BMR Edge-Tax & Regulatory Mont - BMR Advisors

Vol.8 Issue 1.4 December 2012
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Direct Tax
Supreme Court
Financier of vehicles engaged in leasing business is entitled for higher rate of
depreciation on the vehicles
The taxpayer, a non-banking finance company, was engaged in the business of
leasing of vehicles. It bought vehicles and leased out the same to various customers;
such vehicles were registered in the name of the customers under the Motor Vehicles
Act, 1988 (“MV Act”). The taxpayer claimed depreciation in respect of such vehicles
at a higher rate of 30 percent on Written Down Value basis as per New Appendix I to
the Income-tax Rules,1962 (“the Rules”) on the ground that the vehicles were used in
the business of running them on hire. Further, the customers (lessees) did not claim
depreciation on such vehicles.
During the course of the assessment proceedings, the assessing officer (“AO”)
disallowed the claim of depreciation in totality by holding that the taxpayer was neither
the owner of the leased vehicles as these were registered in the name of the lessees
nor had it ‘used’ the vehicles for purposes of business of running them on hire.
On appeal, the Commissioner of Income tax (Appeals) [“CIT(A)”] held that the
taxpayer was allowed to claim the depreciation on the vehicles. However, the
taxpayer’s claim for depreciation at higher rate was rejected by the CIT(A). Aggrieved
by the order of the CIT(A), both, the Revenue Authorities and the taxpayer filed an
appeal before the Income tax Appellate Tribunal (“ITAT”). The ITAT by relying on the
decision of the Supreme Court (“SC”) in the case of CIT Bangalore v Shaan Finance
Private Limited (3 SCC 605), held that the taxpayer has rightly claimed the
depreciation at a higher rate.
On appeal to the High Court (“HC”) at the instance of the Revenue Authorities, the HC
reversed the decision of the ITAT on the ground that the taxpayer was only a
‘financier’ and not the ‘owner’ of the vehicles and thus, was not eligible to claim
depreciation. The taxpayer preferred an appeal before the SC. The SC ruled in favor
of the taxpayer and held that since the taxpayer was the owner and user of the
vehicles, he would be entitled to claim depreciation on such vehicles. The key
observations of the SC were as follows:
The taxpayer was the exclusive and legal owner of the vehicles as per the lease
deed. The registration of the vehicles in the name of the lessees was to meet the
requirements of the MV Act and would not affect the status of the taxpayer as the
owner of the vehicles under eyes of the law.
The use of the vehicles in the hiring business would be treated as 'use of the
assets for the purpose of business' under section 32 of the Income tax Act, 1961
(“the Act”) and it is not necessary for the taxpayer to be the physical user of the
assets to claim depreciation on the same.
ICDS Limited v CIT Mysore and ANR (Civil appeal No 3282 of 2008) (SC)
High Court
Contents
DIRECT TAX. . . . . . . . . . . . .
Supreme Court decision. . . . . . . .
High Court decisions . . . . . . . . . . . .
Tribunal decisions . . . . . . . . . . . . . .
Key Circulars & Notifications. . . . . . .
INDIRECT TAX. . . . . . . . . .
VAT / CST. . . . . . . . . . . . . . . . . . . .
Central Excise. . . . . . . . . . . . . . . . . .
Service Tax . . . . . . . . . . . . . . . . . . .
Customs. . . . . . .. . . . . . . . . . . . . . .
Key Circulars & Notifications . . . . . .
Getting the Deal Through – Tax on
Inbound Investment 2012
Taxand’s Global Guide to M&A Tax.
Click here to view media
commentary
BMR Advisors has been ranked as the
top investment banking firm for M&A in
India (by deal count) in VCCEdge
League Tables for 2012.
BMR Advisors has been ranked as
the third leading financial advisor in
India in Thomson Reuters Mid-
Market Survey
BMR Advisors has been rated as
Tier 1 firm according to
International Tax Review, World
Tax Guide 2013 for the sixth
consecutive year
BMR Advisors has been ranked sixth
(by deal count) in Thomson
Reuters Mid-Market Insight, Jan-
Sep 2012
BMR rated as 3rd most active
transaction advisor by Venture
Intelligence League Table for H1
2012
BMR Advisors is ranked fourth most
active financial advisor for India in
Thomson Reuters Mid-Market
Insight 2011
Rent from composite letting of property and plant and machinery held to be taxable as
income from other sources
The taxpayer, an individual, earned rental income which consisted of rent for building,
furniture, fittings and fixtures, and charges for maintenance of the same. The rental
income was offered to tax by the taxpayer under the head ‘Income from house
property’. During the assessment proceedings, the AO held that the composite rent
should be taxed under the head ‘Income from Other Sources’ (“IFOS”) under the
provisions of section 56 of the Act. While passing the assessment order, the AO
Direct Tax
Indirect Tax
Shweta Aggarwal
Amit Bablani
Rishabh Jain

observed that letting out of machinery, plant and furniture were inseparable from the
letting of the building and therefore, the rental income was chargeable to tax under the
residual head (ie, IFOS). The view of the AO was upheld by the CIT(A).
On further appeal, the ITAT observed that in case of the lessee where the taxpayer
had leased a part of the building along with a right to use the common facilities such
as lift, lobby, staircase, etc, there was mere exploitation of the premises without letting
out of machinery, plant or furniture and accordingly, it held the income from such
letting out to be taxable as income from house property. However, the rental income
from other lessees was held to be taxable as IFOS by the ITAT on the basis that there
was a composite lease wherein the lease of building and facilities (such as fittings,
fixtures, air conditioning plant etc) were inseparable. The taxpayer, aggrieved by the
decision of the ITAT on the latter part, filed an appeal before the HC.
The HC affirmed the ruling of the ITAT. The HC held that the real test to be applied is
whether or not letting is composite and inseparable and if so, the rental income would
be taxed under the residual head of income. It further held that the finding of the ITAT
treating the letting out of facilities and premises to be composite and inseparable is
correct and accordingly, the income from such letting should be taxed as IFOS.
Garg Dyeing & Processing Industries v ACIT (ITA No 319 of 2012) (Delhi HC)
Reopening of assessment not valid on the basis of a change in opinion and after the
expiry of 4 years in absence of any failure to disclose material facts by the taxpayer
The taxpayer had three Export Oriented Units (“EOUs”) eligible for deduction under
section 10A and 10B of the Act. It filed its return of income and claimed the deduction
in respect of its two units. As the taxpayer had incurred a loss in the third unit, the
deduction under section 10A / 10B was not claimed with respect to this unit.
Subsequently, the taxpayer revised its return of income for claiming deduction on
some previously incurred expenses and along with it the taxpayer attached a note
stating the reasons for revising the return as well as for not claiming deduction under
section 10A / 10B in respect of the third unit. The assessment under section 143(3) of
the Act was completed by the AO after making certain additions on the basis of
detailed investigation. Post completion of the assessment, a notice for reassessment
proceedings in the case of the taxpayer was issued after 5 years from the end the
relevant assessment year (“AY”). The reasons recorded by the AO, inter alia,
included not setting off of loss of the third unit before allowing deduction under section
10A / 10B of the Act which resulted in excess deduction under said section(s) and
under -statement of book profit under section 115JB of the Act.
The taxpayer challenged the action of the AO in initiating the reassessment
proceedings by filing a writ petition before the HC. The taxpayer argued that the
reassessment proceedings initiated after 4 years from the expiry of the relevant AY
were time barred and invalid in absence of any failure on the part of the taxpayer to
disclose truly and fully all material facts necessary for assessment. In the case of the
taxpayer, the AO was fully aware of all the facts at the time of original assessment and
no new facts came to AO’s record to invoke section 147 of the Act. Further, the AO
after examining the return of income and all other documents accompanying the return
(including the note stating reasons for not claiming the deduction for the third unit) had
completed the assessment of the taxpayer. In view of these facts, the reassessment
proceedings, being initiated on the basis of change in opinion, is not justifiable and
time barred.
The HC ruled in favour of the taxpayer and quashed the reassessment proceedings.
The observations of the HC were as under:
Though the AO had recorded ‘reasons to believe’ for initiating reassessment
proceedings such reasons did not specify the tangible material which persuaded
the AO to exercise the extraordinary powers under section 147 of the Act.
In the instant case, there was intensive examination during original assessment in
respect of the issue, which was the basis for reopening of assessment and
accordingly, the AO was duty bound to indicate the material which compelled him
to re-initiate the proceedings.
The absence of any tangible material having a live link for validation of the
formation of opinion of the AO amounts to change of opinion, which cannot be a
legitimate ground for initiating the reassessment proceedings.
Moser Baer India Limited v DCIT (WP(C) 7677 of 2011) (Delhi HC)
Shortfall in withholding of tax not to attract disallowance under section 40(a)(ia) of the
Act
The taxpayer made payments to sub-contractors and withheld taxes at the rate of 1
percent as contractual fee. During the course of the assessment proceedings, the AO
contended that the tax should have been withheld at the rate of 10 percent under
section 194I of the Act as the payments were in the nature of machinery hire charges.
The AO disallowed proportionate payments by holding the same to be a case of
shortfall in withholding of tax as per the provisions of section 40(a)(ia) of the Act. On
first appeal, the CIT(A) ruled in favour of the taxpayer.
Puneet Bansal
Sudipta Bhattacharjee
Atti Tyagi
Mukesh Butani, New Delhi
+91 124 339 5010
mukesh.butani@bmradvisors.com
Rajeev Dimri, New Delhi
+91 124 339 5050
rajeev.dimri@bmradvisors.com
Gokul Chaudhri, New Delhi
+91 124 339 5040
gokul.chaudhri@bmradvisors.com
Bobby Parikh, Mumbai
+91 22 3021 7010
bobby.parikh@bmradvisors.com
Abhishek Goenka, Bangalore
+91 80 4032 0100
abhishek.goenka@bmradvisors.com
Sriram Seshadri, Chennai
+91 44 4298 7000
sriram.seshadri@bmradvisors.com
Sumeet Hemkar, Singapore
+65 6408 8004
sumeet.hemkar@bmradvisors.com
Snippet
UK corporate tax rate cut to 21
percent, introduction of research
and development tax credit and
amendments in GAAR
UK government confirmed its draft
legislation reducing the corporate tax
rate from 22 percent to 21 percent
with effect from April 2014. A new
research and development tax credit
has been introduced which is
expected to make UK more attractive
for research and development
activities. Also, 2013 is expected to
see new tax reliefs to support
investment in the production of
animation, high-end television and
video games.
Amendments are also made in
‘double reasonable test’ of GAAR to
make it operate as intended.
Source:
www.internationaltaxreview.com

