BMR Edge-Tax & Regulatory Mont - BMR Advisors

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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
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