The assessee challenged the quantum addition before the Ld. CIT(A) who vide order dated 02.08.2005 confirmed the additions made by the Assessing Officer.

5. Aggrieved by the same, the assessee challenged before the ITAT. However, the appeal of the assessee was dismissed for non prosecution vide order dated 14/07/2010.

6. Penalty proceedings were initiated against the assessee by issuance of notice u/s. 158BFA(2) of the Act on 27/03/2003. The same were revived vide notice dated 01/11/2010. The Assessing Officer vide order dated 30/03/2011 imposed penalty of Rs.18,60,043/- u/s. 158BF(2) of the Act. It was observed by the Assessing Officer from the statement of the partner of the assessee and the books of account seized during the course of search that there was a clear case of suppression of income by the assessee.

7. The assessee challenged the penalty order dated 30-03-2011 before the Ld. CIT(A). The Ld. CIT(A) vide the impugned order dated 24/09/2014 dismissed the appeal of the assessee and observed that the language of section 158BFA(2) makes it obligatory upon the Assessing Officer to impose penalty on the portion of the undisclosed income determined. The assessee is in appeal before us and has challenged the aforesaid order of the Ld. CIT(A) who confirmed the penalty imposed by the Assessing Officer.

8. The Ld. AR has argued that the penalty levied on the assessee should be deleted as there was no evidence to suggest that the assessee had earned unaccounted income except for the statement made by one of the partners. The Ld. AR further argued that the addition has been made on an estimation basis and therefore, penalty cannot be levied.

9. The ld. DR on the other hand has rebutted the submissions made by the Ld. AR. He relied upon the orders passed by the Assessing Officer and the Ld. CIT(A) to support his submissions.

10. We have heard the rival contention and perused the facts of the case. The levy of penalty u/s. 158BFA(2) is not automatic. The Hon’ble Bombay High Court in the case of CIT vs. Dodsal Ltd. (2008) 218 CTR 430 held that section 158BFA(2) provides a discretion to the Assessing Officer for the levy of penalty and what is to be examined is whether there exists appropriate reasons for levy of penalty. The fact that the addition has been confirmed in the quantum proceedings would not by itself be the basis for sustaining the penalty u/s. 158BFA(2) of the Act.

11. The Assessing Officer has relied upon the statement of one of the partners of the assessee. The Assessing Officer has further relied upon the books of account seized during the course of search in the case of the assessee. Apart from that, there is no clinching evidence to demonstrate that the assessee had made unaccounted investments apart from what is declared by the assessee. Even with respect to the books of account seized during the course of search, a bare perusal of the same would not show that the assessee had represented 1/100th of the real income earned. The Assessing Officer had only deduced that the entries had been represented in the aforesaid manner. There is no other evidence to suggest that the gold loans and other advances were 100 times the accounted income. None of the parties to whom the loans had been advanced by the assessee had been examined. It is not the case of the Revenue that the unaccounted cash balance was recovered during the course of search from the premise of the assessee, so as to suggest the earning of unaccounted income. Also, the Assessing Officer has not brought on record any document pertaining to loan transaction which was executed for a higher amount than what is reflected in the books of account. The Assessing Officer had computed the addition on lumpsum basis rather than making separate additions for each year.

12. As regards the interest income is concerned, the Assessing Officer had relied upon the statement made by one of the partners of the assessee and the addition is not made on the basis of concrete documentary evidence found during the course of search. This clearly shows that the additions made in the case of the assessee were on the basis of estimation. There is no independent determination of the undisclosed income. Merely because the explanation of the assessee was rejected by the Assessing Officer with respect to the materials seized, penalty cannot be levied in the case of the present case, that too when the additions have been made on the basis of estimation.

13. In the case of ACIT vs. Shri Chandrakant Kashinath Kele in I.T.A. No. 804/PN/2013 dated 13/03/2015 Act, the ITAT, Pune deleted penalty u/s. 158BFA wherein the additions were made on estimation basis. The Bench observed as under:

“9. In our considered opinion, the fact that the addition has been sustained in the quantum proceedings cannot ipso facto be a basis for sustaining penalty u/s 158BFA(2) of the Act, whose application is not mandatory as held by the Hon’ble Bombay High Court in the case of Dodsal Ltd. (supra). The manner in which the addition has been made in the course of the quantum assessment proceedings clearly shows that the unexplained investment in house property of Rs.11,71,687/- has been arrived at on an estimate basis. In so far as the reference made by the Revenue to the loose papers found of Rs.9.99 lakhs is concerned, it is quite clear that the addition has not been made with reference to the said loose papers found in the course of search. Ostensibly, Revenue has justified the addition in the quantum proceedings on the basis of estimation and so far as the estimation is concerned, even the DVO has estimated the investment in the property near about the same amount as declared by the assessee in the account books. The CIT(A) in the quantum proceedings estimated the value of investment at Rs.30 lakhs as against Rs.40 lakhs made by the Assessing Officer. Under these circumstances, in our view, the CIT(A) has correctly appreciated the facts and circumstances of the case and held that the impugned addition on account of unexplained investment in house property of Rs.11,71,687/- was on estimation basis and not on the basis of any concrete evidence found in the course of search towards incurrence of unaccounted expenditure qua the impugned property. Therefore, having regard to the facts and circumstances of the present case, we affirm the action of the CIT(A) in deleting the penalty with respect to the addition of Rs.11,71,687/- on account of unexplained investment in house property.

10. With respect to the addition on account of unexplained marriage expenditure of Rs.1,96,335/-, in this regard the relevant facts are as follows. The quantum assessment proceedings revealed that in the course of search certain loose papers were found which indicated marriage expenses and on the basis of which the Assessing Officer estimated the expenditure at Rs.12,00,000/-. On the other hand, assessee had shown an expenditure on account of marriage at Rs.5,26,712/- and therefore the Assessing Officer made an addition of Rs.6,73,228/-. In the appellate proceedings, the estimation of total marriage expenditure was scaled down to Rs.7,34,047/- as against Rs.12,00,000/- made by the Assessing Officer and as a consequence addition on account of unexplained marriage expenditure came to Rs.1,96,335/-. On the aforesaid resultant addition, Assessing Officer has imposed penalty u/s 158BFA(2) of the Act. The expenditure has been estimated for marriage of two daughters of the assessee. The CIT(A) has reproduced the submissions of the assessee in para 6.2 of the impugned order on the basis of which he has inferred that the addition of Rs.1,96,335/- has been made on estimate basis only.

11. We have perused the case setup by the assessee before the CIT(A) and find that the CIT(A) has thoroughly examined it and his inference that addition is based on estimate basis is a reasoned one. Before us, no cogent material or reasoning has been advanced by the Ld. Departmental Representative to say that any document or evidence was found in the course of search which would indicate clinchingly incurrence of unaccounted expenditure on marriage of assessee’s daughters. Merely because, assessee’s explanation with respect to the loose papers was rejected in the quantum proceedings and the marriage expenses estimated cannot be a ground to levy penalty u/s 158BFA(2) of the Act in the context of the facts and circumstances of the present case. Therefore, order of the CIT(A) on this aspect is also hereby affirmed.

12. Thus, we find no reasons to interfere with the decision of the CIT(A) which is hereby affirmed and accordingly, Revenue fails in its appeal.

13. In the result, the appeal of the Revenue is dismissed.”

14. In the case of Champaklal J. Khamar vs. ACIT in IT(SS)A No. 340/AHD/2011 dated 18/06/2014, the ITAT, Ahmedabad observed as under:

“7. We have heard the rival submissions and perused the material on record. On the basis of submissions made and the material on record, the factual position that emerges is that search u/s. 132 was carried out at the residential premises of Assessee and certain documents were found and seized. Consequent to search operations block assessment was completed and the total undisclosed income was determined by making addition of Rs.11,79,901/-. The addition made by the Assessing Officer was deleted by CIT(A). Against the order of CIT(A), Revenue preferred appeal before ITAT. Hon’ble ITAT confirmed the addition only to the extent of Rs.3,77,338 as against the total addition of Rs.11,79,901/- as made by the Assessing Officer. On perusing the order of Tribunal, it is seen that the addition on account of cash and investment in articles were sustained on estimated basis. With respect to the addition on account of investment in jewellery it is seen that Assessee had stated to have received the jewellery from her sister in Nairobi but in the absence of any supporting declaration filed before customs/immigration, addition to the extent of 190 gms. of jewellery was sustained. In the present case there is nothing to suggest that the explanation of the Assessee was found to be untrue.

8. In the case of Mahendra Vyas (supra), the coordinate Bench has held as under:-

“8. We do not agree with the submission of Revenue that penalty u/s. 158BFA is mandatory in view of the decision of Rajasthan High Court in the case of CIT vs. Satyendra Kumar Dosi (2009) 315 ITR 172 where the Hon’ble High Court has held that levy of penalty u/s. 158BFA(2) is discretionary and not mandatory.

9. In the case of CIT vs. Becharbhai Parmar (Supra) the Hon’ble Guj. High Court has held as under:

“Sub-section(2) of Section 158BFA makes it clear that it is well within the discretion of the Assessing Officer while framing the assessment for the block period, whether or not to impose any penalty or not. The words, “may direct” have to be given its normal meaning, leaving discretion to the officer. In absence of any special reason the word “may” cannot be read as “shall”. The contention of the counsel for the Revenue that only upon satisfaction of the conditions contained in proviso to sub-section (2) that the assessee, in case of the block assessment can be spared of the penalty cannot be accepted. It is, of course, true that upon satisfying such conditions, that in assessee would get immunity from penalty. Nevertheless, this is not a thing as to suggest that in no other case, or on no other ground the AO may at his discretion, not impose penalty the moment additions under clause (c) of section 158BC are sustained. In other words, the penalty u/s. 158BFA(2) is not mandatory in nature. It is true that Section 273B which provides that penalty shall not be imposed in certain cases on the assessee proving that there was reasonable cause for failure to pay tax refers to several provisions such as sections 271, 271A etc., makes no mention of Section 158BFA(2). This still does not mean that penalty u/s. 158BFA(2) is mandatory.”

9. Considering the totality of the facts more so in view of the fact that additions have been upheld on estimation basis and in view of the decision of the co- ordinate Bench cited hereinabove, we are of the view that no penalty is leviable in the present case. We accordingly direct the AO to delete the penalty.

10. In the result the appeal of the Assessee is allowed.”

15. In view thereof, we direct the Assessing Officer to cancel the penalty imposed u/s. 158BFA(2) of the Act and accordingly, the order of the Ld. CIT(A) is reversed. Accordingly, all the grounds raised by the assessee are allowed.

16. In the result, the appeal of the assessee is allowed.

*****

V.S. CAPITAL SERVICES PVT. LTD. vs.INCOME TAX OFFICER

noreply@blogger.com (Simply Indian Tax) — Thu, 10 Mar 2016 17:14:00 +0530

V.S. CAPITAL SERVICES PVT. LTD. vs.INCOME TAX OFFICER

DELHI TRIBUNAL

H. S. SIDHU, JM & L.P. SAHU, AM.

ITA No. 6162/Del./2012

Mar 3, 2016

(2016) 46 cch 0224 DelTrib

Legislation Referred to

Section 68, 143(3)

Case pertains to

Asst. Year 2002-03

Decision in favour of:

Assessee

Reassessment—Income Escaping assessment—Validity—Reason to believe—Assessee filed return of income declaring income of Rs.3,811—Return was processed u/s 143(1)—Information had been received from DIT(Investigation) that assessee company had received accommodation entries from various companies/parties to tune of Rs. 2,00,000—Those entries were in nature of accommodation entries and in reality it was assessee’s own unaccounted money which had been shown in books of accounts as receipt from parties/companies—Accordingly, case was reopened u/s 147 after recording reasons—Notice u/s 148 was issued and was served upon assessee—In response to said notice, assessee company stated that “return filed by assessee was considered as return filed in response to notice u/s 148—During assessment proceedings AO noticed that accommodation entries were of Rs. 11,10,000/- and not of Rs.2,00,000/- as mentioned in reasons recorded—AO further noticed that assessee had raised share application money/share capital from various companies/parties—Assessee companies furnished required details in respect of share application/share capital raised during year— AO held that in terms of section 68 burden was on assessee to offer satisfactory explanation about nature and source of amount found credited in books of assessee and it further held that it was clear that mere furnishing of particulars was not enough—AO had reason to believe that income of assessee had escaped assessment hence he completed assessment u/s. 143(3)/148—CIT(A) dismissed appeal of assesse filed against validity of reassessment Order passed by AO—Held, after going through reasons recorded by AO and finding given by CIT(A), it viewed that AO had not applied his mind so as to come to independent conclusion that he had reason to believe that income had escaped during year—In Tribunals view reasons were vague and not based on any tangible material as well as same were not acceptable in eyes of law—AO had mechanically issued notice u/s 148 on basis of information allegedly received by him from Directorate of Income Tax (Investigation)—In CIT vs. G&G Pharma India Ltd. it was held that once date on which so called accommodation entries were provided was known, it would not have been difficult for AO, if he had in fact undertaken exercise, to make reference to manner in which those very entries were provided in accounts of Assessee, which must have been tendered along with return, which was filed on 14th November 2004 and was processed u/s 143(3)—Without forming prima facie opinion, on basis of such material, it was not possible for AO to have simply concluded that assessee company had introduced its own unaccounted money in its bank by way of accommodation entries"—Basic requirement that AO must apply his mind to materials in order to have reasons to believe that income of Assessee escaped assessment and same was missing in present case—While CIT(A) might have proceeded on basis that reopening of assessment was valid, this did not satisfy requirement of law that prior to reopening of assessment, AO applied his mind to materials, to conclude that he had reason to believe that income of Assessee had escaped assessment— Unless basic jurisdictional requirement was satisfied post mortem exercise of analysing materials produced subsequent to reopening would not rescue inherently defective reopening order from invalidity—Assessee’s Appeal allowed

Held

After going through the reasons recorded by the AO and the finding given by the Ld. CIT(A) in para 4.2 to 4.4 of pages 5 to 7 of the impugned order, the court was of the view that AO has not applied his mind so as to come to an independent conclusion that he has reason to believe that income has escaped during the year. The court observed that the reasons are vague and are not based on any tangible material as well as are not acceptable in the eyes of law. The AO has mechanically issued notice u/s. 148 of the Act, on the basis of information allegedly received by him from the Directorate of Income Tax (Investigation), New Delhi. Keeping in view of the facts and circumstances of the present case and the case law applicable in the case of the assessee, ITAT are of the considered view that the reopening in the case of the assessee for the asstt. Year in dispute is bad in law and deserves to be quashed.

(Para8.2)

Pr. CIT vs. G&G Pharma India Ltd. in ITA No. 545/2015 dated 8.10.2015 of the Delhi High Court wherein the Hon’ble Court has adjudicated the issue as Once the date on which the so called accommodation entries were provided is known, it would not have been difficult for the AO, if he had in fact undertaken the exercise, to make a reference to the manner in which those very entries were provided in the accounts of the Assessee, which must have been tendered along with the return, which was filed on 14th November 2004 and was processed under Section 143(3) of the Act. Without forming a prima facie opinion, on the basis of such material, it was not possible for the AO to have simply concluded: "it is evident that the assessee company has introduced its own unaccounted money in its bank by way of accommodation entries". In the considered view of the Court, in light of the law explained with sufficient clarity by the Supreme Court in the decisions discussed hereinbefore, the basic requirement that the AO must apply his mind to the materials in order to have reasons to believe that the income of the Assessee escaped assessment is missing in the present case.

(Para8.2.12)

While the CIT may have proceeded on the basis that the reopening of the assessment was valid, this does not satisfy the requirement of law that prior to the reopening of the assessment, the AO has to, applying his mind to the materials, conclude that he has reason to believe that income of the Assessee has escaped assessment. Unless that basic jurisdictional requirement is satisfied a post mortem exercise of analysing materials produced subsequent to the reopening will not rescue an inherently defective reopening order from invalidity.

(Para8.2.13)

Conclusion

When the reasons for reassessment are vague and are not based on any tangible material as well as are not acceptable in the eyes of law than the requirement required for reopening of assessment not justified.

In favour of

Assessee

Cases Referred to

Pr. CIT vs. G&G Pharma India Ltd. in ITA No. 545/2015 dated 8.10.2015

Counsel appeared:

Kapil Goel, Adv. for the Assessee.: V.R. Sonbhadra, Sr. DR for the Department

H. S. SIDHU, JM.

1. The Assessee has filed the Appeal against the impugned Order dated 29.10.2012 passed by the Ld. CIT(A)-19, New Delhi relevant to assessment year 2002-03.

2. The grounds raised by the Assessee reads as under:-

“Validity of Reopening u/s. 148

1. That on the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in upholding the reopening action of AO which stands vitiated inter alia for following reasons:-

a. Total lack of tangible material/ reasonable cause and jurisdiction.

b. Absence of nexus (much less live nexus) between alleged information (unknown whether exists on file or not) and tentative inference drawn;

c. Non Application of mind much less independent application of mind

d. Total lack of clarity on nature of transaction in reasons recorded

2. That on the facts and in the circumstances of the case and in law, learned CIT-A erred in arbitrarily applying factually distinguishable precedents to mechanically uphold the orchestrated additions made by Ld AO inter alia without appreciating that:

a. Reasons recorded originally as supplied to assessee mentioned share application transaction for Rs 200,000 whereas later on addition is made by Ld AO is for Rs. 11,10,000 (unknown how scope of reasons extended as, it is settled reasons cannot be recorded in piecemeal manner and is not empty ritual);

b. On enquiry u/s 133(6) share applicants/holders have adequately responded to Ld AO during assessment stage thereby proving their existence beyond anvil of doubt

c. No meaningful enquiry by Ld AO from share applicants to impeach the unassailable evidence filed by appellant assessee;

d. Whole addition is made on directions and dictates of investigation wing treating its recommendation as gospel truth;

e. Adverse inference is automatically drawn solely and merely because of non production of directors of share applicants companies

3. 'That on the facts and in the circumstances of the case and in law, learned CIT-A erred in sustaining the addition made by Ld AO amounting to Rs. 11,10,000 & Rs 27,750 dehors the material available on record based on peroerse findings and conclusions, .

That the appellant craves leave to add, to, amend, modify, rescind, supplement or alter any of the grounds stated herein above, either before or at the time of hearing of this appeal.

3. The brief facts of the case are that the assessee filed return of income on 31.10.2002 declaring income of Rs.3,811/-. The return was processed u/s 143(1) of the Income-tax Act, 1961 on 27.1.2003. An information has been received from the DIT(Investigation), New Delhi that the assessee company had received accommodation entries from various companies/ parties to the tune of Rs. 2,00,000/-. These entries are in the nature of accommodation entries and in the reality it is the assessee’s own unaccounted money which has been shown in the books of accounts as a receipt from parties/ companies. Accordingly, the case was reopened u/s. 147 of the Income Tax Act after recording the reasons. A notice u/s. 148 of the I.T. Act was issued on 28.8.2006 and was served upon the assessee. In response to the said notice the assessee company vide its letters dated 8.8.2007 stated that “return filed by the assessee u/s. 139 is considered as return filed in response to notice u/s 148. Statutory notice u/s. 143(2) was issued and served and in response thereto assessee’s authorized representative attended the assessment proceedings and during the assessment proceedings AO noticed that the accommodation entries are of Rs. 11,10,000/- and not of Rs.2,00,000/- as mentioned in the reasons recorded. He further noticed that assessee has raised share application money / share capital from various companies/ parties. The assessee companies furnished the required details in respect of share application / share capital raised during the year. Thereafter, the AO held that in terms of section 68 the burden is on the assessee to offer a satisfactory explanation about the nature and source of amount found credited in the books of the assessee and it was further held that it is clear that mere furnishing of particulars is not enough. AO observed that since the assessee has failed to do so in submitting the information called for and has also failed to discharge his onus to produce the parties/ persons, a sum of Rs. 11,10,000/- in respect of share application money/ share capital, and he added the same to the income of the assessee u/s. 68 of the Act and also added Rs. 27,750/- being commission and completed the assessment at Rs. 11,41,560/- u/s. 143(3)/148 of the Act vide order dated 26.12.2007.

4. Against the Order of the Ld. AO, assessee appealed before the Ld. CIT(A), challenging the validity of reassessment as well as the additions in dispute who vide impugned order dated 29.10.2012 has dismissed the appeal of the assesseee.

5. Aggrieved with the aforesaid order of the Ld. CIT(A), Assessee is in Appeal before the Tribunal.

6. At the time of hearing, Ld. Counsel of the assessee has only argued the legal ground challenging the validity of reopening u/s. 148 of the I.T. Act by stating that action of the Assessing Officer is illegal, because the same is lacking tangible material / reasonable cause and justification. The action of the Revenue Authorities is in absence of nexus between alleged information and tentative inference; non application of mind much less independent application of mind; total lack of clarity on nature of transaction in reasons recorded. He further submitted that the present case is squarely covered by the Hon’ble High Court Decision dated 8.10.2015 passed in ITA No. 545/2015 in the case of Pr. CIT-4 vs. G&G Pharma India Ltd., wherein the Tribunal’s decision dated 9.1.2015 has been followed. In this behalf, he filed the copy of the order dated 8.10.2015 of the Hon’ble High Court of Delhi in Pr. CIT vs. G&G Pharma India Ltd. Therefore, he requested that by following the decision in the case of Pr. CIT vs. G&G Pharma India Ltd., the ground no. 1 raised by the Assessee in the present appeal may be allowed.

7. On the contrary, Ld. DR relied upon the order passed by the CIT(A) on issue of validity of reopening and stated that Ld. CIT(A) has rightly upheld the action of the AO of reopening.

8. We have heard both the parties and perused the relevant records available with us, especially the orders of the revenue authorities and the case law cited by the assessee’s counsel on the issue in dispute. In our view, it is very much necessary to reproduce the reasons recorded by the AO before issue of Notice to the Assessee u/s. 148 of the I.T. Act, 1961 which is reproduced hereunder:-

“M/s V. S. Capital Services (P) Limited

Asst. Year -2002-03

Reason for Reopening of the case

25.08.2006

The Information has been received by the Directors of income tax (Inv)-I New Delhi vide letter no DIT (Inv)-I/2006-07/AE/258 at 16/6/2006 that the above said company have received accommodation entries as above:-

Rs.100000/- on 31.03.2002 from M/s. Rabik Exports Limited Through Corporation Bank Paschim Vihar A/c No.-52199.

Rs. 100000/- on 31.03.2002 from Mis. Shashi Sales & Marketing Pvt. Limited Through Corporation Bank Paschim Vihar A/c No.-52351.

In reality these accommodation represent the assessee own unaccounted money. The Assessment in this case was completed u/s 143(1) on 27.01.2003. These entries are not shown in the return of income filed on 31 October, 02. In view of the above I have reasons of believe that the income of Rs. 200000/- has escaped assessment for the A. Year 2002-03. Therefore the case is re- opened u/s 147 of the Income Tax act for the assessment year 2002-2003.

Sd/-

Income Tax Officer W-17(1) New Delhi”

8.1 For the sake of clarity, we are also reproducing herewith the para no. 4 of the impugned order dated 29.10.2012 at page no. 5 wherein Ld. CIT(A) has discussed the issue of challenging the reopening of assessment u/s. 147 of the Act.

“4.1 Ground no. 2 challenges the reopening of assessment u/s 147. In the assessment er, the AO. has stated as follows:

Originally return of income was filed on 31.10.2002 declaring income of Rs. 3,811/-. The return filed was processed u/s 143(1) of I. T. Act on 27.01.2003. An information has been received from the DIT (Inv.), New Delhi that the assessee company had received accommodation entries from various companies! parties to the tune of Rs. 2,00,000/-. These entries is in the nature of an accommodation entries and in the reality it is the assessee is own unaccounted money which has been shown in the books of accounts as a receipt from parties 1 companies.

Accordingly the case was reopened u/s 147 of the Income Tax Act after recording the reasons.

A notice u/s 147 of the IT Act was issued on 28.O8.2006 and was served upon the assessee. In response to the said notice the assessee company vide its letter dated B. B. 2007 that "return filed by the assessee u/s 139 is considered as return filed in response to notice u/s 14B." Statutory notice u/s 143(2) was issued and served. In response to the statutory notices, Shri Rishi Singhal, CA attended the proceedings from time to time. The case was discussed with him.”

8.2 After going through the reasons recorded by the AO and the finding given by the Ld. CIT(A) in para 4.2 to 4.4 of pages 5 to 7 of the impugned order, we are of the view that AO has not applied his mind so as to come to an independent conclusion that he has reason to believe that income has escaped during the year. In our view the reasons are vague and are not based on any tangible material as well as are not acceptable in the eyes of law. The AO has mechanically issued notice u/s. 148 of the Act, on the basis of information allegedly received by him from the Directorate of Income Tax (Investigation), New Delhi. Keeping in view of the facts and circumstances of the present case and the case law applicable in the case of the assessee, we are of the considered view that the reopening in the case of the assessee for the asstt. Year in dispute is bad in law and deserves to be quashed. Our view is supported by the following judgment/decision:-

Pr. CIT vs. G&G Pharma India Ltd. in ITA No. 545/2015 dated 8.10.2015 of the Delhi High Court wherein the Hon’ble Court has adjudicated the issue as under:-

“12. In the present case, after setting out four entries, stated to have been received by the Assessee on a single date i.e. 10th February 2003, from four entities which were termed as accommodation entries, which information was given to him by the Directorate of Investigation, the AO stated: "I have also perused various materials and report from Investigation Wing and on that basis it is evident that the assessee company has introduced its own unaccounted money in its bank account by way of above accommodation entries." The above conclusion is unhelpful in understanding whether the AO applied his mind to the materials that he talks about particularly since he did not describe what those materials were. Once the date on which the so called accommodation entries were provided is known, it would not have been difficult for the AO, if he had in fact undertaken the exercise, to make a reference to the manner in which those very entries were provided in the accounts of the Assessee, which must have been tendered along with the return, which was filed on 14th November 2004 and was processed under Section 143(3) of the Act. Without forming a prima facie opinion, on the basis of such material, it was not possible for the AO to have simply concluded: "it is evident that the assessee company has introduced its own unaccounted money in its bank by way of accommodation entries". In the considered view of the Court, in light of the law explained with sufficient clarity by the Supreme Court in the decisions discussed hereinbefore, the basic requirement that the AO must apply his mind to the materials in order to have reasons to believe that the income of the Assessee escaped assessment is missing in the present case.

13. Mr. Sawhney took the Court through the order of the CIT(A) to show how the CIT (A) discussed the materials produced during the hearing of the appeal. The Court would like to observe that this is in the nature of a post mortem exercise after the event of reopening of the assessment has taken place. While the CIT may have proceeded on the basis that the reopening of the assessment was valid, this does not satisfy the requirement of law that prior to the reopening of the assessment, the AO has to, applying his mind to the materials, conclude that he has reason to believe that income of the Assessee has escaped assessment. Unless that basic jurisdictional requirement is satisfied a post mortem exercise of analysing materials produced subsequent to the reopening will not rescue an inherently defective reopening order from invalidity .

14. In the circumstances, the conclusion reached by the ITAT cannot be said to be erroneous. No substantial question of law arises.

15. The appeal is dismissed.”

9. In view of above, we are of the considered view that the aforesaid issue in dispute is exactly the similar and identical to the issue involved in the present appeal and is squarely covered by the aforesaid decision of the Hon’ble High Court of Delhi in the case of G&G Pharma (Supra). Hence, respectfully following the above precedent in the case of Pr. CIT-4 vs. G&G Pharma India Ltd. (Supra) we decide the legal issue in dispute in favor of the Assessee and against the Revenue and accordingly quash the reassessment proceedings and allow the ground no. 1 raised by the Assessee in its Appeal. Since we have quashed the reassessment proceedings, as aforesaid, the other issues are not being dealt with.

10. In the result, Assessee’s appeal is allowed.

*****

NOTIFICATION NO. 12/2016, DATED: 2-03-2016

noreply@blogger.com (Simply Indian Tax) — Thu, 10 Mar 2016 17:13:00 +0530

NOTIFICATION NO. 12/2016, DATED: 2-03-2016

Mar 2, 2016

CENTRAL GOVERNMENT NOTIFIES STATE LOAD DESPATCH CENTRE UNSCHEDULED INTERCHANGE FUND-BENGAL STATE ELECTRICITY TRANSMISSION COMPANY LIMITED, IN RESPECT OF THE CERTAIN SPECIFIED INCOME ARISING TO THE SAID TRUST

SECTION 10(46)

S.O. 639(E).—In exercise of the powers conferred by clause (46) of section 10 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies for the purposes of the said clause, the State Load Despatch Centre Unscheduled Interchange Fund-West Bengal State Electricity Transmission Company Limited (PAN AAIAS0980J), a trust constituted under the Electricity Act, 2003 (36 of 2003) in respect of the following specified income arising to that trust, namely :-

(a) residual money in the unscheduled interchange pool balance account;

(b) interest on fixed deposits and auto-sweep accounts; and

2. The notification shall be subject to the following conditions, namely that the State Load Despatch Centre Unscheduled Interchange Fund - West Bengal State Electricity Transmission Company Limited,-

(a) shall not engage in any commercial activity;

(b) shall not change its activities and the nature of the specified income shall remain unchanged throughout the financial years; and

(c) shall file return of income in accordance with the provision of clause (g) of sub-section (4C) section 139 of the said Act.