On further appeal at the instance of the Revenue Authorities, the ITAT observed that
for invoking section 40(a)(ia) two conditions need to be satisfied, viz, payment should
be liable to tax withholding and such tax has not been withheld. If both these
conditions are satisfied then such payment can be disallowed under section 40(a)(ia)
of the Act. However, where tax is withheld by the taxpayer under bona fide wrong
impression under a specific section, then provisions of section 40(a)(ia) cannot be
invoked. The provisions of section 40(a)(ia) requires the payer to withhold tax and to
deposit the same with the Government treasury; and does not govern a case of
shortfall in withholding of tax. In case of shortfall of tax due to any difference of
opinion, the taxpayer cannot be treated as an ‘assessee in default’ under section 201
of the Act and no disallowance can be made under section 40(a)(ia) of the Act. This
view was confirmed by the HC by dismissing the appeal of the Revenue Authorities.
CIT v S K Tekriwal (ITA No 183 of 2012) (Calcutta HC)
Diagnostic centre is not an industrial undertaking within the meaning of section 80IA of
the Act
The taxpayer was engaged in providing services such as X-ray, CT scan etc through
an advanced radiological clinic since 1948. The taxpayer established a new Magnetic
Resonance Imaging (“MRI”) unit and started claiming deduction under section 80IA of
the Act on the MRI and CT scan machines installed by it. During the assessment
proceedings for the AY 1999-00, the AO disallowed the claim of deduction of the
taxpayer. The AO held that the deduction under section 80IA is allowable to a new
industrial undertaking while the taxpayer has claimed deduction on the installation of
machines which, being a mere expansion of existing facility of the taxpayer, were not
entitled to said deduction. On appeal, the CIT(A) confirmed the order of the AO.
However, on further appeal, the ITAT allowed the claim of the taxpayer by relying on
its own orders for earlier years.
The Revenue Authorities challenged the orders of the ITAT before the HC and
contended that the deduction under section 80IA is available to a new industrial
undertaking engaged in ‘manufacture or production of any article or thing’, which is not
the case of the taxpayer. Further, the machines installed by the taxpayer cannot be
considered to be engaged in ‘manufacture of new articles or things’ as no
manufacturing process was undertaken by such machines. The Revenue Authorities
relied on the decisions of other HCs on the similar issue. On the other hand, the
taxpayer resisted the submissions of the Revenue Authorities on the basis of
decisions of the HCs which had held the hospitals and diagnostic centres to be
manufacturing goods and therefore, industrial undertakings. Further, the taxpayer
contended that in a diagnostic centre, unexposed films are processed by a specialised
activity and the resultant production of exposed films with imprints of the patient
certainly amounts to processing of goods and thus, should be eligible for deduction
under section 80IA of the Act.
Ruling in favour of the Revenue Authorities, the HC observed that ‘manufacture or
production of an article or thing or their processing’ is an important condition for
claiming deduction under section 80IA of the Act. In the case of a diagnostic centre, it
is a service which is provided and no processing is involved as there is no change in
the article – the film is the medium in which what is recorded is made available to a
doctor for interpretation and the same can easily be given on other media like pen
drive, email etc. On the basis of these observations, it held that the facilities provided
by a diagnostic centre do not result in ‘manufacture or production of articles or things
or their processing’ and accordingly, the deduction under section 80IA of the Act
would not be allowable on the diagnostic centres.
CIT v Dewan Chand Satyapal (ITA No 87 of 2003, 1411 and 1541 of 2006) (Delhi
HC)
Snippet
Andhra Pradesh HC stays Special
Bench ruling in the case of Merilyn
Shipping
The Andhra Pradesh HC directs
interim suspension of ITAT Special
Bench ruling in the case of Merilyn
Shipping wherein it was held that
disallowance under section 40(a)(ia)
of the Act is applicable only where
amount remained unpaid at the end
of the year without withholding of tax.
Source: www.taxindiaonline.com
ITAT
Section 14A disallowance not applicable on exempt income which is incidental
The taxpayer was engaged in the business of exporting goods and dealing in shares
and securities. Since one of the main businesses of the taxpayer was dealing in
shares and securities, holding a certain number of shares was a precondition for the
taxpayer to trade in large volumes in Futures and Options (“F&O”). For the AY 2008-
09, the taxpayer had claimed exemption for dividend income and made a suo moto
disallowance of expenses relatable to dividend income at the rate of 1 percent of the
dividend received.
During the course of the assessment proceedings, the AO made a disallowance of
interest and other expenditure under section 14A of the Act read with Rule 8D of the
Rules. On appeal, the CIT(A) relied on the decision of Special Bench of the ITAT in
the case of Daga Capital Management Services Private Limited, wherein it was held
that section 14A of the Act does not make any distinction between incidental and main
income and is attracted even in case of income not forming part of total income, like
dividend income in respect of shares held as stock-in-trade is incidental to the main
income from trading in shares, and upheld the disallowance made by the AO.

