Issue 10

DIRECT TAXES ... 1 - 12

October, 2011

INDIRECT TAXES . 12 - 14 OTHER LAWS ... 14 - 15 IMPORTANT DUE DATES 15

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DIRECT TAXES
Judicial pronouncements
CIT Vs. M/s. National Travel Services [ITA No. 223 of 2010, 219 of 2010, 1204 of 2010 & 309 of 2011, Delhi High Court, dtd. 11.07.2011] For s. 2(22)(e), firm is shareholder though shares held in names of partners The assessee was a partnership firm consisting of three partners being Naresh Goyal, Surinder Goyal and Jet Enterprises Pvt. Ltd. The assessee was the beneficial owner of 48.18% of the share capital of Jetair Pvt. Ltd which were held in the name of its partners Naresh Goyal and Surinder Goyal. The assessee took a loan of Rs. 28.52 crores from Jetair Pvt. Ltd. The AO held that the said loan was assessable as deemed dividend u/s 2(22)(e) in the hands of the assessee which was reversed by the Tribunal. Before the High Court, the assessee argued, relying on Ankitech Pvt. Ltd, Universal Medicare 324 ITR 363 (Bom) and Bhaumik Colour 118 ITD 1 (Mum) (SB), that sec. 2(22) could only apply in the hands of the shareholder and as the assessee was not a shareholder (its partners were), s. 2(22)(e) could not apply. Delhi High Court rejecting the assessees plea held that the first limb of sec. 2(22)(e) is attracted if the payment is made by a company by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares. While it is correct that the person to whom the payment is made should not only be a registered shareholder but a beneficial share holder, the argument that a firm cannot be treated as a shareholder only because the shares are held in the names of its partners is not acceptable. If this contention is accepted, in no case a partnership firm can come within the mischief of sec. 2 (22)(e) because the shares would always be held in the names of the partners and never in the name of the firm. This would frustrate the object of sec. 2(22)(e) and lead to absurd results. Accordingly, for s. 2(22)(e), a firm has to be treated as the shareholder even though it is not the registered shareholder.

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Commissioner of Income Tax, Cochin v. Electronic Controls & Discharge Systems (P) Ltd [(2011} 13 Taxmann 193, Kerala High Court] Benefit of deduction under Section 10A is not available in respect of sales made to a unit in Special Economic Zone even though such sales are considered as deemed exports under the provisions of the Special Economic Zones Act, 2005. The provisions in Section 10A are comprehensive and exhaustive and that the mandatory conditions of Section 10A (3) have to be satisfied to get the benefit of deduction on export profits. Thus the benefit is available only on actual exports and if the consideration is received in convertible foreign exchange. The concept of deemed export under the SEZ Act is not incorporated in the scheme of deduction under Section 10A, the ITA is a self- contained code and the validity or correctness of the allowance has to be considered with reference to the relevant statutory provisions as contained therein. Where Section 10A provides for deduction on profits derived from export proceeds received in convertible foreign exchange, it could be stated that the Legislature never intended the benefit to be extended to local sales made by the units in

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Judicial pronouncements
the SEZ, whether as part of Domestic Tariff Area sales or inter-unit sales within the Zone or units in other Zones. Hence the Taxpayer was not entitled to claim the deduction under Section 10A in respect of profits derived from the sales made to a unit in a SEZ. Roma Builders (P) Ltd. Vs. Joint Commissioner of Income tax [(2011) 60 DTR (Mum.) (Trib.) 231, ITAT Mumbai Bench, dtd. 09.03.2011] Principal object of the assessee company being to develop and sell the premises constructed and there is material on record to show that the said principal object of the company includes leasing of the stock i.e. property for a temporary period to persons/ companies interested in temporary use, rent is not received from exploitation of the property by way of complex commercial activities but the rental income is derived by the assessee as an owner of the property and it is liable to be assessed under the head Income from house property. CIT Vs Alembic Glass Industries Limited [ITA No. 729 of 2011, Gujarat High Court, dtd. 02.05.2011] In case of business liability, deduction is to be allowed even if it is to be quantified and discharged at a future date. If a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one. The liability is in present though it will be discharged at a future CIT Vs. Rasol Ltd. [(2011) 59 DTR (Cal.) 369, Calcutta High Court, dtd. 19.05.2011] Subsidy received by assessee from the State Government under a scheme of industrial promotion which was meant to provide financial assistance to specified industries for expansion of capacities, modernization and improving their marketing capabilities is capital receipts though the amount of subsidy is equivalent to 90% of the sales tax paid by the beneficiary. Deputy Commissioner of Income tax Vs. Divis Laboratories Ltd. [(2011) 60 DTR (Hyd.)(Trib.)210, ITAT Hyderabad Bench, 25.03.2011] Commission paid to non resident agent for services rendered outside India not being chargeable to tax in India could not be disallowed under Sec. 40(a)(ia). Bharati Shipyard Ltd vs. DCIT [ITA No. 2404/Mum/2009, ITAT Mumbai Special Bench, dtd. 09.09.2011] Amendment in Section 40(a)(ia) of Income Tax Act made by Finance Act 2010 is not retrospective The Finance Act, 2010 has extended the time limit for depositing tax deducted at source by the due date u/s 139(1) of the Act from the earlier lesser time available for compliance. If the tax date. It does not make any difference if the future date on which the liability shall have to be discharged is not certain.

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is deposited by the due date, it would mean escape from the clutches of section 40(a)(ia) for assessment year 2010-2011, but if it is deposited even the next day beyond the due date, natural consequences would follow and it would call for disallowance u/s 40(a) (ia) in the year of incurring the expenditure. In the like manner, in the year under appeal, if the tax deducted at source up to February, 2005 had been deposited up to 31st March, it would have amounted to compliance of the provision, but the late deposit even on 1st April, 2005 would amount to noncompliance warranting interference by section 40(a)(ia) entailing disallowance of expenditure in the Assessment year 2005-06. However the fact that the assessee deposited it beyond the prescribed period, would amount to compliance of the prescription of the proviso, entitling the assessee to deduction in the A.Y. 2006-07. Amendment carried out by the Finance Act, 2010 with retrospective effect from assessment year 2010- 2011 cannot be held to be retrospective from assessment year 2005-2006. CIT Vs. Ranbaxy Laboratories Ltd. [(2011) 60 DTR (Del.) 77, Delhi High Court, dtd. 17.03.2011] Provision of pension payable to employees is not covered by Sec. 43B (b) and same is allowable as deduction. Clause (b) of Sec. 43B mentions about provident fund, superannuation fund, gratuity fund and is followed by any other fund for the welfare of the employees. This last clause thus has to take it colour from the previous clauses and has to be read ejusdem generic. The intention of the legislature behind enacting Sec. 43B(b) was to disallow the statutory liabilities. The legislature never intended to disallow a claim for