3. This notification shall be deemed to be applicable for the financial years 2012-2013, 2013-2014, 2014-2015 and applicable for the financial years 2015-2016 and 2016-2017.

[F. No. 196/51/2012-ITA.I]

DEEPSHIKHA SHARMA, Director

*******

INCOME TAX OFFICER vs.LAXMI NARCINVA URBAN COOPERATIVE CREDIT SOCIETY LTD.

noreply@blogger.com (Simply Indian Tax) — Thu, 10 Mar 2016 17:11:00 +0530

INCOME TAX OFFICER vs.LAXMI NARCINVA URBAN COOPERATIVE CREDIT SOCIETY LTD.

PANAJI TRIBUNAL

N.S. SAINI AM & GEORGE MATHAN, JM.

ITA No. 463/PAN/2015

Mar 2, 2016

(2016) 46 CCH 0213 PanajiTrib

Legislation Referred to

Section 80P(4), 5(cci)

Case pertains to

Asst. Year 2012-13

Decision in favour of:

Assessee

Deduction u/s 80P(2)(a)(i)—Deduction in respect of income of co-operative societies—Deduction of income earned on providing credit facilities to members—Assessee was co-operative society and registered under the Co-operative Act—Assessee claimed deduction of income earned on providing credit facilities to its members as provided u/s 80P(2)(a)(i)—Case of assessee was that it was not carrying on business of banking—Assessee claimed that its society was entitled to deduction u/s 80P(2)(a)(i) as it was Cooperative Society carrying on business of banking or providing credit facilities to its members—AO rejected claim of assessee for deduction u/s 80P(2)(a)(i) on ground that assessee was cooperative bank and not entitled to claim deduction by virtue of s 80P(4)—CIT(A) allowed claim of assessee for deduction u/s 80P(2)(a)(i)—Held, according to impugned order, society and co-operative society were clearly words of different hand distinct significance and membership was only open to society and not to a co-operative society—As rightly pointed out on behalf of Assessee, word society as referred to bye law 9(d) would include co-operative society—Besides qualifying condition 3 for being considered as Primary Cooperative Bank wad that bye laws must not permit admission of any other cooperative society—This was mandatory condition i.e. bye laws must specifically prohibit admission of any other cooperative society to its membership—Revenue had not been able to show any such prohibition in bye laws of Assessee—Thus even aforesaid qualifying condition (3) for being considered as primary cooperative bank was not satisfied—Thus, three conditions as provided u/s 5 (CVV) of the Banking regulation Act, 1949, were to be satisfied cumulatively and except condition (2) other two qualifying conditions were not satisfied—Assessee could not be considered as co-operative bank for purposes of s 80P(4)—Thus, assessee was entitled to benefit of deduction available u/s 80P(2)(a)(i)—No good and justifiable reason to interfere with orders of CIT(A)—Revenue’s Appeal dismissed

Held

According to the impugned order, a society and a co-operative society are clearly words of different hand distinct significance and the membership is only open to society and not to a co-operative society. As rightly pointed out on behalf of the appellant the word society as referred to bye law 9(d) would include the co-operative society. This is so as the definition of a society under the Co-operative Act is co-operative registered under the Co-operative Act. Besides the qualifying condition 3 for being considered as a Primary Cooperative Bank is that the bye laws must not permit admission of any other cooperative society This is a mandatory condition i.e. the bye laws must specifically prohibit admission of any other cooperative society to its membership. The Revenue has not been able to show any such prohibition in the bye laws of the appellant. Thus even the aforesaid qualifying condition (3) for being considered as a primary cooperative bank is not satisfied. Thus, the three conditions as provided under section 5 (CVV) of the Banking regulation Act, 1949, are to be satisfied cumulatively and except condition (2) the other two qualifying conditions are not satisfied. Ergo, appellant cannot be considered to be a co-operative bank for the purposes of Section 80P(4) of the Act. Thus, the appellant is entitled to the benefit of deduction available under Section 80P(2)(a)(i) of the Act.

(Para 4)

Conclusion

Word society as referred to bye law 9(d) included co-operative society hence assessee could not be considered as co-operative bank for purposes of s 80P(4) and would be entitled to benefit of deduction available u/s 80P(2)(a)(i).

In favour of

Assessee

Business Expenditure—Interest, commission, brokerage etc to a resident—Addition u/s 40(a)(ia)—Validity of deletion—AO observed that assessee paid interest in excess of Rs. 10,000 without making TDS therefore he made disallowance by invoking provisions of s 40(a)(ia)—CIT(A) deleted addition made by AO—Held, CIT(A) deleted disallowance made u/s 40(a)(ia) by observing that assessee-society was not held to be bank and therefore TDS provisions were not applicable to assessee-society

Held

On appeal, Commissioner of Income Tax (Appeals) deleted the disallowance made under sec. 40(a)(ia) of the Act by observing that the assessee-society is not held to be a bank, therefore, TDS provisions are not applicable to the assessee-society. Hence, he deleted the addition made under sec. 40(a)(ia) of the Act.

(Para 8)

Conclusion

Where assessee-society was not held to be bank for purposes of s 80P(4), TDS provisions would not be not applicable to assessee-society and hence no addition could be made with respect same.

In favour of

Assessee

Cases Referred to

Quepem Urban Cooperative Credit Society Ltd. vs. ACIT in Tax Appeals No. 22-24/2015 dated 17/04/2015

Counsel appeared:

Anand Shankar Marathe- DR for the Department

GEORGE MATHAN, JM.

1. This is an appeal filed by the Revenue against the order of the Commissioner of Income Tax (Appeals), Panaji-1 in ITA No.342/CIT(A) PNJ-1/14-15, dated 24/08/2015 for the Assessment Year 2012-13.

2. The main issue involved in this appeal is that the Commissioner of Income Tax (Appeals) erred in allowing deduction to the assessee under secs. 80P(2)(a)(i) and 80P(2)(c)(ii) of the Income Tax Act, 1961.

3. The facts of the case, in brief, are that the assessee filed its return of income at NIL after claiming deduction under sec. 80P(2)(a)(i) and 80P(2)(c)(ii) of the Act for Rs. 22,57,192/- and Rs. 19,018/- respectively. It was claimed that the society is entitled to deduction under sec. 80P(2) as it was a Cooperative Society carrying on the business of banking or providing credit facilities to its members. However, the claim of the assessee for deduction under sec. 80P(2) was rejected by the Assessing Officer in the order passed under sec. 143(3) of the Act on the ground that the assessee was a cooperative bank, and hence, not entitled to claim deduction by virtue of sec. 80P(4).

4. On appeal, Commissioner of Income Tax (Appeals) allowed the claim of the assessee by observing as under:-

“6. I have gone through the assessment order and the submission of the appellant. The AO has equated the appellant Co-operative society with Primary Cooperative bank and has denied deduction u/s.80P(2). On this issue, The Hon’ble High Court has decided as under:

“There is no dispute between the parties that the appellant is a co-operative society as the same is registered under the Co-operative Act. The appellant is claiming deduction of income earned on providing credit facilities to its members as provided under section 80P(2)(a)(i) of the Act. It is appellant’s case that, it is not carrying on the business of the banking. Consequently, not being a co-operative bank the provisions of Section 80P(4) of the Act would not exclude the appellant from claiming the benefit of deduction under Section 80P(2)(a)(i) of the Act. However in terms of Section 80P of the Act the meaning of the words Cooperative Bank is the meaning assigned to it in Chapter V of the Banking Regulation Act, 1949. A cooperative bank is defined in Section 5(cci) of Banking Regulation Act to mean a State Cooperative Bank-, a Central Cooperative Bank and a Primary Cooperative Bank. Admittedly, the appellant is not a State Cooperative Bank, a Central Cooperative Bank Thus what has to be examined is whether the appellant is a Primary Cooperative Bank as defined in Para V of the Banking Regulation Act. Section 5(ccv) of the Banking Regulation Act defines a primary cooperative bank to mean a cooperative society which cumulatively satisfies the following three conditions:

1) Its principal business or primary object should be banking business of Banking,

2) Its paid up share capital and reserves should not be less that rupees one lakh.

3) Its bye-laws do not permit admission of any other cooperative society as its member.

It is accepted position that condition No. (2) is satisfied as the share capital in an excess of rupees one lakh It has been the appellant’s contention that the conditions No (1) and (3) provided above are not satisfied.

Therefore the issue that arises for consideration is whether the appellant satisfies condition No (1) and (3) above The impugned order after referring to the definition of ‘Banking Business’ as defined in Section 5b of the Banking Regulation Act, held that the principal business of the Appellant is Banking Section 5b of the Banking Regulation Act defines banking to mean accepting of deposits for the purpose of lending or investment, of deposit of money from the public repayable on demand or otherwise. The impugned order juxtaposes the above definition with the finding of fact that the apel1ant did deal with non members in a few cases by seeing deposits. This read with Bye law 43 leads to the conclusion that it is carrying on banking business. This fact of accepting deposits from people who are not members has been so recorded by the CIT(A) in his order dated 15 July, 2014. Before the Tribunal also the appellant did not dispute the fact that in a few cases they have dealt with non members. However so far as accepting deposits from non members is concerned it is submitted that the Bye-law 43 only permits the society to accept deposits from its members. It is submitted that Bye .laws 43 does ‘not permit receipt of deposits from persons other then members, the word “any person” is a gloss added in the impugned order as it is not found in Bye law 43. It is undisputed that the transactions with non members are insignificant/miniscule. On the above basis it cannot be concluded that the appellant’s, principal business is of accepting deposits from public and therefore it is in banking business. In fact, the impugned order erroneously relies upon bye-law 43 of the society which enables the society to receive deposits to conclude that it can receive deposits from public. However, the impugned order relies upon bye-law 43 to conclude that it enables the appellant to receive deposits from any person is not correct. Thus in the present facts the findings that the appellant’s principal business is of Banking is perverse, as it is not supported by the evidence on record. So far as the issue of primary object of the appellant is concerned the impugned order gives no finding on that basis to deprive the appellant the benefit of Section 80P of the Act The impugned order sets out the object clause of the appellant, which has 24 objects but thereafter draws no sequiter to conclude that the primary object is banking. Consequently there is no occasion to deal with the same as that is not the basis on which the impugned order holds that it is a Primary Cooperative bank.

In the above view, the alternative contention of the appellant that it is not in the business of Banking as the sine quo non to carry on banking business is a licence to be issued by the Reserve Bank of India, which it admittedly does not have, is not being considered.

So far as condition No.3 of the definition/meaning of Primary Cooperative Bank as provided in section 5(ccv) of the Banking Regulation Act is concerned, the same requires the Bye laws of society to contain a prohibition from admitting any other cooperative society as its member. In fact the bye-laws of the appellant society originally in bye- law 9(b) clearly provided that no co-operative society shall be admitted to ‘the membership of the society. Thus there was a bar but the same was amended w.e.f. 12th January, 2001 as to permit a society to be admitted to the membership of the society. Therefore for the subject assessment years there is no prohibition to admitting a society to its membership and one of three cumulative conditions precedent to be a primary cooperative bank is not satisfied. However the impugned order construed the amended clause 9(d) of the appellant’s bye laws to mean that it only permits a society to be admitted to the membership of the appellant and not a co-operative society. According to the impugned order, a society and a co-operative society are clearly words of different hand distinct significance and the membership is only open to society and not to a co-operative society. As rightly pointed out on behalf of the appellant the word society as referred to bye law 9(d) would include the co-operative society. This is so as the definition of a society under the Co-operative Act is co-operative registered under the Co-operative Act. Besides the qualifying condition 3 for being considered as a Primary Cooperative Bank is that the bye laws must not permit admission of any other cooperative society This is a mandatory condition i.e. the bye laws must specifically prohibit admission of any other cooperative society to its membership. The Revenue has not been able to show any such prohibition in the bye laws of the appellant. Thus even the aforesaid qualifying condition (3) for being considered as a primary cooperative bank is not satisfied. Thus, the three conditions as provided under section 5 (CVV) of the Banking regulation Act, 1949, are to be satisfied cumulatively and except condition (2) the other two qualifying conditions are not satisfied. Ergo, appellant cannot be considered to be a co-operative bank for the purposes of Section 80P(4) of the Act. Thus, the appellant is entitled to the benefit of deduction available under Section 80P(2)(a)(i) of the Act.

The contention of Ms. Dessai, learned Counsel for the revenue that the appellant is not entitled to the benefit of Section 80P (2)(a)(i) of the Act in view of the fact that it deals with non-member cannot be upheld. This for the reason that section 80P(1) of the Act restricts the benefits of deduction of income of co-operative society to the extent it is earned by providing credit facilities to its members. Therefore, to the extent the income earned is attributable to dealings with the non-members are concerned the benefit of Section 80P of the Act would not be available. In the above view of the matter, at the time when effect has been given to order of this Court, the authorities under Act would restrict the benefit of deduction under section 80P of the Act only to the extent that the same is earned by the appellant in carrying on its business of providing credit facilities to its members. Accordingly, the substantial question of law as framed is answered in the negative i.e.in favour of the appellant and against the respondent-revenue.

In view of the decision of the Hon’ble High Court, the AO is directed to allow the deduction u/s.80P to the appellant. The appeal is allowed.”

5. The Departmental Representative relied on the order of the Assessing Officer. He could not point out any specific error in the above quoted order of the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) has allowed the claim of deduction under sec. 80P(2) of the Act after following the decision of the Hon’ble Bombay High Court at Panaji in the case of M/s. The Quepem Urban Cooperative Credit Society Ltd. Vs. ACIT in Tax Appeals No. 22-24/2015 dated 17/04/2015. No contrary decision could be cited by the Departmental Representative. We, therefore, do not find any good and justifiable reason to interfere with the order of the Commissioner of Income Tax (Appeals), which is hereby confirmed and this ground of appeal of the Revenue is dismissed.

6. The another grievance of the Revenue in this appeal is directed against the order of the Commissioner of Income Tax (Appeals) deleting the addition made under sec. 40(a)(ia) of the Act.

7. We have heard the submissions of Departmental Representative and perused the orders of the lower authorities and the material available on record. The Assessing Officer observed that the assessee has paid interest in excess of Rs. 10,000/- without making TDS and, therefore, he made disallowance of Rs. 32,84,449/- by invoking the provisions of sec. 40(a)(ia).

8. On appeal, Commissioner of Income Tax (Appeals) deleted the disallowance made under sec. 40(a)(ia) of the Act by observing that the assessee-society is not held to be a bank, therefore, TDS provisions are not applicable to the assessee-society. Hence, he deleted the addition made under sec. 40(a)(ia) of the Act.

9. The Departmental Representative during the course of hearing did not make any submissions on the above ground of appeal taken by the Revenue. Hence, we dismiss this ground of appeal of the Revenue.

10. In the result, appeal of the Revenue stand dismissed.

*****

HDFC BANK LTD. vs.DEPUTY COMMISSIONER OF INCOME TAX

noreply@blogger.com (Simply Indian Tax) — Thu, 10 Mar 2016 17:09:00 +0530

HDFC BANK LTD. vs.DEPUTY COMMISSIONER OF INCOME TAX

HIGH COURT OF BOMBAY

M. S. SANKLECHA & B. P. COLABAWALLA, JJ.

WRIT PETITION NO. 1753 OF 2016

Feb 25, 2016

(2016) 95 CCH 0061 MumHC

Legislation Referred to

Section 14A, 254(1), 260A

Case pertains to

Asst. Year 2001¬02

Decision in favour of:

Matter remanded back

Income—Expenditure incurred in relation to income not includible in total income—Disallowance u/s 14A—Disallowance of interest paid on borrowed funds in respect of investments made in tax free securities—Applicability of Section 14A—For Assessment Year 2008-09, Assessee filed its return of income declaring income of Rs.241.72crores— Assessee had in its return of income also declared income of Rs.5.81crores from investments in securities which were exempt from tax—Those investments were treated by Assessee as stock in trade—Assessee had during subject Assessment year paid interest on borrowed funds and had claimed same as expenditure—However, Assessee did not disallow any expenditure on income earned on tax free securities on ground that investments in tax free securities was made out of its own tax free funds as it had ample funds of its own to make investments—AO disregarded contention of assessee that Section 14A would not apply in respect of its tax free securities as it had ample interest free funds available and same was utilized from common pool consisting of interest bearing funds—AO invoked Section 14A r/w Rule 8D to disallow amount of Rs. 3.39crores on account of interest and Rs.0.27crore as other expenses aggregating to Rs.3.66crores u/s 14A as being an expenditure incurred for earning tax exempt income of Rs.5.81crores—CIT(A) upheld Order of AO—ITAT dismissed appeal of assessee holding that Section 14A was applicable to assessee’s case—Held, Section 14A would be inapplicable in assessee’s case—However this was also disregarded by impugned order on ground that High Court did not entertain appeal of Revenue from order of Tribunal holding that Section 14A was inapplicable where investment had been made in stock in trade—This non-entertainment of appeal being on ground that High Court found no substantial question of law— Therefore, impugned order passed by ITAT did not lay down any binding proposition of law—If appeal was not admitted from order of Tribunal, then it was open to Tribunal in another case to decide directly contrary to view taken by earlier order of Tribunal, which was not entertained by High court in appeal—In fact when appeal was not entertained then order of Tribunal held field and coordinate benches of Tribunal were obliged to follow same unless there was some difference in facts or law applicable and difference in fact and/or law should be reflected in its order taking different view—Tribunal had acted beyond limits of its authority—Tribunal made observation that there was no such thing as estoppel in law and by virtue of that gave itself licence to decide issue before it ignoring binding precedent in Assessee’s own case in HDFC Bank Ltd(supra)—Once there was binding decision of High Court, same continued to be binding on all authorities within State till such time as it stayed and/or set aside by Apex Court or High Court which took different view on identical factual matrix—For purposes of certainty, fairness and uniformity of law, all authorities within State were bound to follow orders passed by High Court in all like matters, which by itself implied that if there were some distinguishing features in matter before Tribunal then Tribunal was free to decide on basis of facts put before it—It was not open to Tribunal to sit in appeal from orders of High Court and not follow it—In case doctrine of precedent was not strictly followed there would complete confusion and uncertainty—High Court had to exercise our powers under Article 227 of the Constitution of India—Impugned order of Tribunal had chosen to disregard and/or circumvent binding decision of High Court in respect of same assessee for earlier assessment year—This was clear case of judicial indiscipline and creating confusion in respect of issues which stand settled by decision of High Court—Impugned order of Tribunal was set aside and same restore to Tribunal to decide it afresh on its own merits and in accordance with law—It was not open to Tribunal to disregard binding decisions of High Court, grounds indicated in impugned order which were not at all sustainable

Held

Section 14A of the Act would be inapplicable. However this was also disregarded by the impugned order on the ground that this Court did not entertain an appeal of the Revenue from the order of the Tribunal holding that Section 14A of the Act is inapplicable where the investment has been made in stock in trade. This non entertainment of an appeal being on the ground that this Court found no substantial question of law.

________________________________________

(Para18)

That if appeal is not admitted from an order of the Tribunal, then it is open to the Tribunal in another case to decide directly contrary to the view taken by the earlier order of the Tribunal, which is not entertained by this court in appeal. This without even as much as a whisper of any explanation with regard to how and why the facts of the two cases are different warranting a view different from that taken by the Tribunal earlier. In fact when an appeal is not entertained then the order of the Tribunal holds the field and the coordinate benches of the Tribunal are obliged to follow the same unless there is some difference in the facts or law applicable and the difference in fact and / or law should be reflected in its order taking a different view. Tribunal has acted beyond the limits of its authority.

(Para19)

Impugned order of the Tribunal has an observation therein that there is no such thing as estoppel in law and by virtue of that gives itself a licence to decide the issue before it ignoring the binding precedent in the petitioner’s own case in HDFC Bank Ltd(supra). Once there is a binding decision of HIGH Court, the same continues to be binding on all authorities within the State till such time as it stayed and / or set aside by the Apex Court or this very Court takes a different view on an identical factual matrix or larger bench of this Court takes a view different from the one already taken.

(Para22)

For the purposes of certainty, fairness and uniformity of law, all authorities within the State are bound to follow the orders passed by us in all like matters, which by itself implies that if there are some distinguishing features in the matter before the Tribunal and, therefore, unlike, then the Tribunal is free to decide on the basis of the facts put before it. However till such time as the decision of this court stands it is not open to the Tribunal or any other Authority in the State of Maharashtra to disregard it while considering a like issue. In case HIGH Court are wrong, the aggrieved party can certainly take it up to the Supreme Court and have it set aside and / or corrected or where the same issue arises in a subsequent case the issue may be re¬ urged before HIGH Court to impress upon it that the decision rendered earlier, requires reconsideration. It is not open to the Tribunal to sit in appeal from the orders of High Court and not follow it. In case the doctrine of precedent is not strictly followed there would complete confusion and uncertainty. The victim of such arbitrary action would be the Rule of law of which we as the Indian State are so justifiably proud.

(Para23)

It is in the above circumstances that High Court are of the view that High Court have to exercise our powers under Article 227 of the Constitution of India. This is in view of the manner in which the impugned order of the Tribunal has chosen to disregard and/or circumvent the binding decision of this Court in respect of the same assessee for an earlier assessment year. This is a clear case of judicial indiscipline and creating confusion in respect of issues which stand settled by the decision of High Court.

(Para24)

It is in the above view, that High Court set aside the impugned order of the Tribunal dated 23rd September, 2015 in its entirety and restore the issue to the Tribunal to decide it afresh on its own merits and in accordance with law. However the Tribunal would scrupulously follow the decisions rendered by this Court wherein a view a has been taken on identical issues arising before it. It is not open to the Tribunal to disregard the binding decisions of High Court, the grounds indicated in the impugned order which are not at all sustainable. (Para25)

Conclusion

Once there was binding decision of High Court, same continued to be binding on all authorities within State till such time as it stayed and/or set aside by Apex Court or High Court which took different view on identical factual matrix.

In favour of

Matter remanded

Cases Referred to

CIT vs. HDFC Bank Ltd. 366 ITR 505CIT vs. India Advantages Securities Ltd. ITA 1131/13Godrej and Boyce Manufacturing Co. Ltd. vs. Deputy Commissioner of Income Tax, 328 ITR 81Union of India vs. Raghuvir Singh 1989 (2) SCC 754Collector of Central Excise vs. Dunlop India Ltd. 154 ITR 172Cassell and Co. Ltd. vs. Broome (1972) AC 1027 (HL)Cassell vs. Broome (1972) AC 1027Rookes vs. Barnard (1964) AC 1129East India Commercial Co. Ltd. Calcutta and Anr. vs. Collector of Customs, Calcutta 1962 SC SC 1893Mittal Engineering vs. Coll, of Central Excise 1997 (1)SCC 203)Girnar Tea vs. State of Maharashtra 2007(7) SCC 555 Shin Estu Chemical Co. Ltd vs. Aksh opticfibre Ltd 2005 (7) SCC 234)CIT vs. Reliance Utilities and Power Ltd. 313 ITR 340Panjumal Hassomal Advani vs. Harpal Singh Abnashi Singh Sawhney & Ors. AIR 1975(Bom) 120

Counsel appeared:

J.D. Mistry, Senior Counsel a/w Madhur Agarwal a/w Atul Jasani for the Petitioner.: Suresh Kumar a/w Samiksha Kanani for the Respondent

PER COURT

1. Heard. Rule. Respondents wave service. By consent of the parties, Rule is made returnable forthwith.

2. This petition under Articles 226 and 227 of the Constitution of India challenges the order dated 23rd September, 2015 passed by the Income Tax Appellate Tribunal (Tribunal) under Section 254(1) of the Income Tax Act, 1961 (the Act). By the impugned order dated 23rd September, 2015, the Tribunal dismissed the petitioner's appeal relating to the Assessment Year 2008¬09 on the issue of applicability of Section 14A of the Act to disallow a portion of the interest paid on borrowed funds in respect of investments made in tax free securities. This when it has own funds in excess of investments made in the securities and further these securities are held as stock in trade. This dismissal of the appeal, submit the petitioner, inspite of the issue being concluded on both the grounds in its favour by the binding decisions of this Court.

3. However, Mr. Suresh Kumar the learned Counsel for the Revenue urged that as there is an alternative remedy of an statutory appeal available under Section 260A of the Act from impugned order of the Tribunal this court should not exercise its extraordinary jurisdiction under Article 226 of the Constitution of India. It is submitted that issue raised in this petition could be examined in appeal. It is true that an order passed under Section 254(1) of the Act by the Tribunal, such as the impugned order is amenable to an appeal to this Court under Section 260A of the Act. Normally we would have directed the petitioner to adopt its statutory alternative remedy. However, the grievance of the petitioner here is not so much to the merits or demerits of the impugned order, but the refusal of the Tribunal to follow the binding decision of this Court in the case of the petitioner itself being CIT Vs. HDFC Bank Ltd. 366 ITR 505 for an earlier Assessment Year 2001¬02 on identical issue of applicability of Section 14A of the Act to partially disallow interest expenditure when interest free funds available with the Petitioner are in excess of investments made in tax free securities. Thus, the endeavor of the petitioner is to bring to our notice that in passing the impugned order dated 23 September 2015 the Tribunal has exceeded the bounds of its authority, by disregarding the binding decisions of this Court, which if not corrected, may sound the death knell of two established practices of our judicial system viz. doctrine of Precedent i.e. treating like cases alike and the hierarchical structure of our judicial system/jurisprudence where each lower forum / tier is bound by the orders of the higher tier on like issues till such time as it is set aside by a further higher forum. It is in the aforesaid circumstances, that we are compelled to examine the grievance of the petitioner in the context of our supervisory jurisdiction under Article 227 of the Constitution of India.

4. Factual Matrix :¬

(a) For the Assessment Year 2008¬09, the petitioner filed its return of income declaring an income of Rs.241.72crores. The petitioner had in its return of income also declared an income of Rs.5.81crores from the investments in securities which were exempt from tax. These investments were treated by the petitioner as stock in trade. The petitioner had during the subject Assessment year paid interest on borrowed funds and had claimed the same as an expenditure. However the petitioner did not disallow any expenditure on the income earned on the tax free securities on the ground that the investments in tax free securities was made out of its own tax free funds as is evidenced by the fact that it had ample funds of its own to make investments. Thus no disallowance was made on the expenditure claimed as the interest paid on borrowed funds.

(b) By an order dated 22nd December, 2010 passed under Section 143(3) of the Act, the Assessing Officer assessed the petitioner's income at Rs.1067.93crores. This after disregarding the petitioner's contention that Section 14A of the Act would not apply in respect of its tax free securities as it had ample interest free funds available and the same was utilized from a common pool consisting of interest bearing funds and interest free funds to purchase the tax free securities. This only on the ground that the petitioner was not able to indicate / lead evidence that the investments made in tax free securities came out of its interest free funds. In the circumstances the Assessing officer invoked Section 14A of the Act r/w Rule 8D of the Income Tax Rules (Rules) to disallow an amount of Rs. 3.39crores on account of interest and Rs.0.27crore as other expenses aggregating to Rs.3.66crores under Section 14A of the Act as being an expenditure incurred for earning tax exempt income of Rs.5.81crores.

(c) Being aggrieved with the order dated 22nd December, 2010 of the Assessing Officer, the petitioner preferred an Appeal to the Commissioner of Income Tax (Appeals) [CIT(A)]. By an order dated 21st November, 2011, the CIT(A) dismissed the petitioner's appeal upholding the order of the Assessing Officer.

(d) Being aggrieved, the petitioner inter alia carried the issue of disallowance of interest to the extent of Rs.3.39crores under Section 14A r/w Rule 8D of the Rules in appeal to the Tribunal. Before the Tribunal, the petitioner raised two grounds with regard to the above issue as under:¬

(i) It possessed interest free funds which were more than the tax free investments. Thus no disallowance of expenditure on account of interest paid could be made in view of the binding decision of this Court in the petitioner's own case in HDFC Bank Ltd. (supra); and

(ii) The tax free securities were held by it as its stock in trade. Thus no disallowance of any expenditure under Section 14A of the Act could be made in view of binding decision of this Court in CIT Vs. India Advantages Securities Ltd. ITA 1131/13decided on 30th April, 2014.