Aggrieved by the CIT(A)’s order, the taxpayer filed an appeal with the ITAT. Before
the ITAT, the taxpayer inter alia contended that shares were held as stock-in-trade
and dividend was only an incidental income and it had sufficient interest free funds for
investment in shares. It claimed that borrowings were for its F&O business and
hence, interest could not be apportioned to dividend income under Rule 8D of the
Rules.
The ITAT, deleting the disallowance, held that since earning of dividend income is
incidental to the main business of the taxpayer, ie business of sale of shares and
trading in F&O, no notional expenditure could be disallowed under section 14A of the
Act by the AO.
Ethio Plastics Private Limited v DCIT (ITA No 848 of 2012) (Ahmedabad ITAT)
Appropriate tax rate for grossing up payments in absence of Permanent Account
Number
The taxpayer, a manufacturing company, entered into annual maintenance contracts
with foreign suppliers of machinery and equipment for preventive maintenance and
repairs. Pursuant to such contracts, the taxpayer had made payments for repairs of
machinery to a German entity during the year under consideration. Such repairs were
carried out outside India. According to the taxpayer, the payments represented
business receipts of the German entity and in absence of a Permanent Establishment
(“PE”) in India of such entity, the payments were not chargeable to tax in India. The
taxpayer also believed that such payments did not constitute Fees for Technical
Services (“FTS”) under Article 12(4) of the India-Germany tax treaty or section 9(1)(vii)
of the Act. However, out of abundant caution, the taxpayer withheld tax before making
the payments to the foreign entities as per the provisions of section 195 of the Act
read with section 206AA of the Act and paid it to the Government treasury. The
taxpayer also filed an appeal with the CIT(A) denying its liability to withhold tax at
source.
Snippet
Discussion paper on buy back
through open market purchase
Securities Exchange Board of India
(“SEBI”) vide press release dated
January2, 2013 has issued a
discussion paper on ‘Proposed
modifications to the existing
framework for buy back through open
market purchase’ for public
comments. The discussion paper
broadly outlines the major issues
faced in buy back through open
market purchase along with reasons
and solutions for the same. The
discussion paper is open for public
comments till January 31, 2013.
Source: www.sebi.gov.in
On first appeal, the CIT(A) held that the payments were in nature of FTS and were
chargeable to tax in India irrespective of whether the services were rendered in India
or not and whether the non-residents had any business connection in India or not.
Rejecting the taxpayer’s contentions, the CIT(A) also held that in the absence of a
Permanent Account Number(“PAN”) of the non-resident, a higher rate of 20 percent in
accordance with section 206AA of the Act would be applicable. Further, the CIT(A)
held that as the taxpayer was liable to withhold tax at 20 percent, the grossing up also
was to be done with reference to the same rate of tax and not at the ‘rates in force’ or
‘rate prescribed under the tax treaty’.
Aggrieved by the order of the CIT(A), the taxpayer filed an appeal with the ITAT. On
the basis of the review of the purchase order and the invoices, the ITAT observed that
the machinery had to be repaired and not to be modified or improved and by placing
reliance on the ITAT decisions on the similar issue, it held that the payments for repair
of machinery cannot be treated as FTS, rather it is business income which was not
taxable in India in the absence of a PE in India. Since there was no liability to withhold
tax on the taxpayer in the first place, the ITAT held that the issue of grossing up would
not be relevant.
In a different set of appeals pertaining to another payment, the ITAT observed that the
services of repairs rendered by the non-residents include its assistance in analyzing
and solving technical problems, locating and mending the cause of the dysfunction,
analysis and assistance to the operator and preventive maintenance. The ITAT held
that such services clearly fall within the purview of definition of FTS as such services
involved rendering of technical assistance and services to the taxpayer in India. Thus,
the taxpayer was held to be liable to withhold taxes on such payments.
With respect to the taxpayer’s contention that a non-resident is not required to obtain
PAN in India, the ITAT held that the provisions of section 206AA of the Act clearly
override the other provisions of the Act. Therefore, a non-resident whose income is
chargeable to tax in India has to obtain PAN. Section 206AA of the Act is brought in
the statue to ensure that there is no evasion of tax by the foreign entities. Thus, the
ITAT held that in view of failure to furnish PAN, the CIT(A) had rightly applied the
higher rate of 20 percent for withholding purposes (as per the provisions of section
206AA).
However, with respect to the grossing up issue, the ITAT ruled in favour of the
taxpayer. The ITAT observed that a literal reading of section 195A of the Act implies
that the income should be increased at the rates in force for the relevant AY and not
the rate at which the tax is to be withheld by the taxpayer. Accordingly, the grossing
up should be done at the rates in force for the AY in which such income is payable
and not at 20 percent as specified under section 206AA of the Act.
M/s Bosch Limited v ITO (ITA No 552-558 of 2011) (Bangalore ITAT)
Payment for acquiring satellite rights of films is taxable as ‘royalty’ and liable for tax
withholding in India
The taxpayer was engaged in the business of purchase and sale of rights in satellite
Snippet
Income tax department asks
Vodafone to pay INR 14,000 crore
Income tax department has sent a
reminder letter to Vodafone to pay the
outstanding tax demand amounting to
INR 14,000 crore on account of the
offshore sale of shares. In January
2012, the SC had quashed an income
tax order that determined the tax
liability on Vodafone for the offshore
deal. The Government then by way of
retrospective amendments to the
income tax law clarified that the law’s
intent was always to tax such an
indirect offshore transfer of shares

and movies. During the year under consideration, the taxpayer had debited a sum of
INR 25.71 crores for purchasing satellite rights of films and programs. Such rights
were brought from various parties at varying cost. The taxpayer did not withhold tax
on such payments on the belief that it being engaged in the business of purchasing
and selling broadcasting rights was not obliged to withhold taxes.
During the course of the assessment proceedings, the AO held that the assignor only
assigned his rights to the taxpayer through the agreements. Further, the rights were
only for 20 to 25 years and were not of permanent nature. Accordingly, there was only
assignment of rights and no sale of rights to the taxpayer and therefore, the payments
were in the nature of royalty and subject to tax withholding under section 194J of the
Act. In absence of tax withholding at source, the AO disallowed the payments by
applying the provisions of section 40(a)(ia) of the Act.
involving underlying Indian assets.
Income tax department has issued the
reminder letter by invoking the
‘validation’ clause introduced in last
year's budget. The clause provides
validation of demands raised under
the Act in respect of income from
offshore share transfers irrespective
of any Court ruling.
Source: The Hindu
On appeal to the CIT(A), the taxpayer contended that the transaction in question was
that of purchase of rights and not assignment. Further, the taxpayer contended that
the scope of ‘royalty’ specifically excludes from its ambit ‘any consideration received
for sale or distribution or exhibition of cinematographic film’ (as per explanation 5 to
section 9(1)(vi) of the Act) and accordingly, no tax withholding was required on such
payments. The CIT(A) appreciated the contentions of the taxpayer and deleted the
disallowance made under section 40(a)(ia) of the Act. The CIT(A) held that though the
agreements were named as ‘assignments’ these were only purchase agreements
granting the taxpayer complete ownership of satellite copyrights and accordingly, the
taxpayer was not liable to withhold taxes on the payments for such purchase.
Aggrieved by the order of the CIT(A), the Revenue Authorities filed an appeal before
the ITAT. The ITAT held that the payments made for acquiring satellite rights of films
would be taxable as royalty and thus, would be subject to tax withholding. Further, the
ITAT for determination of applicability of section 40(a)(ia) of the Act remitted the
matter back to the AO. The key observations of the ITAT were as follows:
On a reference to the agreements, it was observed that the consideration was not
paid for the purchase of the cinematographic films but only for obtaining the rights
for satellite broadcasting and therefore, cannot be excluded from the scope of
royalty.
It observed that as long as the transfer is of a right relatable to a copyright of a
film or video tape, whether perpetual or for a part of the rights, which are to be
used in connection with television or tapes, the consideration paid for such
transfer would qualify as ‘royalty’. Thus, the payments in the case of the taxpayer
would continue to be treated as royalty.
Relying on the decision of Merilyn Shipping and Transport v ACIT [16 ITR
(Trib)1(SB)], it held that disallowances under section 40(a)(ia) of the Act are
attracted only on amounts standing payable at the end of the relevant financial
year and not on the amounts paid in the said year.
Shri Balaji Communications v ACIT (ITA No 1744 of 2011) (Chennai ITAT)
AO is duty bound to follow directions of the ITAT in case matter is restored back to his
file
The taxpayer entered into an agreement with a Russian company for provision of
supervisory services in relation to erection of a steel plant. On application to the AO
for determining the rate of tax withholding on the payments under the said agreement,
the AO held the payments to be in the nature of FTS. According to the AO, since the
Russian company had a PE in India the payments were held to be taxable as
business profits and the rate of withholding tax was determined at 30 percent (as
against 20 percent requested by the taxpayer) in terms of the provisions of section
44D read with section 115A of the Act. On appeal, the CIT(A) upheld the order of the
AO. On further appeal, the ITAT directed the AO to decide the matter after
considering the CIT(A)’s decision in taxpayer’s own case for the earlier years and the
appeal effect order of the AO for those years.
The AO, however, determined the rate of withholding at 30 percent by following its
original order and completely ignoring the directions of ITAT. On first appeal, the
CIT(A) upheld the decision of the AO. On further appeal, the taxpayer relying on the
decision of Bhopal Sugar Industries Limited v ITO (40 ITR 618) (SC) contended that
the AO has decided the issue afresh and not followed the directions of the ITAT and
accordingly, the order of the AO should be quashed.
The ITAT ruled in favour of the taxpayer and observed that the AO is bound by the
directions of the ITAT and if the AO is aggrieved by order of ITAT, the only available
remedy is to prefer an appeal. On this basis, it held that the action of the AO in not
complying with the directions of the ITAT is failure on his part which is against the
principle of justice and is highly condemnable. Accordingly, the action of the AO was
held to be not sustainable.
Steel Authority of India Limited v ITO (ITA No 2872 of 2011) (Delhi ITAT)
Depreciation admissible on acquired client list; despite its nomenclature in the books
of accounts
Snippet
GAAR implementation postponed
to 2016
The Government, among other major
recommendations of Shome
Committee, accepted postponement
of GAAR till 2016. Major changes
accepted by the Government are (i)
impermissible avoidance arrangement
(“IAA”) to mean one where obtaining
tax benefit is the 'main' purpose; (ii)
Approving panel to consist of
chairman who is / has been a HC
judge; (iii) taxpayer will have an
opportunity to prove that arrangement
is not an IAA; (iv) investments made
before August 30, 2010 to be
grandfathered; (v) Tax benefit of INR
3 crores to be the threshold limit to
invoke GAAR. While most of the
recommendations of the draft report
have been accepted by the