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Judicial pronouncements
ascertained liability which is computed scientifically in respect of the retiral benefits of its employees and which is not to be contributed to a fund. The pension scheme provide that pension would be paid by the assessee to its employees on attaining the retirement age or resigning after having rendered services for specified years. Thus, where the liability on this account accrues form year to year, the same is payable on retirement /resignation of the eligible employees. Shri Homi K. Bhabha Vs. ITO [ITA No.3287/Mum/2009, ITAT Mumbai Bench, dtd 28.09.2011] PMS Fees not deductible against capital gains. Despite dissenting orders, reference to Special Bench not necessary The assessee placed Rs. 2.25 crores with ENAM Asset Management Co, a portfolio manager, which was used for purchase and sale of securities etc and gave rise to capital gains. The assessee paid the portfolio manager fees being 1/2% of the NAV of securities under management in addition to 20% of the profits in excess of 15% of the profits after expenses. The assessee claimed that the said fee had direct relation with the capital gains and so was deductible either as (i) diversion of income by overriding title from the sale proceeds or as (ii) part of the cost of acquisition of the shares or as (iii) expenditure incurred wholly and exclusively in connection with the transfer of shares. The AO & CIT (A) rejected the claim. Before the Tribunal, the assessee argued that though the decision of the Mumbai Bench in Devendra Motilal Kothari 50 DTR 369 (Mum) was against the assessee, the decision of the Pune Bench in K R A Holding & Trading which had taken a contrary view had to be followed. The ITAT Mumbai Bench dismissing the appeal held that:1. While, in Devendra Motilal Kothari 50 DTR 369, the Mumbai Bench held that the fees paid for portfolio management services was neither diversion of income by overriding title nor cost of acquisition nor cost of improvement, the Pune Bench in K R A Holding & Trading declined to follow that by relying on the judgement of the Bombay High Court in Shakuntala Kantilal 190 ITR 56 (Bom). Subsequently, the Mumbai Bench in Pradeep Kumar Harlalka declined to follow the Pune Bench on the ground that the judgement of the Bombay High Court in Shakuntala Kantilal had been held to not be good law in Roshanbabu Mohammed 275 ITR 231 (Bom). The majority opinion (in terms of number of orders) and the latest order (in the point of time) were against the assessee. 2. The argument that the Mumbai Benches had not appreciated the correct position in law is not acceptable. Judicial discipline requires that when a particular issue has been decided by a bench, then the subsequent co-ordinate benches should normally follow the same though there are no fetters on its powers to doubt the correctness of the earlier order if there are compelling reasons for the same. Further, whether an earlier order should be followed or a reference to the Special Bench be made depends on whether the Bench is satisfied or not about the correctness of the earlier order and not on the view point of the aggrieved party. It is only when a subsequent Bench finds itself unable to endorse the earlier view that it may make reference for the

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constitution of the Special Bench. The aggrieved party cannot compel the later Bench to either take a contrary view or make a reference for the constitution of the Special Bench. Bennett Coleman & Co. Ltd vs. ACIT [ITA No. 3013/Mum./2007, ITAT Mumbai Special Bench, 30.09.2011] Loss on pro-rata reduction of share capital is Notional. In absence of consideration, capital gains provisions do not apply The assessee invested Rs.24.84

crores in equity shares of Times Guarantee Ltd. Pursuant to a scheme of reduction u/s 100 of the Companies Act, the face value of Times Guarantee shares was first reduced to Rs. 5 from Rs. 10 and thereafter two equity shares of Rs.5 each were consolidated into one equity share of Rs.10. The result was that the assessees investment was reduced to Rs.12.42 crores. The assessee, relying on Kartikeya Sarabhai 228 ITR 163 (SC) & G. Narsimhan 236 ITR 327 (SC), claimed that the reduction in face value was a transfer and that it had suffered a long-term capital loss of Rs.22.21 crores after indexation. The AO disallowed the claim on the ground that (i) there was no transfer and (ii) there was no consideration and the machinery provisions of s. 48 cannot apply. The issue was referred to the Special Bench. ITAT Special bench held by the majority that 1. First the face value of each share was reduced from Rs. 10 to Rs. 5 and then two shares of Rs. 5 each were consolidated into one share of Rs. 10 each. If the argument is that earlier shares were replaced or substituted by new shares, then there is no transfer but it is merely a case of substitution of

DIRECT TAXES
Judicial pronouncements
one kind of share with another kind of share (Rasiklal Maneklal (HUF) 177 ITR 198 (SC) followed); shares by virtue of s. 55(v). Deputy Commissioner of Income Tax Vs. Ansal Properties & Infrastructure Ltd. [(2011) 60 DTR (Del)(Trib.)294, ITAT Delhi Bench, 09.07.2010] Where the assessee has transferred entire plant and machinery of one division and purchased assets with same 2. Assuming that a reduction of rate of depreciation in other division of more value, the capital gains on transfer of entire machinery and plant of the said division amount to nil and not liable to taxed under Sec. 50. Mrs. Asha Bharat Shah Vs. ITO [ITA No. 1716/Mum./2010, ITAT Mumbai Bench, 15.02.2011] The word may used in the sub-sec. (2) to sec. 50C do not give discretion to the A.O. to refer or not to refer the matter to the DVO Sub-section (2) of Sec. 50C provides that if the assessee claims before the A.O. that the value adopted by the Stamp Valuation authority exceeds the fair market value of the property as on the date of the transfer which has not been disputed by the assessee in any legal proceedings then the A.O. may refer the case to the Valuation Officer, as per the provisions of the Wealth-tax Act, 1957. The Ld. CIT (A) declined to entertain the plea of the assessee for referring the matter to the DVO by holding that the word may is used by the Legislature and it is discretion of the A.O. to refer or not to refer. Relying on the decision of Meghraj Baid ITAT Mumbai bench held that the word may used in sub-sec. (2) to sec. 50C signifies that in case the A.O. is not satisfied with the explanation of the assessee then he should refer the matter to the DVO for the valuation. Further ITAT Mumbai Bench relying on the judgment of Smt. Sarala N. Sakra-

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ney, held that reference by the AO to the DVO under s.55A for valuation of fair market value of the property as on 1st April, 1981 is not valid for the reason that fair market value declared by the assessee as per Government registered valuers report was more than the fair market value as estimated by the DVO. CIT Vs. Dinesh Megji Toprani (HUF) [ITA No. 3404 of 2010, Bombay High Court, dtd 04.08.2011] Exemption u/s 54F to HUF allowable even if property is in the name of individuals but purchased from HUF account and with HUFs PAN The assessee HUF sold certain immovable properties and out of the sale proceeds received, purchased immovable properties and claimed benefit of deduction under Section 54F of the Income Tax Act, 1961. The assessing officer was of the opinion that the property was purchased in the name of the individuals namely Dr.Dinesh Megji Toprani and Mrs.Jyoti Dinesh Toprani and not in the name of the HUF and, therefore, the assessee was not entitled to the deduction under Section 54F of the Income Tax Act, 1961.On appeal filed by the assessee, the Commissioner of Income Tax (Appeals) allowed the claim of the assessee and by the impugned order, the Income Tax Appellate Tribunal has affirmed the decision of the Commissioner of Income Tax (Appeals). Being aggrieved by the above order, the Revenue has filed in High Court. The Bombay High Court dismissing the appeal held that no fault can be found with the decision of the Income Tax Appellate Tribunal in allowing the benefit of deduction under Section 54F of the Income Tax Act, 1961 on the ground that the property purchased in the name of the members of the HUF, in fact belongs to the HUF.