However, the Tribunal by the impugned order did not accept the petitioner's submission on both the grounds. It disregarded the binding decision of this Court by holding that an earlier decision of this Court in Godrej and Boyce Manufacturing Co. Ltd. Vs. Deputy Commissioner of Income Tax, 328 ITR 81, which was not brought to the notice of this Court in HDFC Bank Ltd.(supra) would hold the field. Further on the second issue of stock in trade the impugned order after holding that it was raised for the first time before the Tribunal, yet on merits holds that the decision of this Court in India Advantage Securities Ltd. (supra) cannot apply. This for the reason that this Court in India Advantage Securities Ltd. (supra) dismissed the Revenue’s appeal at the stage of admission on the ground that no question of law arises for consideration from the order of the Tribunal.

Submissions :¬

5. Mr. Mistry, learned Senior Counsel in support of the petition submits as under :¬

(a) The issue which arose for consideration before the Tribunal with regard to applicability of Section 14A of the Act in respect of the tax free income earned on investments in case of a party possessed of interest free funds in excess of the investments made in tax free securities stood concluded in favour of the petitioner by the binding decision of this Court as rendered in the petitioner's own case viz. HDFC Bank Ltd (supra) on identical facts. Nevertheless the binding decision is disregarded by seeking to hold that the issue is covered by an earlier decision of this Court in Godrej and Boyce Manufacturing Co. Ltd(supra), when in fact it has not decided the issue;

(b) There is no conflict between the decisions of this Court in Godrej and Boyce Manufacturing Co. Ltd.(supra) and HDFC Bank Ltd(supra). This is for the reason that this Court has in Godrej and Boyce Manufacturing Co. Ltd.(supra) has not ruled on the issue of disallowance of interest under Section 14A of the Act on the ground of presumption where sufficient interest free funds are available to make investment in tax free instruments. This issue was only decided later by this Court for the first time in the petitioner’s own case in HDFC Bank Ltd.(supra).

(c) In view of the fact that there is only one decision viz. HDFC Bank Ltd(supra) of this court reigning, it was not open to the Tribunal to disregard a decision of this court by merely holding the decision in HDFC Bank Ltd. (supra) was per incuriam. This on the ground that in HDFC Bank Ltd. (supra) attention was not invited to the decision of this Court in Godrej and Boyce Manufacturing Co. Ltd.(supra). This is more particularly so when Godrej and Boyce Manufacturing Co. Ltd. (supra) has no application to the present facts;

(d) In fact the Tribunal has been consistently following the ratio of the decision of this Court in HDFC Bank (supra) in other cases before it, but HDFC Bank itself i.e. the petitioner does not get its benefit.

(e) Similarly, the alternative submissions urged before the Tribunal that these investments in securities are its stock in trade and consequently Section 14A of the Act is not applicable is also concluded in favour of the petitioner as held by this Court in India Advantages Securities Ltd. (supra). However the impugned order ignores the same on the ground that this Court in the above case only dismissed the Revenue’s appeal before it and therefore not binding. Further the impugned order also places reliance upon the decision of this Court in Godrej and Boyce Manufacturing Co. Ltd.(supra) even when it has no application to the facts before it.

6. Per contra Mr. Suresh Kumar, learned Counsel for the Revenue in support of the impugned order submits as under :¬

(a) This petition should not be entertained as there is an alternative remedy available to the petitioner under Section 260A of the Act by way of an appeal to this Court from the impugned order of the Tribunal.

(b) The appeal filed by the petitioner before the Tribunal arose from orders of the Assessing Officer and the CIT(A) holding that the petitioner was unable to establish that its interest free funds were utilized for the purposes of investment in securities. Consequently, it is submitted that the decision of this Court in HDFC Bank Ltd. (supra) would not have any application to the facts of the present case.

(c) In the facts of the present case the decision of this Court in Godrej and Boyce Manufacturing Ltd. (supra) was applicable and not the decision rendered by this Court in HDFC Bank Ltd. (supra). In support reliance is placed upon the impugned order of the Tribunal.

(d) The alternative contention that the investment in securities are petitioner’s in stock in trade, was raised for the first time only before the Tribunal and thus could not be entertained. In any case the decision of this Court in India Advantage Securities Ltd (supra) would have no application as the revenue’s appeal was dismissed by this court at the stage of admission.

It is, therefore, submitted that the impugned order passed by the Tribunal calls for no interference by this Court in its extraordinary jurisdiction under Articles 226 and 227 of the Constitution of India.

Consideration :¬

7. In our system of Jurisprudence the theory of Precedents and the hierarchical structure are an inherent part of our dispute resolution/justice obtaining apparatus i.e. Courts / Tribunal. The theory of precedent ensures that what has been done earlier would be done subsequently on identical facts. To wit, like cases are to be treated alike. Thus, the doctrine of precedent ensures certainty of law, uniformity of law and fairness meeting some of the essentials ingredients of Rule of Law. In fact, the Supreme Court in Union of India vs. Raghuvir Singh 1989 (2) SCC 754 while setting out the objectives of the doctrine of Precedent observes at para 7, 8 and 9 thereof as under:¬

"7. India is governed by a judicial system identified by a hierarchy of courts, where the doctrine of binding precedent is a cardinal feature of its jurisprudence. …....

8. Taking note of the hierarchical character of the judicial system in India, it is of paramount importance that the law declared by this Court should be certain, clear and consistent. It is commonly known that most decisions of the courts are of significance not merely because they constitute an adjudication on the rights of the parties and re¬ solve the dispute between them, but also because in doing so theyembody a declaration of law operating as a binding principle in future cases. In this latter aspect lies their particular value in developing the jurisprudence of the law.

9. The doctrine of binding precedent has the merit of promoting a certainty and consistency in judicial decisions, and enables an organic development of the law, besides providing assurance to the individual as to the consequence of transactions forming part of his daily affairs. And, therefore, the need for a clear and consistent enunciation of legal principle in the decisions of a Court.”

(emphasis supplied)

8. Further the Apex Court in the case of Collector of Central Excise Vs. Dunlop India Ltd. 154 ITR 172 has observed as under :¬

“We desire to add and as was said in Cassell and Co. Ltd. V. Broome (1972) AC 1027 (HL), we hope it will never be necessary for us to say so again that “in the hierarchical system of courts” which exists in our country, “it is necessary for each lower tier”, including the High Court, “to accept loyally the decisions of higher tiers.”It is inevitable in a hierarchical system of courts that there are decisions of the supreme appellate tribunal which do not attract the unanimous approval of all members of the judiciary ….... But the judicial system only works if someone is allowed to have the last word and that last word, once spoken, is loyally accepted”(See observations of Lord Hailsham and Lord Diplock in Broome V. Cassell). The better wisdom of the court below must yield to the higher wisdom of the court above. That is the strength of the hierarchical judicial system. In Cassell V. Broome (1972) AC 1027, commenting on the Court of Appeal's comment that Rookes V. Barnard (1964) AC 1129, was rendered per incuriam, Lord Diplock observed (p.1131).

“The Court of Appeal found themselves able to disregard the decision of this House in Rookes V. Barnard by applying to it the label per incuriam. That label is relevant only to the right of an appellate court to decline to follow one of its own previous decisions, not to its right to disregard a decision of a higher appellate court or to the right of a judge of the High Court to disregard a decision of the Court of Appeal.”

It is needles to add that in India under article 141 of the Constitution, the law declared by the Supreme Court shall be binding on all Courts within the territory of India and under art. 144 all authorities, civil and judicial, in the territory of India shall act in aid of the Supreme Court.”

(emphasis supplied)

9. Although both the above decisions are rendered in the context of the decision of the Supreme Court, the same principle with equal force would apply to the decisions of the High Court within the State over which it exercises jurisdiction. This issue is long settled by the Apex Court in East India Commercial Co.

Ltd. Calcutta and Anr. vs. Collector of Customs, Calcutta 1962 SC SC 1893 wherein it has been held as under:¬

“29. …... This raises the question whether an administrative tribunal can ignore the law declared by the highest court in the State and initiate proceedings in direct violation of the law so declared. Under Art.215, every High Court shall be a court of record and shall have all the powers of such a court including the power to punish for contempt of itself. Under Art. 226, it has a plenary power to issue orders or writs for the enforcement of the fundamental rights and for any other purpose to any person or authority, including in appropriate cases any Government, within its territorial jurisdiction. Under Art. 227, it has jurisdiction over all courts and tribunals throughout the territories in relation to which it exercises jurisdiction. It would be anomalous to suggest that a tribunal over which the High Court has superintendencecan ignore the law declared by that court and start proceedings in direct violation of it. If a tribunal can do so, all the subordinate courts can equally do so, for there is no specific provision, just like in the case of Supreme Court, making the law declared by the High Court binding on subordinate courts. It is implicit in the power ofsupervision conferred on a superior tribunal that all the tribunals subject to its supervision should conform to the law laid down by it. Such obedience would also beconducive to their smooth working: otherwise, there would be confusion in the administration of law and respect for law would irretrievably suffer. We, therefore, hold that the law declared by the highest court in the State is binding on authorities or tribunals under its superintendence, and that they cannot ignore it either in initiating a proceeding or deciding on the rights involved in such a proceeding. If that be so, the notice issued by the authority signifying the launching of proceedings contrary to the law laid down by the High Court would be invalid and the proceedings themselves would be without jurisdiction.”

(emphasis supplied)

Thus, the law declared by the decisions of the High Court will be binding upon all authorities and Tribunals functioning within the State. Consequently, the decisions of this Court would be binding upon all Authorities, Tribunals and Courts subordinate to the High Court within the State of Maharashtra.

10. One more aspect which needs to be adverted to and that is that a decision would be considered to be a binding precedent only if it deals with/decides an issue which is subject matter of consideration/decision before a coordinate or subordinate court. It is axiomatic that a decision cannot be relied upon in support of the proposition that it did not decide.(seeMittal Engineering v. Coll,of Central Excise 1997 (1)SCC 203).Therefore it is only the ratio decidendi i.e. the principle of law that decides the dispute which can be relied upon as precedent and not any obiter dictum or casual observations. (See Girnar Tea vs. State of Maharashtra 2007(7) SCC 555 and Shin Estu Chemical Co. Ltd v. Aksh opticfibre Ltd 2005 (7) SCC 234).

11. Keeping the aforesaid position of law in mind, we shall now examine the impugned order of the Tribunal. The issue before the Tribunal as raised by the petitioner was that Section 14A of the Act would have no application to disallow interest expenditure on fund borrowed in respect of the tax free returns on the securities, for the following two reasons :¬

(a) The petitioner was possessed of sufficient interest free funds of Rs.2153 crores as against the investment in tax free securities of Rs.52.02 crores. Consequently, there is a presumption that the investment which has been made in the tax free securities has come out of the interest free funds available with the petitioner. This is so as it has been held by this Court in the petitioner's own case for an earlier Assessment year being HDFC Bank Ltd.(supra). This decision on the above issue has been accepted by the Revenue. This is evidenced by the fact although an appeal has been filed to the Supreme Court with regard to another issue arising from the order in HDFC Bank Ltd. (supra) namely broken period interest, no appeal on this issue as raised before the Tribunal has been challenged before the Supreme Court; and

(b) In any event, the tax free investment in securities were the petitioner's stock in trade. Consequently, there would be no occasion to invoke Section 14A of the Act as held by this Court in India Advantage Securities Ltd. (supra) wherein the Revenue’s appeal from the order of the Tribunal was dismissed, to contend that no disallowance can be made under Section 14A of the Act in respect of exempted Income arising from stock in trade.

12. The impugned order of the Tribunal in so far as contention (a) above is concerned, chose to disregard the binding decision of this court in petitioner’s own case being HDFC Bank Ltd.(supra).

The impugned order of the Tribunal after recording that it is conscious that the decision of this Court are binding upon it proceeds on the basis that it had to decide which of the two decisions rendered in Godrej and Boyce (supra) and HDFC Bank Ltd. (supra) is to be followed. Thereby implying and proceeding on the basis that there is a conflict between the two decisions rendered by this Court in Godrej and Boyce Manufacturing Co. Ltd. (supra) and HDFC Bank Ltd. (supra). We are unable to understand on what basis the impugned order has proceeded on the basis that there is a conflict between the two decisions. This is so as with the assistance of the Counsel we closely examined the decision of this court in Godrej and Boyce Manufacturing Co. Ltd. (supra). On examination we find that the issue arising in this case before the Tribunal viz. where interest free funds are available with an Assessee which are more than the investments made in the tax free securities, then a presumption arises that the investments were made from its interest free funds, was not decided therein. In fact, no view even as an obiter dictum on the issue was expressed by this court in the above case. This issue along with other issues were restored by this Court in Godrej and Boyce Manufacturing Co. Ltd. (supra) to the Assessing officer for passing an order afresh, after the Court upheld the Constitutionality of Section 14A of the Act.

13. One more fact which must be emphasized is that merely because a decision has been cited before the Court and a reference to that has been made in the order of the Court such as in the case of Godrej and Boyce Manufacturing Co. Ltd. (supra) reference was made toCIT Vs. Reliance Utilities and Power Ltd. 313 ITR 340 by itself would not lead to the conclusion that Reliance Utilities and Power Ltd. (supra) has been considered and the opinion on the same has been rendered in the case of Godrej and Boyce Manufacturing Co. Ltd.(supra). The test to decide whether or not two decisions are in conflict with each other is to first determine the ratio of both the cases and if the ratio in both the cases are in conflict with each other, then alone, can it be said that the two decisions are in conflict. We find that no such exercise has been done. If it was done, the Tribunal would have noted that this Court in Godrej and Boyce Manufacturing Co. Ltd. (supra) has not decided the issue of applicability of Reliance Utilities and Power Ltd. (supra) inasmuch as it has restored the entire issue to the Assessing officer after upholding the constitutional validity of Section 14A of the Act.

14. The only basis for proceeding on the basis that there is a conflict between the two decisions of this court which emerges from the impugned order is that in petitioner's own case in HDFC Bank Ltd. (supra), reliance was placed upon the decision of this Court in Reliance Utilities and Power Ltd. (supra) to conclude that where both interest free funds and interest bearing funds are available and the interest free funds are more than the investments made, the presumption is that the investment in the tax free securities would have been made out of the interest free funds available with the assessee. Though, the decision of this Court in Reliance Utilities and Power Ltd. (supra) was rendered in the context of Section 36(1)(iii) of the Act, it was consciously applied by this Court while interpreting Section 14A of the Act in HDFC Bank Ltd. (supra). The impugned order of the Tribunal proceeds on the basis that Godrej and Boyce Manufacturing Co.

Utilities and Power Ltd. (supra), which is factually not so. The decision of this Court in Godrej and Boyce Manufacturing Co. Ltd. (supra) only makes a reference to the decision of this Court in Reliance Utilities and Power Ltd. (supra) and gives no findings on the issue which arose in that case and its applicability while interpreting Section 14A of the Act. This Court in Godrej and Boyce Manufacturing Co. Ltd. (supra) has in fact restored all the issues to the Assessing Officer for fresh consideration. This court in Godrej and Boyce Manufacturing Co. Ltd. (supra) did not decide whether or not the principles laid down in Reliance Utilities and Power Ltd. (supra) can be invoked while applying Section 14A of the Act. Thus by no stretch of reasoning can it be countenanced that there is conflict in the decisions of this Court in Godrej and Boyce Manufacturing Co. Ltd.(supra) and HDFC Bank Ltd.(supra). The decision in Godrej and Boyce Manufacturing Co. Ltd.(supra) is not a precedent for the issue arising before the Tribunal and could not be relied upon in the impugned order of the Tribunal to disregard the binding decision in HDFC Bank Ltd. (supra).

15. It is clear that for the first time in the case of HDFC Bank Ltd. (supra) that this Court took a view that the presumption which has been laid down in Reliance Utilities and Power Ltd. (supra) with regard to investment in tax free securities coming out of assessee's own funds in case the same are in excess of the investments made in the securities (notwithstanding the fact that the assessee concerned may also have taken some funds on interest) applies, when applying Section 14A of the Act. Thus, the decision of this Court in HDFC Bank Ltd. (supra) for the first time on 23rd July, 2014 has settled the issue by holding that the test of presumption as held by this Court in Reliance Utilities and Power Ltd. (supra) while considering Section 36(1)(iii) of the Act would apply while considering the application of Section 14A of the Act. The aforesaid decision of this Court in HDFC Bank Ltd. (supra) on the above issue has also been accepted by the Revenue inasmuch as even though they have filed an appeal to the Supreme Court against that order on the other issue therein viz. broken period interest, no appeal has been preferred by the Revenue on the issue of invoking the principles laid down in Reliance Utilities and Power Ltd. (supra) in its application to Section 14A of the Act. Therefore, the issue which arose for consideration before the Tribunal had not been decided by this Court in Godrej and Boyce Manufacturing Co. Ltd.(supra). It arose and was so decided for the first time by this Court in HDFC Bank Ltd. (supra). Thus, there is no conflict as sought to be made out by the impugned order. Thus, the impugned order has proceeded on a fundamentally erroneous basis as the ratio decindi of the order in Godrej and Boyce Manufacturing Co. Ltd.(supra) had nothing to do with the test of presumption canvassed by the petitioner before the Tribunal on the basis of the ratio of the decision of this Court in HDFC Bank Ltd.(supra).

16. At the hearing Mr. Suresh Kumar, learned Counsel for the Revenue urged that on the facts of this case no fault can be found with the order of the Tribunal. It is submitted that, the petitioner was not able to establish before the Assessing Officer and the CIT(A) that the amounts invested in the interest free securities came out of interest free funds available with the petitioner. In that view of the matter, it is submitted by him that the order of this Court in HDFC Bank Ltd. (supra) would not apply to the facts of the present case. We are unable to understand the above submission. The Assessing Officer passed the Assessment order on 22nd December, 2010 under Section 143(3) of the Act. The CIT (A) passed an order on 21st November, 2011 dismissing the petitioner’s appeal. On both the dates, when the orders were passed by the Assessing Officer and CIT (A), the authorities did not have the benefit of the order of this Court in HDFC Bank Ltd. (supra) rendered on 23rd July, 2014. Once the issue is settled by the decision of this Court in HDFC Bank Ltd. (supra), there is now no need for the assessee to establish with evidence that the amounts which has been invested in the tax free securities have come out of interest free funds available with it. This is because once the assessee is possessed of interest free funds sufficient to make the investment in tax free securities, it is presumed that it has been paid for out of the interest free funds. Consequently, we do not find any merit in the above submission made at the hearing on behalf of the Revenue.

17. At the hearing before us the Petitioner drew our attention to various orders of the Tribunal where a consistent view has been taken by the coordinate benches of the Tribunal in applying the presumption laid down by this Court in Reliance Utilities and Ltd. (supra) as well as the decision of this Court in HDFC Bank Ltd. (supra) while deciding on application of Section 14A of the Act to disallow interest claimed as expenditure. Besides reliance is also placed upon a decision of this Court in the case of the petitioner itself before this Court in Income Tax Appeal No.860 of 2012 rendered on 24th September, 2014 wherein question (b) as formulated by the Revenue raised the same issue namely applicability of the Godrej and Boyce Manufacturing Co. Ltd. (supra) while interpreting Section 14A of the Act in the context of the test of presumption as arising in the appeal before the Tribunal. For the purposes of this order, we are not taking into account the above decisions as they were not cited at the hearing before the Tribunal. Thus we are only examining whether the action of the Tribunal is within the bounds of its authority on the basis of the materials placed before it leading to the impugned order and we unfortunately find it is not so. This is for the reason that it failed to follow the binding precedent in HDFC Bank Ltd. (supra).

18. The alternative submission (b) which was put forth by the petitioner before the Tribunal that the investment in securities are its stock in trade. Consequently, Section 14A of the Act would be inapplicable by placing reliance upon the decision of this Court in India Advantage Securities Ltd. (supra). However this was also disregarded by the impugned order on the ground that this Court did not entertain an appeal of the Revenue from the order of the Tribunal holding that Section 14A of the Act is inapplicable where the investment has been made in stock in trade. This non entertainment of an appeal being on the ground that this Court found no substantial question of law. Therefore, the impugned order holds that the decision relied upon in India Advantage Securities Ltd. (supra) does not lay down any binding proposition of law.

19. We are unable to comprehend how and why the impugned order of the Tribunal is of the view that if an appeal is not admitted from an order of the Tribunal, then it is open to the Tribunal in another case to decide directly contrary to the view taken by the earlier order of the Tribunal, which is not entertained by this court in appeal. This without even as much as a whisper of any explanation with regard to how and why the facts of the two cases are different warranting a view different from that taken by the Tribunal earlier. In fact when an appeal is not entertained then the order of the Tribunal holds the field and the coordinate benches of the Tribunal are obliged to follow the same unless there is some difference in the facts or law applicable and the difference in fact and / or law should be reflected in its order taking a different view. Moreover the impugned order of the Tribunal places reliance upon the decision of this Court in Godrej and Boyce Manufacturing Co. Ltd.(supra) to deny the claim. On this issue no decision was rendered by this court in Godrej and Boyce Manufacturing Co. Ltd.(supra) and therefore how could it be relied upon to deny the claim of the petitioner is beyond comprehension. This again shows that the Tribunal has acted beyond the limits of its authority.

20. Mr. Suresh Kumar on behalf of the Revenue states that this ground was raised for the first time before the Tribunal and not urged before the lower authorities and therefore no fault can be found with the order of the Tribunal. Once Tribunal has considered the issue on merits and dealt with it in detail, it is not open to the Revenue to urge an objection when the Tribunal has itself decided the issue on merits.

21. The impugned order of the Tribunal seems to question the decision of this Court in HDFC Bank Ltd. (supra) to the extent it relied upon the decision of this Court in Reliance Utilities and Power Ltd. (supra). This is by observing that the decision in Reliance Utilities and Power Ltd.(supra) it must be appreciated was rendered in the context of Section 36(1)(iii) of the Act and its parameters are different from that of Section 14A of the Act. This Court in its order in HDFC Bank Ltd.(supra) consciously applied the principle of presumption as laid down in Reliance Utilities and Power Ltd. (supra) and in fact quoted the relevant paragraph to emphasize that the same principle / test of presumption would apply to decide whether or not interest expenditure could be disallowed under Section 14A of the Act in respect of the income arising out of tax free securities. It is not the office of Tribunal to disregard a binding decision of this court. This is particularly so when the decision in Reliance Utilities and Power Ltd. (supra) has been consciously applied by this Court while rendering a decision in the context of Section 14A of the Act.

22. We also note that the impugned order of the Tribunal has an observation therein that there is no such thing as estoppel in law and by virtue of that gives itself a licence to decide the issue before it ignoring the binding precedent in the petitioner’s own case in HDFC Bank Ltd(supra). Once there is a binding decision of this Court, the same continues to be binding on all authorities within the State till such time as it stayed and / or set aside by the Apex Court or this very Court takes a different view on an identical factual matrix or larger bench of this Court takes a view different from the one already taken.

23. We are conscious of the fact that we are fallible and, therefore, an order passed by us may not meet the approval of all and some may justifiably consider our order to be incorrect. However the same has to be corrected/rectified in a manner known to law and not by disregarding binding decisions of this Court. In fact our court in Panjumal Hassomal Advani Vs. Harpal Singh Abnashi Singh Sawhney & Ors. AIR 1975(Bom) 120 has observed that a coordinate bench cannot refuse to follow an earlier decision on the ground that it is incorrect and / or rendered on misinterpretation. This for the reason that the decision of a co¬ordinate bench would continue to be binding till it is corrected by a higher Court. This principle laid down in respect of a co¬ordinate Court would apply with greater force on subordinate Courts and Tribunals. We are also conscious of the fact that we are not final and our orders are subject to appeals to the Supreme Court. However, for the purposes of certainty, fairness and uniformity of law, all authorities within the State are bound to follow the orders passed by us in all like matters, which by itself implies that if there are some distinguishing features in the matter before the Tribunal and, therefore, unlike, then the Tribunal is free to decide on the basis of the facts put before it. However till such time as the decision of this court stands it is not open to the Tribunal or any other Authority in the State of Maharashtra to disregard it while considering a like issue. In case we are wrong, the aggrieved party can certainly take it up to the Supreme Court and have it set aside and / or corrected or where the same issue arises in a subsequent case the issue may be re¬ urged before the Court to impress upon it that the decision rendered earlier, requires reconsideration. It is not open to the Tribunal to sit in appeal from the orders of this Court and not follow it. In case the doctrine of precedent is not strictly followed there would complete confusion and uncertainty. The victim of such arbitrary action would be the Rule of law of which we as the Indian State are so justifiably proud.

24. It is in the above circumstances that we are of the view that we have to exercise our powers under Article 227 of the Constitution of India. This is in view of the manner in which the impugned order of the Tribunal has chosen to disregard and/or circumvent the binding decision of this Court in respect of the same assessee for an earlier assessment year. This is a clear case of judicial indiscipline and creating confusion in respect of issues which stand settled by the decision of this Court.

25. It is in the above view, that we set aside the impugned order of the Tribunal dated 23rd September, 2015 in its entirety and restore the issue to the Tribunal to decide it afresh on its own merits and in accordance with law. However the Tribunal would scrupulously follow the decisions rendered by this Court wherein a view a has been taken on identical issues arising before it. It is not open to the Tribunal to disregard the binding decisions of this Court, the grounds indicated in the impugned order which are not at all sustainable. Unless the Tribunal follows this discipline, it would result in uncertainty of the law and confusion among the tax paying public as to what are their obligations under the Act. Besides opening the gates for arbitrary action in the administration of law, as each authority would then decide disregarding the binding precedents leading to complete chaos and anarchy in the administration of law.

26. Accordingly, the Rule is made absolute in above terms. No order as to costs.

*****

CAPGEMINI BUSINESS SERVICES (INDIA) LTD. vs.ASSISTANT COMMISSIONER OF INCOME TAX

noreply@blogger.com (Simply Indian Tax) — Thu, 10 Mar 2016 16:29:00 +0530

CAPGEMINI BUSINESS SERVICES (INDIA) LTD. vs.ASSISTANT COMMISSIONER OF INCOME TAX

BOMBAY TRIBUNAL

D. KARUNAKARA RAO, AM & SANJAY GARG, JM.

ITA No. 7779/M/2011

Feb 29, 2016

(2016) 46 cch 0253 MumTrib

Legislation Referred to

Section 144C(1), 92A(2)(a), 195, 234B

Case pertains to

Asst. Year 2007-08

Issue

Transfer Pricing Adjustments

Decision in favour of:

Assessee

Transfer Pricing—Computation of arm’s length price—Transfer pricing adjustment—Selection of comparables—Exclusion of companies—Assessee was subsidiary of ‘’x’’ which was in turn subsidiary of ; ‘’Y’’ , had its registered office in Mumbai and corporate office in Bangalore— Assessee had selected Transactional Net Margin Method (TNMM) as the most appropriate method to determine arm's length price for provision of ITES to group entities and had selected comparable companies rendering ITES for determination of arm's length price—TPO proposed for transfer pricing adjustment—.TPO selected 25 comparables of companies—Assessee sought for exclusion of comparables selected by TPO—Held, perusal of record revealed that business activity of ‘’M’’ and that of assessee were entirely different— Scope of profit and margins owing to different nature of services offered by assessee and ’M’’ also different—’M’’ was providing high end services in structural engineering— Assessee’s services were mainly relating to data analysis and back up office support services which did not require much involvement of high skilled knowledge process and expense whereas, in case of ’M’’ nature of services, itself, revealed that same involved high-tech skills, domain knowledge and experience of highly skilled and professionals/ persons and that profit margin in such type of skilled services would be higher—’M’’ could not be taken as comparable to determine arm's length price in case of transactions of assessee with its associate enterprises—Company ‘’’V’’ was engaged in services of data analytics and providing data services solutions—However, employees’ salary cost of ’’V’’. was relatively very low as compared to that of assessee—’’V’’ had outsourced significant parts of operations and did not have so much employees’ salary cost as was in case of assessee and therefore business model of ’’V’’was different—Business model of ’’V’’ being different from assessee company not required to be included in list of comparables—AO was directed to exclude ’’V’’ and ’’M’’ while determining arm's length price of assessee relating to transactions with its AEs—Assessee’s Appeal allowed.