The taxpayer, engaged in the business of share broking, purchased the entire
clientele business of another stock broker for a certain consideration. The purchase
price of the clientele business was booked by the taxpayer as purchase of goodwill in
its books of accounts. While filing its return of income, the taxpayer claimed
depreciation on the goodwill at the rate of 25 percent by treating the same to be a
‘commercial right’ covered under the definition of intangible asset.
Government, override of GAAR over
tax treaty with other countries, under
certain circumstances, have been
retained.
Source: The Economic Times
During the assessment proceedings, the AO denied depreciation on the goodwill as
claimed by the taxpayer. The AO observed that acquisition of business of another
entity is not acquisition of goodwill. The AO was of the opinion that depreciation is
allowable only on assets which keep depreciating over a period of time due to
damage, wear and tear and obsolescence and in this case, the asset, ie the clientele,
was tangible, does not depreciate and accordingly, does not fulfil the conditions of
intangibility. Further, the AO also held that the tangible asset has to be put to use for
claiming depreciation and this condition was not satisfied in taxpayer’s case. On first
appeal, the CIT(A) upheld the order of the AO observing that the payment under
question was neither goodwill nor any commercial right.
Aggrieved by the order of the CIT(A), the taxpayer filed an appeal before the ITAT and
contended that it had acquired a right to directly deal with clients of the vendor
company which shall substantially increase the business of the taxpayer and thus,
facilitate the taxpayer to carry on its business smoothly. Ruling in favour of the
taxpayer, the ITAT observed that phrase ‘any other business or commercial rights of
similar nature' would include all kinds of commercial rights and the right acquired by
the taxpayer, being a tool to carry its business would be covered within this phrase so
as to be eligible for depreciation. It further held that even if the payment is treated as
for acquisition of goodwill, considering the taxpayer’s business, the goodwill is
paramount and by applying the decision of Supreme Court in the case of Smifs
Securities would be entitled for depreciation.
India Capital Markets Private Ltd v DCIT (ITA No 2948 of 2010) (Mumbai ITAT)
Payment to non - residents for rendering logistics services outside India in relation to
production of films would not liable to tax withholding in India
The taxpayer, engaged in the business of production of films, made payments to
service providers from UK, Brazil, Canada, Australia and Poland. The payments were
made for the services provided outside India which included arrangement of shooting
locations, obtaining necessary permissions from authorities, arrangement for shipping
and custom clearance, arranging for meals, shooting equipment, etc. While making
the payments, no tax was withheld by the taxpayer treating the same to be business
profits and not taxable in the absence of a PE of the payees in India.
During the course of the assessment proceedings, the AO held the payments to be in
the nature of FTS and thus, the taxpayer was liable to withhold taxes on the same
under section 195 of the Act. The AO further observed that it was not open to the
taxpayer to make payments by unilaterally taking a no tax position and the taxpayer
should have obtained the concurrence of the AO by applying for a withholding tax
order under section 195(2) of the Act.
On appeal, the CIT(A) ruled in favour of the taxpayer. On the basis of the perusal of
the agreements relevant to each of the service provider, the CIT(A) held that the
services in question were purely commercial in nature and therefore, the payments for
such services would qualify as business profits; not taxable in the absence of PE in
India. It further held that the logistic services could not be termed as FTS as such
services do not result in rendering of any technical, managerial or consultancy
services and thus, would not be taxable in India as FTS. Accordingly, the taxpayer
was not required to apply for a withholding tax order under the provisions of section
195(2) of the Act.
Aggrieved by the order of the CIT(A), the Revenue Authorities filed an appeal before
the ITAT. The ITAT upheld the order of the CIT(A) and allowed the claim of the
taxpayer by making the following observations:
The logistic services were commercial in nature and could not be termed as
technical, managerial or consultancy services; the services were neither technical
in nature nor could be treated as managerial services merely because some
managerial skill was required to render the services;
The requirement of knowledge of local laws on the part of the service providers to
render specified services to the taxpayer to aid in shooting overseas would not
change the basic commercial nature of the services;
If the relevant payment does not contain the element of income taxable in India,
the payer is not required to obtain a withholding tax order before making the
payment to a non-resident.
Yashraj Films Private Ltd v ITO (ITA No 4856 of 2008) (Mumbai ITAT)
FTS credited but not paid in absence of approval from Reserve Bank of India not liable
to income tax

The taxpayer, a foreign partnership firm established in Germany, was engaged in
rendering management and technical consulting services through its Branch Office
(“BO”) in India. During the relevant year under consideration, the taxpayer availed
services from its group companies in relation to its projects in India. The taxpayer
debited the payment for such services in its books of accounts and claimed a
deduction for the same in its return of income while the payments were not actually
made due to non-receipt of necessary approval from the Reserve Bank of India
(“RBI”). During the course of the assessment proceedings, the AO held the payments
to be in the nature of FTS and thus, taxable in India. Further, the taxpayer was
treated as an agent of the group companies.
Before the CIT(A), the taxpayer contended that the amount payable did not partake
the character of income in the hands of its group companies as the necessary
approval from the RBI under the Exchange Control regulations was not received.
Rejecting the submissions of the taxpayer, the CIT(A) held that once the taxpayer had
accounted for the invoices in its books and the effect of liability had been
acknowledged by way of claiming a deduction, the income would be accrued during
the year under consideration. As an alternate, the taxpayer also contended that even
as per the specific language used in the relevant tax treaties, FTS could be taxed only
when it was paid to the foreign entities and since the amounts of FTS had not been
paid by the taxpayer in the year under consideration, the same could not be taxed in
that year. The CIT(A), however, held the word ‘paid’ used in the relevant Article of the
treaties dealing with FTS to denote ‘incurring of a liability’. On the said basis, the
CIT(A) upheld the AO’s action.
Aggrieved by the order of the CIT(A), the taxpayer filed an appeal with the ITAT.
Ruling in favour of the taxpayer, the ITAT observed that the amount in question cannot
be taxed in absence of necessary RBI approval. The ITAT further observed that as
per the FTS Article under the relevant treaties (specifically with reference to German,
Singapore and UK tax treaty), the amounts could be taxed only on payment basis and
since the impugned amounts were never ‘paid’ to the foreign entities, the same could
not be brought to tax.
Booz Allen & Hamilton (India) Ltd v ADIT (ITA Nos 4503,4504,4506,4507 and 4508
of 2003) (Mumbai ITAT)
Interest under section 234C of the Act is not applicable when income is earned at fag
end of the year
The taxpayer, engaged in the business of real estate development, filed its return of
income declaring income under the head ’profits and gains of business or profession’.
The AO accepted the same after charging interest under section 234C of the Act.
The taxpayer filed an application under section 154 of the Act stating that since
income returned by it was earned at the end of the relevant financial year, the interest
under section 234C of the Act for deferment in payment of advance tax cannot be
charged and therefore, the same constitutes a mistake apparent from record. The
application was disposed off by the AO without dealing with this issue.
On appeal, the CIT(A) affirmed the order of the AO by observing that the exemption
from the applicability of interest under section 234C of the Act was available only on
capital gains and winning from lotteries etc; and not on income returned under the
head ’profits and gains of business and profession’ under which the income of the
taxpayer was offered to tax.
Aggrieved by the order of the CIT(A), the taxpayer filed an appeal before the ITAT.
Before the ITAT, the taxpayer reiterated the submissions made before the lower
authorities. Ruling in favour of the taxpayer, the ITAT observed that where the
taxpayer has earned income at fag end of the year he is not expected to estimate /
imagine that he will earn that income and pay advance tax thereon. Accordingly, no
interest could be charged in the case of the taxpayer.
Lalitha Developers v DCIT (ITA No 770 of 2011) (Bangalore ITAT)
Circular / Notifications
Time limit for filing ITR – V extended
Central Board of Direct taxes (“CBDT”) has extended the time limit to file form ITR-V
for AY 2010-11 and AY 2011-12 to February 28, 2013. The time limit for filing ITR-V
for AY 2012-13 has also been extended to March 31, 2013 or 120 days from the date
of uploading the electronic return, whichever is later.
Source: Notification No 1/2013, issued by CBDT
Link: http://law.incometaxindia.gov.in/DIT/Notifications.aspx
CBDT addresses issues faced by software export industry
The CBDT has issued Circular providing clarifications on various issues relating to the
export of computer software and allowance of deduction under sections 10A, 10AA

and 10B of the Act. For details of the circular, please refer to the BMR Buzz dated
January 22, 2013.
Source: Circular No 1/2013, issued by CBDT
Link: www.itatonline.org
External Commercial Borrowings limit for Infrastructure Finance Companies
revised
RBI has made an upward revision of the limit for External Commercial Borrowings
(“ECB”) for non banking finance companies categorized as Infrastructure Finance
Companies (“IFC”). IFC can now raise ECB to the extent of 75 percent of net owned
funds including the outstanding ECB. IFC desirous of availing ECB beyond 75
percent of their owned funds would require the approval of RBI under the approval
route.
Hedging requirement for currency risk has been reduced from 100 percent of
exposure to 75 percent of exposure.
Source: Circular No 69 dated January 7, 2013, issued by RBI
Link: http://www.rbi.org.in
External commercial borrowings for micro finance institutions and non –
government organisations to be fully hedged
RBI has mandated all authorised dealer banks to ensure that ECB raised by micro
finance institutions and non – government organisations to be fully hedged.
Source: Circular No 63/RBI dated December 20, 2012, issued by RBI
Link: http://www.rbi.org.in
Sin Maarten has been notified as specified territory under section 90(2) of the
Act
Central Government has notified Sin Maarten, a part of Kingdom of Netherlands as
specified territory under section 90(2) of the Act.
Source: Notification No 54/2012 dated December 17, 2012, issued by CBDT
Link: http://law.incometaxindia.gov.in/DIT/Notifications.aspx
Certification requirement introduced in Rule 112F of the Rules
Rule 112F of the Rules, outlining the cases wherein investigating officer (“IO”) is not
required to issue notice for assessing income for 6 years immediately preceding the
year of search, has been amended to provide certain certification requirement to be
complied with by the IO. Such certification shall also be sent to the AO and
Commissioner of Income Tax having jurisdiction over the assessee.
Source: Circular No 10/2012 dated December 31, 2012, issued by CBDT
Link: http://law.incometaxindia.gov.in/DIT/Circulars.aspx
Low cost affordable housing projects notified as eligible end use for ECB
RBI has notified low cost affordable housing projects (“LCAHP”) as eligible end use for
ECB under approval route. Salient features of the scheme are as under:
Along with developers of LCAHP, Housing Finance Companies (“HFC”) and
National Housing Bank (“NHB”) can also avail the ECB facility
Projects should have minimum 60 percent floor space index (“FSI”) reserved for
units with maximum carpet area of 60 square meters
Slum rehabilitation projects are also eligible subject to necessary approvals of
necessary authorities
ECB proceeds cannot be used for acquisition of land
NHB shall be the nodal agency for deciding the eligibility of project for ECB
Upper cap of USD 1 billion is fixed for the financial year 2012-13, subject to
annual review
All other conditions applicable to ECB need to be complied with
Source: Circular No 61 dated December 17, 2012, issued by RBI
Link: http://rbi.org.in/scripts/NotificationUser.aspxId=7757&Mode=0