shares in the manner done by the assessee amounts to a transfer, Sec. 45 is not attracted because there is no consideration received by the assessee for the transfer. Unless and until a particular transaction leads to computation of capital gains or loss as contemplated by s. 45 & 48, it cannot attract capital gain tax. On facts, the assessee had not received any consideration for reduction of share capital. While the number of shares held by the assessee has reduced to 50%, nothing had moved from the side of the company to the assessee (B. C. Srinivasa Setty 128 ITR 294 (SC) & Bombay Burmah 147 TR 570 followed) 3. Further, by the reduction, the assessees rights had not been extinguished because it continued to hold the same percentage in the holding of Times Guarentee as it did before the reduction. There was no change in the intrinsic value of his shares and even his rights vis-vis other shareholders as well as vis--vis company remained the same. The concept of capital gains has to be understood as in the commercial world and there was no loss that can be said to have actually accrued to the shareholder as a result of reduction in the share capital. Also, there would be no change even in the cost of acquisition of

DIRECT TAXES
Judicial pronouncements
CIT Vs. Chiranjeevi Wind Energy Ltd. [(2011) 243 CTR (Mad.) 195, Madras High Court, dtd. 10.01.2011] Different parts of windmill when assembled get transformed into an ultimate product which is commercially known as Windmill which amounts to manufacture or production within the meaning of Sec. 80IB(2)(iii) The different parts procured by the assessee by themselves cannot be treated as windmill. Those different parts bear distinctive names and when assembled together, thereafter it gets transformed into an ultimate product which is commercially known as a Windmill. There can, therefore, be no difficulty in holding that such an activity carried on by the assessee would amount to manufacture as well as production of a thing or article as set out in Sec. 80-IB(2)(iii). (India Cine Agencies Vs. CIT(2008) 220 CTR (SC) 223 applied). CIT Vs. Sumi Motherson Innovative Engineering Ltd. [(2011) 60 DTR (Del.) 190, Delhi High Court, dtd. 08.10.2010] While computing book profit under Sec. 115JB, under cl. (iii) of the Explanation, brought forward loss on the last date of immediate preceding year which is to be brought forward to the financial year in question is to be reduced; what happens during the course of the year is not relevant. Tribunal was therefore justified in upholding the claim of deduction of brought forward loss as per books as on the end of the immediate preceding year even if during the current year such loss was wiped off due to reduction of share capital. M/s. Synthetic Colour Chem Industries Vs DCIT [ITA No.5563/M/2009, ITAT Mumbai Bench, 11.05.2011] Retraction of statement made during the survey after six months is merely an afterthought The survey was conducted on

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accounted commission. Under these circumstances the affidavits filed retracting the statement and making allegations six months later has to be treated as a self serving statement by the partner and his employees and this has to be rejected as an afterthought. DCIT Vs. M/s. Stup Consultants Pvt. Ltd. [ITA No. 5617/Mum/2009; ITA No. 6062/Mum/2009 & ITA No. 6063/ Mum/2009, ITAT Mumbai bench, dtd. 09.09.2011] Despite s. 209(3) of the Cos Act, company can follow cash system for tax purposes The assessee, a company, followed, in accordance with s. 209(3) of the Companies Act, 1956, the mercantile system of accounting according to which the profits were Rs. 7.48 crores. However, for income-tax purposes, it followed the cash system of accounting according to which the profits were Rs. 4.76 crores and offered that sum to tax. The AO rejected the claim on the ground that u/s 209(3) of the Cos Act, a company is obliged to follow the mercantile system and that is its regular method for purposes of s. 145. However, the CIT (A) upheld the assessees claim. On appeal by the department, ITAT Mumbai Bench upholding the assessees plea held that the assessee has regularly employed the cash system of accounting in recording its day-to-day business transactions. It is not a case where the assessee has been maintaining its accounts of dayto-day business under the mercantile system of accounting and thereafter prepares accounts in accordance with cash system of accounting for income tax purposes. Section 209(3) of the Companies Act, 1956 does not override s. 145 of the Income-tax Act. There was also no valid basis for the AOs action in rejecting the books of

18.2.2005 when the loose papers being the pages 26, 27, 28, 29, 30 were found which had been duly signed by the partner of the assessee firm based on entries and based on the said papers the partner of the assessee had declared Rs.1.05 undisclosed crores. income of on Subsequently

4.3.2005, a fortnight after the date of survey, the assessee had written a letter to the AO in which a request had been made that installments may be granted for payment of additional tax. However, 6 months later when the return was filed, a retraction statement was enclosed alleging that the partner had been forced to admit additional income and in fact no incriminating papers were found. These claims have been rejected by the authorities below as an after thought. ITAT Mumbai bench held that no infirmity was in the conclusion arrived at by the revenue authorities on this point. In case, the partner had really been forced to admit additional income and papers were cooked up, by the survey party, the assessee would have immediately after survey complained to the higher authorities. The Learned AR for the assessee admitted that no complaint had been filed by the assessee. In fact two weeks after the date of survey the assessee had written a letter dated 4.3.2005 to the AO requesting for installment and even in this letter no allegation was made. The loose papers found have been duly signed by the partners and these clearly gave the details of unaccounted sales and un-

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Judicial pronouncements
account and system of accounting followed by the assessee. Further, since the department has accepted the assessees system for the past several years, the principles of consistency apply and there should be finality and certainty in litigation in the absence of fresh facts to show that the assessees system of accounting is arbitrary or perverse (Amarpali Mercantile 45 ITD 386 (Del) distinguished, Chennai Finance 81 ITD 7 (Hyd) followed). Dalmia Pvt. Ltd. Vs. CIT & Anr. [Writ Petition (Civil) No. 6205 of 2010, Delhi High Court, dtd 26.09.2011] S. 147: Despite specific & pointed queries in s. 143(3) assessment, AO cannot be said to have formed any opinion if explicit opinion not recorded In the balance sheet enclosed with the ROI, the assessee disclosed sundry creditors of Rs. 1.66 crores. In the course of the s. 143 (3) assessment, the AO asked the assessee to submit the entire list of sundry creditors with their names and addresses etc. The assessee submitted confirmations to the extent of Rs. 1.13 crores and though it could not explain Rs. 33 lakhs, the AO assessed only Rs. 19.86 lakhs u/s 41(1) in respect of 7 creditors. The assessee filed an appeal on the issue. After the expiry of 4 years and pursuant to an audit objection, the AO issued a notice u/s 148 seeking to assess the balance of the creditors as well u/s 41(1). The assessee filed a Writ Petition challenging the reopening on the ground that (i) as the AO had consciously assessed only Rs. 19.86 lakhs though he was aware of the creditors figure being Rs. 1.66 crores, it was a case of change of opinion and (ii) as 4 years from the end of the assessment year had elapsed, reopening was not permissible as there was no failure on the part of the assessee to make a full and true disclosure of the material facts. Delhi High Court dismissing the petition held that:1. The argument that as the AO had called for the details of Rs. 1.66 crores and confined the addition only to Rs. 19.66 lakhs, the reopening is on a change of opinion is not acceptable. The question of change of opinion arises when the AO forms an opinion and decides not to make an addition and holds that the assessee is correct. Here, though the AO had asked specific and pointed queries with regard to the sundry creditors of Rs. 1.66 crores, he had made an addition of only Rs.19.86 lakhs and there was no discussion, ground or reason why addition of Rs. 32.97 lakhs was not made in-spite of the assessees failure to furnish conformation and details to that extent. The argument that when the assessment order does not record any explicit opinion on the aspects now sought to be examined, it must be presumed that those aspects were present to the mind of the AO and had been held in favour of the assessee is too far-fetched a proposition to merit acceptance (Consolidated Photo vs. ACIT 281 ITR 394 (Del) followed); 2. The argument that there was a full and true disclosure of material facts is not acceptable because though in the regular assessment proceedings, the assessee was asked to furnish details with regard to all creditors, this was not done. The term failure on the part of the assessee is not restricted only to the income-tax return but extends also to the assessment proceedings. If the assessee does not disclose or furnish to the AO complete and correct information and details it is required and under an obligation to disclose, there is a failure on its part