Held

A perusal of the record reveals that the business activity of the Mold- Tek Technologies Ltd. and that of the assessee are entirely different. The scope of profit and margins owing to the different nature of services offered by the assessee and Mold-Tek Technologies Ltd. may also be different. The Mold-Tek Technologies Ltd. is providing high end services in structural engineering. At this stage, the Ld. A.R. has invited our attention to page 251 of the paper book to contend that the Mold-Tek Technologies Ltd. is also engaged in providing Healthcare Billing Services. May it be so, the point raised by the Ld. AR is that the nature of services provided by Mold-Tek Technologies Ltd. are entirely different from that of the assessee. The assessee’s services are mainly relating to data analysis and back up office support services which do not require much involvement of high skilled knowledge process and expense whereas, in case of Mold-Tek Technologies Ltd. the nature of services, itself, reveals that the same involved high-tech skills, domain knowledge and experience of highly skilled and professionals/ persons and that the profit margin in such type of skilled services will be higher. ITAT agree with the finding of the Special Bench of the Tribunal when we compare the case of the assessee with that of Mold-Tek Technologies Ltd. that the Mold-Tek cannot be taken as a comparable to determine arm's length price in case of transactions of assessee with its associate enterprises. The second objection pressed by the assessee is in relation to Vishal International Technology Ltd. pleading that the same cannot be considered as a comparable for the purpose of calculating the bench mark operating profit margin on the ground that the business model of the said company was different. It was contended that Vishal International Technology Ltd. was engaged in the services of data analytics and providing data services solutions. However, the employees’ salary cost of Vishal International Technology Ltd. was relatively very low as compared to that of the assessee. The Vishal International Technology Ltd. had outsourced significant parts of operations and did not have so much employees’ salary cost as was in the case of the assessee and therefore the business model of the Vishal International Technology Ltd. was different.

(Para 4)

Considering the above facts on the file and the submissions made by the Ld. Representatives of the parties, in ITAT view, the Mold-Tek Technologies Ltd. and Vishal International Technology Ltd. cannot be taken as comparables.

(Para 5)

ITAT accordingly, direct the AO to exclude Vishal International Technology Ltd. and Mold-Tek Technologies Ltd. while determining the arm's length price of the assessee relating to the transactions with its AEs. This issue is decided accordingly.

(Para 6)

Conclusion

Companies selected by TPO for determining arms length price were functionally different from assessee hence same required to be excluded from list of comparables

In favour of

Assessee

Disallowance—Disallowance relating to club entrance fees—AO made disallowance expenses of Rs.5,50,000/- incurred towards club entrance fees on ground that assessee made claim that special membership would help in building better relationship with clients without submitting any cogent evidence in this respect—Held ,Punjab & Haryana High Court in case of “CIT vs. Groz Beckert Asia Ltd.” held that no capital asset was created or came into existence on account of obtaining corporate membership—Corporate membership obtained was for limited period and it was obtained for running business with view to produce profit and said corporate membership fee paid to club was to be treated as revenue expenditure— This ground was decided in favour of assessee.

Held

Punjab & Haryana High Court in the case of “CIT vs. Groz Beckert Asia Ltd.” reported as (2013) 351 ITR 196 P&H (FB), wherein, the Hon’ble High Court has held that no capital asset is created or comes into existence on account of obtaining corporate membership. The corporate membership obtained was for a limited period and it was obtained for running the business with a view to produce profit and the said corporate membership fee paid to the club was to be treated as revenue expenditure. Relying on the said the Full Bench decision of the Hon’ble Punjab & Haryana High Court, this ground is decided in favour of the assessee.

(para5)

Conclusion

Corporate membership obtained was for limited period and it was obtained for running business with view to produce profit and said corporate membership fee paid to club was to be treated as revenue expenditure

In favour of

Assessee

Tax credit of branch profit—Non allowance—Lower Authorities did not allow tax credit of branch profit tax paid in USA— Contention of lower authorities was that ‘branch holding tax’ was akin to ‘accumulated earning tax’ which had been specifically excluded from taxes covered under DTAA—Held, scope of Article II relating to “Taxes Covered” had been explained in said guide/technical explanation— It had been specifically provided that taxes covered in case of US, as indicated in paragraph 1(a) of Article II, were Federal income taxes imposed by Code, together with excise tax imposed on insurance premiums paid to foreign insurers (Code section 4371)— Article specified that Convention did not apply to accumulated earning tax (Code section 531), personal holding company tax (Code section 541) or social security taxes (Code sections 1401, 3101 and 3111)- State and local taxes in United States were also not covered by Convention— Perusal of Article II of ‘DTAA’ read with ‘technical explanation to convention’ revealed beyond doubt that taxes which had been excluded from purview of DTAA had been specifically mentioned therein— Further, as observed, accumulated earning tax, which had been provided u/s 531 of the Internal Revenue Code of US, was different from ‘branch profit tax’ which was dealt with under separate section 884—Section 884’ dealing with branch profit tax held that branch profit tax had not been specifically excluded from DTAA and thus being part of Internal Revenue Code was covered by US treaty—This issue was accordingly decided in favour of assessee.

Held

The scope of Article II relating to “Taxes Covered” has been explained in the said guide/technical explanation. It has been specifically provided that the taxes covered in the case of US, as indicated in paragraph 1(a) of Article II, are the Federal income taxes imposed by the Code, together with the excise tax imposed on insurance premiums paid to foreign insurers (Code section 4371). The Article specifies that the Convention does not apply to the accumulated earning tax (Code section 531), the personal holding company tax (Code section 541) or the social security taxes (Code sections 1401, 3101 and 3111). State and local taxes in the United States are also not covered by the Convention. A perusal of the Article II of the ‘DTAA’ read with the ‘technical explanation to the convention’ reveals beyond doubt that the taxes which have been excluded from the purview of the DTAA have been specifically mentioned therein. Further, as observed above, the accumulated earning tax, which has been provided under section 531 of the Internal Revenue Code of the US, is different from ‘branch profit tax’ which is dealt with under separate section 884. The ‘section 884’ dealing with branch profit tax has not been specifically excluded from the DTAA and thus being a part of the Internal Revenue Code is covered by the US treaty. This issue is accordingly decided in favour of the assessee.

(Para8)

Conclusion

Accumulated earning tax, which has been provided under section 531 of the Internal Revenue Code of the US, is different from ‘branch profit tax’ which is dealt with under separate section 884 Internal Revenue Code.

In favour of

Assessee

Business Expenditure—Interest, commission, brokerage etc.— Disallowance u/s 40(a)(i) on account of expenditure incurred for purchase of “off shelf” software—AO noticed that assessee had incurred expenses in foreign currency for purchase of software from ‘’’Q’’—AO, however, observed that assessee had purchased right to use software and software was used for business purpose in India—AO held that same was liable for deduction of tax at source u/s 195 in view of provisions of section 9—AO made disallowance u/s 40(a)(i) on ground that said expenditure was subject to deduction of tax at source u/s 195—Held, from definition of Copyright Act,1957 of India , It was apparent that fair use of work for purpose of which it was being purchased and doing of such other acts including making of copy for protection from damage or loss could not , in any case, said to be any infringement of copyright whether or not any license in this respect had been granted by author/owner of work— Right to use or for use of product accrued to purchaser by operation of statute and same would amount to sale of goods and acts done such as downloading of same to computer or making backup copies etc. would be necessary acts for enabling use of product and would not amount to transfer of copyright or right therein, but only transfer of copyrighted product and thus would not be covered under definition of royalty under DTAA—Consideration, thus, paid would be business income of non-resident and taxable in accordance with provisions of DTAA—Even in cases where owner of copyrighted work may restrict use of or right to use work by way of certain terms of license/software agreement, validity or enforceability of same may be subject matter in other laws such as Indian Contract Act 1872 , Sale of goods Act 1930 or Consumer Protection Act 1986 etc., but, same in any way could not be said to grant of or infringement of copyright in light of specific statutory provisions of Copyright Act 1957—DRP had given specific finding of fact that what assessee had purchased was shrink wrapped /off shelf software— It had also been discussed that definition of ‘royalty’ given in treaty was more beneficial to assessee as compared to provisions of section 9—Assessee had opted for definition that was provided under DTAA, thus as per section 90, definition of ‘royalty’ as provided in DTAA would prevail as over general definition of ‘royalty’ provided under the Income Tax Act— Hence, without expressing opinion or any view in relation to definition of ‘royalty’ vis-à-vis ‘computer software’ as provided under the Income Tax Act, ITAT given findings only in respect of scope of ‘royality’ under DTAA—Assessee could not be said to have paid consideration for use of or right to use copyright but had simply purchased copyrighted work embedded in CD- ROM which could be said to be sale of ‘good’ by owner— Consideration paid by assessee thus as per clauses of DTAA could not be said to be royalty and same would be outside scope of definition of ‘royalty’ as provided in DTAA and would be taxable as business income of recipient— Assessee was entitled to fair use of the work/product including making copies for temporary purpose for protection against damage or loss even without license provided by owner in this respect and same would not constitute infringement of any copyright of owner of work even as per provisions of section 52 of the Copyright Act,1957—This ground was decided in favour of Assessee

Held

The provisions of the Copyright Act, as discussed above are clear and unambiguous in this respect. If the assessee has purchased a copy of a computer software programme and he uses the said copy for his business purpose and if the said use falls within the scope and purview of the exceptions of section 52, such as the use of it for the purpose for which it is supplied and to make backup copies for temporary purpose as a protection against loss or damage and doing of any act necessary to obtain information essential for operating the software for the purpose for which it is purchased etc. as provided under section 52, then in that event it cannot be said to be an infringement of copyrights of the author or owner of the work. In view of above, when ITAT see the definition as per the statutory provisions/domestic law of the country i.e. Copyright Act,1957 of India which is the taxing State in this case, it is apparent that the fair use of the work for the purpose of which it is being purchased and doing of such other acts including making of copy for protection from damage or loss can not, in any case, said to be any infringement of copyright whether or not any license in this respect has been granted by the author/owner of the work. The right to use or for use of the product accrues to the purchaser by the operation of the statute the same would amount to the sale of a goods and the acts done such as downloading of the same to the computer or making backup copies etc. would be the necessary acts for enabling the use of the product and would not amount to the transfer of copyright or right therein, but only the transfer of the copyrighted product and thus will not be covered under the definition of royalty under DTAA. The consideration, thus, paid will be the business income of the non-resident and taxable in accordance with the provisions of DTAA. We may clarify here that even in cases where the owner of the copyrighted work may restrict the use of or right to use the work by way of certain terms of the license/software agreement, the validity or the enforceability of the same may be subject matter in other laws such as Indian Contract Act 1872 , Sale of goods Act 1930 or the Consumer Protection Act 1986 etc., but, the same in any way can not be said to grant of or infringement of copyright in the light of specific statutory provisions of Copyright Act 1957.

(Para 49)

Now coming to the facts of the case in hand, the DRP has given a specific finding of fact that what the assessee in the present case has purchased is the shrink wrapped /off the shelf software. It has also been discussed in detail in paras above that the definition of ‘royalty’ given in the treaty is more beneficial to the assessee as compared to the provisions of section 9 of the Income Tax Act and the assessee has opted for the definition that is provided under the DTAA, thus as per section 90 of the Income Tax Act, definition of ‘royalty’ as provided in the DTAA will prevail as over the general definition of ‘royalty’ provided under the Income Tax Act. Hence, without expressing ITAT opinion or any view in relation to the definition of ‘royalty’ vis-à-vis ‘computer software’ as provided under the Income Tax Act, ITAT have given ITAT findings only in respect of the scope of ‘royality’ under the DTAA. .(Para50)

. In view of ITAT detailed discussion made above, the assessee can not be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be said to be sale of ‘good’ by the owner. The consideration paid by the assessee thus as per the clauses of DTAA can not be said to be royalty and the same will be outside the scope of the definition of ‘royalty’ as provided in DTAA and would be taxable as business income of the recipient. The assessee is entitled to the fair use of the work/product including making copies for temporary purpose for protection against damage or loss even without a license provided by the owner in this respect and the same would not constitute infringement of any copyright of the owner of the work even as per the provisions of section 52 of the Copyright Act,1957.

(Para51)

Conclusion

Consideration paid by assessee thus as per clauses of DTAA could not be said to be royalty and same would be outside scope of definition of ‘royalty’ as provided in DTAA and would be taxable as business income of recipient

In favour of

Assessee

Cases Referred to

“Maersk Global Centres (India) (P.) Ltd. vs. ACIT” (2014) 31 ITR(Tri.-1) (Mumbai-SB)

“Rampgreen Solutions Pvt. Ltd. vs. CIT” in ITA No.102 of 2015

“CIT vs. Groz Beckert Asia Ltd.” reported as (2013) 351 ITR 196 P&H (FB)

“DIT vs. Ericson A.B.” (2012) 343 ITR 470

“CIT vs. Samsung Electronics Company Ltd. & Others” (2012) 345 ITR 494

“CIT vs. Synopsis International Old Ltd.” (2013) 212 taxman 454

“Vrizon Communication Singapore vs. ITO” 361 ITR 0575 (Mad.)

“Union of India vs. Azadi Bachao Andolan” (2003) 263 ITR 607

“Siemens AG” 310 ITR 320 (Bom)

Gracemac Co. vs. ADIT 134 TTJ (Delhi) 257

CIT vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom)

“CIT vs. Samsung Electronics Company Ltd. & Others” (2012) 345 ITR 494

“Advent Systems Ltd vs. Unisys Corporation” (925) F 2d 670 (3rd Cir 1991)

Counsel appeared:

M.M. Golvala, A.R. for the Assessee.: A.A. Khan, D.R. for the Revenue

SANJAY GARG, JM.

1. The present appeal has been preferred by the assessee against the order dated 08.08.2011 of the Dispute Resolution Panel (hereinafter referred to as the DRP) relevant to assessment year 2007-08.

2. The brief facts of the case are that the assessee namely ‘Capgemini Business Services (India) Limited’ [Formerly known as 'Unilever India Shared Services Limited’] (hereinafter referred to as the assessee or assessee company) for a part of A.Y 2007-08 was a subsidiary of Hindustan Unilever Limited (HUL), which is in turn a subsidiary of Unilever Plc. CBSIL, has its registered office in Mumbai and corporate office in Bangalore. Cape Gemini SA., France acquired 51% shareholding in CBSIL from HUL on 11 October 2006 (during the relevant AY 2007-08). Pursuant to the acquisition, the name of the company has been changed from ‘Unilever India Shared Services Limited’ to ‘Capgemini Business Services (India) Limited’ with effect from 14 May 2007. During A.Y 2007-08, the assessee had primarily provided business process management services in the areas of finance accounts, operational control assessment, administration of foreign exchange, one off consultancy projects and competitors’ intellectual study to Unilever group companies. The services rendered by the assessee have been in the nature of ‘Information Technology Enabled Services’ (ITES) / ‘Back Office Support Services’. Considering that the Unilever Group had an indirect equity stake in excess of 26% in the assessee for the period from 1 April 2006 to 11 October 2006, the transactions between the assessee and Unilever group entities came under the purview of ‘Indian Transfer Pricing (TP) Regulations’.

The assessee had selected the Transactional Net Margin Method (TNMM) as the most appropriate method to determine the arm's length price for the provision of ITES to group entities and had selected comparable companies rendering ITES for determination of arm's length price. Based on the analysis carried out by the assessee, the international transactions were determined as meeting with the arm's length price. The assessee's case was referred to the Transfer Pricing Officer (TPO) for AY 2007-08. The TPO proposed an adjustment to the transfer prices with respect to the provision of ITES to the tune of Rs.33,070,534/-. The Assessing Officer (hereinafter referred to as the AO) relied on the TPOs Order and issued a draft assessment order under Section 144C(1) of the Act proposing the above TP adjustment. The assessee filed objections against the draft assessment order before the DRP. However, the DRP rejected the assessee’s objections not only in relation to transfer pricing adjustments but also in relation to disallowances proposed by the AO in relation to club entrance fee, credit of ‘branch profit tax’ paid by the assessee in USA and the expenditure incurred towards purchase of ‘software’. Being aggrieved by the order of the Ld. DRP, the assessee has come in appeal before us with the following grounds of appeal:

“Ground No.1 - Transfer Pricing (‘TP') adjustment of Rs.3,30,70,534

On the facts, in law and in the circumstances of the present case, the learned Additional Commissioner of Income-tax 1(2) (hereinafter referred as 'AO') and the Dispute Resolution Panel ('DRP') erred in concluding the assessment by upholding the action of the Additional Commissioner of Income-tax Transfer Pricing Officer - 1(2) (hereinafter referred as 'TPO') in determining the arm's length price of the international transaction of business process management services rendered to Associated Enterprises ('AEs') at Rs. 50,99,80,530 instead of Rs.47,69,09,996 as determined by Capgemini Business Services (India) Limited ('the Appellant') by:

a. considering the Appellant's transactions with overseas Unilever group entities, post transfer of the Appellant's shareholding to Capgemini Group from Unilever Group on 11 October 2006, as international transaction, having failed to appreciate that Unilever Plc's share holding (indirect) in Appellant post 11 October 2006 fell below the 26% limit under Section 92A(2)(a) of the Act for the purpose of constituting AE;

b. disregarding the internal comparability analysis between the Appellant's international transactions with overseas Unilever group entities for the period:

- prior to the acquisition of Appellant's shareholding by Capgemini Group; and

- post such acquisition.

c. disregarding the Appellant's contemporaneous TP documentation and conducting his own comparability analysis which is not in accordance with contemporaneous documentation requirement under Indian TP regulations, having failed to appreciate that in the case under consideration, none of the conditions set out in Section 920(3) of the Act are satisfied;

d. selecting companies that are not comparable to the Appellant vis-a-vis its AEs, for the determination of the arm's length price;

e. using current year's financial data (i.e. Financial Year 2006-07) for the comparable companies for benchmarking the Appellant's international transactions pertaining to business process management services rendered to AEs;

f. not granting a working capital adjustment to the Appellant to account for the differences in the working capital cycle of the comparables vis-à-vis the Appellant; and

g. denying the (+/-) 5% range benefit available under proviso to Section 92C(2) of the Act.

The Appellant prays that the book value of the international transaction be held to be the arm's length price and accordingly, the AO be directed to delete the adjustment of Rs. 3,30,70,534.

2. Club entrance fees

On the facts, in law and in the circumstances of the present case, the AO erred in disallowing expense of Rs. 550,000 incurred towards club entrance fees.

The Appellant prays that the sum of Rs. 550,000 be allowed as business expense and the additions made by the AO be deleted.

3. Tax credit in India for Branch Profit Tax paid by the Appellant in USA

On the facts, in law and in the circumstances of the present case, the AO erred in not allowing tax credit of Branch Profit Tax of US$ 31,310 (equivalent to Rs.1,408,950) paid in USA.

The Appellant prays that the Branch Profit Tax of US$ 31,310 (equivalent to Rs. 1,408.950) paid in USA be allowed as tax credit while determining the Indian income-tax liability.

4. Payment towards purchase of software

On the facts, in law and in the circumstances of the present case, the AO has erred in disallowing expenditure of Rs. 953,437, incurred for purchase of 'off the shelf' software from QAD Singapore Pte Ltd., Singapore, under Section

40(a)(i) of the Act alleging that the said expenditure is subject to deduction of tax at source under Section 195 of the Act.

The Appellant prays that the expenditure towards purchase of 'off the shelf' software be allowed.

5. On the facts, in law and in the circumstances of the present case, the learned AO erred in levying interest under Section 234B and 234C of the Act.

The Appellant craves leave to add, alter, amend or withdraw all or any of the Grounds of Appeal (hereinafter referred to as the AO) and to submit such statements, documents and papers as may be considered necessary either at or before the appeal hearing.”

Ground No.1

3. Though, the assessee has raised various points and issues vide different sub grounds taken in ground No.1, however, the Ld. A.R. of the assessee, at the outset, has submitted that so far as the transfer pricing adjustments are concerned, the assessee had provided 12 comparables whereas the TPO accepted only 4 out of those. The TPO himself added 25 comparables for arriving at arm's length price for determining the transfer pricing adjustments. The TPO had accepted the analysis of the assessee using the TNMM as most appropriated method for determination of ALP of international transactions whereby the operating margin of the assessee was compared vis-à-vis its transactions with Unilever group entities during the period prior to 11.10.06 with its operating margin from transactions with Unilever entities in post 11.10.06 period. This internal comparison was done by the TPO as the functions’ profile of the assessee in pre and post scenarios had remained the same. The TPO also carried out external comparability analysis. According to the analysis report given by the assessee the ratio of OP/OC (Operating profit/operating cost) was given at 19.91% whereas as per the comparables taken by the TPO, the OP/OC ratio came to 28.23%. The short contention of the Ld. A.R. before us has been that the assessee otherwise will be satisfied if the comparables introduced by the AO are taken for analysis except the two i.e. Mold-Tek Technologies Ltd. (SCG) mentioned at Sl. No.20 and in case of Vishal International Technology Ltd. mentioned at Sl. No.24 of the comparables taken by the TPO in his order. He has submitted that if the above two comparables are excluded, the arm's length price so arrived after taking the other comparables of the TPO will be in the range of + 5% of the price declared by the assessee.

The Ld. A.R. of the assessee while inviting our attention to the business activity of Mold-Tek Technologies Ltd. has pointed out that the said company has been in a totally different activity. He, in this respect, has invited our attention to page 247 & page 251 of the paper book, which are the part of the director’s report for the year ended 31.03.07 of Mold-Tek Technologies Ltd., wherein it has been provided that during the year, the IT division of the said company commenced engineering services to high rise buildings for clients in US and Canada which offered excellent growth prospects. The company had two divisions, one is plastic division and the other is KPO division. KPO division deals with IT enabled services providing services in relation to designing and detailing of the buildings apart from other activities. The Ld. A.R. has further invited our attention to the Special Bench decision of the Tribunal in the case of “Maersk Global Centres (India) (P.) Ltd. vs. ACIT” (2014) 31 ITR(Tri.-1) (Mumbai-SB). The assessee company in that case was engaged in almost similar activities as that of the assessee before us, i.e. services relating to transaction, processing data entry, reconciliation of statements and other similar support services. In the said case, the AO had taken the said company Mold-Tek Technologies Ltd. as comparable, however the Special Bench of the Tribunal in para 81 of the order has observed that from the annual report of the said company for the financial year 2007-08, it revealed that the said company was providing structural engineering KPO services and its business activity was entirely different from that of the assessee’s BPO/KPO services provided by the assessee in relation to back office support, data processing and analysis etc. The relevant observations of the Special Bench of the Tribunal for the sake of convenience are reproduced as under:

“81. In so far as the case of Mold-Tek Technologies Ltd. is concerned, it is observed from the annual report of the said company for the financial year 2007-08 placed at page 139 to 151 of the paper book that the said company was pioneer in structural engineering KPO services and its entire business comprised of providing only structural engineering services to various clients. Further information of Mold-Tek Technologies Ltd. available on their Website is furnished in the form of printout at page 158 to 165 of the paper book and a perusal of the same shows that it is ale ading provider of engineering and design services with specialization in civil, structural and mechanical engineering services. It is stated to have a strong team of skilled resources with world class resources and skill sets. It is also stated to have consistently helped the clients to cut down design and development costs of civil, structural, mechanical and plant design by 30-40% and delivered technologically superior outputs to match and exceed expectations. It is claimed to have in-house software development team, quality control training and trouble shooting facilities. M/s Mold-Tek is also rendering web design and development services with experience in turning them into an effective graphic design representation and creating dynamic and graphic rich web applications from IT specs, design prints etc. Keeping in view this information available in the annual report of Mold-Tek as well on its website, we are of the view that the said company is mainly involved in providing high-end services to its clients involving higherspecial knowledge and domain expertise in the field and the same cannot be taken as comparable to the assessee company which is mainly involved in providing low-end services.”

4. A perusal of the record reveals that the business activity of the Mold- Tek Technologies Ltd. and that of the assessee are entirely different. The scope of profit and margins owing to the different nature of services offered by the assessee and Mold-Tek Technologies Ltd. may also be different. The Mold-Tek Technologies Ltd. is providing high end services in structural engineering. At this stage, the Ld. A.R. has invited our attention to page 251 of the paper book to contend that the Mold-Tek Technologies Ltd. is also engaged in providing Healthcare Billing Services. May it be so, the point raised by the Ld. AR is that the nature of services provided by Mold-Tek Technologies Ltd. are entirely different from that of the assessee. The assessee’s services are mainly relating to data analysis and back up office support services which do not require much involvement of high skilled knowledge process and expense whereas, in case of Mold-Tek Technologies Ltd. the nature of services, itself, reveals that the same involved high-tech skills, domain knowledge and experience of highly skilled and professionals/ persons and that the profit margin in such type of skilled services will be higher.

We agree with the finding of the Special Bench of the Tribunal when we compare the case of the assessee with that of Mold-Tek Technologies Ltd. that the Mold-Tek cannot be taken as a comparable to determine arm's length price in case of transactions of assessee with its associate enterprises.

The second objection pressed by the assessee is in relation to Vishal International Technology Ltd. pleading that the same cannot be considered as a comparable for the purpose of calculating the bench mark operating profit margin on the ground that the business model of the said company was different. It was contended that Vishal International Technology Ltd. was engaged in the services of data analytics and providing data services solutions. However, the employees’ salary cost of Vishal International Technology Ltd. was relatively very low as compared to that of the assessee. The Vishal International Technology Ltd. had outsourced significant parts of operations and did not have so much employees’ salary cost as was in the case of the assessee and therefore the business model of the Vishal International Technology Ltd. was different. The Ld. A.R. has relied in this respect to the decision of the Hon’ble Delhi High Court in the case of “Rampgreen Solutions Pvt. Ltd. vs. CIT” in ITA No.102 of 2015 decided vide order dated 10.08.15. The business model of the Vishal International Technology Ltd. being different on the ground that it was indulged in out sourcing of its operations has not only been considered by the special bench of the Tribunal but also by the Hon’ble Delhi High Court in the case of “Rampgreen Solutions Pvt. Ltd.” (supra).

5. Considering the above facts on the file and the submissions made by the Ld. Representatives of the parties, in our view, the Mold-Tek Technologies Ltd. and Vishal International Technology Ltd. cannot be taken as comparables.

6. We, accordingly, direct the AO to exclude Vishal International Technology Ltd. and Mold-Tek Technologies Ltd. while determining the arm's length price of the assessee relating to the transactions with its AEs. This issue is decided accordingly.

Ground No.2

7. Ground No.2 is relating to club entrance fees. The AO disallowed the expenses of Rs.5,50,000/- incurred towards club entrance fees on the ground that the assessee has made a claim that the special membership would help in building better relationship with clients without submitting any cogent evidence in this respect. Before us, the Ld. A.R. of the assessee has submitted that the same was a corporate membership and the company had nominated two of its employees i.e. CEO and Chief Engineer Operations for availing the membership facilities. He has further invited our attention to the full bench decision of the Hon’ble Punjab & Haryana High Court in the case of “CIT vs. Groz Beckert Asia Ltd.” reported as (2013) 351 ITR 196 P&H (FB), wherein, the Hon’ble High Court has held that no capital asset is created or comes into existence on account of obtaining corporate membership. The corporate membership obtained was for a limited period and it was obtained for running the business with a view to produce profit and the said corporate membership fee paid to the club was to be treated as revenue expenditure. Relying on the said the Full Bench decision of the Hon’ble Punjab & Haryana High Court, this ground is decided in favour of the assessee.

Ground No.3

8. Vide ground No.3, the assessee has agitated the action of the lower authorities in not allowing tax credit of branch profit tax paid in USA. The lower authorities, in this respect, have relied upon Article 2 of the Indo US DTAA (Double Taxation Avoidance Agreement), wherein, the taxes covered under the treaty in the United States inter alia are the federal income taxes imposed by the US ‘Internal Revenue Code’ but excluding the ‘accumulated earning tax’, ‘the personal holding tax’ and ‘social security taxes’ etc. The contention of the lower authorities is that the ‘branch holding tax’ is akin to the ‘accumulated earning tax’ which has been specifically excluded from the taxes covered under the DTAA. The Ld. A.R. of the assessee, however, brought our attention to page 1161 of the paper book which is the copy of section 531 of the US ‘Internal Revenue Code’ which is relating to the imposition of accumulated earning tax. He has further invited our attention to section 884 of the ‘Internal Revenue Code’ which deals with the branch profit tax. He, in this respect, has argued that the ‘accumulated earning tax’ and the ‘branch profit tax’ are the different taxes which have been dealt by different sections. Section 531 of the Internal Revenue Code deals with imposition of ‘accumulated earning tax,’ whereas, section 884 deals with ‘branch profit tax’. The Ld. A.R. has further invited our attention to page 1167 of the paper book which is the “Official Technical Explanation of the Convention and Protocol between the US and India”. This technical explanation is an official guide to the convention/DTAA. The scope of Article II relating to “Taxes Covered” has been explained in the said guide/technical explanation. It has been specifically provided that the taxes covered in the case of US, as indicated in paragraph 1(a) of Article II, are the Federal income taxes imposed by the Code, together with the excise tax imposed on insurance premiums paid to foreign insurers (Code section 4371). The Article specifies that the Convention does not apply to the accumulated earning tax (Code section 531), the personal holding company tax (Code section 541) or the social security taxes (Code sections 1401, 3101 and 3111). State and local taxes in the United States are also not covered by the Convention. A perusal of the Article II of the ‘DTAA’ read with the ‘technical explanation to the convention’ reveals beyond doubt that the taxes which have been excluded from the purview of the DTAA have been specifically mentioned therein. Further, as observed above, the accumulated earning tax, which has been provided under section 531 of the Internal Revenue Code of the US, is different from ‘branch profit tax’ which is dealt with under separate section 884. The ‘section 884’ dealing with branch profit tax has not been specifically excluded from the DTAA and thus being a part of the Internal Revenue Code is covered by the US treaty. This issue is accordingly decided in favour of the assessee.