Step by step instructions for grant of refunds issued by income tax department
With a view to reduce the problems raised due to mismatch of tax and tax withholding
credits, the Income tax department has issued Instruction No 1 dated November 27,
2012 which contains a step by step procedure for adjustment of refunds to be followed
by the AOs and the centralized processing centre.
Source: Instruction No 1 dated November 27, 2012, issued by Director of Income
tax (Systems)
Link: www.itatonline.org
Ministry of Corporate Affairs notifies change in form DIN 4
Ministry of Corporate Affairs (“MCA”) has added a paragraph in the certification
requirement part of Form DIN 4 which is required to be filed to intimate change in the
details of directors. Director Identification Number (“DIN”) is a unique identity number
which is assigned to an individual who wishes to become a director of any Indian
company.
Source: Notification (F NO 5/80/2012 – CLV) dated December 24, 2012, issued by
MCA
Link: www.taxmann.com
New form 18 and DIN 1 notified by MCA
MCA has notified new Form 18 and DIN 1 which is required to be filed to intimate any
change in registered office of the company and to obtain new DIN respectively.
Source: Notification (F NO 5/80/2012 – CLV) dated December 24, 2012, issued by
MCA
Source: www.taxmann.com
Indirect tax
Value Added Tax (“VAT”) / Central Sales Tax (“CST”)
Kora maal (brass ware) after polishing and engraving continues to be same
commodity and there is no change in the identity of goods
The taxpayer was engaged in purchase of kora maal (brass ware) from manufacturer
and after engraving and polishing, selling the same to a dealer outside state who is
stated to have exported the same. The Revenue Authorities raised demand of
purchase tax under section 3AAAA of the Uttar Pradesh Trade Tax Act, 1948 (“UP
Trade Tax Act, 1948”) against the taxpayer on the basis that engraving and polishing
changes the identity of goods after its purchase. Aggrieved by it, the taxpayer filed an
appeal before the first appellate authority.
Snippet
As a part of measures to shore up
revenues, the Finance Ministry may
reinstate import duty on crude oil in
Budget 2013. In June 2011, customs
duty on crude oil imports had been
done away with.
Source: The Economic Times
The matter finally reached the HC where the Revenue Authorities contended that the
inextricable link of purchase with the exports required for claiming the exemption has
not been demonstrated in the present case and hence the matter should be remanded
back to the sales tax tribunal for examination of this aspect.
The HC held that even if the sale was not inextricably linked to export and the sale of
polished kora maal was an independent sale of goods to a dealer outside state, the
same would qualify as a sale in the course of inter- state trade or commerce and
would be exempt from payment of purchase tax (proviso (iii) to section 3AAAA of the
UP Trade Tax Act, 1948 inter alia exempts the levy of purchase tax on goods which
the purchasing dealer resells in the same form and condition in the course of interstate
trade). Accordingly, the HC dismissed the revision petition.
Commissioner trade tax, UP, Lucknow v Pioneer India [2012-56-VST-323 (All)]
‘Harpic’ and ‘Lizol’ classified under Drugs and Cosmetics Act, 1940 but having the
primary quality of disinfectant fall under the definition of pesticides liable to be taxed at
4 percent and Mortein mosquito repellents are liable to be taxed at 12.5 per cent
(rates applicable during the disputed period) in Andhra Pradesh
The taxpayer was engaged in manufacture and sale of Lizol (floor cleaner), Harpic
(toilet cleaner) and Mortein mosquito repellents. The Revenue Authorities contended
that these goods were liable to be taxed at 12.5 percent by virtue of being covered
under the exclusion of entry 88 of Schedule IV to the Andhra Pradesh Value Added
Tax, 2005 (“AP VAT Act”) which covers drugs and medicines excluding products
capable of being used as cosmetics and toilet preparations and mosquito repellents in
any form.
The taxpayer contended that though Lizol and Harpic are manufactured under drugs
license but are disinfectants capable of destroying germs fall within the category of
pesticides covered by entry 20 of Schedule IV to the AP VAT Act (which levies tax at 4

percent on pesticides, insecticides etc excluding mosquito repellents in any form).
The Andhra Pradesh HC with respect to Lizol and Harpic affirmed the view of the
taxpayer while placing reliance on decision of the SC in the case of Bombay Chemical
Pvt Ltd[1995 (99) STC 339 (SC)] wherein it was held that the disinfectants having the
capability to kill bacteria would be considered pesticides, thereby giving a broader
understanding to the term ‘pesticides’.
Further, the HC held that such goods would not be covered by the exclusion under
entry 88 of the Schedule IV to the AP Vat Act since the entry seems to exclude
products capable of being used as cosmetics and toilet preparations and does not
deal with disinfectants used to kill bacteria and germs.
With respect to Mortein mosquito repellents, the HC held that since mosquito
repellents were covered by exclusions both under entry 20 and entry 88, its taxability
at 12.5 percent need not be challenged.
Reckitt Benckiser (India) Ltd v State of Andhra Pradesh [2012-194-ECR-
0154(AP)]
‘Inkjet cartridges’ and ‘Tonor cartridges’ are covered by entry 4 of Part B of the
Second Schedule to the Assam Value Added Tax Act, 2003 as parts and accessories
of computer system and peripherals
Snippet
Industry body CII demanded that
indirect tax rates be kept unchanged
till implementation of Goods and
Services Tax regime and
rationalisation of subsidies in the
forthcoming General Budget for 2013-
14.
Source: www.moneycontrol.com
The taxpayers was engaged in sale of Information Technology products including
‘inkjet and tonor cartridges’. The taxpayers had claimed that these items are covered
by entry 4 of Part B of the Second Schedule (‘parts and accessories of computer
system and peripherals’) to the Assam Value Added Tax Act, 2003 (the “Assam VAT
Act”) which lists items taxable at the concessional rate of 4 percent (during the
disputed period).
However, the plea of the taxpayers was rejected by the Revenue Authorities
contending that such goods are consumables and not parts or accessories of
computer systems and are thus, taxable at the higher rate under the residual entry.
The taxpayers’ plea was accepted by the Gauhati HC holding that such goods form an
integral part of printers which is undisputedly covered under the entry ‘computer
system and peripherals’. Reliance was placed on the decision of Delhi HC in the case
of Commissioner of Trade and Taxes v HP India Sales Private Limited (2007-VIL-18-
HC-Del) wherein it was held that tonors and cartridges were parts and accessories of
computer systems.
Hewlett Packard India Sales Pvt Ltd v State of Assam and Others [2012-56-VST-
472 (Gau])
‘Dettol’ falls under the category of drug and medicine and not a toilet preparation;
‘Lizol and Harpic’ having the primary quality of disinfectant to be treated as pesticides
The taxpayers were engaged in manufacturing, selling and marketing of household
products including disinfectants like ‘Harpic’ and ‘Lizol’ and antiseptic liquid, ‘Dettol’.
The taxpayers had been paying tax at the rate of 4 percent on sale of these goods in
Assam based on the following grounds:
‘Lizol’ and ‘Harpic’, containing active ingredients like hydrochloric acid are
disinfectants. Hence, they are covered under the specific entry no 19 of Part A of
the Second Schedule to the Assam VAT Act including pesticides, insecticides etc
taxable at 4 percent during the disputed period;
Dettol, having therapeutic and prophylactic properties, is a drug/ medicine, covered
under the specific entry no 21 of the Fourth Schedule of the Assam VAT Act
including drugs and medicines, also taxable at 4 percent during the disputed period.
Snippet
The Finance Ministry has decided to
take help from the Financial
Intelligence Unit-India in tracking
evasion of Central excise duty and
service tax, mainly in cases where
defaulters are not traceable.
Source: The Hindu
Contrary to the claims of the taxpayers, the Revenue Authorities contended that the
above products, ‘Lizol’, ‘Harpic’ and ‘Dettol’ being floor cleaner, toilet cleaner and a
toilet preparation are not covered by any of the specific entries, and should be
classified under residuary entry no 1 of the Fifth Schedule of the Assam VAT Act,
leviable to tax at the higher rate of 12.5 percent during the disputed period.
The Gauhati HC while examining the issue placed reliance on the decision of SC in
the case of Bombay Chemical Pvt Ltd [1995 99 STC 339 (SC)] which held that the
disinfectants having the capability to kill bacteria would be considered as ‘pesticides’.
Accordingly, the Gauhati HC held that ‘Lizol’ and ‘Harpic’ being disinfectants having
the capability to kill germs can be considered as ‘pesticides’, covered under the
specific entry taxable at 4 percent during the disputed period.
Further, analyzing the definition of ‘drug’ as defined under the Drugs and Cosmetics
Act, 1940 as well as Medicinal and Toilet Preparations (Excise Duty) Act, 1955 the
Court held that if the purpose of a substance is to prevent disease, unless otherwise
provided, it can be considered a drug. The main purpose for the use of ‘Dettol’ is to
prevent infections. Thus, by applying the ‘users test’, it would squarely fall under the
definition of ‘drug’. Further, from the users’ point of view, it cannot be considered to
be ‘cosmetic’ or a ‘toilet preparation’ (requiring the main characteristics of cleansing,