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(Honda Siel Power Products vs. DCIT followed).

DCIT Vs. Rupen Das [ITA No. 1260/ Kol/2010, 12.11.2010] For loan taken in violation of section 269SS penalty can not be imposed if same was taken to meet business needs ITAT Kolkata Bench noted that the Assessing Officer imposed penalty of Rs. 7,00,000 on the assessee under section 271D of the Act on the ground that the assessee had contravened the provisions of section 269SS of the Incometax Act by accepting cash loans exceeding Rs. 20,000. The assessee explained that these cash loans were taken to make the payment to the employees to avoid agitation of the employees and to maintain good relations with the employees. The assessee took the said cash loan due to shortage of funds and to meet the emergency needs under bona fide belief that those transactions would not attract any penal provision. The Assessing Officer has not disputed the fact that the loans were taken for payment of salary/ wages to the employees working as security personnel for the assessee. ITAT further held that they also find force in the submissions of the assessee that there was business exigency forcing the assessee to take cash loans for the purpose of disbursing salary/wages to the employees of the assessee. The Assessing Officer did not dispute the fact that the loans were taken for payment of salary to the employees. Hence no penalty should be levied. ITAT Kolkata bench,

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Judicial pronouncements
CIT Vs. Splender Construction [ ITA No.1977 of 2010, Delhi High Court, dtd 14.01.2011] Despite disclosure of conversion of stock into investment and acceptance by AO, claim that gains is LTCG attracts s. 271(1)(c) penalty The assessee owned a plot of land which in the earlier years was treated as stock-in-trade. In the year of sale, the assessee converted the stock into investment and offered the gains as LTCG. The AO accepted the conversion of stock into investment but held that the gain was a STCG as the period of holding had to be reckoned from the date of conversion. This was upheld by all the authorities including the High Court. The AO levied penalty u/s 271(1) (c) which was deleted by the Tribunal on the ground that as the High Court had admitted the assessees appeal on the merits, it showed that the issue whether the gain was LTCG or STCG was debatable and could not be treated as frivolous or mala fide to attract the levy of penalty u/s 271 (1) (c). On appeal by the department, Delhi High Court reversing the Tribunal order held that the Tribunal has side tracked the main issue. It was obvious that conversion of the land into investment just before the sale of the property was made to avoid payment of full taxes. Though the AO accepted the conversion, the assessees claim that the gains was a LTCG amounted to furnishing inaccurate particulars of income. The issue was not debatable as held by the Tribunal. Though the appeal was admitted by the High Court, the Tribunal glossed over a very important and fundamental fact that the appeal was admitted and dismissed on the same date. Accordingly, when the order of the AO in quantum proceedings was sustained by all successive authorities and the High Court also dismissed the appeal at the admission stage, albeit after admitting the same, it cannot be said that the issue was debatable. CIT Vs. SAS Pharmaceuticals [ (2011) 60 DTR (Del) 258, Delhi High Court, dtd. 08.04.2011] There is no concealment or non disclosure in the case of surrender of income during survey as the assessee had made a complete disclosure in the IT Return and offered the surrendered amount for the purposes of tax and therefore no penalty under Sec. 271(1)(c) could be levied. Unless it is found that there is actually a concealment or non disclosure of the particulars of income, penalty cannot be impose. There is no such concealment or non disclosure as the assessee had made a complete disclosure in the IT return and offered the surrendered amount for the purpose of tax. Insilco Limited Vs CIT [ITA No. 179 of 2009, Delhi High Court, dtd. 11.07.2011] Tribunal can issue direction beyond the scope of the appeal for correction of error The Delhi High Court held that Tribunal had rightly given the issue directions beyond the scope of appeal, which are nothing but pointing out what the AO was required to do under the law. This issue was very much before the Tribunal and the Tribunal has given these directions to give complete effect to the orders passed in quantum proceedings. It is trite law that nobody can be allowed to enrich itself unjustly and in the matter of calculation once an error is found that can always be directed to be corrected. The Delhi High Court did not agree with the submission of the learned counsel for the appellant that the Tribunal has exceeded its jurisdiction.

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Deputy Commissioner of Income Tax Vs. Summit Securities Ltd. [(2011) 59 DTR (Mum.)(SB)(Trib.) Special 313, ITAT dtd. Mumbai 10.08.2011] Once a case has been decided by an earlier Bench of the Tribunal, the subsequent bench should respect such decision and should not make departure therefrom; however if after due application of mind the subsequent Bench comes to the conclusion that it cannot agree with the earlier view, it is empowered rather duty-bound to make reference to the President on the point they perceive to be an error of law in the earlier decision. CIT Vs. Surya Herbal Ltd. [CC Bench,

13694/2011, Supreme Court of India, dtd. 29.08.2011] CBDTs low tax effect circular not applicable to matters having cascading effect The High Court, relying on CBDTs Instruction No. 3/2011 dated 9-2-2011, dismissed the departments appeal as not maintainable on the ground that the tax effect was less than Rs. 10 lakhs. The department filed a SLP in the Supreme Court. Supreme Court allowing the Petition held that liberty is given to the Department to move the High Court pointing out that the Circular dated 9th February, 2011, should not be applied ipso facto, particularly, when the matter has a cascading effect. There are cases under the Income Tax Act, 1961, in which a common principle may be involved in subsequent group of matters or large number of matters. In such cases if attention of the High Court is drawn, the High Court will not apply the Circular ipso facto.