Ground No.4

9. Ground No.4 is in relation to disallowance of expenditure of Rs.9,53,437/- incurred for purchase of “off the shelf” software from ‘QAD Singapore Pvt. Ltd.’ under section 40(a)(i) of the Act on the ground that the said expenditure was subject to deduction of tax at source under section 195 of the Act. The AO noticed that the assessee had incurred expenses in foreign currency for the purchase of software from QAD Singapore Pvt. Ltd. The case of the assessee has been that it had not purchased any copyright in the software rather, it had purchased only a copyrighted article named as ‘MFG Pro Software.’ The AO, however, observed that the assessee had purchased the right to use the software and the software is used for the business purpose in India. He, therefore, held that the same was liable for deduction of tax at source under section 195 of the Act in view of the provisions of section 9 of the Income Tax Act, wherein it has been provided that the income on account of consideration paid for royalty is to be deemed to have accrued in India.

10. Before the DRP, the assessee adduced evidence in the form of invoice and other documents/material in respect of the software purchased to prove that the said software has been standard software and that the payment made by the assessee for the said software was a onetime payment and not a recurring payment for use of software. It was also explained by the assessee that what it had purchased was a ‘copyrighted article’ and not the ‘copyright,’ itself, so as to classify it as royalty or fees for technical services.

In para 7.3 of the impugned order, the DRP, after perusal of the documents submitted by the assessee, has held that the software purchased was a one “off the shelf” product. However, the DRP further observed that the software was not sold but a license was given to the assessee to use it in a particular manner in consideration of the license fee. Even after obtaining a copy of the software, the assessee required permission to use the software by way of activation on a certified machine. Therefore, payment made by the end user was towards license to use copyright in software and not for sale of software. The DRP, therefore, held that the license to use the software would fall under the purview of royalty. Being aggrieved by the above finding of the DRP, the assessee has come in appeal before us.

11. We have heard the rival contentions and have also gone through the records. The Ld. A.R. of the assessee has contended that ‘MFG Pro Software’ purchased by the assessee is an accounting software and is available off the shelf. QAD Singapore Pvt. Ltd. supplied the said software to the assessee company outside India on a computer disk with free on board basis and further that the said entity does not have a permanent establishment in India. He, therefore, has contended that the said disk purchased by the assessee would fall in the definition of ‘goods’ as defined in the ‘Sale of Goods Act’ and the consideration paid is the sale price of the goods and not the royalty and hence the assessee was not liable to deduct TDS on the payment for the purchase of goods from the foreign company as the same was business income in the hands of the recipient and not the royalty. The Ld. A.R. of the assessee, in this respect has relied upon the decision of the Hon’ble Delhi High Court in the case of “DIT vs. Infrasoft Ltd.” (2013) 39 taxmann.com 88 (Del.) and further on another decision of the Hon’ble Delhi High Court in the case of “DIT vs. Ericson A.B.” (2012) 343 ITR 470.

12. On the other hand, the Ld. D.R., relying upon the decisions of the co- ordinate bench of this Tribunal in the case of “Reliance Infocom Ltd.” and in specific relying on para 29, 35 & 36 of the said decision, has contended that the software purchased by the assessee was a separate software and the same was not supplied along with the equipments and that the same was not an embedded software in the computer/equipment. The assessee was not the owner of the software, the ownership of the software had remained with the owner; the assessee was just a given license to use the software which was the right to use of copyright in the software. The Tribunal in the said decision (supra) has relied upon the decision of the Hon’ble Karnataka High Court in the case of “CIT vs. Samsung Electronics Company Ltd. & Others” (2012) 345 ITR 494 and upon another decision of the Hon’ble Karnataka High Court in the case of “CIT vs. Synopsis International Old Ltd.” (2013) 212 taxman 454. The Ld. DR in this respect has relied upon the amended definition of the ‘royality’ u/s 9 of the Income Tax Act. It is pertinent to mention here that vide amendment Act of 2012, Explanation 4 has been added to section 9(1)(vi) of the Act with retrospective effect including the software in the definition of royalty. The Ld. DR has stated that the definition of royalty under the Act is parametria with that of the treaty, therefore, the same is to be read into the definition of treaty as provided in the DTAA for determining the tax liability of the assessee in this respect. The contention of the Ld. AR, on the other hand is that the definition of royalty, since provided in the DTAA is to be looked into only and that the definition, if any, provided under the Act is to be ignored.

13. After hearing the Ld. Representatives of the parties, the first and foremost question for adjudication before us is as to whether the definition of ‘Royalty’ as provided under the Income Tax Act is to be taken or that which has been provided in the DTAA with Singapore.

14. The Ld. D.R. at this stage relying upon the decision of the Hon’ble Madras High Court in the case of “Vrizon Communication Singapore vs. ITO” 361 ITR 0575 (Mad.) has contended that in ‘Para 100’ of the said decision, the Hon’ble Madras High Court has observed that the definition of royalty under DTAA and the Indian Income Tax are in paramateria. He has further stated that the said decision of the Hon’ble Madras High Court in the case of “Vrizon Communication Singapore” (supra) has been followed by the Mumbai Bench of the Tribunal in “Viacom 18 Media Pvt. Ltd. vs. ADIT (International Taxation) reported in (2014) 44 taxman.com 1 (Mumbai). He, therefore, has vehemently contended that the definition of royalty as provided under the various clauses and explanations of section 9 of the Income Tax Act should be adopted. He, in this respect, has stated that the Explanation 4 to section 9(1) (vi), introduced vide Amendment Act of 2012, is clarificatory in nature under which the software has been specifically included in the definition of royalty, and it should be read along with the definition of royalty as provided under the DTAA. He therefore has contended that the consideration paid by the assessee for the use of software is to be treated as royalty.

On the other hand the contention of the Ld. AR of the assessee has been that if the provisions of DTAA are more beneficial to the assessee then the same would prevail over the provisions of the Income Tax Act as provided under section 90 of the Income Tax Act. He, in this respect, has relied upon the decision of the Hon’ble Supreme Court in the case of “Union of India vs. Azadi Bachao Andolan” (2003) 263 ITR 607.

15. We have considered the rival contentions of the Ld. Representatives in this respect. We have also gone through the relevant definitions as provided under the DTAA and under the Income Tax Act. So far as the definition of royalty as provided under section 9(1)(vi)of The Income Tax Act is concerned, the relevant part of the said provision is reproduced as under:

Section 9(1)

“(vi) income by way of royalty payable by— (a) the Government ; or

(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or

(c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :

Provided that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum consideration for the transfer outside India of, or the imparting of information outside India in respect of, any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property, if such income is payable in pursuance of an agreement made before the 1st day of April, 1976, and the agreement is approved by the Central Government :

Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.

Explanation 1.—For the purposes of the first proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date; so, however, that, where the recipient of the income by way of royalty is a foreign company, the agreement shall not be deemed to have been made before that date unless, before the expiry of the time allowed under sub- section (1) or sub-section (2) of section 139 (whether fixed originally or on extension) for furnishing the return of income for the assessment year commencing on the 1st day of April, 1977, or the assessment year in respect of which such income first becomes chargeable to tax under this Act, whichever assessment year is later, the company exercises an option by furnishing a declaration in writing to the Assessing Officer (such option being final for that assessment year and for every subsequent assessment year) that the agreement may be regarded as an agreement made before the 1st day of April, 1976.

Explanation 2.—For the purposes of this clause, "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for—

(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;

(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;

(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or

(vi) the rendering of any services in connection with the activities referred to in sub- clauses (i) to (iv), (iva) and (v).

Explanation 3.—For the purposes of this clause, "computer software" means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data.

Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not—

(a) the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

Explanation 6.—For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;”

16. The definition of “royalty” as provided in the DTAA of India with Singapore, for the sake of convenience and comparison, is also reproduced as under:

“Article 12(3)

The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use:

a. any copyright of literary, artistic or scientific work, including cinematograph film, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right, property or information;

b. any industrial, commercial or scientific equipment, other than payments derived by an enterprise from activities described in paragraph 4(b) or 4(c) of Article 8.”

17. We further find that in the various treaties with different countries, the Article 12 therein, generally, deals with the payments in respect of royalties and almost identical/similar definition has been provided in various treaties with various other countries.

18. A comparison of the definition of ‘royalty’ as provided under the DTAA (as reproduced above) with the definition of ‘royalty’ as provided under Income Tax Act shows that the same are not at paramateria with each other. The definition provided under the DTAA is the very short and restrictive definition, whereas, the definition of the royalty as provided under the Income Tax Act is a very wide and inclusive but vague. A careful reading of the relevant provision under the DTAA and under the Income Tax Act reveals that the DTAA covers only a part of the items mentioned under sub clause (i) to (v) to Explanation 2 to section 9(1)(vi). We may mention here that the section 9(1)(vi) having sub clauses (a), (b), & (c) is very vast to cover consideration paid for any right, property or information used or services utilized for the purpose of business or profession. Further, we find that in the said sub clauses (a), (b) & (c) of section 9(1) (vi), the wording is somewhat vague and negatively written. Even, if we apply and read the negatively written wording in clause (c) in relation to a payment made by a non resident into the clause (b), i.e. in relation to payment made by a resident Indian and read the clause(b) in terms of clause(c), even then what the ‘royalty’ may constitute will be the income payable in respect of any right, property or information used or services utilized for the purpose of business or profession by such resident to a non resident. However, vide explanation 2 the vast definition provided in sub clauses (a), (b) & (c) of section 9(1) (vi), have been restricted only to the consideration paid for the items as mentioned (i) to (vi) of Explanation 2. However, ‘Explanation 4’ inserted by Finance Act, 2012, provides that the transfer of rights in respect of any right, property or information includes and has always included the right for use or right to use a computer software including granting of a license. We find that so far as Income Tax Act is concerned, ‘computer software’ has neither been included nor is deemed to be included within the scope or definition of ‘literary work’ in any definition or explanation provided under the Act. The term ‘literary work’ has been separately mentioned under clause (v) to Explanation 2 to include the consideration paid for the same within the scope of royalty, whereas, the term ‘computer software’ has been specifically included, not under the clause (v) to Explanation 2, but, under the main clause (vi) to section 9(1).

Hence, the computer software has been recognized as a separate item not only in 2nd proviso to clause (vi) but in Explanation 4 also and has been included in the definition and within the scope of the words ‘right’, ‘property’ or ‘information’. The same has not been included in the meaning and scope of the term ‘literary work’ under clause (v) to Explanation 2.

It is to be further noted that the consideration paid for ‘computer software’ has not been specifically included under the definition of royalty under the DTAA.

19. Under the circumstances, the contention of the Ld. D.R. that the definition of royalty as under the Income Tax Act is in paramateria as under the DTAA can not be accepted as it is apparent that the definition under the DTAA is short and restrictive whereas the definition under the Income Tax Act is wide, inclusive and extended. Since the definition provided under the royalty in the DTAA is more beneficial to the assessee, hence as per the provisions of section 90, the definition of royalty as provided under DTAA is to be taken.

So far as the reliance of the Ld. D.R. on the decision of the Hon’ble Madras High Court in the case of “Vrizon Communication Singapore” (supra) and of the Mumbai Tribunal in the case of “Viacom 18 Media Pvt. Ltd.” (supra) is concerned, we find that the said decisions have been rendered in context of some other item relating to the consideration paid for transponder/band width/telecom services. In that context, the Hon’ble Madras High Court has interpreted the right to use the ‘equipment’ and the word ‘process’ applying the domestic law, definition of which was not available in the DTAA. However, in this case, we have to define the term ‘literary work’, the term ‘copyright’; the definitions of the same are not available under the Income Tax Act, rather, the same are available under the Copyright Act, 1957.

20. Moreover, the Hon’ble Delhi High Court in the case of “DIT vs Nokia networks OY” [2012] Taxmann.com 225 (Delhi) has held that though Explanation 4 was added to section 9(1)(vi) by the Finance Act 2012 with retrospective effect from 1.6.1976 to provide that all consideration for user of software shall be assessable as “royalty“, the definition in the DTAA has been left unchanged. In “Siemens AG” 310 ITR 320 (Bom), it was held that amendments cannot be read into the treaty. As the assessee has opted to be assessed by the DTAA, the consideration cannot be assessed as “royalty” despite the retrospective amendments to the Act. The relevant findings of the Hon’ble Delhi High Court as given in para 23 of the said decision, for the sake of convenience are reproduced as under:

“The decision of the Delhi Bench of the ITAT has dealt with this aspect in its judgment in Gracemac Co. Vs. ADIT 134 TTJ (Delhi) 257 pointing out that even software bought off the shelf, does not constitute a “copyrighted article” as sought to be made out by the Special Bench of the ITAT in the present case. However, the above argument misses the vital point namely the assessee has opted to be governed by the treaty and the language of the said treaty differs from the amended Section 9 of the Act. It is categorically held in CIT Vs. Siemens Aktiongesellschaft, 310 ITR 320 (Bom) that the amendments cannot be read into the treaty. On the wording of the treaty, we have already held in Ericsson (supra) that a copyrighted article does not fall within the purview of Royalty.”

21. Further, in a recent judgment in the case of “DIT Vs New Skies Satellite BV,” (ITA 473/2012 vide order dated 08.02.2016), the Hon’ble Delhi High Court has observed that no amendment to the Act, whether retrospective or prospective can be read in a manner so as to extend in operation to the terms of an international treaty. In other words, a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument affected between two sovereign states prior to such amendment. That an amendment to a treaty must be brought about by agreement between the parties. Unilateral amendments to treaties are therefore categorically prohibited. Even the Parliament is not competent to effect amendments to international instruments. As held by the Hon’ble Supreme Court in “Azadi Bachao Andolan” (2003) 263 ITR 607, these treaties are creations of a different process subject to negotiations by sovereign nations. While relying on the decision of the Hon’ble Madras High Court, in “CIT vs VR. S.RM. Firms & Ors”, the Hon’ble Delhi High Court held that the tax treaties are considered to be mini legislation containing in themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries. The Parliament is not equipped with the power to, through domestic law, change the terms of a treaty. Amendments to domestic law cannot be read into treaty provisions without amending the treaty itself. It is fallacious to assume that any change made to domestic law to rectify a situation of mistaken interpretation can spontaneously further their case in an international treaty. Therefore, mere amendment to Section 9(1)(vi) cannot result in a change. It is imperative that such amendment is brought about in the agreement as well. Hon’ble Delhi High Court concluded in the said decision (supra) that the Finance Act, 2012 will not affect Article 12 of the DTAAs, it would follow that the first determinative interpretation given to the word “royalty” prior to the amendment in the Income Tax Act will continue to hold the field for the purpose of assessment years preceding the Finance Act, 2012 and in all cases which involve a Double Tax Avoidance Agreement, unless the said DTAAs are amended jointly by both parties.

22. Further, we find that in all the decisions of the Hon’ble High Courts relied upon by both the Ld. Representatives of the parties i.e. not only in the decisions relied upon by the assessee of the Hon’ble Delhi High Court in the case of “Infrasoft Ltd.” (supra) and “Ericson A.B.” (supra) but also in the decisions relied upon by the Revenue i.e. “Samsung Electronics Company Ltd. & Others” (supra), “Synopsis International Old Ltd.” (supra) and of the Tribunal in the case of “Reliance Infocom Ltd.” (supra), the different Benches of the High Courts and the Tribunal have been unanimous to hold that as per the law laid down by the Hon’ble Supreme Court in the case of “Union of India vs. Azadi Bachao Andolan” (2003) 263 ITR 607, that where a specific provision is made in the DTAA, that provision will prevail over the general provisions contained in the Income Tax Act if, the same is more beneficial to the assessee as provided under section 90 of the Income tax Act. All the Hon’ble High Courts (supra) have also been unanimous to further hold that the definition of ‘royalty’ is restrictive in DTAA whereas the definition of royalty under the Income Tax Act is broader in its content. Therefore, the definition of royalty in DTAA is more beneficial to the assessee and hence the case of the assessee is to be examined in the light of the definition of royalty as provided in the DTAA and that the provisions of the DTAA will, in such an event, override the provisions of the Income Tax Act. Since, the Ld. AR of the assessee has stated that the definition of treaty in the DTAA with Singapore is more beneficial to the assessee and that the case of the assessee be decided taking the definition as provided in the treaty, hence, in the light of above cited decisions, we proceed to examine as to the consideration paid by the assessee for the purchase of off the shelf software can be covered within the scope of the ‘royalty’ as provided under the DTAA.

23. From the perusal of the above reproduced definition of royalty as provided in Article 12 in ‘Singapore treaty,’ it is revealed that it is the payment which is received as consideration for the ‘use of’ or the ‘right to use’ “any copyright of literary, artistic, scientific work including …..” (emphasis supplied by us). Hence, what is relevant is the consideration paid ‘for the use of’ or the right ‘to use’ any ‘copyright’. The right to use a computer software/programme has not been specifically mentioned in the treaty with Singapore or even in the identically worded treaty with US and or with any other country.

However, the Ld. DR, at this stage, has stressed on the definition of word ‘literary work’. It has been submitted that the definition of ‘Literary work’ as provided under the domestic law viz. Copyright Act, 1957 should be considered while deciding the scope of the term “Royalty” as defined under the treaty. This issue has been discussed by the Hon’ble Karnataka High Court in the case of “Samsung Electronics Company Ltd. & Others” (supra) while relying upon Article 3 sub section (2) of the DTAA with US, observing that any term not defined in the convention shall, unless the context otherwise requires, have the meaning which it has under the laws of that ‘State’ concerning the tax to which the convention applies. Hence, the reference is to be made to the respective law of the taxing State (India in this case) regarding the definition of ‘literary work’ and ‘copyright’. The relevant part of the Article 3 of the DTAA with Singapore for the purpose of ready reference is reproduced as under:

Art 3. “(2.) As regards the application of the Agreement by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have, the meaning which it has under the law of that State concerning the taxes to which the Agreement applies.”

24. Hence, the question before us, at this stage, is whether the term ‘literary work’ as mentioned in the definition of royalty in the treaty would include ‘software’ or not?

We note that the term 'Literary work' covers work, which is expressed in print or writing irrespective of the question of its literary merit or qualit y. It must be expressed in some material form, i.e. writing or print or in some form of notation or symbols, which means in a form capable of either visually or audibly recreating the representation of the original work. As per the provisions of section 2(o) of the Indian Copyright Act, 1957 the term ‘literary work’ includes computer programs, tables and compilations including computer data base. Therefore, the computer software has been recognized as a copyright work in India, if they are original intellectual creations.

25. “Computer programme” as defined in the Copyright Act, means a set of instructions expressed in words, codes, schemes or in any other form, including a machine-readable medium capable of causing a computer to perform a particular task or to achieve a particular result. The words 'schemes or in any other form' would seem to indicate that the source code and object code of a computer programme are entitled to copyright protection. It may be noted here that copyright protects the expression of an idea and not the idea itself. The ideas embedded in the software are therefore not protected but the ways by which the ideas are expressed in the source code are protected.

26. In the past, software were often sold as an integral part of the computer system, but now a days, software products are sold or licensed in the form of computer readable media such as diskettes and CD-ROMs or directly over the Internet. Though such floppy disc; the CD-ROM or the Hard Disc are tangible commodities, but, the software embedded in these media devices is intangible. In the earlier day’s customized software was made and the contracts involved two distinct parties who could discuss all the terms of such agreement between them. However, now a days the software become mass market items and are available off the shelf. At the time of sale of such off the shelf software embedded diskettes or CD-ROMs, the rights assigned by the author/owner of the software would be very specific in their scope, indicating clearly to the purchaser the actions that he/she is permitted to perform in relation to the software embedded in those discs.

27. Now, the question before us is as to whether the sale of shrink wrapped/off the shelf computer software by the non-resident to the resident assessee amounts to the transfer for the ‘use of’ or the right ‘to use’ any copyright in a literary work. Before deliberating further in this respect, we think it proper to first discuss the nature of the shrink wrapped software.

The words ‘shrink wrap’ refer to the shrink wrap packaging that generally contain the CD ROM of software. The terms and conditions of accessing the particular software are printed on the ‘shrink wrap cover’ of the CD and the purchaser after going through the same tears the cover to access the CD ROM. The typical ‘shrink wrap’ agreement is a single piece of paper describing the licence terms, contained inside the box and wrapped in transparent paper along with the computer software installation and diskettes or the owner’s manual. These agreements contain typical clauses on anti-reuse, anti-reverse engineering and limited copyright provision. Sometimes, these may have clauses disclaiming of warranties and liabilities. End user is bound and is considered to have agreed with the license, if he tears open the package. Shrink wrap agreements do not follow the normal practice of an agreement between the parties, where the terms of an agreement are negotiated between the parties.

The other popular way of transfer/sale or licensing the software is through ‘Click Wrap’ agreements. In these licenses, software developers do not receive a signed agreement from the user instead of he relies on the customers manifestation of ascent via the internet. The user generally is asked to review the terms of the agreement and indicate the ascent by clicking on the button/icon at the end of the license. The button or the icon provided in these agreements is generally ‘I agree’ and ‘I decline’. The ‘I agree’ or ‘Ok’ button/icon constitutes agreement to the ‘click wrapped’ license agreement. Some times when ‘shrink wrapped’ software is downloaded on the computer, it may again ask to agree to certain terms as in case of Click wrap software. The purchaser or the end user once has clicked the ‘Ok’ button he has no right to decline the terms of agreement by returning the software. There is no bargaining involved in these licenses whose terms are set by the licensor.

28. Software contracts, like many other transactions, are governed by the common law principles as embodied in the Indian Contract Act. Contracts can be in the nature of sale or assignment/license. If the computer software is considered as a 'good', the Sale of Goods Act, 1930 will have relevance in the formation and execution of the sale contract.

In context of copyright law, a license is a permission to do an act that, when the doing of the same without permission, would be unlawful. In Software Licences, the copyright owner retains substantial rights and greater ability to control the use of software. Licence may have provisions relating to the persons who may use the programme, the number of copies that can be made, warranty, limitation of liability, distribution of the software, etc. These are generally biased towards the licensor.

29. The plea raised on behalf of the Revenue is that sale of off-the-shelf software may be easily termed as sale but in such a 'buying', the title to the box, containing disk, manual etc., may pass to the buyer, but the title to IP in the software does not. Hon’ble Karnataka High Court in “CIT vs. Samsung Electronics Company Ltd. & Others” (2012) 345 ITR 494 has observed that under the agreement, what was transferred was only a license to use the copyright belonging to the non-resident subject to the terms and conditions of the agreement and that the non-resident supplier continued to be the owner of the copyright and all other intellectual property rights; that the copyright is a negative right. It is a bundle of many rights and license is granted for making use of the copyright in respect of shrink wrapped software / off the shelf software under the respective agreement which authorizes the end user i.e. the customer to make use of the copyright software contained in the said software, which is purchased off the shelf or imported as shrink wrapped software and that the same would amount to transfer of part of the copyright and transfer of right to use the copyright for internal business of the assessee as per the terms and conditions of the agreement. It was therefore held that the contention of the assessee that there was no transfer of copyright or any part thereof under the agreements entered into by the respondent with the non-resident supplier of software cannot be accepted. The Tribunal in the said case has also relied upon another decision of the Hon’ble Karnataka High Court in the case of “CIT vs. Synopsis International Old Ltd.” (2013) 212 taxman 454 wherein the Hon’ble Karnataka High Court has observed that even in case of end-user software license agreement granted for a non exclusive, non transferable, without right of sub license of use of the licensed software and design techniques, that does not take away the software out of the definition of the copyright. Even if it is not a transfer of exclusive right in the copyright, the right to use the confidential information embedded in the software in terms of the license makes it abundantly clear that there is transfer of certain rights which the owner of a copyright possesses in the said computer software/programme in respect of the copyright. The Hon’ble Karnataka High Court while analyzing the provisions of the DTAA held that the consideration paid ‘for the use’ or ‘right to use’ the said confidential information in the form of computer programme software itself constitutes royalty and attracts tax. It has been further held that it is not necessary that there should be a transfer of exclusive right in the copyright. That the consideration paid is for rights in respect of copyright and for the user of the confidential information embedded in the software/computer program, therefore, it falls within the mischief of explanation 2 of clause (vi) of sub section (1) of section 9 of the Income Tax Act and there is a liability to pay the tax in India.

30. However, different benches of the Hon’ble Delhi High Court in the above cited decisions in the case of “DIT vs. Infrasoft Ltd.” (supra); “DIT vs Nokia networks OY” (supra) and in the case of “DIT vs. Ericson A.B.” (supra) have been unanimous to hold that the license granted to the licensee permitting him to download the computer programme and storing it in computer for its own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purposes. The said process is necessary to make the program functional and to have access to it. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. The Hon’ble Delhi High Court has observed that in such a case there is no transfer of any right in respect of copyright to the assessee and it is a case of transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty. The Hon’ble Delhi High Court has further held that what is transferred is neither can be right in the software nor the use of the copyright in the software, but is the right to use copyrighted material or article which is clearly distinct from the rights in a copyright and the same does not give rise to any royalty income and would be the ‘business income’. The Hon’ble Delhi High Court in the case of “Infrasoft Ltd.” (supra) has also relied upon another decision of the Hon’ble Delhi High Court in the case of “DIT vs. Nokia Networks OY” (2013) 212 taxman 68 wherein the Hon’ble Delhi High Court has held that the copyright is distinct from material object. It is intangible, incorporeal right in the nature of privilege, quite independent of any material substance such as manuscript. The transfer of the ownership of a physical thing in which copyright exists comes to the purchaser with the right to do with it whatever he pleases, except the right to make copies and issue them to the public. Just because one has the copyrighted article, it does not follow that one has also copyright in it.

31. Now, after going through the divergent views of the different Benches of the High Courts on this issue, the question that arises before us as to whether the sale of shrink wrapped software can be said to be sale of ‘Good’ or grant of ‘License to use’.

Section 2(7) of the Sale of Goods Act, 1930 defines 'good' as 'every kind of movable property other than actionable claims and money, and includes stock and shares, growing crops, grass....' This definition of 'goods' thus includes all types of movable properties, whether tangible or intangible. The Hon’ble Supreme Court in the case of “Tata Consultancy Services vs State of Andhra Pradesh” 271 ITR 401 (2004), has considered computer software as 'goods' and stated that notwithstanding the fact that computer software is intellectual property, whether it is conveyed in diskettes, floppy, magnetic tapes or CD ROMs, whether canned (shrink-wrapped) or uncanned (customized), whether it comes as part of the computer or independently, whether it is branded or unbranded, tangible or intangible. The Hon’ble Supreme Court held that, 'it would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software whether customized or non- customized satisfies these attributes, the same would be goods.' The Hon’ble Apex court while citing the decision of the US court in “Advent Systems Ltd v Unisys Corporation” (925) F 2d 670 (3rd Cir 1991), held that a computer program may be copyrightable as intellectual property, does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, movable and available in the market place. In such a case, the intellectual property has been incorporated on a media for purposes of transfer. The software and the media cannot be split up.

In “Associated Cements Co. Ltd. vs. Commissioner of Customs”, AIR 2001 SC 862, the Hon’ble Supreme Court examined whether the drawings and license could be considered as ‘goods’. The Hon’ble Supreme Court held that all tangible, movable articles are goods for charge of custom duties under section 12 read with section 2(22)(e) of the Customs Act, 1962, irrespective of what the article may be or may contain. It may be that what the importer wanted and paid for was technical advice or information technology, an intangible asset, but the moment the information or advice is put on media, whether paper or cassette or diskette or any other thing, that what is supplied, it becomes chattel. The Hon’ble Supreme Court, thus, held that the intellectual property such as drawings, license and technical material when put on a media is to be regarded as an article and there is no scope for splitting the engineering drawings or encyclopedia into intellectual input on the one hand and the paper on which it is scribed on the other hand.

