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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) <strong>Tax</strong> 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
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