DIRECT TAXES
Judicial pronouncements (International Taxation)
M/s Tally Solutions Private Ltd. Vs. The Deputy Commissioner of Income Tax [ITA No.1235/Bang/2010, ITAT Bangalore Bench, dtd 26.09.2011] Nothing in s.92CA requires the AO to first form a considered opinion before making a reference to the TPO. Further E x c es s M et h o d is an Ea rn in g es t ab li sh ed considered opinion before making a reference to the TPO. It is sufficient if he forms a prima facie opinion that it is necessary and expedient to make such a reference. The making of the reference is a step in the collection of material for making the assessment and does not visit the assessee with civil consequences. There is a safeguard of seeking prior approval of the CIT. Moreover, by virtue of CBDTs Instruction No.3 of 2003 dated 20.5.2003 it is mandatory for the AO to refer cases with aggregate value of international transactions more than Rs.5 crores to the TPO (Sony India 288 ITR 52 (Del) & Ranbaxy Laboratories 299 ITR 175 (AT) (Del) followed);

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the assessee would have sold in an uncontrolled condition (method explained, Intel Asia Electronics Inc followed); 3. On merits, the Excess Earning Method has to be applied using the projected sales (and not actual sales) because when an intangible is sold, the risk of future income potential lies with the buyer. DCIT Vs. M/s. BP India Services Private Limited [ITA No.4425/ Mum/2010, ITAT Mumbai Bench, dtd 23.09.2011] Transfer Pricing: Important principles of Comparable Uncontrolled Transaction explained. In applying the TNMM, the net profit margin realized from a comparable uncontrolled transaction is to be taken into consideration. 1. The assessee, engaged in providing support and advisory services to BP group companies, entered into international transactions with its AEs pursuant to which it made payments for business support services. The assessee adopted the TNMM and claimed that the transactions were at ALP on the basis that its profit rate compared 2. The argument that the Excess Earning Method adopted by the TPO is not a prescribed method is not acceptable. A sale of IPR is not a routine transaction involving regular purchase and sale. There are no comparables available. The Excess Earning Method is an established method of valuation which is upheld by the U.S Courts in the context of software products. The Excess Earning Method the CUP method supplements favourably with the comparables. In the list of comparables were two entities which had suffered a loss. There were also two other companies with high profit margin. The TPO excluded the loss making companies from the comparables on the ground that they were having a different functional & product profile as compared to the assessee. In appeal, the CIT (A) held that the loss making concerns could not be excluded.

met h o d o f in t h e ca se o f software products. The assessee sold its Intellectual Property Rights (IPRs) (patents, copyrights and trade marks) to its Associate Enterprise (AE) for a consideration of Rs. 38.50 crores. The sale price was justified on the basis that there were inherent flaws in the IPRs and intense development inputs were required to be done by the buyer. The TPO adopted the Excess Earning Method (as prescribed Valuation by the International Standard

Council) and determined the value of the IPR at Rs.260.63 crores which was upheld by the DRP. In appeal before the Tribunal, the assessee raised the following contentions: (a) that the AO had made a reference to the TPO without forming a considered opinion on the issues under reference; (b) the Excess Earning Method adopted by the TPO was not a prescribed method under the Act or Rules; (c) as there was no appropriate method for determination of ALP of IPR, the value declared by the assessee had to be accepted as ALP; (d) on merits, the TPO had relied on estimates and surmises in projecting the future cash flows while disregarding evidence in the form of audited financial statements. ITAT Bangalore bench held that:1. There is nothing in s.92CA that requires the AO to first form a

method and is used to arrive at the CUP price i.e. the price at which

DIRECT TAXES
Judicial pronouncements (International Taxation)
He also upheld the alternate argument that if the loss making companies were excluded, the high profit companies also had to be excluded. On appeal by the department, ITAT Mumbai Bench reversing the CIT(A)s order held that:1. Under Rule 10B(1)(e)(ii), the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transaction is computed having regard to the same base; The term uncontrolled transaction is defined in Rule 10A(a) to mean a transaction between enterprises other than associate enterprises, whether resident or non-resident. The result is that in applying the TNMM, the net profit margin realized from a comparable uncontrolled transaction is to be taken into consideration. The conditions require that a case should not only be comparable but also have uncontrolled transactions. These twin conditions need to be cumulatively satisfied. If a case is only comparable but has controlled transactions or vice-versa, it falls outside the ambit of the list of comparable cases; 2. Further, Rules 10B (2) & (3) set out the circumstances with reference to which the comparability of an international transaction with an uncontrolled transaction has to be judged. The decisive factors for determining inclusion or exclusion of any case in/from the list of comparables are the specific characteristics of services provided, assets employed, risks assumed, the contractual terms and conditions prevailing including the geographical location and size of the markets, costs of labour and capital in the markets etc. The fact whether 3. the comparable has a higher or lower profit rate has not been prescribed as a determinative factor to make a case incomparable. This is because profit is not a factor in itself, but a consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 10B (2) read with subrule (3), that such case shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of comparables; On facts, the two loss making companies, though excluded by the TPO for being functionally different, were not eligible to be taken as comparables because the whole/ majority of the transactions were from related/ controlled parties. The transactions were not uncontrolled transactions and so the prescription of Rule 10B (1)(e) (ii) r.w. Rule 10A(a) failed. The alternate argument that if the loss making companies are excluded, the high profit companies should also be excluded is not acceptable. As stated above, the question of inclusion or exclusion from the list of comparables under Rule 10B (2) & (3) has to be determined on the basis of factors like characteristics of services provided, assets employed, risks assumed, contractual terms and conditions prevailing including the geographi-

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cal location etc and not only on the basis of high or low profit rate (Quark Systems 132 TTJ (Chd) (SB) 1 explained). CIT Vs. Oracle India (P) Ltd. [(2011) 243 CTR (Del) 103, Delhi High Court, dtd. 30.03.2011] Payment of royalty by assessee company to its US based holding company is not it by the provisions of Sec. 92 in the absence of any comparable case on record to determine the ordinary profit in similar business and the price fixed has been accepted as ALP by the TPO ; payment of royalty being a business expenditure which was incurred wholly and exclusively for the purpose of business of the assessee, it is to be allowed in toto as business expenditure. Assessee, a 100 per cent subsidiary of US Company, imports master copies of software from the latter which are duplicated on blank discs, packed and sold in the market by way of a sublicence. In addition to a lumpsum amount, assessee pays royalty @ 30 per cent of the list price of the licensed products. AO diallowed payment of royalty beyond 30 per cent of the sublicencing fee earned by the assessee by invoking provision of Sec. 92 on the ground that the software was sold at a price lesser than the Indian published price (IPP). The Delhi High Court held that the act of AO was not justified as for the purpose of assumption of jurisdiction under Sec, 92 it is necessary to established that the course of business between the resident and non resident is so arranged that the business transacted between them provides to the resident either (i) no profits, or (ii) less than ordinary profits which might be expected to arise in the business.