32. No doubt, the dominant object of sale in such transaction is the computer software and not the disk or the CD upon which such software is loaded. As understood by us, what the ‘computer programme’ or the ‘software’ is an expression of work/ideas written on a media in a computer programming language and that is why it has been included worldwide in the category of literary work. As per the definition provided in section 2 (ffc) of the Indian ‘Copyright Act 1957’ "Computer programme" means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result; As per Explanation 3 to section 9(1)(vi), the computer software has been defined as follows:

“ ‘computer software’ means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data.”

Hence, like any other literary work, computer programme can not be read or utilized without downloading on a media like hard disk, CD, floppy or any other such device. As an author of a literary work may be having some ideas in his mind in an intangible form but the copyright in those ideas is created when they are expressed in a particular manner in the shape of some impressions, symbols or language or visuals etc. on a media such as book, film or CD or screen etc. Now a days not only the computer programmes but also the other literary work can be transmitted over the internet from one media/computer to the other media /computer. But these expressions of ideas called literary work including computer programmes can not be read or utilized without downloading or writing them on a media. Hence, though the same as a result of advancement in technology can be transmitted in an intangible form, but to constitute a literary work, these have to be transformed into a tangible form.

Computer programmes in itself can not be equated and categorized into an intangible material or right a such as a business or commercial right like copy right, right to practice some profession or noncompeting right etc.; Hence once incorporated on a media, it become a ‘goods’ and itself is not a copy right; however a copy right can be created in respect of such ideas expressed on a media. Further the copyright doesn’t protect the idea itself but only protects the way or the manner in which such ideas are expressed.

33. Further, it is also not disputed that in case of shrink wrapped software, the product is available off the shelf in the market. The owner or the licensor does not invite any expression of interest from the intending users of the product. He does not grant license by seeing the names and details of the persons seeking the license to use software rather the situation is a diagonally opposite. The license is not granted to any specific person; anybody can purchase the product from the market which is available in the shape of CD ROM/diskette falling in the definition of ‘goods’ as defined under the sale of Goods Act, 1930. Whosoever pay the price of the good, he is supposed to have right to use that good. On the completion of the sale, the property in such a good passes to the buyer and the buyer has every right of fair use of the said product and subject to the conditions mentioned in the shrink wrap/cover of the product which are in the shape of restrictions or limitations to the effect that the buyer will not misuse the product which may amount to infringe of copyright in the product. So what the buyer purchases is the copyrighted product and he is entitled to fair use of the product. The restriction or the terms mentioned in the paper/cover are the conditions of sale restricting misuse and can not be said to be license to use. However, the purchaser is entitled to perform all or any of the activities which is essentially required for the fair use for the purpose for which the product is purchased by him. Section 52 of the Copyright Act expressly recognizes such a right of the purchase which we will discuss in later part of this order.

Further, the computer software as generally observed has a shorter life cycle. When a shrink wrapped software is sold, the owner gets the price of the copy of the product/work. Even if the owner/licensor has fixed the duration or the time limit for the use of the product, on the expiry of which the same becomes unusable, he in-fact receives the price for the expected life of the work and product. In such case the purchaser pays the price for the product itself and not the license to use.

34. The next contention of the Revenue is that in case of software Licenses, the copyright owner gives a license to use the copyright in the software and that the owner of software exercises power over not only the software itself but also over people who may wish to use the software and that the owner of the software decides who will use his work. It has therefore been strongly contended on behalf of the Revenue that it is the right given to use the copyright in the software.

35. This contention, though, on the face of it may seem to be quite plausible or reasonable, however, when we examine the nature of the transactions in case of shrink wrapped software, we are of the view that the above contention is not so true. In our view, in case of shrink wrapped software, what is sold is the CD ROM or diskette wrapped in a transparent cover and in a paper put inside the cover, the conditions of use along with restrictions and limitations of use of the said article/product are mentioned. In our view, the sale of such a CD ROM/diskette is not a license but it is a sale of a product which of course is a copyrighted product and the owner of the copyright puts the conditions and restrictions on the use of the product so that his copyrights in the copyrighted article or the work, which has been written on such CD ROM/diskette, may not be infringed. Such conditions, in our view, are not the license to use the product. The purchaser gets the right to use the product/diskette along with the property in the ‘good’ in the shape of work embedded or written in it when the sale is complete i.e. when such diskette/COD ROM is delivered by the seller to the purchaser in lieu of the consideration paid to him. Thus what is restricted by the so called agreement or commonly used software license is that the user will not infringe the copyrights in the product of the copyright owner of the work. The purchaser is always entitled to fair use of the work which he has purchased. Thus at the most, what can be said to be granted under such a license is the right to use the copyrighted work and the right to use the copyright itself in the work. What is prohibited through these conditions is its misuse which may infringe the rights of the owner of the software e.g. the purchaser of the product may attempt as it is easy in case of software to make copies etc. These license agreements in case of shrink wrapped software are thus the conditions of the sale of the product and cannot be termed as a grant of license to use the product.

36. Further, a question, which needs to be examined whether the statutory rights of the purchaser/user of the software can be curtailed or done away by the terms of the above explained shrink wrapped or click wrapped mass licenses/ agreements. Firstly there are severe doubts about the enforceability of such agreements. In the so called internet license agreement, the end user is supposed to click the icon ‘I agree’ which means that the end user has agreed to the terms of the license agreement. However, it may be noted that such agreements do not ask the name or address or other details of the user. It is not mentioned in such type of agreements that who is using the product. It is the computer upon which such software is loaded that can be said to have agreed to abide by the terms of the software license as the user remains unidentifiable. In such type of software licenses, there are certain inbuilt mechanism made by the buyer preventing the misuse or infringement of the copyright in the product; the moment the end user attempts to violate such conditions, such software becomes inoperative on the computer or sometimes also damage the other data/applications on the computer. However, for the enforceability of such license agreement it is not known who is actual user or which person actually has violated the terms of the agreement. Suppose, in case of a company a product is purchased by the staff of the company, for its use in regular course of work or business of the company and an employee of the company while installing the software on the computer in the office of the company clicks the button or the icon ‘I agree’ and thereafter such an employee or any other employee of the company violates any condition of the license agreement, can such license agreement be enforced against the company or the Directors of the company can be held liable for any such infringement, especially when they are not signatories to such an agreement and nor they have authorized any employee of the company to sign any agreement on behalf of the company and even no name of the company is even written in such type of agreement and even it is also not known as to who actually clicked the button ‘I agree’. Under these circumstances, the enforceability of such a license is highly doubtful.

So far as the legal enforceability of such a Licence Agreements is concerned, in spite of the fact that it may fulfill all the requirements of a valid contract, such an agreement may not be enforceable, if, its stipulations conflict with the law governed in the country where such licenses are intended to be enforced, or if it is an unconscionable or unreasonable bargain. In computer software, generally it is the tendency of software producers to do away with the rights and privileges of the user, even which are specifically conferred upon the user by the relevant laws such as Copyright Act, Contract Act and other relevant laws. The fair use of the purchased article is the other plea which contradicts the license theory. As per the provisions of section 52 of the Copyright Act 1957, which has provisions similar to the provisions of section 117 of the US Copyright Act, the owner of a copyright of computer software is legally entitled to fair use that copy of software even without a license from the software publisher and any condition put in a license restricting the fair or reasonable use of the product purchased by the buyer in that respect will have to be ignored. If the license severely limits the rights of the consumers, such as implied conditions and warranties in a contract, it cannot be enforced. If in the license agreement, there are certain conditions which are in violation of the provisions of the Contract Act, then such conditions cannot be enforced and even under some circumstances, the whole contract can be held to be void. These terms of the mass software license are in the shape of ‘standard terms’ which the licensee or the user of the product often ignores while accepting the license before downloading the software. The courts in India in such a situation have opined that such standard conditions put in a contract which are often in the form of standard format and being so much detailed and numerous and are generally not read by the other party/buyer of the product, should be fair and any unfair condition restricting the users’ rights relating to the goods or the services availed of, which can be held to be unreasonable and against the public policy, cannot be enforced. Thus these licenses create a clear conflict between copyright law and contract law, which have different purposes and objectives. The technological restrictions such as encryption technology and transactional design having restrictions on the development, use, services, may be called in question under the Competition Act, 2002 also. Further the condition in the agreement that the ownership of each copy of software would remain with the software publisher and that the user will have only right to use the software is to be looked in terms of the Indian Contract Act to arrive at a conclusion whether such a condition is reasonable and is not against the public policy or whether it is restricting the fair use of right of the user/purchaser of the product. It is also a determinative factor as to whether the property in the goods after buying off the shelf product in case of shrink wrapped software has passed on to the purchaser or not as per the provisions of Sale Of Goods Act 1930.

37. As discussed above, in case of shrink wrapped software, the work is embedded in the diskette/CD ROM which is when sold to the buyer in retail transaction as in case of ‘sale of goods’ and consequently on the completion of the sale, the property in such goods passes to the buyer. The user/purchaser of the CD ROM or the diskette is the owner of the copy and in such a case, a license is not technically required in order for the purchaser to use the copyrighted product/software for his own/ business use. So what the buyer buys is the copyrighted product and he is entitled to fair use of the product as is provided under section 52 of the Copyright Act. He is also entitled to perform all or any of the activities which is essentially required for the fair use and for the purpose for which the product is purchased by the buyer.

38. It may also be pointed out here that even, if, such a license agreement is not signed by the end user still the owner of the product will have the copyrights in such a product, as are defined and explained under the Indian Copyright Act; even the registration of the product or the work under the Copyright Act is not compulsory. The owner of the work is deemed to be protected in relation to the copyrights in the work but the fair use of the product/work cannot be denied and any clause in such agreement should be deemed to be void as against the principle of fair use of the product.

39. Further, to determine whether a copyright in a work is infringed or not or would be deemed to be infringed or not, the most important test is to find out whether the use is likely to harm the potential market or the value of the copyright work. When it is not the allegation of the owner/purchaser of the work that the purchaser/user was reproducing the work and distributing it so as to affect his potential market in exercising the reproduction right, then it cannot be said that the user has infringed the rights of the purchaser, who in fact has paid the consideration to use the copyrighted work. The use of information in the work by the purchaser for which he purchases such a product/diskette/CD ROM is thus comes within the scope of fair use. Copyright does not protect the fair or exclusive use of the information rather, the purpose of copyright protection is to regulate the dissemination of information viz. production of the copies of the copyrighted work/information and distribution thereof. The use of information viz. a new technology or invention can, however, be protected under the Patents Act, 1970. However, it is pertinent to mention here that even under the Patents Act 1970, the computer Software can not be patented. The computer software, subject to certain exception, have been specifically excluded from patentable items under the Patents Act, 1970.

40. At this stage, we think it appropriate to discuss here the relevant provisions of the Copyright Act, 1957 also. The copyright has been defined under section 14 of the Copyright Act, 1957 as under:

“14. Meaning of copyright – For the purposes of this Act, ‘copyright’ means the exclusive right subject to the provisions of this Act, to do or authorize the doing of ay of the following acts in respect of a work or any substantial part thereof, namely:

(a) in the case of a literary, dramatic or musical work, not being a computer programme, -

(i) to reproduce the work in any material from including the storing of it in any medium by electronic means;

(ii) to issue copies the work to the public not being copies already in circulation;

(iii) to perform the work in public, or communicate it to the public;

(iv) to make any cinematograph film or sound recording in respect of the work;

(v) to make any translation of the work; (vi) to make any adaptation of the work;

(vii) to do, in relation to a translation or an adaptation of the work, any of the acts specified in relation to the work in sub-cls. (i) to (vi);

(b) in the case of a computer programme,-

(i) to do any of the acts specified in cl. (a);

(ii) to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme:

Provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental.

……………………”

41. Section 51 of the copyright is also relevant which deals as to when the copyright is infringed which for the sake of convenience is reproduced as under:

“CHAPTER XI

Infringement of Copyright

51. When copyright infringed. -Copyright in a work shall be deemed to be infringed- (a) when any person, without a licence granted by the owner of the copyright or the Registrar of Copyrights under this Act or in contravention of the conditions of a licence so granted or of any condition imposed by a competent authority under this Act-

(i) does anything, the exclusive right to do which is by this Act conferred upon the owner of the copyright, or

(ii) permits for profit any place to be used for the communication of the work to the public where such communication constitutes an infringement of the copyright in the work, unless he was not aware and had no reasonable ground for believing that such communication to the public would be an infringement of copyright; or

(b) when any person-

(i) makes for sale or hire, or sells or lets for hire, or by way of trade displays or offers for sale or hire, or

(ii) distributes either for the purpose of trade or to such an extent as to affect prejudicially the owner of the copyright, or

(iii) by way of trade exhibits in public, or

(iv) imports into India, any infringing copies of the work

Provided that nothing in sub-clause (iv) shall apply to the import of one copy of any work for the private and domestic use of the importer.

Explanation.- For the purposes of this section, the reproduction of a literary, dramatic, musical or artistic work in the form of a cinematograph film shall be deemed to be an "infringing copy"

42. Certain provisions of section 52 of the Copyright Act which are relevant are also reproduced as under:

“52. Certain acts not to be infringement of copyright.-(1) The following acts shall not constitute an infringement of copyright, namely:

(a) a fair dealing with a literary, dramatic, musical or artistic work 104 [not being a computer programme] for the purposes of-private use, including research; criticism or review, whether of that work or of any other work;”

(aa) the making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme, from such copy-in order to utilize the computer programme for the purposes for which it was supplied; or

to make back-up copies purely as a temporary protection against loss, destruction or damage in order only to utilise the computer programme for the purpose for which it was supplied;”

(ab) the doing of any act necessary to obtain information essential for operating inter-operability of an independently created computer programme with other programmes by a lawful possessor of a computer programme provided that such information is not otherwise readily available;

(ac) the observation, study or test of functioning of the computer programme in order to determine the ideas and principles which underline any elements of the programme while performing such acts necessary for the functions for which the computer programme was supplied;

(ad) the making of copies or adaptation of the computer programme from a personally legally obtained copy for non-commercial personal use;”

43. The proviso to section 57 of the Act is also relevant. The said section 57 of the Act of 1957 is also reproduced as under:

“57. [Author’s special rights. (1) Independently of the author’s copyright and even after the assignment either wholly or partially of the said copyright, the author of a work shall have the right-

(a) to claim authorship of the work; and

(b) to restrain or claim damages in respect of any distortion, mutilation, modification or other act in relation to the said work which is done before the expiration of the term of copyright if such distortion, mutilation, modification or other act would be prejudicial to his honour or reputation:

Provided that the author shall not have any right to restrain or claim damages in respect of any adaptation of a computer programme to which clause (aa) of sub-section (1) of section 52 applies.”

44. A perusal of the above provisions of the copyright Act reveals that the computer software is included in the definition of literary work and is covered under the purview and scope of copyright. The exclusive rights to do or authorize the doing of certain acts as mentioned in clause (a) and clause (b) of section 14 vests in the owner of the work and as per section 51 of the Act, copyright in a work shall be deemed to be infringed when any person without license granted by the owner of the copyright or in contravention of the conditions of a license so granted does anything, the copyright of the owner is stated to be infringed.

However a perusal of the above provisions of the Copyright Act also reveals that even in some cases unauthorized uses of a copyright work is not necessarily infringing. An unlicensed use of the copyright is not an infringement unless it conflicts with one of the specific exclusive rights covered by the copyright statue. Further there are certain exceptions also. As per the proviso to sub clause (iv) to the clause (b) to section 51, import into India of one infringing copy of any work for the private and domestic use of the importer will not be considered as infringement.

Further, the section 52 of the Act provides for certain other exceptions and the doing of such acts as mentioned under section 52 is not considered as infringement of the copyright as per the statute.

In case of software, it has been provided that making of copies or adaptation of a computer programme by the lawful possessor of a copy of such computer programme from such copy in order to utilize the computer programme for the purpose of which it was supplied or to make back-up copies purely as a temporary protection against loss, destruction or damage and in order to utilize the computer programme and further the doing of any act necessary to obtain information essential for operating inter operatability of an independently created computer programme with other programmes in case such information is not otherwise readily available, the observation, study or test of functioning of computer programme with determination, the ideas and principles necessary for the functions for which the computer programme was supplied and the making of copies or adaptation of computer programme from a personally and legally obtained copy from non-commercial personal use, have been excluded from the definition of infringement of copyright. Even import of one infringed copy of the work for private and domestic work of the importer has been excluded from the scope of infringement of Copyright under the Act.

45. It is also pertinent to mention here that the Income Tax Act does not specifically include the ‘computer software’ in the term ‘literary work’ and under such circumstances, if we apply the same analogy to the treaty, then perhaps the ‘computer software’ will be out of the scope of the treaty. However, if we apply the Copyright Act, then the ‘computer software’ will have to be included in the term ‘literary work’ but to constitute ‘royalty’ under the treaty, the consideration should have been paid for the use of or the right to use the copyright in the ‘literary work’ and not the ‘literary work’ itself.

46. Further, when we read the definition of copyright and literary work as provided in the Copyright Act, 1957, it is also important to note down that what constitutes infringement of copyright and what are the exceptions to it. If the software purchased by the assessee and the use of it by the assessee is covered within the exceptions as provided under section 52 of the Copyright Act, then in that event it cannot be said that the transfer of right to use or for use of the copyright has passed. The proviso to section 57 of the Copyright Act has further clarified that the author of the work shall not have right to restrain or claim damages in respect of any adaptation of a computer programme to which clause (aa) of sub section (1) of section 52 applies.

47. Further in case of imported software i.e. if the original work has been published outside India, as per the provisions of the Copyright Act, apart from the work being original and not copied from elsewhere, the work should be first published in India or if the work is published outside India, the author on the date of publication, if the author is dead, at the time of his death, should be citizen of India. In case of unpublished work, the author on the date of making of a work should be a citizen of India or domicile in India. Section 40 of the Copyright Act 1957, provides for International Copyrights. As per the section 40 of the Act, the Government of India may by an order published in the official gazette direct that all or any provisions of this Act shall apply to the work published or unpublished in any territory outside India. Such a right is extended in relation to countries which have entered into a treaty or which are a party to a convention relating to rights of the copyright owners and have undertaken to make such provisions in their laws in relation to the Indian authors for protection of their rights in their country. Section 40, 40A and section 41of the Copyright Act, 1957 are relevant in this respect. Section 42 of the Copyright Act, however, put certain restrictions on the rights in works of foreign authors first published in India wherein it has been provided that if a foreign country does not give adequate protection to the works of the Indian authors, the Central Government may direct that such of the provisions of the Act as confer copyright on works first published in India of the foreign authors shall not apply. So if a foreign country recognizes the copyrights of the Indian authors in their copyrighted work, the India also allows the copyright to the foreign authors on reciprocal basis. So a foreign author can claim the copyright in a product, if India has a treaty with that country or if India and that other country are signatories of the certain international treaties or conventions e.g. Berne convention to which India is a signatory. Under such circumstances, in respect of works done in foreign countries or by foreign authors, the copyright does not automatically flow or extended to them. The rights of the foreign author are to be examined in the light of the Copyright Act and the relevant treaty or the convention, if any, signed by India with that country to which the foreign author belongs. The copyright in a foreign product thus does not flow automatically or impliedly, so far as the Indian copyright laws are concerned.

48. Hence, while interpreting the definition of ‘royalty’ as provided in the DTAA, it is to be seen as to what has been purchased by the assessee i.e. whether the ‘copyright’ itself has been purchased or what the assessee has purchased is only a ‘copyrighted work’. It is also required to be analysed as to whether the use of such right would amount to infringement of copyright if a license or permission in this respect is not given by the owner; and when assessee has purchased a copyrighted product i.e. off the shelf software, whether the use of the same for the business purpose of the assessee is covered within the exceptions as provided under section 52 of the Copyright Act. Further, in case of imported work/product, whether the protection of copyright is available to the foreign author in terms of section 40,40A, 41 and 42 of the Copyright Act 1957.

49. The provisions of the Copyright Act, as discussed above are clear and unambiguous in this respect. If the assessee has purchased a copy of a computer software programme and he uses the said copy for his business purpose and if the said use falls within the scope and purview of the exceptions of section 52, such as the use of it for the purpose for which it is supplied and to make backup copies for temporary purpose as a protection against loss or damage and doing of any act necessary to obtain information essential for operating the software for the purpose for which it is purchased etc. as provided under section 52, then in that event it cannot be said to be an infringement of copyrights of the author or owner of the work. As held by the Hon’ble Karnataka High Court in the case of “Samsung Electronics Company Ltd. & Others” (supra) while relying upon Article 3 sub section (2) of the DTAA with US as the identically worded article being there in almost all the tax treaties with other countries, that any term not defined in the convention shall, unless the context otherwise requires, have the meaning which it is under the laws of that ‘State’ concerning the tax to which the convention applies. In view of above, when we see the definition as per the statutory provisions/domestic law of the country i.e. Copyright Act,1957 of India which is the taxing State in this case, it is apparent that the fair use of the work for the purpose of which it is being purchased and doing of such other acts including making of copy for protection from damage or loss can not, in any case, said to be any infringement of copyright whether or not any license in this respect has been granted by the author/owner of the work. The right to use or for use of the product accrues to the purchaser by the operation of the statute and as held by the Hon’ble Delhi High Court in the case of “Infrasoft Ltd.” (supra), the same would amount to the sale of a goods and the acts done such as downloading of the same to the computer or making backup copies etc. would be the necessary acts for enabling the use of the product and would not amount to the transfer of copyright or right therein, but only the transfer of the copyrighted product and thus will not be covered under the definition of royalty under DTAA. The consideration, thus, paid will be the business income of the non-resident and taxable in accordance with the provisions of DTAA. We may clarify here that even in cases where the owner of the copyrighted work may restrict the use of or right to use the work by way of certain terms of the license/software agreement, the validity or the enforceability of the same may be subject matter in other laws such as Indian Contract Act 1872 , Sale of goods Act 1930 or the Consumer Protection Act 1986 etc., but, the same in any way can not be said to grant of or infringement of copyright in the light of specific statutory provisions of Copyright Act 1957.

50. Now coming to the facts of the case in hand, the DRP has given a specific finding of fact that what the assessee in the present case has purchased is the shrink wrapped /off the shelf software. It has also been discussed in detail in paras above that the definition of ‘royalty’ given in the treaty is more beneficial to the assessee as compared to the provisions of section 9 of the Income Tax Act and the assessee has opted for the definition that is provided under the DTAA, thus as per section 90 of the Income Tax Act, definition of ‘royalty’ as provided in the DTAA will prevail as over the general definition of ‘royalty’ provided under the Income Tax Act. Hence, without expressing our opinion or any view in relation to the definition of ‘royalty’ vis-à-vis ‘computer software’ as provided under the Income Tax Act, we have given our findings only in respect of the scope of ‘royality’ under the DTAA.

51. In view of our detailed discussion made above, the assessee can not be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be said to be sale of ‘good’ by the owner. The consideration paid by the assessee thus as per the clauses of DTAA can not be said to be royalty and the same will be outside the scope of the definition of ‘royalty’ as provided in DTAA and would be taxable as business income of the recipient. The assessee is entitled to the fair use of the work/product including making copies for temporary purpose for protection against damage or loss even without a license provided by the owner in this respect and the same would not constitute infringement of any copyright of the owner of the work even as per the provisions of section 52 of the Copyright Act,1957.

52. Even otherwise, the Revenue has not cited any direct case law of the jurisdictional High Court of Bombay before us. In the case laws cited by the Revenue of the Hon’ble Karanatka High Court in the matter of “CIT vs. Samsung Electronics Company Ltd.” (supra) and “CIT vs. Synopsis International Old Ltd.” (supra ) though a view in favour of the Revenue has been taken, but, the Hon’ble Delhi High Court in the case of “DIT vs. Infrasoft Ltd.” (supra) which is a latter decision and has discussed the Samsung case also has taken the view in favour of the assessee. The Hon’ble Delhi High court has taken the identical view favouring the assessee in the case of “DIT vs Nokia Network” (supra) and in the case of “DIT vs. Ericson A.B.” (supra) also. The Hon’ble Bombay High Court in the case of “The Addl. Commissioner of Sales Tax vs. M/s Ankit International,” Sales Tax Appeal No.9 of 2011 vide order dated 15 September, 2011 while relying upon the decisions of the Hon’ble Supreme Court in “The Commissioner of Income Tax V. Vegetable Product Ltd.” (1973) 88 ITR 192 and in “Mauri Yeast India Pvt. Ltd. V. State of U.P.” (2008) 14 VST 259(SC) : (2008) 5 S.C.C. 680 has held that, if two views in regard to the interpretation of a provision are possible, the Court would be justified in adopting that construction which favours the assessee. Reliance can also be placed in this regard on the decision of Hon’ble Supreme Court in “Bihar State Electricity Board and another vs. M/s. Usha Martin Industries and another : (1997) 5 SCC 289. We accordingly adopt the construction in favour of the assessee.

In view of our discussion made above, this issue is accordingly decided in favour of the assessee.

53. In view of our observations made above, the appeal of the assessee is treated as allowed for statistical purposes.

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DEPUTY COMMISSIONER OF INCOME TAX vs.W. RAMANA RAO HYDERABAD TRIBUNAL

noreply@blogger.com (Simply Indian Tax) — Thu, 10 Mar 2016 16:27:00 +0530

DEPUTY COMMISSIONER OF INCOME TAX vs.W. RAMANA RAO
HYDERABAD TRIBUNAL
P. MADHAVI DEVI, JM & B. RAMAKOTAIAH, AM
I.T.A. No. 127/HYD/2015
Mar 4, 2016
(2016) 46 cch 0234 HydTrib
Legislation Referred to
Section
Case pertains to
Asst. Year 2009-10
Decision in favour of:
Assessee
Income—Taxability—Relevant assessment year—Adoption of sale consideration as cost of plots—Assessee was partner in ’X’ and Director in ’Y’ company—Assessee had 5% share in ’X’ and 9% shareholding in Y company— Consequent to settlement between parties by agreement, there was settlement among directors by which there was an understanding to pay certain amounts of cash also allot 10,400 Sq. Yds., of land for surrendering interest in company—AO while making computation of capital gain brought to tax entire amount as per his valuation of consideration received/receivable by assessee—Asessee submitted that entire amount was not taxable and even if it was taxable, it would be taxable in AY 2008-09 as agreement was dtd. 11-02-2008—CIT(A) held that in subsequent years plots were sold and income was offered under head business income—Since cost of plots was not debited to profit and loss account in both years i.e. AY 2011-12 and 2012-13 sale consideration adopted for purpose of computing capital gains should be cost of plots and was to be debited to profit and loss account in subsequent years for AY 2011-12 and AY 2012-13—Held, ITAT did not see any reason to interfere with order of CIT(A)—There was no merit in Revenue’s grounds as said settlement was entered on 11-02-2008 which fell in AY. 2008-09 and not in 2009-10—Just because survey was conducted and statement was recorded, amount could not be brought to tax in AY 2009-10—ITAT found no merit in Revenue’s grounds on issue—With reference to valuation also, ITAT was of opinion that CIT(A) had correctly directed value to be adopted which itself became ‘cost for plots’ which were sold subsequently—Orders of CIT(A) was thus confirmed—Revenue’s Appeal dismissed
Held
After considering the rival contentions and perusing the evidence on record, ITAT did not see any reason to interfere with the order of the Ld. CIT(A). There was no merit in Revenue’s grounds as the said settlement was entered on 11-02-2008 which falls in AY. 2008-09 and not in 2009-10. Just because a survey was conducted and statement was recorded, the amount cannot be brought to tax in AY. 2009-10. In view of that, ITAT found no merit in the Revenue’s grounds on the issue. With reference to the valuation also, ITAT were of the opinion that Ld. CIT(A) had correctly directed the value to be adopted which itself becomes ‘cost for the plots’ which were sold subsequently. Consequently, ITAT affirmed the orders of Ld. CIT(A) and dismissed the grounds.
(para 6)
Conclusion
Where impugned settlement was entered on 11-02-2008 which fell in AY 2008-09 and not in 2009-10, just because survey was conducted and statement was recorded, amount could not be brought to tax in AY 2009-10.
In favour of
Assessee
Counsel appeared:
M. Sitaram, DR for the Revenue. : B. Satyanarayana, AR for the Assessee.
B. RAMAKOTAIAH, AM:-
1. This is Revenue appeal against the order of the Commissioner of Income Tax (Appeals)-II, Hyderabad dated 03-11-2014. The issue in this appeal as contested by the Revenue is with reference to taxability of the amount and consideration to be adopted.