eautifying, promoting attractiveness etc) which are not present in ‘Dettol’.
Accordingly, ‘Dettol’ being a drug would get covered under the specific entry no 21 of
the Fourth Schedule of the Assam VAT Act taxable at 4 percent during the disputed
period.
Reckitt Benckiser v State of Assam [2012-56-VST-452 (Gau)]
Excise
Section 11AC of the Central Excise Act, 1944 allows a taxpayer the option to pay only
25 percent of the demand as penalty if the entire demand along with interest and
reduced penalty is paid within 30 days from the date of communication of Central
Excise Officer’s order. The said time limit cannot be modified by any authority
whatsoever
The taxpayer, a manufacturer of excisable goods, had availed excess input credit
which was subsequently reversed after it was pointed out by the Revenue Authorities.
Penalty under section 11AC of the Central Excise Act, 1944 was confirmed against
which an appeal was filed before the Customs Excise and Service tax Appellate
Tribunal (“Tribunal”). The Tribunal observed that the adjudication order did not provide
the taxpayer the option to pay reduced penalty of 25 percent under section 11AC and
held that the benefit of reduced penalty would be available if 25 percent penalty is paid
within 30 days of communication of its order. The Revenue Authorities seeking to
recover 100 percent penalty preferred an appeal before the Bombay HC against the
decision of the Tribunal.
The Revenue Authorities contended that once demand was confirmed by invoking
larger period of limitation, penalty under section 11AC was to be compulsorily levied
and the benefit of 25 percent penalty would be available only if the demand along with
interest and reduced penalty is paid within 30 days of the communication of Central
Excise Officer’s order as provided under the Central Excise Act, 1944.
The taxpayer argued that the Tribunal’s order is perfectly valid as the operative part of
the adjudication order did not explicitly clarify the option of reduced penalty available
with the taxpayer.
The Bombay HC disregarded the taxpayer’s arguments by stating that it was not
obligatory to include the above explained option in the adjudication order’s operating
part. The taxpayers’ plea that section 11AC should be read liberally was rejected as
the section imposed punishment on those who evaded taxes. The appeal was allowed
and it was held that when the legislature specifically fixed a time limit to avail an
incentive, it was not open for any authority to modify the time limit so fixed.
CCE v Castrol India Ltd [2012 (286) ELT 194 (Bom)]
Benefits provided under Exemption Notification No 56/2002 – CE will be available even
though the Khasra numbers of the industrial areas where the units are located are
different from those given under the relevant Notification
The taxpayer, located in Jammu & Kashmir, was in the business of manufacture of
goods which were exempt from excise duty as provided under Exemption Notification
No 56/2002 – CE subject to the condition that the goods were manufactured and
cleared by units located in industrial growth centres, industrial estates, export
promotion industrial parks, etc as given under Annexure II to the said Notification.
In the present case, appeals were filed before the Tribunal by the Revenue Authorities
against the decision given by the Commissioner of Central Excise (Appeals) in favour
of the taxpayer on the ground that the units of taxpayers were located in Khasra
numbers other than those specified in the Notification No 56/2002 – CE.
The Revenue Authorities agreed to the fact that the goods and the industrial areas
where the units were located were specified in the Notification but argued that duty
was still payable because the units were not located in Khasra numbers specified
against the corresponding industrial area in the said Annexure. It was further argued
that the provisions of the Notification be construed strictly and interpreted only on their
wordings.
The Tribunal observed that in some cases there were some typo-graphical mistakes
and in other cases the relevant Khasra numbers were included in the Notification albeit
they were wrongly specified against other industrial areas. After noting that the
Notification did not stipulate that the unit must also be located in the Khasra numbers
mentioned against the each industrial area, the Tribunal held that just because of
some typo-graphical mistakes or just because a Khasra number is mentioned against
a wrong industrial area, the benefits of the Notification could not be denied to the
taxpayer. Consequently, all the appeals of the Revenue Authorities were dismissed.
CCE v BR Agrotech Ltd [2012 (286) ELT 127 (Tri – Del)]
The liability to pay excise duty in case of job work arrangements falls on the person
who gets the goods manufactured on job work basis
Diwan Saheb Fashions, the taxpayer, was engaged in stitching garments out of fabric
bought by customers from their shop (stitching to take place after sale of fabric) or from

outside. For purchases made by the customers from the taxpayers, it was not
compulsory for customers to also get their fabric stitched. No excise duty was being
paid by the taxpayers in respect of the stitching activity.
The Revenue Authorities contended that the taxpayers, being the job workers, should
be liable to pay excise duty. The taxpayers defended by placing reliance on Rule 7AA
of the Central Excise Rules, 1944 and the corresponding successor rules, Rule 4(1)
and Rule 4(3) of the Central Excise Rules, 2001 and 2002. It was pointed out that the
liability to pay excise duty was that of those who supply the materials as these rules
specified that in cases of job work, excise duty was to be paid by the person for whom
goods were being manufactured on job work basis as if such person was the
manufacturer of the goods. Further, exemption from excise duty was available on
garments got stitched from one’s own fabric and based on measurements in terms of
Notification No 7/2003 – CE dated March 1, 2003.
The Delhi HC agreed with the taxpayer’s submissions and held that the liability to pay
excise duty would fall on the respective customers but at the same time they should be
eligible for exemption given to Small Scale Industries (“SSI”) units.
CCE v Diwan Saheb Fashions Pvt Ltd & Ors (2012-TIOL-942-HC-Del-CX)
Subsequent investments in the plant and machinery and increase in commercial
production after the cut-off date to start commercial production cannot be a ground to
deny the excise exemption under Notification No 39/2001 – CE where company has
already obtained a certificate from the concern authority confirming fulfillment of
prescribed investment criteria
The taxpayer set up the unit in the Kutch area of Gujarat and availed exemption from
excise duty on clearance of its final product. This exemption was claimed by taxpayer
under the Notification No 39/2001 – CE dated July 31, 2001 which provides for excise
duty exemption on final product cleared by a unit meeting the criteria envisaged under
the said Notification subject to a certification condition.
The taxpayer obtained the above certificate confirming that unit was set up after the
date of publication of the said Notification and required plant and machinery has been
installed. The taxpayer commenced the commercial production, cleared the final
products and availed the exemption under the said Notification. During the period April
2005 to December 2005, the taxpayer also filed the monthly excise returns and
disclosed the average per month clearance of 5,000 tons of final product (ie MS
Billets).
The Revenue Authorities denied the excise duty exemption on clearance of final
product on the ground that taxpayer has done backward integration and installed
various other plants in the project which became functional after December 31, 2005
and that the substantial investment made by them in the backward integrated plant
was, in fact to be done for setting up of the plant as envisaged in the said Notification.
The Revenue Authorities further alleged that factually the project commenced its
commercial production only after completion of aforementioned backward integration ie
only after December 31, 2005. As per Revenue Authorities average clearance of
5,000 tons of final product per month was not a substantial clearance so as to
conclude that taxpayer has commenced commercial production. Given this, the
Revenue Authorities alleged that the taxpayer has not complied with the prescribed
conditions of investment in plant and machinery by prescribed cut-off date and hence it
was not eligible for excise duty exemption under the said Notification.
The Tribunal held that there was no dispute that the taxpayer’s unit at Kutch was a
new industrial unit set up after the date of publication of the said Notification and also it
was undisputed that a certificate was given which categorically indicated that the
taxpayer had installed the machinery and had complied with the said condition as
envisage in the said Notification. Also, in view of Tribunal, average clearance of 5,000
tons of final product per month (as disclosed in monthly excise returns) cannot be
considered as small production as was sought to be propagated by the Revenue
Authorities.
It was held that the taxpayer has strong prima facie case for waiver of pre-deposit as it
was undisputed that the taxpayer’s unit was set up after the publication of the said
Notification and subsequent investment made by the taxpayer in the plant in the form
of backward integration cannot be held against the taxpayer to deny the benefit of the
said Notification.
Electrotherm India Ltd v CCE Rajkot [2012 (194) ECR 257 (Tri-Ahd)]
'Soft Serve' served at McDonalds is classifiable as 'Ice Cream' under Tariff Heading
2105 of the Central Excise Tariff Act, 1985 and will attract applicable excise duty. The
SC also observed that in the absence of definition of the term 'Ice Cream' or 'Soft
Serve', classification is to be determined on the touchstone of common parlance test
The taxpayer was engaged in the business of selling burgers, nuggets shakes, softserve
etc through its fast food chain of restaurants, ‘McDonalds’. The taxpayer was of
the view that ‘soft-serve’ was classifiable either under heading 04.04 or 2108.91 of the
Central Excise Tariff Act, 1985 (‘Tariff Act’) for which applicable excise duty is ‘Nil’.