DIRECT TAXES
Judicial pronouncements (International Taxation)
Since the assessee has declared income, it is not a case of no profit. As regards the adequacy of profits vis-vis ordinary profits which might be expected to arise in the business, this can be found only when exercise is undertaken to compare the income of the assessee with other comparable enterprise in India. AO did not undertake this exercise and bring on record any comparable case to find out the ordinary profit in this type of business. Further the price fixed has been accepted as ALP by the TPO. Once it is held that the payment of royalty by the assessee to its parent company is not hit by the provision of Sec. 92 and the price fixed is ALP as determined by the TPO himself, there is no reason to hold that the expenses could not be allowed under Sec. 37(1). What is to be seen is that the expenditure was incurred by the assessee in the course of business and has nexus with the business of the assessee. Once these conditions are satisfied, the payment is to be allowed in toto as business expenditure. Question of commercial expediency is to be judged by the assessee and not by AO. Emersons Process Management Mumbai year particularly when assessee is successfully able to demonstrate that the entity sought to be used as comparable is not engaged in same or materially similar business at least in the present year. Indian Additives Limited v. The ACIT [ITA No. 951/Mds./2009, ITAT Chennai, dtd. 17.06.2011] TPO should provide reasons for rejecting the Most Appropriate Method [MAM] used by the assessee before adopting a different MAM ITAT Chennai Bench held that particular MAM used by the taxpayer cannot be rejected without providing any cogent reasons. Further, the Tribunal also mentioned that if there exist significant amount of purchases from Associates enterprises, the same cannot be included while computing the gross margins under the Resale Price Method [RPM]. The Tribunal have also re-emphasized the importance of comparing the Functional, Risk and Asset Analysis [FAR] analysis of the tested party and that of the comparable companies method. In Re. Millennium IT Software Ltd. [A.A.R. No.835 of 2009, AAR, dtd. 29.09.2011] License fee for Software, even if copyrighted article, taxable as royalty The applicant was the developer of software. It granted a non-exclusive and non-transferable license to an Indian company to use the software without any sub-licensing rights. The licensee was not allowed to modify the software programme and could make copies only for its own use. The applicant filed an application for advance ruling in which it claimed, relying on Dassault while applying the TNM

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Systems 322 ITR 125 (AAR) and Tata Consultancy Services 271 ITR 401 (SC), that the transaction involved the use/ right to use of a copyrighted article but not the copyright itself and so the license fees were not assessable to tax as royalty u/s 9(1)(vi) of the Act & Article 12 of the India-Sri Lanka DTAA. The Authority of Advance Ruling (IT) rejecting the applicants plea held that Sec. 9(1)(vi) & Article 12 define the term royalty to include any payment for the use of, or the right to use, a copyright of scientific work. Software programmes are a copyright and are protected under the Copyright Act, 1957. As the software programme is a copyright, any payment received for transferring the right to use it is royalty as defined in the Act. The argument that there is a distinction between a copyright and a copyrighted article is not acceptable because there is no such distinction made either in the Income-tax Act or the Copyright Act. The use of software involves the use of the copyright; the software cannot be divorced from the copyright itself. Accordingly, even a fee for the use of a copyrighted article is assessable as royalty. (Microsoft/ Gracemac 42 SOT 550 (Del) followed; Dassault Systems 322 ITR 125 (AAR) not followed; Tata Consultancy 271 ITR 401 (SC) distinguished) Dresser Rand India Pvt. Ltd. v. ACIT [ITA No. 8753/Mum./2010, Bench, 07.09.2011] Integral tests for a Cost Contribution Arrangement to be considered at arms length defined The integral tests for a Cost Contribution Arrangement to be considered at arms length are: that the services were availed, the costs have been allocated in a reasonable and an impartial manner and there is documentation to demonstrate the receipt of services. ITAT Mumbai

India Pvt Ltd. Vs. Add. CIT (ITA No. 8118/Mum/2010, ITAT Bench, dtd. 12.08.2011] Selection of a comparable company should be determined having regard to its functional comparability for the year under review and not with reference to preceding years The fact that the company was selected as one of the comparables, by assessee himself, in the preceding assessment year cannot be put against the assessee, as whether or not a comparable is to be included must depend on its merits rather than be solely guided by events of an earlier

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DIRECT TAXES
Judicial pronouncements (International Taxation) / Circulars / Notifications
It is the prerogative of the assessee to decide how he conducts the business and not for the tax authorities to question such commercial decisions. Exclusive method of accounting does not impact the profit and loss account thereby the adjustment under section 145A on account of unutilized CENVAT credit to the closing stock is unwarranted. New Delhi for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and notifies that all the provisions of the said agreement shall be given effect to in the Union of India with effect from 01.04.2012. Notification 09.09.2011 Vide the above notification, CBDT has notified (subject to certain conditions) bonds issued by Industrial Finance Corporation of India, Life Insurance of India, Infrastructure Development Finance Company Limited, India Infrastructure Finance Company Ltd. and NonBanking Finance Company classified as Circulars / Notifications / Instructions / Press Release Notification 01.09.2011 Notification In exercise of power conferred by Sec. 90 of the Income tax Act, the Central Government through the above notification notified that all the provisions of the Second Protocol amending the agreement between the Government of India and the Government of Singapore for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income, shall be given effect to in the Union of India for taxable periods falling after January 1, 2008, that is Financial Year 2008-09 and subsequent financial years in accordance with the provision of Article 3 of the Protocol. Notification 02.09.2011 In exercise of the powers conferred by sub Section (1) of Sec. 90A of the Income Tax Act, the Central Government had adopted the agreement between India Taipei Association in Taipei and Taipei Economics and Cultural center in No. 48/ 2011, dtd. 06.09.2011 In exercise of the powers conferred by Sec. 10(45) of the Income Tax Act, the Central Government has through the above notification, notified certain allowances and perquisites w.r.e.f. 01.04.2008 for serving Chairman and members of Union Public Service Commission namely, the value of rent free official residence, conveyance facilities, sumptuary allowance and leave travel concession. The said notification also notifies allowances and perquisites for retired Chairman and retired members of Union Public Service Commission which are as follows: a) A sum of max. Rs. 14,000 per month for defraying the service of an orderly and meeting expense incurred towards secretarial assistance on contract basis. No. 49/2011 dtd. No. 47/2011 dtd. an Infrastructure Finance Company by the Reserve Bank of India as Long term Infrastructure bonds in reference to Sec. 80CCF. No. 50/2011 dtd.

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free of cost and the number of free calls to the extent of Rs. 1,500 per month (over and above free calls allowed).

b) The value of a residential telephone

Order under Sec. 119 of IT Act [F. No.225/72/2010/ITA.II dtd. 30.09.2011] Central Board of Direct taxes department has extended due date of filing income tax return for the assessment year 2011-12 from 30-09-2011 to 3110-2011 for the assessee of Sikkim. This step is taken due to earthquake in Sikkim last month which cause life disturbance as well as life losses in Sikkim state. Accordingly, CBDT also extends the audit report as prescribed under section 44AB of income tax act to 31 October 2011. Press Information Bureau India Signs DTAA with Uruguay on 08.09.2011. Agreement will Provide Tax Stability to the Residents of both Countries, Facilitate Mutual Economic Cooperation and Stimulate the Flow of Investment, Technology and Services. The Government of India signed a Double Taxation Avoidance Agreement (DTAA) with the Oriental Republic of Uruguay for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income and on capital on 8th September, 2011. The DTAA provides that business profits will be taxable in the source state if the activities of an enterprise constitute a permanent establishment in that state. Such permanent establishment includes a branch, factory, etc. Profits of a construction, assembly or installation projects will be taxed in the state of source if the project continues in that state for more than six months.