2. Briefly stated, assessee is a partner in M/s. Sree Projects and Director in M/s. Swadesh Villas Pvt. Ltd. Assessee has 5% share in M/s. Sree Projects and 9% shareholding in the company. Consequent to settlement between the parties by an agreement dt. 11-02-2008, there was settlement among the directors by which there was an understanding to pay certain amounts of cash and also allot 10,400 Sq. Yds., of land for surrendering the interest in the company. Assessing Officer (AO) brought to tax the entire amount of Rs. 2,25,53,054/- as per his valuation of consideration received/receivable by assessee. It was contended before the Ld. CIT(A) that entire amount is not taxable and even if it is taxable, it is taxable in AY. 2008-09 as the agreement was dt. 11-02-2008. Assessee also contested the valuation of the land assigned to assessee.

3. The detailed submissions by assessee before the Ld. CIT(A) are as under:

“4. During the course of assessment as well as during appeal proceedings, the stand of the assessee/appellant was consistent in stating that the amount of Rs. 34,93,054/ - was not received and therefore, the same was not offered to tax. It was further explained that though 10,400 square yards of land was allotted to the appellant, the same continued to be in the name of the company and was not registered to the appellant. Out of 10,400 sq.yards subsequent sales were made by the company directly to the parties and the sale consideration was offered to tax in the hands of the appellant. The details of sales made out of 10,400 square yards of land are as under:

Year of Sale (F.Y.	Schedule of property Area	Square Yard	Sale amount	SRO Value	Name & Addres s of Purcha -ser	Year of sale offered to tax
2010-11	Gudur Village	2918	23,34,400	11,67,200	--	2011-12
2010-11	Nagulapuram Village	1300	5,20,000	3,90,000	--	2011-12
	Total	4218	28,54,400	15,57,200
2011-12	Gudur Village	3576	25,60,500	14,30,400	--	2012-13
2011-12	Nagulapuram Village	1100	4,40,000	3,30,000	--	2012-13
	Total	4676	30,00,500	17,60,400
	Grand Total	8894	58,54,900	33,17,600

4.1 The appellant submitted copies of income-tax returns and profit and loss account for A.Y.2011-12 and A.Y.2012-13. The details are summarized as under:

Particulars	A.Y. 2011-12	A.Y. 2012-13
Gross Sales	28,54,400	30,00,800
Income returned after claiming certain expenses	19,91,690	21,75,880
Date of filing of income tax return	12.11.2012	14.11.2012

It is pertinent to mention that though the gross receipts realized on sale of plots were credited to profit and loss account, the cost of the plots was not debited to profit and loss account.
The total land allotted to the appellant was 10,400 sq.yds, the land sold was 8894 sq.yds, balance land remaining is 1506 sq.yards. the appellant states that this land is still in the name of M/s.Swadesh Villas Pvt. Ltd. He also submitted a copy of letter dated 16.10.2014 issued by Sri R. Srinivasulu, Managing Director of Swadesh Villas Pvt. Ltd. which read that the land of 1506 square yards is still in the name of the company and plots will be registered in favour of Mr.W.Ramana Rao on request.

4.2 It was submitted by the appellant that they have entered the business during real estate boom and carried out real estate ventures in and around Shadnagar. It was further submitted that after purchasing the land at Gudur Village, Kottur Mandai, Mahaboobnagar district, and after developing layout, they have realized that the land is covered by the G. O. No.111 dated 08.03.1996, according to which no residential layout can be carried out in the 84 specified villages and Gudur is also included in such list. It was explained that due to the G.O.No.111 prohibiting layout in Gudur Village, fall in real estate prices, further due to Telangana State agitation, the plots could not be sold and even some of the purchasers demanded their money back. On account of series of problems certain differences and misunderstanding developed among the partners and ultimately all the partners j directors moved out of M/s. Sree Projects and M/s. Swadesh Villas Pvt. Ltd. and both the entities were retained with Mr. R. Srinivasulu and his wife Smt. R. Sreedevi. Rest of the partners / directors came out after reaching a settlement for payment of certain cash and land. However, due to bad real estate conditions the agreed sum was not paid to the appellant except for an amount of Rs.946,946/ - which was offered as income in A.Y.2008-09.

4.3 The Assessing Officer simply made the addition stating that the assessee failed to demonstrate that he had not received money during the previous year relevant to A.Y.2009-10. It is also pertinent to mention that no information is brought on record by the AO in support that the assessee received any money apart from Rs.946,946/-. Further, the statement of the assessee given during survey proceedings, is categorical that he received only Rs. 946,946/- which would be offered for A.Y.2008-09 and rest of the amounts would be offered on receipt basis. Despite of the categorical statement by the assessee the Assessing Officer made the addition of Rs. 2,25,55,305/- (Rs. 2,35,00,000 - Rs. 9,46,946) on the ground that the assessee failed to prove that he did not receive money”.

4. Ld. CIT(A) after considering the submissions of assessee decided the issue as under:

“5. 1 have carefully considered the factual position of the case. The issues for consideration are :

(i) Whether there is any transfer of shares by the appellant to M/s. Swadesh Villas Pvt. Ltd.

(ii) If there is a transfer of shares, what is the sale consideration to be adopted for computing the capital gains.

5.1 The provisions of section 2(47) defined the term 'transfer' read as under:

"transfer", in relation to a capital asset, includes,-

(i) the sale, exchange or relinquishment of the asset; or

(ii) the extinguishment of any rights therein; or

(iii) the compulsory acquisition thereof under any law ; or

(iv) in a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment;] [or]

[(iva) the maturity or redemption of a zero coupon bond; or]

[(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882); or

(vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment o], any immovable property.

[Explanation 1]-For the purposes of sub-clauses (v) and (vi), "immovable property" shall have the same meaning as in clause (d) of section 269 UA.]

[Explanation 2]-For the removal of doubts, it is hereby clarified that "transfer" includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India;) ”
From the preliminary reading of the term 'transfer' as defined in the Act, the appellant is hit by the provisions of section 2(47) (i), (vi) and Explanation 2. Therefore, he received cash and land in lieu of the transfer of shares / for surrendering his interest in the company. Vide the agreement dated 11.02.2008 there was settlement among the Directors by which there was an understanding to pay certain amount of cash and land of 10,400 sq.yds for surrendering his interest in the company. Therefore the gain on transfer of shares has to be brought to tax under the head capital gains. The Assessing Officer brought market value of land to tax. Such value is purely notional, infact, there was tremendous fall in real estate market from 2008 onwards and lands were stated to have been sold at a later date for much lesser price. Therefore, it is appropriate that the sub-registrar value as on 11.02.2008 is to be considered as the sale consideration In summary, the capital gain shall be brought to tax for A.Y.2008-09 by taking sale consideration equivalent of cash component received of Rs.9,46,946/- plus SRO Value of 10,400 sq.yds as on 11.02.2008.

5.2 It is also pertinent to mention that in subsequent years the plots were sold and the income was offered under the head business income. Since the cost of the plots was not debited to the profit and loss account in both the years i.e. A.Y.2011-12 and 2012-13 the sale consideration adopted for the purpose of computing capital gains shall be the cost of the plots and is to be debited to the profit and loss account in subsequent years for A.Y.2011-12 and A.Y.2012-13”.

5. Assessee is not aggrieved, but Revenue is aggrieved and raised the following grounds:

“2. The learned CIT(A) ought not to have held that the consideration should be brought to tax for the AY. 2008-09 instead of AY. 2009-10.

3. The learned CIT(A) ought not have reduced the consideration received while settlement deed clearly specified the amount for which the rights were given up by the assessee.

4. The learned CIT(A) ought not have directed the AO to adopt the SRO value as the entire consideration is required to be considered for taxation”.

6. After considering the rival contentions and perusing the evidence on record, we do not see any reason to interfere with the order of the Ld. CIT(A). There is no merit in Revenue’s grounds as the said settlement was entered on 11-02-2008 which falls in AY. 2008-09 and not in 2009-10. Just because a survey was conducted and statement was recorded, the amount cannot be brought to tax in AY. 2009-10. In view of that, we find no merit in the Revenue’s grounds on the issue. With reference to the valuation also, we are of the opinion that Ld. CIT(A) has correctly directed the value to be adopted which itself becomes ‘cost for the plots’ which were sold subsequently. Consequently, we affirm the orders of Ld. CIT(A) and dismiss the grounds.

7. In the result, Revenue’s appeal is dismissed.
Order pronounced in the open Court on 04th March, 2016.
*****

ITO, Ward-1(5), Panaji. Vs. The Kadamba Employees Cooperative Credit Society Ltd., KTC Bus Stand, Panaji - Goa.

noreply@blogger.com (Simply Indian Tax) — Thu, 10 Mar 2016 16:00:00 +0530

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH,

PANAJI BEFORE SHRI N.S. SAINI, HON’BLE ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN,

HON’BLE JUDICIAL MEMBER

ITA Nos. 432 to 435/PNJ/2015 (Asst. Years : 2007-08, 2009-10, 2010-11 & 2012-13)

ITO, Ward-1(5), Panaji. Vs. The Kadamba Employees Cooperative Credit Society Ltd., KTC Bus Stand, Panaji - Goa.

PAN No. AACAT 3775 G (Appellant) (Respondent) Assessee by : Shri Chinmay S. Kamat - CA. Department By : Shri K. Mehboob Ali Khan - DR Date of hearing : 16/02/2016. Date of pronouncement : 16/02/2016. O R D E R PER GEORGE MATHAN, JUDICIAL MEMBER These are the appeals filed by the Revenue against the separate orders passed by the Commissioner of Income Tax (Appeals), Panaji-1 in ITA Nos.204 to 206 & 283/PNJ/14-15, each, dated 24/08/2015 for the Assessment Years 2007-08, 2009-10, 2010-11 & 2012-13. 2. The main issue involved in these appeals is that the Commissioner of Income Tax (Appeals) erred in deleting the addition to the assessee under sec. 80P(2)(a)(i) of the Income Tax Act, 1961. 3. The facts of the case, in brief, are that the assessee filed its return of income after claiming deduction under sec. 80P(2)(a)(i) of the Act for ₹ 17,72,186/- in the Assessment Year 2007-08, ₹ 36,84,897/- in the Assessment Year 2009-10, ₹ 31,41,967/- in the Assessment Year 2010-11 and ₹ 63,41,932/- in the Assessment Year 2012-13. It was 2 ITA Nos. 432 - 435/PNJ/2015 claimed that the society is entitled to deduction under sec. 80P(2)(a)(i) as it was a Cooperative Society carrying on the business of banking or providing credit facilities to its members. However, the claim of the assessee for deduction under sec. 80P(2)(a)(i) was rejected by the Assessing Officer in the order passed under sec. 143(3) of the Act on the ground that the assessee was a cooperative bank, and hence, not entitled to claim deduction by virtue of sec. 80P(4). 4. On appeal, Commissioner of Income Tax (Appeals) allowed the claim of the assessee by observing as under:- “6. I have gone through the assessment order and the submission of the appellant. The AO has equated the appellant Co-operative society with Primary Cooperative bank and has denied deduction u/s.80P(2). On this issue, The Hon‟ble High Court has decided as under: “There is no dispute between the parties that the appellant is a co-operative society as the same is registered under the Co-operative Act. The appellant is claiming deduction of income earned on providing credit facilities to its members as provided under section 80P(2)(a)(i) of the Act. It is appellant‟s case that, it is not carrying on the business of the banking. Consequently, not being a co-operative bank the provisions of Section 80P(4) of the Act would not exclude the appellant from claiming the benefit of deduction under Section 80P(2)(a)(i) of the Act. However in terms of Section 80P of the Act the meaning of the words Cooperative Bank is the meaning assigned to it in Chapter V of the Banking Regulation Act, 1949. A cooperative bank is defined in Section 5(cci) of Banking Regulation Act to mean a State Cooperative Bank-, a Central Cooperative Bank and a Primary Cooperative Bank. Admittedly, the appellant is not a State Cooperative Bank, a Central Cooperative Bank Thus what has to be examined is whether the appellant is a Primary Cooperative Bank as defined in Para V of the Banking Regulation Act. Section 5(ccv) of the Banking Regulation Act defines a primary cooperative bank to mean a cooperative society which cumulatively satisfies the following three conditions: 1) Its principal business or primary object should be banking business of Banking, 2) Its paid up share capital and reserves should not be less that rupees one lakh. 3 ITA Nos. 432 - 435/PNJ/2015 3) Its bye-laws do not permit admission of any other cooperative society as its member

It is accepted position that condition No. (2) is satisfied as the share capital in an excess of rupees one lakh It has been the appellant‟s contention that the conditions No (1) and (3) provided above are not satisfied. Therefore the issue that arises for consideration is whether the appellant satisfies condition No (1) and (3) above The impugned order after referring to the definition of „Banking Business‟ as defined in Section 5b of the Banking Regulation Act, held that the principal business of the Appellant is Banking Section 5b of the Banking Regulation Act defines banking to mean accepting of deposits for the purpose of lending or investment, of deposit of money from the public repayable on demand or otherwise. The impugned order juxtaposes the above definition with the finding of fact that the apel1ant did deal with non members in a few cases by seeing deposits. This read with Bye law 43 leads to the conclusion that it is carrying on banking business. This fact of accepting deposits from people who are not members has been so recorded by the CIT(A) in his order dated 15 July, 2014. Before the Tribunal also the appellant did not dispute the fact that in a few cases they have dealt with non members. However so far as accepting deposits from non members is concerned it is submitted that the Bye-law 43 only permits the society to accept deposits from its members. It is submitted that Bye .laws 43 does „not permit receipt of deposits from persons other then members, the word “any person” is a gloss added in the impugned order as it is not found in Bye law 43. It is undisputed that the transactions with non members are insignificant/miniscule. On the above basis it cannot be concluded that the appellant‟s, principal business is of accepting deposits from public and therefore it is in banking business. In fact, the impugned order erroneously relies upon bye-law 43 of the society which enables the society to receive deposits to conclude that it can receive deposits from public. However, the impugned order relies upon bye-law 43 to conclude that it enables the appellant to receive deposits from any person is not correct. Thus in the present facts the findings that the appellant‟s principal business is of Banking is perverse, as it is not supported by the evidence on record. So far as the issue of primary object of the appellant is concerned the impugned order gives no finding on that basis to deprive the appellant the benefit of Section 80P of the Act The impugned order sets out the object clause of the appellant, which has 24 objects but thereafter draws no sequiter to 4 ITA Nos. 432 - 435/PNJ/2015 conclude that the primary object is banking. Consequently there is no occasion to deal with the same as that is not the basis on which the impugned order holds that it is a Primary Cooperative bank. In the above view, the alternative contention of the appellant that it is not in the business of Banking as the sine quo non to carry on banking business is a licence to be issued by the Reserve Bank of India, which it admittedly does not have, is not being considered. So far as condition No.3 of the definition/meaning of Primary Cooperative Bank as provided in section 5(ccv) of the Banking Regulation Act is concerned, the same requires the Bye laws of society to contain a prohibition from admitting any other cooperative society as its member. In fact the bye-laws of the appellant society originally in byelaw 9(b) clearly provided that no co-operative society shall be admitted to „the membership of the society. Thus there was a bar but the same was amended w.e.f. 12 January, 2001 as to permit a society to be admitted to the membership of the society. Therefore for the subject assessment years there is no prohibition to admitting a society to its membership and one of three cumulative conditions precedent to be a primary cooperative bank is not satisfied. However the impugned order construed the amended clause 9(d) of the appellant‟s bye laws to mean that it only permits a society to be admitted to the membership of the appellant and not a co-operative society. According to the impugned order, a society and a co-operative society are clearly words of different hand distinct significance and the membership is only open to society and not to a co-operative society. As rightly pointed out on behalf of the appellant the word society as referred to bye law 9(d) would include the co-operative society. This is so as the definition of a society under the Co-operative Act is co-operative registered under the Co-operative Act. Besides the qualifying condition 3 for being considered as a Primary Cooperative Bank is that the bye laws must not permit admission of any other cooperative society This is a mandatory condition i.e. the bye laws must specifically prohibit admission of any other cooperative society to its membership. The Revenue has not been able to show any such prohibition in the bye laws of the appellant. Thus even the aforesaid qualifying condition (3) for being considered as a primary cooperative bank is not satisfied. Thus, the three conditions as provided under section 5 (CVV) of the Banking regulation Act, 1949, are to be satisfied cumulatively and except condition (2) the other two qualifying conditions are 5 ITA Nos. 432 - 435/PNJ/2015 not satisfied. Ergo, appellant cannot be considered to be a co-operative bank for the purposes of Section 80P(4) of the Act. Thus, the appellant is entitled to the benefit of deduction available under Section 80P(2)(a)(i) of the Act. The contention of Ms. Dessai, learned Counsel for the revenue that the appellant is not entitled to the benefit of Section 80P (2)(a)(i) of the Act in view of the fact that it deals with non-member cannot be upheld. This for the reason that section 80P(1) of the Act restricts the benefits of deduction of income of co-operative society to the extent it is earned by providing credit facilities to its members. Therefore, to the extent the income earned is attributable to dealings with the non-members are concerned the benefit of Section 80P of the Act would not be available. In the above view of the matter, at the time when effect has been given to order of this Court, the authorities under Act would restrict the benefit of deduction under section 80P of the Act only to the extent that the same is earned by the appellant in carrying on its business of providing credit facilities to its members. Accordingly, the substantial question of law as framed is answered in the negative i.e.in favour of the appellant and against the respondent-revenue. In view of the decision of the Hon‟ble High Court, the AO is directed to allow the deduction u/s.80P to the appellant. The appeal is allowed.” 5. The Departmental Representative relied on the orders of the Assessing Officer. He could not point out any specific error in the above quoted orders of the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) has allowed the claim of deduction under sec. 80P(2)(a)(i) of the Act after following the decision of the Hon’ble Bombay High Court at Panaji in the case of M/s. The Quepem Urban Cooperative Credit Society Ltd. Vs. ACIT in Tax Appeals No. 22-24/2015 dated 17/04/2015. No contrary decision could be cited by the Departmental Representative. We, therefore, do not find any good and justifiable reason to interfere with the orders of the Commissioner of Income Tax (Appeals), which are hereby confirmed and this ground of appeal of the Revenue is dismissed. 6 ITA Nos. 432 - 435/PNJ/2015 6. The another grievance of the Revenue in all these appeals is directed against the order of the Commissioner of Income Tax (Appeals) deleting the addition made under sec. 40(a)(ia) of the Act. 7. We have heard rival submissions of both the parties and perused the orders of the lower authorities and the material available on record. The Assessing Officer observed that the assessee has paid interest in excess of ₹ 10,000/- without making TDS and, therefore, he made disallowance of ₹ 6,49,872/- in the Assessment Year 2007-08, ₹73,837/- in the Assessment Year 2009-10, ₹ 63,469/- in the Assessment Year 2010-11 and ₹ 1,31,075/- in Assessment Year 2012-13 by invoking the provisions of sec. 40(a)(ia). 8. On appeal, Commissioner of Income Tax (Appeals) deleted the disallowance made under sec. 40(a)(ia) of the Act by observing that the assessee-society is not held to be a bank, therefore, TDS provisions are not applicable to the assessee-society. Hence, he deleted the disallowance of ₹ 6,49,872/- in the Assessment Year 2007-08, ₹73,837/- in the Assessment Year 2009-10, ₹ 63,469/- in the Assessment Year 2010-11 and ₹ 1,31,075/- in Assessment Year 2012-13 made under sec. 40(a)(ia) of the Act. 9. The Departmental Representative during the course of hearing did not make any submissions on the above ground of appeal taken by the Revenue. Hence, we dismiss this ground of appeal of the Revenue. 10. In the result, all the appeals filed by the Revenue are dismissed. Order Pronounced in the Court at the close of the hearing on Tuesday, the 16 th day of February, 2016 at Goa. Sd/- sd/- (N.S.SAINI) (GEORGE MATHAN) Accountant Member Judicial Member Dated : 16 t h February, 2016. 7 ITA Nos. 432 - 435/PNJ/2015 vr/- Copy to: 1. The Assessee 2. The Revenue . 3. The CIT 4. The CIT(A) 5. The D .R. 6. Guard file . By order Assistant Registrar I.T.A.T., Panaji.

Real estate: Higher unsold inventory, fewer residential projects mark 2015

noreply@blogger.com (Simply Indian Tax) — Sun, 31 Jan 2016 11:23:00 +0530

The real estate industry was hit hard in 2015 by poor sales of residential projects and fewer launches, resulting in a surge in unsold inventory. The year ended with the lowest number of new launches and sales volumes across the top eight cities of the country since 2010, according to global property consultantKnight Frank.

While the sales volume during 2015 was similar to that in 2014, new launches fell sharply by 21% across the country, Knight Frank said in the 4th edition of its half-yearly report – India Real Estate. Last year the sales volume stood at 2.64 lakh units, while in 2014 it was 2.74 lakh.

The current unsold inventory levels stand at over 690,000 units and it would take close to three years to exhaust. National Capital Region (NCR) is the worst affected residential market in India, where both absorption and new launches declined. It is expected to take more than four years to unwind the existing unsold inventory of 206,000 units in NCR. This is significantly higher than the average time – of less than three years – that other cities will take.

In terms of new launches, NCR, Mumbai and Bengaluru witnessed a sharp drop of 20%, 36% and 27% respectively during 2015. While sales grew by just 3% during the second half of 2015 compared to the second half of 2014, launches continued to fall by 13%. The recovery in sales was largely on account of the better-than-expected sales volume during the festive season.

Steady sales volume and restricted launches have helped in bringing down the stress level in the residential market by some degree in the second half of the year, Knight Frank said. While Mumbai leads in this unwinding of unsold inventory, Hyderabad and Pune follow. Pune and Bengaluru continued to be among the best performing residential markets in the country with low quarters to sell unsold inventory and minimal age of unsold inventory.

“The Bengaluru residential market remains one of the best performing markets in India. Although the residential market did witness some lows with 13% drop in launches YoY, this has in turn helped in bringing down the stress by cutting down the inventory. We presume upward pressure on prices with an expected 7% weighted average price hike in the next six months,” Satish B N, Executive Director, South, Knight Frank said.

In Mumbai Metropolitan Region, new launches were down by 23% compared to H2, 2014 and demand shrunk by 6%. Price growth was marginal at 3%, making it a good time end user to buy a home. Budget housing segment (Rs 30-60 lakh) continued to witness distress with Navi Mumbai, Peripheral Central and Western suburbs witnessing drastic drop in demand. Thane emerged as the silver lining with demand increasing by 13% with good connectivity to office market. Premium South Mumbai market witnessed 108% jump in new project launches to 208 units in H2, 2015.

Outlook for 2016

“Encouraged by the improving sales volume, we believe that developers will start pushing new projects in the coming six months. In H1, 2016, new launches and sales are estimated to jump by 8% and 10% respectively, compared to the same period of the previous year,” Knight Frank said.

“Our outlook for 2016 remains muted. To further revive the demand, it is important to transmit the benefits of the rate cuts to consumers,” Shishir Baijal, Chairman and Managing Director, Knight Frank India said.

Office market sees shortage of quality space

The office market witnessed severe shortage of good quality space with the demand consistently surpassing supply since 2014. Vacancy levels reached an eight-year low of 15.8% in 2015 from 17% in 2008. It had peaked to 21% in 29012. Bengaluru had the lowest vacany level in the country, at 8%, and Pune followed with 11.3%. Similar to 2014, demand surpassed new completions in 2015 as well. While 40.8 million sq ft of office space was absorbed in 2015, only 35.5 million sq ft was delivered. This helped in bringing down the vacancy level in the past year.

In terms of absorption, 2015 managed to surpass the 2014 numbers. While 38.3 million sq ft of space was absorbed in 2014, it increased by 7% in 2015. Chennai and Pune led in terms of annual absorption growth, at 37% and 15%, respectively. In terms of new completions, NCR and Bengaluru witnessed the fastest growth, at 56% and 13%, respectively.

Rents in most of the cities have increased steadily since the last two years. Going forward, this trend is expected to continue in the coming six-month period, with Pune and Bengaluru projected to grow at the fastest pace, the Knight Frank report added.Source:http://www.financialexpress.com/

Govt to get Rs 726 crore via 2nd tranche of gold bond scheme

noreply@blogger.com (Simply Indian Tax) — Sun, 31 Jan 2016 11:22:00 +0530

The government has received subscription for 2,790 kg gold amounting to Rs 726 crore under the second tranche of sovereign gold bond scheme, three times more than what it had received earlier.
“Second tranche of Gold Bond Scheme: About 3.16 lakh applications for 2,790 kgs gold involving subscription of Rs 726 crore received,” Economic Affairs Secretary Shaktikanta Das tweeted.
The first tranche of the scheme, which was launched in November, had received a subscription for 915.95 kg of gold worth Rs 246 crore. As many as 62,169 applications had come for the first tranche.
“Second tranche of Gold Bonds: Outcome significantly better than first tranche. Scheme picking up,” Das said in another tweet.
The second tranche of gold bond scheme, which opened for subscription on January 18, closed on January 22. The bonds would be alloted on February 8.
The gold bonds are issued in denominations of 5 grams, 10 grams, 50 grams and 100 grams for a term of 5-7 years with a rate of interest to be calculated on the value of the metal at the time of investment.
The scheme has an annual cap of 500 grams per person.
In order to hard sell gold bonds, Finance Minister Arun Jaitley had earlier this month asked banks to make their best efforts to reach out to potential investors to invest in the second tranche of sovereign gold bonds.
Prime Minister Narendra Modi had on November 5 launched gold schemes to wean investors away from physical gold.
India imports about 1,000 tonnes of gold every year and the precious metal is the second-highest constituent of the import bill after crude oil.
The scheme is aimed at reducing demand for gold in physical form by encouraging people to buy the commodity in demat or the paper form.
During April-December this fiscal, gold imports increased to $26.45 billion as against $25.85 billion in the same period last year.
The government has fixed the rate of interest on gold bonds for the year 2015-16 as 2.75 per cent per annum, payable on half yearly basis.
The Finance Ministry, in a statement, said the top 10 receiving agencies in terms of subscription amount are SBI, Indian Bank, Syndicate Bank, ICICI Bank, Bank of India, Punjab and Sind Bank, Andhra Bank, Canara Bank, PNB, and Central Bank of India.
“The trend during the second tranche of gold bonds shows that the scheme is gradually picking up amongst the investors with increase in awareness and more clarity about the provisions of the scheme,” the statement added.
To increase the awareness amongst potential depositors about the scheme, the government had also launched the media campaign through AIR, FM radio, print, Mobile SMS, Facebook and Twitter.
“The objective of the scheme is to reduce the demand for physical gold and shift a part of the domestic savings used for purchase of gold into financial savings,” it added.
The statement added the actual amount garnered through the scheme may vary as comprehensive information from all the authorised receiving agencies is under compilation.Source:http://www.financialexpress.com/

‘Make in India’ is a marathon, not a sprint: Suresh Prabhu

noreply@blogger.com (Simply Indian Tax) — Sun, 31 Jan 2016 11:19:00 +0530

The Railways Ministry is investing billions of dollars to modernise the sector and give a push to the ‘Make in India’ initiative, which is a “marathon” and not a “sprint”, Railways Minister Suresh Prabhu said today.
Suresh Prabhu said the government is making right investments to make the manufacturing initiative a success story.
‘Make in India’ “is a mission and not a slogan. We are working on it. I always say that if you are doing a marathon run, do not run as a sprinter,” he said here at the ET Global Business Summit.
There are lot of comparative advantages in India for the manufacturing sector and the world situation today favours India, he said.
Talking about modernisation of the railways, he said the ministry has already issued tenders for USD 7 billion for diesel and electric locomotives.
Besides, the ministry is planning to invest USD 20 billion to USD 25 billion for locomotive and coach building factories in West Bengal.
He also said that about 85 per cent of the over USD 16 billion high speed rail network will be made in India and “the ecosystem which will be developed because of (these investments) will be unimaginable”.
Speaking at the event, Secretary in the Department of Industrial Policy and Promotion Amitabh Kant said that the country’s growth should be driven by domestic business.
On the government’s part, Kant said “there is a need to make things easier” and “for the country to have a high rate of growth, at least 10 to 11 states needs to grow at 10-12 per cent over the next three decades and we need to make champion states”.
“My belief is that you cannot solve the problems of the next billion people, you cannot provide power to all by 2022 and housing for all by 2022 till India does not become the most disruptive nation in the world.”
BCG Chairman Hans-Paul Burkner said that India is a huge market for industrial and consumer goods as well as there is a great opportunity for exports.
To make India a favoured investment destination, the government needs to ensure that there is predictability, reliability and stability in terms of rules and regulations, he added.
Michael Thiemann, CEO, ThyssenKrupp, raised the issue of data protection in India.
Regarding infrastructure development, construction giant L&T’s Deputy Managing Director and President S N Subrahmanyan said that there is a need to develop infrastructure eying the demand of the future.
He also stressed on skill development to match the growing needs.
Vedanta Resources CEO Tom Albanese said India has a lot of unrealise potential particularly in mines and minerals.Source:http://www.financialexpress.com/

Process of Co-operative Housing Society Registration

noreply@blogger.com (Simply Indian Tax) — Sat, 16 Jan 2016 14:03:00 +0530

Process of Co-operative Housing Society Registration

 60 % of the Promoters are must be ready to form Co-op. Housing Society.