Show cause notices were issued to taxpayer alleging that the ‘soft serve’ ice-cream
was classifiable as ‘Miscellaneous Edible Preparations’ under Tariff Act, attracting 16
percent duty under heading 2105.00 –‘Ice-cream and other edible ice, whether or not
containing cocoa’.
The matter reached the SC in due course. The SC held that in the absence of a
technical or scientific meaning or definition of the term ‘ice-cream’ or ‘soft serve’, the
issue would have to be examined on the touchstone of the common parlance test. SC
observed that headings 04.04 and 21.05 have been couched in non-technical terms.
Heading 04.04 reads ‘other dairy produce; edible products of animal origin, not
elsewhere specified or included’ whereas heading 21.05 reads ‘ice-cream and other
edible ice’. Neither the headings nor the chapter notes/section notes explicitly define
the entries in a scientific or technical sense. Further, there was no mention of any
specifications in respect of either of the entries. On that basis, the argument that since
‘soft serve’ is distinct from ice-cream’ due to a difference in its milk fat content, was
rejected.
Further, rejecting the taxpayer’s argument that ‘soft serve’ cannot be regarded as ‘icecream’
since the former is marketed and sold around the world as ‘soft serve’, the SC
held that the manner in which a product may be marketed by a manufacturer, does not
necessarily play a decisive role in affecting the commercial understanding of such a
product. What matters is the way in which the consumer perceives the product at the
end of the day notwithstanding marketing strategies.
It was also held that it is a settled principle in excise classification that the definition of
one statute having a different object, purpose and scheme cannot be applied
mechanically to another statute. Accordingly the taxpayer’s submission that the
common parlance understanding of ‘ice-cream’ can be inferred by its definition as
appearing under the Prevention of Food Adulteration Act, 1955 (“PFA”) cannot be
adopted.
In view of above, the SC held that ‘soft serve’ marketed by the taxpayer, during the
relevant period, is to be classified under tariff sub-heading 2105.00 as ‘ice-cream’ and
was liable to excise duty.
CCE New Delhi v Connaught Plaza Restaurant Pvt Ltd New Delhi (2012 TIOL 114
SC – CX)
One time technical assistance fee charged for providing services such as putting up a
restaurant in running condition, designing of food facilities and monthly fees for other
services, right to use technical knowhow and brand name of franchisor cannot be said
to be additional consideration for sale of confectionary, cakes etc by franchisor to
franchisee
The taxpayer operated a chain of restaurants and also manufactured confectionary
items like cakes, pastries, cookies etc chargeable to central excise duty. The goods
manufactured are cleared to their own restaurants and also to their franchisees. The
taxpayer, in terms of the agreement with the franchisees, charged lump sum amount in
the beginning as technical assistance fee, and thereafter a monthly amount as fixed
percentage of the gross sales during the month.
According to the Revenue Authorities, such lump sum amount and the monthly amount
should also be added to the assessable value of the goods for payment of excise
duty. The taxpayer submitted that there is no link between the price at which cookies,
cakes and pastries etc manufactured are sold to their franchisees and the collection of
one time technical assistance fee and monthly fee.
Further, the taxpayer submitted that the technical fees and monthly fees is for
providing certain technical assistance to the franchisees and for permitting them to
operate by using the taxpayer’s brand name and business model, and the price
charged is equal to the price adopted for clearance of same goods to the taxpayer’s
own restaurants. Further, service tax has been discharged on said amounts under
franchise services.
The Tribunal took note of Rule 6 of Central Excise Valuation Rules, 2000 and held that
the same applies when there is some supply of goods or services either free or at
reduced cost from the buyer (franchisees in this case) to the manufacturer (the
taxpayer in this case) for use in the manufacture of the goods which are to be sold to
the buyer – thus, it was held to be inapplicable in this case.
The amounts in question were being received for certain services rendered by the
taxpayer to the franchisees. Further, as service tax had been paid on the said
amounts, they could not qualify as additional consideration for sale.
Therefore, there is no question for rejecting the normal price/ transaction value on
which the duty has been paid.
Nirulas Corner House Pvt Ltd v CCE Delhi [2012 (286) ELT 46 (Tri - Del)]
Service tax
Supplementary services provided by tour operator such as organizing local events/

trips are includible in the taxable value of the tour operator’s service and abatement
allowed on such value
The taxpayer was a public sector undertaking engaged in providing tour operator’s
service and deposited service tax after availing the benefits under abatement
Notification No 39/97 –ST dated August 22, 1997 and Notification No 1/2006-ST dated
March 1, 2006. The issues that arose were:
Whether any amount collected for local events/ trips such as amount collected
towards train charges, darshan ticket charges, entry fees, hill transportation
charges and water fleet charges (supplementary charges) would form part of the
taxable value of tour operator’s service; and
Whether abatement could be claimed on such amount
The taxpayer contended that only the amount charged for the journey can be included
in the taxable value and not for the amounts charged for supplementary services.
Supplementary charges paid by the taxpayer and reimbursed by their customers are
not his expenditure and therefore are not to be included. Also, abatement should be
allowed without including such charges/ fees in the taxable value. Revenue
Authorities contended that local small trips undertaken by a tourist in a particular place
are covered by the definition of ‘tour’ and the distance of such ‘tour’ is immaterial.
Also the abatement could only be claimed on the gross taxable value.
The Tribunal held that the term ‘journey’ in the definition of ‘tour’ is neither defined in
the Finance Act, 1994 (“Finance Act”) nor in the Service Tax Rules, 1994.
Accordingly, it has to be understood in common parlance to include local sight-seeing
/ trips organized by tour operator for the tourists. Further, from September 10, 2004,
the business of a tour operator includes arrangements for accommodating, sightseeing
or other similar services and thus, local events or trips can reasonably be
brought within the ambit of the expression 'other similar services' by applying principle
of ejusdem generis.
With respect to the taxpayer’s claim for 60 percent abatement, it was held that the
benefit is available only to a 'package tour' and on the gross amount charged. This
gross amount is the taxable value and includes the amounts collected towards the
cost of supplementary services. In view of finding that supplementary services are
rendered in relation to package tour, the collections for the same from tourists cannot
be classified as 'reimbursements'.
Hence, the amount collected from customers for these supplementary services would
form part of taxable value and taxpayer was entitled to abatement to extent of 60
percent on gross taxable value under the aforementioned Notifications.
Andhra Pradesh Tourism Development Corporation Ltd v CCE ]2012 (28) STR
595 (Tri-Bang)]
Service tax is not payable on the sale proceeds realised from auction of abandoned /
uncleared cargo by the custodian of goods
The taxpayer was running a container freight station and was functioning as a
custodian of the bonded warehouses under the provisions of the Customs Act, 1962
(“the Customs Act”). In the course of undertaking the business operations, the
taxpayer sold some uncleared cargo by way of auction. The Revenue Authorities
demanded service tax from the taxpayers on income earned from such sale
contending that the sale proceeds attract service tax under the taxable category of
‘cargo handling services’ and ‘storage and warehousing services’.
The taxpayer relied upon Central Board of Excise and Customs (“CBEC”) Circular No
11/1/2002- TRU, dated August 1, 2002 wherein it has been clarified that service tax is
not leviable on the activities of the custodian when he auctions abandoned cargo and
VAT / Sales Tax is paid. The taxpayer further relied on earlier judgments wherein the
Tribunal has taken a view that no service tax is leviable on auction of uncleared cargo.
Based on the above submissions, the Mumbai Tribunal held that no service tax was
payable by the taxpayer on the sale consideration received from auction of uncleared
cargo.
Maersk India Pvt Ltd v CCE&C Raigad [2012-37-STT-685 (Bom- Tri)]
Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 is ultra vires the
Finance Act to the extent it provides for inclusion in the taxable value, expenditure or
costs incurred by the service provider in the course of provision of output services
The taxpayer was a company engaged in rendering consultancy services to the
National Highway Authority of India (“NHAI”) in respect of highway projects. The
taxpayers received payments for their consultancy service as well as reimbursements
for the expenses incurred such as air travel, hotel stay, etc in relation to providing
such services. However, service tax was paid only on the fee received for providing
consultancy services (excluding the value of reimbursements).
A show cause notice was issued on basis of Rule 5(1) of the Service Tax