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DIRECT TAXES / INDIRECT TAXES

Judicial Pronouncements / Circulars / Notifications
Profits derived by an enterprise from the operation of ships or aircraft in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalty income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 5% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the sale of shares will be taxable in the country of source and tax credit will be given in the country of residence. The Agreement further incorporates provisions for effective exchange of information including banking information and assistance in collection of taxes between tax authorities of the two countries in line with internationally accepted standards including antiabuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries. The Agreement will provide tax stability to the residents of India and Uruguay and facilitate mutual economic cooperation as well as stimulate the flow of investment, technology and services between India and Uruguay. F. NO. 225/93/2009/ITA.II Guidelines for selection of Cases for scrutiny for F.Y. 2010-11 Selection of cases for scrutiny during the financial year 2010-11 will be done primarily through CASS this year. Manual Selection for scrutiny this year will be limited only to a few categories of cases listed below. List of cases selected during each month in accordance with the selection criteria mentioned below shall be submitted by the Assessing Officers to their respective Range heads by the 15th of the following month and also displayed on the Notice Board of their office. These guidelines are meant only for the use of officers of the Income Tax Department. These are not be disclosed even if a request is made under the right to Information Act, in view of the decision of the Central Information Commission in the case of Shri Kamal Anand Vs Director (ITA-II), CBDT (Order No. CIC/AT/2007/00617 dated 21.02.2008). Selection Criteria Applicable to all returns: a) Value of international transaction as defined u/s 92B exceeds Rs. 15 crores. b) Cases involving addition in an earlier assessment year in excess of Rs.10 lacs on a substantial and recurring question of law or fact which is confirmed in appeal or is pending before an appellate authority. c) Cases involving addition in an earlier assessment year on the issue of transfer pricing in excess of Rs.10 Lakhs or more. d) Assessments in survey cases for the financial year in which survey was carried out This criteria will not apply if all of the following conditions are fulfilled: 1.There are no impounded books or documents. 2.There is no retraction of disclosure made during the survey. 3.Declared income, excluding any disclosure made during the survey, is nor less than the declared income of the preceding assessment year. e) Assessment in Search & Seizure cases to be made under sections 158B, 158BC, 158BD, 153A 153C & 143(3) of the IT Act.

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f) Assessments initiated under section 147 / 148 of the IT Act. Assessing Officer may select any return of scrutiny after recording the reasons and obtaining approval of the CCIT/DGIT. The cases under this category should be selected if there are compelling reasons and the case is not selected through CASS. There cases should be watched by CCIT / CIT in respect of the quality of assessment.

INDIRECT TAXES
Judicial Pronouncements
CCE Vs. M/s. Sundstrand Forms Pvt. Ltd. [Civil Appeal No. 4077 of 2003, Supreme Court of India, dtd. 30.08.2011] Marketability is essential criteria for charging excise duty and product must be marketable in the condition in which it emerges The Supreme Court of India in a recent decision in case of Medley Pharmaceuticals Ltd. Vs. The Commissioner of Central Excise and Customs, Daman, reported in (2011) 2 SCC 601 has very carefully considered almost all the previous decisions of Supreme Court on the issue of the levy/payment of Excise Duty Valuation on articles manufactured by the assessee company. After referring to practically all the decisions on the issue, Supreme Court held that the consistent view is that the marketability is an essential criteria for

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INDIRECT TAXES
Judicial Pronouncements
charging duty and that the test of marketability is that the product which is made liable to duty must be marketable in the condition in which it emerges. Supreme Court also held that the word Marketable means saleable or suitable for sale and that it need not in fact be marketed but then the article should be capable of being sold to consumers, as it is without anything more. Supreme Court further went on to hold that the essence of marketability of goods is neither in the form nor in the shape or condition in which the manufactured article is found but it is the commercial identity of the article known to the market for being bought and sold. The Court further held that the product in question is generally not being bought or sold or has no demand in the market, would be irrelevant. M/s. Asia Impex Versus CC, Amristar [Customs Appeal No.C/351/2007, CESTAT Delhi, dtd. 11.01.2011] Opinion of one expert cannot be rejected on the basis of that of another expert unless there is sufficient independent reason for such rejection The value of the imported goods cannot be based on the value of the goods in the local market. In the present case, no valid reasons have been given by the commissioner to reject the valuation adopted by the overseas chartered engineer. Similarly, comparing the value of the imported goods which are old and used with the data available in DOV is also not appropriate as the said data do not disclose the age, residual life, physical condition of the goods sought to be compared. The decision in the case of Anish Kumar Spinning Mills is to the effect that the opinion of one expert Home Solutions Retails (India) Ltd. Vs. Union of India & ors. [ WP(C) No.3398/2010, Delhi High Court, dtd. 23.09.2011] Delhi High Court has upheld the constitutional validity of Service Tax on renting of immovable property with retrospective effect Delhi High Court held that when premise is taken for commercial purpose, it is basically to sub serve the cause of facilitating commerce, business and promoting the same. Therefore, there can be no trace of doubt that an element of value addition is involved and once there is a value addition, there is an element of service. The imposition of service tax under Section 65(105)(zzzz) read with Section 66 is not a tax on land and building which is under Entry 49 of List II. What is being taxed is an activity, and the activity denotes the letting or leascannot be rejected on the basis of that of another expert unless there is sufficient independent reason for such rejection Commissioner of c. Ex., Bangalore Vs. Tata Advances Materials Ltd. [2011 (271) ELT 62 (Kar.), Karnataka High Court, 11.04.2011] Payment inclusive of Central Excise Duty by Insurance Company on destruction of Capital goods could not render credit claimed by assessee as irregular. Assessee had paid insurance premium and got compensation. It is not a case of double payment or irregular availment of Cenvat credit.

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ing with a purpose, and the purpose is fundamentally for commercial or business purpose and its furtherance. The concept has to be read in conjunction. Once there is a value addition and the element of service is involved, in conceptual essentiality, service tax gets attracted and the impost gets out of the purview of Entry 49 of List II of the Seventh Schedule of the Constitution and falls under the residuary entry, that is, Entry 97 of List I. Retailers Association of India Vs. Union of India & Ors, [(2011) 60 DTR (Bom) 49, Bombay High court, dtd. 04.08.2011] Bombay High Court also upheld the constitutional validity of Service Tax on renting of immovable property with retrospective effect Levy of service tax on renting of immovable property for commercial purposes under Sec. 65(105)(zzzz) of the Finance Act, 1994, is a charge on service and not on lands and buildings and,therefore, such levy of service tax is within the legislative competence of the Parliament referable to the residuary power of the Parliament under Article 248 r/w. entry 97 of list I of Schedule VII to the Constitution; amendment of sub. Cl. (zzzz) was given retrospective effect so as to cure the deficiency pointed out by the Delhi High Court in the original provision and thus, the same does not invalidate the amended provision. Meghachem Industries Vs. Commissioner Of C. Ex., Ahmedabad [2011 (23) STR 472 (Tri.-Ahmedabad), bench, CESTAT 04.04.2011] Courier Service used for sending documents is definitely activity relating to business and hence eligible for availing Cenvat Credit. Ahmedabad