 If flats are sold as per the Maharashtra Ownership Flats Act,1963 [MOFA] then it is the

duty of the Builder / Developer to form society and hand over the Account + Documents

to Provisional Working Committee [PWC] In this case the builder become CP and other

flat owners become Promoters for Registration purpose. This society register under Co-

operation.

 When the builder is not registering society due to some reasons or not support to

registered society then flat purchasers can apply for registration of Co-operative Housing

Society under Non Co-operation. In this case one of the flat owner should be elected as

CP for Registration purpose. In this case some more time is taken to registered society as

registrar is issue notice to builder for Non Co-operation. If no response then ex-party

decision are taken for registration of the society. Now all the case of Non Co-operation

Registration decisions is given by District Deputy Registrar [DDR] then society is

registered

 All flat owners should hold meeting and elect Promoter. All power for Registrations,

documentation etc. should be given to promoter. The resolution should be passed and

must be sign by all flat owners who wish to become member of the Co-operative Housing

Society

 Appoint Consultant / Legal Advocate for registration and ask him to comply all

requirements. All members together also can do work for registration.

 For registration of Co-op. Hsg. Society the following documents should be filed to Dy.

Registrar / Asst. Registrar Of Co-operative Department area concern in order as follow

1. Applications for Name to be Reserved for Proposed Society's

2. Form of resolution electing a CP and Promoter and giving them authority for doing

certain acts on behalf of the proposed society

3. Application form "A" 4 copies

4. Information in Annexture " A " " B " " C " 4 copies

5. Bye-Law of the Society 2 copies

6. Details of Accounts Annexture " D " 2 copies

7. Bank Balance Certificate in Original 1 copy in Original

8. Agreement of Flat 1 copy

9. Advocate Search Report 2 copy [Title Certificate]

10. Society's Building Plan 2 copies

11. Lay Out Plan 2 copies

12. Sanction Plan from Authority 2 copies

13. O.C / C.C copy 2 copies

14. Promoter's Guarantee in form " X " On Rs. 100/- Stamp paper & notarized 1 copy

15. Guarantee in form " Y " On Rs. 100/- Stamp paper & notarized 1 copy

16. Guarantee in form " Z " On Rs. 100/- Stamp paper & notarized 1 copies

17. 7/12 or City Survey Revenue Record of Land [not more than 1 month old] 1 copy

18. Promoters Affidavit On Rs. 100/- Stamp paper & notarized 1 copy

19. Indemnity Bond On Rs. 100/- Stamp paper & notarized 1 copy

20. NA Certificate / ULC 2 copy

21. Plot area Land Map 2 copies

22. Scheme

23. Registration Fee Challan for Rs.2500 1 copy original

24. Builder Non Co-operation form Z On Rs. 100/- Stamp paper & notarized if required 1

copy

25. CP Affidavit for Child Labour On Rs. 100/- Stamp paper & notarized 1copy

All this forms are available at your District Co-operative Housing Society Federation.

On submission of above document the Dy./Asst. Registrar will go through the papers And

document. If found OK he will make order for issue of Registration Certificate.

If any deficiencies are found then the applicant will be inform accordingly and documents will

be corrected wherever necessary. When all papers are in order, he will issue order for issue of

Registration Certificate.

Registration Certificate is issued with covering letter and Officer's name is mentioned who will

attend First General Meeting. Normally the Officer concern is not attending meeting. In absence,

all members have to hold meeting and have to elect Provisional Working Committee [PWC]

whose working period will be ONE Year. After electing PWC the member of PWC has to

submitted the M-20 bond on Rs. 100/- stamp paper with the sign of Officer's whose name is in

Covering latter to Dy./Asst. Registrar. All Rule and Regulations ,resolution and minutes

which is written in AGM Register must be sign by Officer's name is mentioned in covering

letter it is the most important step.[Many society forget this which create problem latter]

After First Annual General Meeting PWC is replaced with new Working Committee

[WC] whose working period will be FIVE Year. The new WC election can conduct before

PWC time over with proper election process. WC also has to submit the M-20 bond on Rs. 100/-

stamp paper with the sign of election officer to Dy./Asst. Registrar

When application for Name reservation of Society has given , the Dy./Asst. Registrar give

instruction to Open Bank Account in Dist. Central Co-op. Bank The Account has to opened in

the name of CP And deposit all money of Share Capital Contribution [per member Share Money

is Rs. 50*10 = Rs. 500 i.e. 10 share of 50 rupees each ] and Member ship Fees of Rs. 100/- i.e.

Per member you have to deposit Rs. 600/- in bank and obtain Bank Balance Certificate and

submitted it to Dy./Asst. Registrar. After First Annual General Body Meeting the Bank Account

has to transfer in the name of Society. For bank Account operation Chairman sign must and

either Secretary and Treasurer. Expenditure has to be made as per provision of Bye-Laws. Bank

and Cash Transaction [Collection and Payment] are handled by Treasure when Billing Clerk or

Accountant are not been kept.

S. 195/ 40(a)(ia): In view of retrospective amendment

noreply@blogger.com (Simply Indian Tax) — Sat, 16 Jan 2016 13:58:00 +0530

COURT: ITAT Panaji
CORAM: George Mathan (JM), N. S. Saini (AM)
SECTION(S): 195, 40(a)(ia)
GENRE: Domestic Tax, International Tax
CATCH WORDS: Accrual of income, commission, non-resident, TDS disallowance
COUNSEL: Sharmila Prabhu
DATE: August 20, 2015 (Date of pronouncement)
DATE: December 21, 2015 (Date of publication)
AY: 2009-10
FILE:
CITATION:
S. 195/ 40(a)(ia): In view of retrospective amendment to s. 195 to provide that s. 195 applies whether or not the non-resident person has a residence or place of business or business connection in India, commission to non-resident agents for services rendered outside India is liable for TDS u/s 195 and has to suffer disallowance u/s 40(a)(ia)

The assessee had made expenditure in the previous year relevant to AY 2009-10 on account of payments of commission to non-resident agents outside India. The AO disallowed the expenditure u/s 40(a) for non-deduction of tax at source. The CIT(A) deleted the disallowance on the basis that the amounts were not chargeable to tax in India. On appeal to the ITAT, held, allowing the appeal:

In respect of the issue as to whether the Assessee was liable to deduct TDS u/s 195 and whether the disallowance was liable to be made u/s 40(a)(ia) of the Act, it is noticed that the provisions of s. 195 has been amended by the introduction of the Explanation-II to the said section by the Finance Act, 2012, with retrospective effect from 1.4.1962, whereby it is clarified that ‘the obligation to comply with sub-section (1) and to make deduction thereunder applies and shall be deemed to have applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has (i) a residence or place of business or business connection in India…’ In view of the introduction of Explanation II to s. 195… the disallowance… would have to be restored…

Note: This decision seems contrary to the decision of the Hon’ble Bombay High Court in CIT v. Gujarat Reclaim and Rubber. Further, the reliance on Explanation II to s. 195 also appears to be misplaced. The Memorandum Explaining the Provisions of the Finance Act through which the Explanation was introduced specifically states, “Section 195 of the Income-tax Act requires any person to deduct tax at source before making payments to a non-resident if the income of such non-resident is chargeable to tax in India. “Person”, here, will take its meaning from section 2 and would include all persons, whether resident or non-resident. Therefore, a non-resident person is also required to deduct tax at source before making payments to another non-resident, if the payment represents income of the payee non-resident, chargeable to tax in India. There are no other conditions specified in the Act and if the income of the payee non-resident is chargeable to tax, then tax has to be deducted at source, whether the payment is made by a resident or a non-resident…” This clearly indicates that the amendment in the Finance Act, 2012, was only to clarify that the obligation u/s 195 attaches to resident payers as well as non-resident payers. In other words, the Explanation was inserted to negate the argument being advanced in cases of payments between two non-residents that there was no obligation u/s 195. The Explanation therefore does not at all change the position insofar as payments by a resident to a non-resident are concerned: these payments fall within the scope of s. 195(1) if the payment is chargeable to tax in the hands of the recipient non-resident. The requirement of the payment being chargeable to tax in the hands of the non-resident is not diluted at all. This aspect appears to not have been considered by the ITAT.

Updates Bogus Sales/ Purchases: Addition

noreply@blogger.com (Simply Indian Tax) — Sat, 16 Jan 2016 13:57:00 +0530

Hiralal Chunilal Jain vs. ITO (ITAT Mumbai)

Posted on January 13, 2016 — No Comments ↓
COURT: ITAT Mumbai
CORAM: Rajendra (AM), Sandeep Gosain (JM)
SECTION(S): 143(3)
GENRE: Domestic Tax
CATCH WORDS: Bogus purchases, Bogus Sales
COUNSEL: Satish Mody
DATE: January 1, 2016 (Date of pronouncement)
DATE: January 13, 2016 (Date of publication)
AY: 2009-10
FILE:
CITATION:
Bogus Sales/ Purchases: Addition solely on the basis of information received from the sales-tax department is not sustainable. Suspicion of the highest degree cannot take the place of evidence

The AO received information from the investigation wing of STD, Maharashtra that the assessee was one of the beneficiaries of accommodation entries, that Shiv Sagar the supplier of the goods was one of the entities who had admitted to have bogus bills, that the assessee had asked for cross examination of the supplier but same was not given, that the AO had not supplied the copy of the statements of Shiv Sagar to the assessee, that in the books of accounts of the assessee all the purchases and sales were recorded, that payments were made through banking channels, that the AO had made addition of entire purchases u/s.69 of the Act, that the FAA had reduced it to 20%. It is a fact that the AO had not rejected the sales of the assessee and the assessee was maintaining the quantative details and stock register. In our opinion, once the sales are accepted as genuine or not doubted the AO cannot reject the entire purchase. In the case of Nikunj Eximp Enterprises 372 ITR 619 the Hon’ble Bombay High Court has held if sales were not doubted by the AO and copies of bank statement showing entries of payment through account payee cheques to the suppliers, copies of invoices for purchases and a stock statement, i.e. stock reconciliation statement are filed purchased could not be rejected. In the case of Rajeev Kalathil (67 SOT 52) the Tribunal has held as under:

“2.4. We find that AO had made the addition as one of the supplier was declared a hawala dealer by the VAT Department. We agree that it was a good starting point for making further investigation and take it to logical end. But, he left the job at initial point itself. Suspicion of highest degree cannot take place of evidence. He could have called for the details of the bank accounts of the suppliers to find out as whether there was any immediate cash withdrawal from their account. We find that no such exercise was done.”

In the present case also the AO had made the addition on the basis of information received from the Sales tax department, but, he did not make any independent inquiry. He did not follow the principles of natural justice before making the addition. The FAA had reduced the addition to 20%, but he has not given any justification except stating that same was done to plug the probable leakage revenue. Considering the peculiar facts and circumstances of the case, we are reversing the order of the FAA.

UNEXPLAINED INVESTMENT

noreply@blogger.com (Simply Indian Tax) — Sat, 16 Jan 2016 13:53:00 +0530

UNEXPLAINED INVESTMENT
In favour of: Assessee (partly)

Unless there is finding to effect that investment by way of incurring cost was for acquiring goods that were sold, had been made by Assessee and that has also not been disclosed, question, regarding entire sum of undisclosed sale proceeds being treated as income of relevant assessment year would be answered in negative.

Ahmedabad Tribunal
SAMIR P. JARIWALA VS INCOME TAX OFFICER : (2015) 45 CCH 0340 AhdTrib
Decided On: Dec 18, 2015

TDS
In favour of: Assessee

No Benefits were paid to Director at par with regular employee, when Director was paid professionally for his technical services provisions u/s. 194J would be quite applicable instead of 201(1)/201(1A)

Bombay Tribunal
B4U TELEVISION NETWORK INDIA LTD. & ANR. VS DEPUTY COMMISSIONER OF INCOME TAX & ANR. : (2015) 45 CCH 0351 MumTrib
Decided On: Nov 30, 2015

ADDITION
In favour of: Assessee (Partly)

When there was no evidence given by assesse to extent of Rs.3,96,272 for certain electricity charges, said amount was properly added by AO and confirmed by CIT(A). However where tenants had actually given money for electricity charges to be paid on their behalf by assessee, same should have been taken into account by AO as well as CIT(A) and addition in this respect could not be added to income of assessee.

Delhi Tribunal
CHANDER PAL AGGARWAL VS INCOME TAX OFFICER : (2015) 45 CCH 0353 DelTrib
Decided On: Dec 29, 2015

Ravi Sud v. Assistant Commissioner of Income-tax*

noreply@blogger.com (Simply Indian Tax) — Wed, 23 Sep 2015 10:29:00 +0530

IT: Where assessee filed revised return and had suo motu offered additional income and same was not detected during any course of action by revenue authorities, it could not be said to be a case of concealment of income inviting penalty action under section 271(1)(c)
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[2015] 60 taxmann.com 241 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'D'
Ravi Sud
v.
Assistant Commissioner of Income-tax*
B.R. BASKARAN, ACCOUNTANT MEMBER
AND SANJAY GARG, JUDICIAL MEMBER
IT APPEAL NOS. 93 TO 98 (MUM.) OF 2012
[ASSESSMENT YEARS 1998-99 TO 2000-01]
MARCH 4, 2015
Section 271(1)(c) of the Income-tax Act, 1961 - Penalty - For concealment of income (Revised return) - Assessment year 1998-99 - Assessee filed original return declaring a certain income - Subsequently he filed revised return declaring additional income being share of profit from firm 'R', which was claimed as exempt in original return - Prior to filing of revised return, a search was conducted under section 132 upon firm 'R' and same was found to be a bogus firm - Thereafter Assessing Officer issued on assessee a notice under section 148, in response to which assessee submitted that revised return be treated as filed in response to said notice - Thereupon Assessing Officer completed assessment of assessee under section 143(3) read with section 147 determining total income as was declared in revised return - He also levied penalty upon assessee under section 271(1)(c) holding that assessee had filed revised return after detection of alleged bogus firm 'R' and, therefore, revised return was not voluntary and it was a case of concealment of income - Whether as assessee had suo motu offered additional income and same was not detected during any course of action by revenue authorities against assessee, it could not be said to be a case of concealment of income inviting penalty action under section 271(1)(c) - Held, yes [Para 4] [In favour of assessee]
G.P. Mehta for the Appellant. Love Kumar for the Respondent.

Life Shines Educational & Charitable Trust v. Assistant Commissioner of Income-tax*

noreply@blogger.com (Simply Indian Tax) — Wed, 23 Sep 2015 10:28:00 +0530

IT: Where assessee-trust was only running a pre-school by collecting fees for imparting education to children, assessee's main objects were covered by charitable purposes 'education' under section 2(15) and it was entitled for registration under section 12AA
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[2015] 60 taxmann.com 155 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'A'
Life Shines Educational & Charitable Trust
v.
Assistant Commissioner of Income-tax*
A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER
AND S.S. GODARA, JUDICIAL MEMBER
IT APPEAL NOS. 2818 AND 2819 (MDS.) OF 2014
MARCH 5, 2015
Section 2(15), read with sections 12AA and 80G, of the Income-tax Act, 1961 - Charitable purpose (Education) - Commissioner on perusal of details furnished by assessee trust found that trust was only running a pre-school for pre-KG, LKG and UKG classes by collecting fees for imparting education to children and it did not carry out any reasonable charitable activity ever since its creation - He rejected application for registration under section 12AA holding that assessee had not complied requirements of section 12AA - He also refused to grant registration under section 80G - Whether assessee's main objects were covered by charitable purposes 'education' under section 2(15) - Held, yes - Whether, therefore, assessee was entitled for registration under section 12AA - Held, yes [Para 4] [In favour of assessee/Matter remanded]

IP India Foundation v. Director of Income-tax (Exemptions)*

noreply@blogger.com (Simply Indian Tax) — Wed, 23 Sep 2015 10:28:00 +0530

IT : Where assessee's primary purpose remained advancement of objects of general public utility, even if an incidental or ancillary activity for purpose of achieving main purpose was profitable in nature, denial of registration was unjustified
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[2015] 61 taxmann.com 59 (Hyderabad - Trib.)
IN THE ITAT HYDERABAD BENCH 'A'
IP India Foundation
v.
Director of Income-tax (Exemptions)*
P.M. JAGTAP, ACCOUNTANT MEMBER
AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
IT APPEAL NO. 739 (HYD.) OF 2014
JANUARY 30, 2015
Section 12A, read with section 2(15), of the Income-tax Act, 1961 - Charitable trust - Registration of (Business practices) - Assessee-trust filed an application for registration under section 12AA - Director of Income-tax (Exemption) rejected said claim by holding that assessee intended to engage business practices for purpose of economic growth, which did not come under purview of charitable purposes - It was observed that main object of assessee was to focus on area of education and environment, watershed management, women empowerment through skill development initiatives, provision of drinking water, youth empowerment, medical health camps, environmental conservation program, and promotion of sports and a host of extracurricular activities at local levels aimed towards community sustainability - Whether since assessee's primary purpose was advancement of objects of general public utility and it would remain charitable even after an incidental or ancillary activity for purpose of achieving main purpose was profitable in nature, order of Director of Income-tax (Exemptions) was not correct - Held, yes [Paras 7 and 8] [In favour of assessee]

Smt. Rekhaben Thakkar v. Assistant Commissioner of Income-tax, Central Circle-1, Baroda

noreply@blogger.com (Simply Indian Tax) — Wed, 23 Sep 2015 10:27:00 +0530

IT : When cheque issued by assessee to searched person was found from searched person, cheque did no more continue to belong to assessee; further where no satisfaction was recorded by Assessing Officer of person searched and cheque was also undated, conditions for issuing notice to assessee under section 153C were not satisfied
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[2015] 61 taxmann.com 60 (Ahmedabad - Trib.)
IN THE ITAT AHMEDABAD BENCH 'A'
Smt. Rekhaben Thakkar
v.
Assistant Commissioner of Income-tax, Central Circle-1, Baroda*
G.D. AGRAWAL, VICE-PRESIDENT
AND S.S. GODARA, JUDICIAL MEMBER
IT APPEAL NOS. 3088 TO 3093 (AHD.) OF 2008 AND 666 TO 671 (AHD.) OF 2010
[ASSESSMENT YEARS 1999-2000 TO 2004-05]
JUNE 12, 2015
Section 153C of the Income-tax Act, 1961 - Search and seizure - Assessment of income of any other person (Condition precedent) - Assessment years 1999-2000 to 2004-05 - During search at premises of Group K, an undated cheque issued by assessee in favour of its director was seized - Assessing Officer issued notice under section 153C to assessee - Whether where no satisfaction was recorded by Assessing Officer of person searched, and satisfaction was recorded by Assessing Officer of assessee being 'other person', notice issued to assessee under section 153C was not valid - Held, yes - Whether since cheque, on basis of which notice was issued, was undated, it could not be said to pertain to any of years for which notice was issued - Held, yes - Whether since cheque was in name of director of Group K which was searched and cheque was found from person upon whom cheque was drawn, cheque, in fact, belonged to said group and could not be said to be continued to 'belonging to' assessee who issued cheque - Held, yes - Whether, therefore, conditions for issue of notice to assessee under section 153C were not satisfied - Held, yes [Para 17] [In favour of assessee]

Splitting up or reconstruction or transfer of used assets of its non STPI unit

noreply@blogger.com (Simply Indian Tax) — Sat, 19 Sep 2015 11:30:00 +0530

IT : Where STPI unit established by assessee for which section 10A deduction was claimed, was not formed by splitting up or reconstruction or transfer of used assets of its non STPI unit , assessee would be entitled for said deduction
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[2015] 60 taxmann.com 127 (Karnataka)
HIGH COURT OF KARNATAKA
Commissioner of Income-tax
v.
Quest Informatics (P.) Ltd.*
N.KUMAR AND B. VEERAPPA, JJ.
IT APPEAL NOS. 188 TO 190 OF 2014
JANUARY 5, 2015
Section 10A of the Income-tax Act, 1961 - Free trade zone (Splitting up or reconstruction) - Assessment years 2007-08 to 2009-10 - Assessee, an Indian company, was engaged in business of computer software development and business process outsourceing - During financial year 2005-06, assessee was running its business from a non-STPI unit under a rented premises - During said period, assessee applied for permission to set up STPI unit at ground floor of said premises - STPI authorities granted approval for setting up of STPI unit at ground floor of said premises - STPI authorities duly granted approval - Assessee started its business in newly set up unit during financial year 2006-07 - Assessee also continued to carry out its business from non-STPI unit also - However, separate books of account were maintained by assessee for STPI unit and non-STPI unit - Whether where STPI unit established by assessee for which section 10A deduction was claimed was not formed by splitting up or reconstruction or transfer of used assets of an existing unit, assessee would be entitled for said deduction - Held, yes [Paras 3 and 4] [In favour of assessee]

Assessee/appellant was ill but got alright, illness cannot be any excuse for delay in filing appeal

noreply@blogger.com (Simply Indian Tax) — Sat, 19 Sep 2015 11:29:00 +0530

IT: In order to constitute reason for delay in filing appeal under section 249, illness must be at time of expiry of limitation; if assessee/appellant was ill but got alright, illness cannot be any excuse for delay in filing appeal
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[2015] 61 taxmann.com 46 (Chandigarh - Trib.)
IN THE ITAT CHANDIGARH BENCH 'SMC
Satbarg Singh
v.
Income-tax Officer, Ward- 2 (3), Chandigarh*
H.L. KARWA, VICE-PRESIDENT
IT APPEAL NOS. 352 TO 356 (CHD.) OF 2015
[ASSESSMENT YEARS 1994-95 TO 1998-99]
JULY 3, 2015
Section 249 of the Income-tax Act, 1961 - Commissioner (Appeals) - Form of appeal and limitation (Condonation of delay) - Assessment years 1994-95 to 1998-99 - Assessee filed appeals against assessment orders for relevant assessment years after delay of almost 12 years - Reason stated for delay was that assessee was not keeping up good health, was in severe depression due to various issues and lenders were asking for money - Facts revealed that assessee was regularly performing his duties in his department till his retirement in 2009 - No proof was submitted to show that due to illness, assessee was utterly disabled to attend to any work or was unfit to assist his legal representative or advocate - Whether in order to constitute reason for delay in filing appeal, illness must be at time of expiry of limitation; if assessee/appellant was ill but got alright, there cannot be any excuse for delay in filing appeal - Held, yes - Whether there being no evidence on record to show that assessee was prevented by sufficient cause from filing appeals within time, delay in filing appeals before Commissioner (Appeals) could not be condoned and, accordingly, appeals were to be dismissed - Held, yes [Para 11] [In favour of revenue]

Printtech v. State of Haryana

noreply@blogger.com (Simply Indian Tax) — Thu, 20 Aug 2015 11:15:00 +0530

CST & VAT : Haryana VAT : In terms of provisions of section 15(4), date of communication of assessment order could not be taken as date of making of order
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[2015] 59 taxmann.com 421 (Punjab & Haryana)
HIGH COURT OF PUNJAB AND HARYANA
Printtech
v.
State of Haryana*
AJAY KUMAR MITTAL AND JASPAL SINGH, JJ.
VATAP NO. 88 OF 2014 (O & M)†
JULY 25, 2014
Section 15 of the Haryana Value Added Tax Act, 2003 - Returns, assessment and tax administration - Registered dealer - Assessment of - Assessment year 2003-04 - Assessing Authority made assessment of assessee to best of his judgment and passed assessment order under section 15(4) on 29-3-2013 - He issued said order on 2-7-2013 and it was served on assessee on 13-7-2013 - Assessee submitted that date of issue of assessment order would constitute passing of assessment order and same being after 31-3-2013 was beyond limitation - Hence, assessment order was barred by limitation - Whether what is of essence under section 15(4) is to assess to best of Assessing Authority's judgment amount of tax due from assessee and it nowhere requires that assessment order must be served on assessee before expiry of period of limitation prescribed for framing assessment - Held, yes - Whether, therefore, date of communication of assessment order could not be taken as date of making of order - Held, yes - Whether in view of position of law assessment had been made within time prescribed under Act and it was not barred by limitation - Held, yes [Paras 7 and 17] [In favour of revenue]
Circulars, Notifications and Instructions : Instruction dated 13-12-2004 and Instruction dated 14-3-2006
__._,_.___

Otis Elevators Company (India) Ltd. v. Commissioner of Commercial Taxes, U.P. Lucknow

noreply@blogger.com (Simply Indian Tax) — Thu, 20 Aug 2015 11:15:00 +0530

CST & VAT : Uttar Pradesh VAT - Where Assessing Authority made assessment relying upon judgment of Supreme Court in case of State of Andhra Pradesh v. Kone Elevators (India) Ltd.[2005] taxmann.com 1542 and raised tax demand upon assessee, since said judgment had now been overruled by Supreme Court in another case, assessee was entitled to complete stay of demand amount
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[2015] 59 taxmann.com 458 (Allahabad)
HIGH COURT OF ALLAHABAD
Otis Elevators Company (India) Ltd.
v.
Commissioner of Commercial Taxes, U.P. Lucknow*
ANIL KUMAR, J.
TRADE TAX REVISION NO. 46 OF 2015†
JULY 3, 2015
Section 55, read with section 57, of the Uttar Pradesh Value Added Tax Act, 2008 - Appeals, revision, etc. - Appeal - Assessment year 2009-10 - Assessee was engaged in business of supplying of parts and components of lifts and elevators in offices, etc. - Assessing Authority relying on judgment of Supreme Court rendered in case of State of Andhra Pradesh v. Kone Elevators (India) Ltd. [2005] taxmann.com 1542 treated transaction in question as sale and raised tax demand upon assessee - First Appellate Authority stayed demand to extent of 50 per cent - Tribunal modified order of First Appellate Authority and granted stay to extent of 80 per cent of total demand - Whether since earlier judgment of Supreme Court in Kone Elevators (India) Ltd.'s case (supra) had now been overruled by Constitution Bench of Supreme Court in Kone Elevator India (P.) Ltd. v. State of Tamil Nadu [2014] 45 taxmann.com 150, assessee was entitled to complete stay of demand amount - Held, yes [Para 13] [In favour of assessee]

TPO made addition to assessee's ALP in respect of selling ready to serve food to its AE without giving adjustment on account of difference in capacity utilisation

noreply@blogger.com (Simply Indian Tax) — Thu, 20 Aug 2015 11:14:00 +0530

IT/ILT : Where TPO made addition to assessee's ALP in respect of selling ready to serve food to its AE without giving adjustment on account of difference in capacity utilisation between assessee and its comparable, impugned addition deserved to be set aside
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[2015] 59 taxmann.com 437 (Pune - Trib.)
IN THE ITAT PUNE BENCH 'B'
Tasty Bite Eatables Ltd.
v.
Assistant Commissioner of Income-tax, Circle-7, Pune*
MS. SUSHMA CHOWLA, JUDICIAL MEMBER
AND R.K. PANDA, ACCOUNTANT MEMBER
IT APPEAL NO. 1682 (PN) OF 2011
[ASSESSMENT YEAR 2007-08]
JUNE 10, 2015
Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm’s length price (Comparables and adjustments/Adjustments - Capacity utilization) - Assessment year 2007-08 - Assessee-company was engaged in business of manufacture, marketing and distribution of ready to serve and ready to cook food products and food intermediates - During relevant year, assessee entered into international transaction relating to sale of ready to serve foods to its AE - Assessee adopted TNM method to benchmark its transaction with its Associated Enterprises - It selected ADF Foods Ltd., as a comparable company to benchmark its transactions with AEs - Assessee's case was that its PBDT on cost during year was 6.25 per cent whereas that of comparable company ADF Foods Ltd. worked out to 9.02 per cent considering average of sales and cost - Contention of assessee to consider PLI as OP/OE and adjustment on account of under utilization of capacity while determining ALP of international transaction was not found acceptable by TPO - He thus made certain addition to assessee's ALP - It was noted that capacity utilisation of assessee worked out to 15 per cent whereas capacity utilisation of comparable company was 53 per cent and therefore, difference between two was significant and material to impact profit margin of assessee - Moreover, assessee's contention that transfer pricing adjustment had to be made with respect to international transactions only and not on entire sales as done by TPO also required verification - Whether in view of aforesaid, impugned addition was to be set aside and, matter was to be remanded back for disposal afresh - Held, yes [Paras 33,36 and 37] [In favour of assessee/Matter remanded]