(Determination of Value Rules), 2006 (‘Valuation Rules’). The taxpayers submitted
that Rule 5(1) of the Valuation Rules, in as much as it provides for including all
expenditure or costs incurred by the service provider in the course of providing the
taxable service in the taxable value of services, travels beyond the mandate of Section
67 of the Finance Act. Accordingly, the taxpayers submitted that it is only the value of
service that is to say; the value of the consulting engineering service rendered by the
taxpayer to NHAI that can be brought to charge and nothing more and thus, Rule 5(1)
of the Valuation Rules is ultra vires Section 67 of the Finance Act.
On analysing relevant provisions of service tax laws and after going through the above
submissions, the HC held that:
On a combined reading of section 66 and section 67 of the Finance Act it is clear
that in determining the taxable value only consideration actually paid as quid pro
quo for the service can be brought to charge. The expenditure or costs incurred by
the service provider in the course of providing the taxable service cannot be
considered as the gross amount charged by the service provider ‘for such service’
provided by him;
Therefore, the provisions of Rule 5(1) to the extent it seeks to include expenses
incurred for providing a taxable service in the value of taxable service, exceeds
the mandate of section 67 of the Finance Act.
While the Central Government has powers under section 94 of the Finance Act to
make rules, such power to make rules cannot exceed the scope of levy envisaged
under the Finance Act/ charging section.
Therefore, Rule 5(1) of the Valuation Rules, to the extent it provides for inclusion
of expenditure incurred in the course of provision of taxable service, in the value
of taxable service, is ultra vires the provisions of section 66 and 67 of the Finance
Act.
Intercontinental Consultants and Technocrats Pvt Ltd v UOI (2012-TIOL-966-HC-
Del-ST)
Whether premium received by the insurance company is inclusive of service tax or not
would depend on the terms of contract pursuant to which insurance policy is executed
and the conduct of the company. Non-disclosure of real prices at which the service is
provided along with prevailing statutory taxes and levies amounts to unfair trade
practices pursuant to which taxes cannot be recovered from the customers at a later
stage
The taxpayer was a public limited company engaged in providing life insurance and
other similar services. With respect to a 20 year life insurance policy sold to their
customers, the taxpayer, till the fourth instalment, collected premium without any
charge of service tax. However, in the fourth instalment, the taxpayer charged service
tax in addition to the premium. The same was objected by one of the customers. Not
satisfied with the explanation of the taxpayers, the customer moved to ‘Insurance
Ombudsman’ with the complaint. The Insurance Ombudsman accepted the case of
the customer that the premium receivable should be inclusive of tax.
Aggrieved by the same, the taxpayers preferred an appeal with the Kerala HC wherein
the taxpayer contended that it is the duty of the service recipient to pay tax. The
customer did not dispute the liability of service tax. However, he contended that the
premium stated to him by the taxpayer at the time of canvassing the policy was
inclusive of service tax and other levies.
The appeal was dismissed on the grounds that it depends on the terms of the contract
pursuant to which insurance policy is executed whether premium is inclusive of service
tax or not. Policy document and the premium receipts issued for first three annual
premiums did not contain statement that it did not include statutory taxes and levies.
Further, the taxpayers did not claim service tax till fourth instalment, which
communicated through their conduct that the premiums were inclusive of service tax.
It was more so since policy was issued when service tax was in force and premium
was fixed by the taxpayer taking into account the nature of business, viability and
profit. In the event the premium offered didn’t include the service tax, the taxpayers, in
the normal course, should have disclosed the same.
Further, the HC held that non- disclosure of real price at which the service is provided
along with prevailing statutory taxes and levies amounts to misleading vis a vis price,
which is an unfair trade practice under Section 2(r)(l)(ix) of Consumer Protection Act,
1986. Without such disclosure of the duties and levies at the time of transaction, the
taxpayers are not entitled to claim them from customer at a later stage during course of
continuing service.
Max New York Life Insurance Co Ltd v Insurance Ombudsman [2012-28-STR-453
(Ker)]
Back office activities like preparation of tax returns, co-sourcing services, analyzing
client data and calculating estimates of tax amount would not qualify as Information
Technology services even though they are performed by using computer programs

The taxpayer was a private limited company registered with the Software Technology
Park of India (“STPI”) providing various back office services to their overseas group
entity such as lead tax services, international assignment services, etc. The taxpayers
got registered under the categories of ‘business auxiliary service’ and ‘management
consultancy service’.
On March 31, 2006, they applied for a refund under Rule 5 of the Cenvat Credit Rules,
2004 of various input services such as equipment hiring charges, professional
consultation service, recruitment service, security service, etc used in relation to export
of their output services.
According to the Revenue Authorities, the taxpayers were infact engaged in ‘export of
software’ which is a non-taxable service against which no CENVAT credit shall be
available. Also, as per the Revenue Authorities, the input services declared by the
taxpayers did not appear to have any nexus with the output services provided by them
and therefore the taxpayers are ineligible to avail input service credit. Accordingly, the
claim of the taxpayers for refund was rejected.
The matter finally reached the Andhra Pradesh HC. Besides the above contentions,
the Revenue Authorities relied upon the decision of Bangalore Tribunal in the case of
Gandhi and Gandhi Chartered Accountants v Commissioner [2010-17-STR-25 (Tri-
Bang)] which was confirmed by the SC wherein it was held that the activity of
computerized data processing for filing and accounts management qualifies as
‘Information Technology Service’ and is excluded from ‘Business Auxiliary Service’.
The Andhra Pradesh HC held that activities performed by the taxpayers are not in
relation to computer systems, which is also supported by the ‘SOFTEX’ forms
submitted by them to STPI wherein they have mentioned that they export ‘services’
only and not ‘software’ and they have declared their exports as ‘others-Back Office
Services’. The HC further held that reliance may not be placed on the decision in
Gandhi and Gandhi's case, wherein it appears that the Tribunal did not consider the
words ‘primarily in relation to computer systems/programming’ while giving its
decision. The fact that the said decision was confirmed by a non-speaking order by
the SC does not mean that the reasoning in the order of the Tribunal was approved by
the SC. Accordingly, the position of the taxpayers was upheld.
CC&E v Deloitte Tax Service India Pvt Ltd (2012-TIOL-954-HC-AP-ST)
Customs
Once the end use condition stipulated under the Project Import Scheme with respect
to the goods imported has been fulfilled, the benefit under the said scheme cannot be
denied in case of non-compliance with the procedural requirements under the said
scheme in time
The taxpayer had imported Heat Recovery Steam Generators under Chapter 98.01 of
the Customs Tariff Act, 1975 (“Custom Tariff Act"). The taxpayer had furnished a
certificate from a Chartered Engineer certifying that the said goods have been installed
as per the provisions of the Project Import Regulations, 1986 (‘Import Regulations’).
Additionally, the Assistant Commissioner of Central Excise, Kakinada had furnished a
letter certifying that the goods imported had been installed as per the contract. The
taxpayer had submitted the reconciliation statement in terms of Regulation 7 of the
Import Regulations after nearly two years of the last consignment
The Assistant Commissioner of Customs, Kakinada finalized the assessments for the
bills of entries after denying the benefit of concessional rate of customs duty under the
Import Regulation on the ground that the taxpayer had violated Regulation 7 of the
Import Regulations. Subsequently, the said order was affirmed by the Commissioner
(Appeals) and held that the taxpayer had failed to satisfy a substantial condition of
submitting the reconciliation statement within 3 months of import or extended time
provided by the authority.
The taxpayer in the appeal to the Tribunal, amongst other decisions, relied on the
decision of SC in the case of Mangalore Chemicals and Fertilizers Ltd v Deputy
Commissioner [1991 (55) ELT 437 SC], and pressed on the fact that it was a settled
law that a substantial benefit could not be denied for violation of procedure.
The Tribunal held that since the Assistant Commissioner of Central Excise, Kakinada
had already certified that the goods under question have been installed in the factory
premises, the demand of differential duty could not have been raised validly on the
ground of non-compliance of a procedural requirement specified under the Import
Regulations.
Alstom Projects India Ltd v CC Visakhapatnam [2012 (286) ELT 235 (Tri– Bang)]
Circulars / Notifications
Customs
Notification No 61/2012-Customs further deepens the tariff concessions in respect of
goods imported from Singapore under Comprehensive Economic Cooperation
Agreement between India and Singapore

Source: Notification No 61/2012-Customs dated December 18, 2012
Link: http://www.cbec.gov.in/customs/cs-act/notifications/notfns-2012/cstarr2012/cs61-2012.htm
Export incentives
Notification and Public Notice from DGFT has introduced the Incremental Exports
Incentivization Scheme’. The objective of the scheme is to incentivize incremental
exports achieved by an Importer Exporter Code (“IEC”) holder by providing an
additional duty credit scrip at 2 percent of the Free on board (“FOB”) value of
incremental exports done during the period January to March 2013 as compared to
period January 2012 to March 2012.
Source: Notification No 27 (RE-2012) / 2009-2014 and Public Notice No 41/2009-
2014 (RE-2012) both dated December 28, 2012
Link: http://164.100.9.245/Exim/2000/NOT/NOT12/not2712.htm

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