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INDIRECT TAXES / OTHER LAWS

Judicial Pronouncements / Circulars / Notifications
Commr. of C. Ex., Bangalore III Vs. Satnzen Toyotetsu India (P) Ltd. [2011 (23) STR 444 (Kar.), Karnataka High Court, 08.04.2011 ] Definition of Input Service is inclusive and services mentioned in Sec. are only illustrative. Test for eligibility is whether service is used for manufacture of final product directly or indirectly in relation to activities relating to business. If any of these two tests are satisfied, service falls within the definition of input service and manufacturer eligible to avail Cenvat credit. Enso Secutrack Ltd. Vs. Commissioner of C. Ex., Hyderabad [2011 (23) STR 465 (Tri.-Bang.), CESTAT Bangalore Bench, 19.04.2011] Provision of Rule 3(3) of Taxation of Service (Provided Outside India and Received in India) Rules, 2006 cannot be invoked if service rendered and consumed outside India. The appellant raised FCCBs in the international capital market and the money so raised was invested in Mauritius. The service was rendered and consumed outside India. Once it is admitted that the money were invested outside India, but only because the said money raised is supposedly in relation to the benefit or business of the service recipient located in India, provision of Rule 3(3) cannot be invoked. The money so raised by issuing FCCBs is invested in Mauritius which is outside India and the services rendered were for raising of such money for investment in Mauritius. Rules 12 will have to be filed electronically by all the assessees irrespective of the duty paid in the preceding years. Monthly Return for production and removal of goods (ER-1), Quarterly Return (ER-3), Annual Financial Information Statement (ER-4) are some of the returns and statements prescribed under Rule 12.Similar amendment has been made in CENVAT Credit Rules, 2004 to the effect that assessee will now have to file the annual Declaration in respect of principal inputs (ER-5) and the monthly return of information relating to principal inputs (ER-6) electronically irrespective of the duty paid in the preceding year. Notification No. 44/2011-ST, dtd. 09.09.2011 Business Auxiliary Services provided by Sub Brokers to Stock Brokers in relation to sale or purchase of securities listed on registered stock exchange are exempt from payment of service tax vide notification No. Such 31/2009-ST dated 01.09.2009.

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01.01.2005 as instructed vide instruction no. F No. 275/7/2010-CX-8A, dated 30-6-2010.

OTHER LAWS
Judicial Pronouncements Gheru Lal Bal Chand Vs. State of Haryana [Punjab & Haryana High Court] Innocent purchaser cannot be disallowed Input Tax Credit (ITC) for non payment of tax by seller. In legal jurisprudence, the liability can be fastened on a person who either acts fraudulently or has been a party to the collusion or connivance with the offender. However, law nowhere envisages imposing any penalty either directly or vicariously where a person is not connected with any such event or an act. Law cannot envisage an almost impossible eventuality. The onus upon the assessee gets discharged on production of Form VAT C-4 which is required to be genuine and not thereafter to substantiate its truthfulness by running from pillar to post to collect the material for its authenticity. In the absence of any malafide intention, connivance or wrongful association of the assessee with the selling dealer or any dealer earlier thereto, no liability can be imposed on the principle of vicarious liability. Law cannot put such onerous responsibility on the assessee otherwise; it would be difficult to hold the law to be valid on the touchstone of articles 14 and 19 of the Constitution of India.

exemption has now been extended vide the above notification to the authorized person also. Notification No. 45/2011-ST, dtd. 12.09.2011 Taxable service provided to any business entity, by an arbitral tribunal, in respect of arbitration has been exempted from payment of service tax vide the above notification. Instruction No. F. No. 276/8/2009CX-8A-ST, dtd. 26.09.2011 Vide the above instruction; it has been held that the service tax liability on any taxable service provided by a nonresident or a person located outside India, to a recipient in India, would arise w.e.f. 18.04.2006, i.e., the date of enactment of section 66A of the Finance Act, 1994 and not from

Circulars / Notifications / Instructions

Notification No. 21 & 22/2011 CE (NT) dtd. 14.09.2011 Central Excise Rules, 2002 have been amended to provide that the returns and statements prescribed under

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OTHER LAWS
Judicial Pronouncements /Circulars / Notifications
The selling-registered dealer who had collected tax from the purchasingregistered dealer acts as an agent for the Government as held in Atul Fasteners Ltd.s case. Still further, paid would mean and embrace within it ought to have been paid as enunciated in Elphinstone Spinning and Weaving Mills Co.Ltd.s case. Moreover, the apex Court in B. R. Enterprises v. State of U.P., (1999)9 SCC 700, Calcutta Gujarathi Education Society v. Calcutta Municipal Corporation (2003) 10 SCC 533 and M.Nagraj v. Union of India (2006) 8 SCC 212 has interpreted the rule of reading down statutory provisions to mean that a statutory provision is generally read down so as to save the provision from being pronounced to be unconstitutional or ultra vires. The rule of reading down is to construe a provision harmoniously and to straighten crudities or ironing out creases to make a statute workable. To conclude, no liability can be fastened on the purchasing registered dealer on account of non-payment of tax by the selling registered dealer in the treasury unless it is fraudulent, or collusion or connivance with the registered selling dealer or their predecessor with the purchasing registered dealer is established. M/s. L.N. Gadodia & Sons & ANR. Vs. Regional Provident Fund Commissioner [SLP No. 11230 of 2008, Supreme Court of India, dtd. 26.09.2011] SC allows clubbing of two establishments as one for the purposes of the PF as there was unity of ownership, management, control, finance, labour and functional integrity When two establishments are run by the same family under a common management with common work force and with financial integrity, they are expected to be treated as branches of one establishment for the purposes of the Provident Fund Act. The authorities had clubbed two establishments as one and demanded provident fund contribu-

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tion from both. It argued that they were in separate business enterprises and registered as separate private limited companies. However, the Delhi high court and the Supreme Court accepted the contention of the PF Commissioner that they were not separate entities. It said that the tests in such cases was whether there was unity of ownership, unity of management and control, unity of finance and unity of labour and unity of functional integrity. Circulars / Notifications General Circular No. 66/2011, dtd. 04.10.2011 The time for filing DIN-4 by DIN holders for furnishing the PAN and to update PAN details has been extended till 15.12.2011. General Circular No. 65/2011-MCA, dtd. 04.10.2011 Company Law Settlement Scheme, 2011 has been extended upto 15th December, 2011.

Due Dates of key compliances pertaining to the month of October 2011:

5th Oct. 6 Oct. 7th Oct. 10 Oct. 15th Oct. 15 Oct. 21st Oct. 25 Oct.
th th th th

Payment of Service Tax & Excise duty for September Payment of Service Tax & Excise duty paid electronically through internet banking TDS/TCS Payment for September Excise Return ER1 / ER2 /ER6 PF Contribution for September Due date of for filing TDS return for the quarter ended on 30-09-2011 ESIC Payment for September Service tax Return for the half year ended on 30-09-2011

The information contained in this newsletter is of a general nature and it is not intended to address specific facts, merits and circumstances of any individual or entity. We have tried to provide accurate and timely information in a condensed form however, no one should act upon the information presented herein, before seeking detailed professional advice and thorough examination of specific facts and merits of the case while formulating business decisions. This newsletter is prepared exclusively for the information of clients, staff, professional colleagues and friends of SNK.

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