Supreme Court holds that amount withdrawn from ... - BMR Advisors

Vol. 5 Issue 1 January, 2011About BMR Advisors | BMR in News | BMR Insights | Events | Contact Us | FeedbackSupreme Court holds that amount withdrawn from revaluationreserve should be included in book profits for paying MinimumAlternate TaxThe taxpayer company had in an earlier year, revalued its fixed assets and created arevaluation reserve in its balance sheet. In a subsequent year, depreciation was computed onthe revalued amounts and the depreciation pertaining to the difference between the historicalcost of the fixed asset and its revalued amount (“depreciation adjustment”), was credited tothe profit and loss account as a withdrawal of the reserve. The taxpayer reduced thedepreciation adjustment while computing tax on book profits under section 115JB of theIncome-tax Act, 1961 (“the Act”), but the Revenue rejected this claim. The taxpayercontended that while creating the revaluation reserves in the earlier year, it did not debit theprofit and loss account, but debited the asset account and consequently, the book profits forthe earlier year remained unaffected and therefore, when the reserve is withdrawn, it shouldbe reduced from the book profits. On appeal, the Supreme Court observed that section 115JBof the Act contemplates only those reserves which actually affected the net profits. TheSupreme Court held that since in the year of creation of the revaluation reserve, there was nodebit to the profit and loss account and consequently, the reserve was not added back to thebook profits of the earlier year, its withdrawal cannot be deducted in computing the bookprofits for the current year. Accordingly, the Supreme Court dismissed the appeal of thetaxpayer.Indo Rama Synthetics (I) Ltd vs CIT (Unreported)High Court DecisionsExpenses paid to a subsidiary company cannot be disallowed under section 40A(2) of the ActThe taxpayer, a miner and exporter of iron ore, purchased iron ore from its subsidiarycompany. The Revenue observed that the rates at which the taxpayer purchased iron orewere higher than the prevailing market rates and disallowed the difference as excessiveunder section 40A(2) of the Act. The taxpayer argued that the rates of iron ore purchase weredetermined under a contract, which assured certain quality and quantity and consequently,the higher rates were justified. On the appeal, the High Court observed that circular 6P of1968 provided that section 40A (2) of the Act would not apply when there was no attempt toevade tax. Further, the Court also held that section 40A (2) of the Act could not be applied tothe taxpayer as a subsidiary company is not covered as a related party of the parent companyContentsDIRECT TAX. . . . . . . . . . . . .High Court decisions . . . . . . . . . . . . . .Tribunal decisions . . . . . . . . . . . . . . . ..Notifications & Circulars. . . . . . . . . . .INDIRECT TAX. . . . . . . . . .Excise. . . . . . . . . . . . . . . . . . . . . . . . . . . .Customs. . . . . . . . . . . . . . . . . . . . . . . . .Servicetax. . . . . . . . . . . . . . . . . . . . . . . .VAT/CST. . . . . . . . . . . . . . . . . . . . . . . . . .Notifications & Circulars. . . . . . . . . . . .BMR Advisors has been rankedthird most active transactionadvisors according to the VentureIntelligence India League Table2010BMR Advisors has been ranked5th (by deal count) in theMergermarket India League Table,2010.BMR Advisors ranked fourth inThomson Reuters Mid MarketIndia League Table, 2010.BMR wins India Case of the Year,and Best Use of the Internetawards at 5th International TaxReview Asia Awards, 2010.

transactions under the TNMM. In computing the net margins, the taxpayer excluded the passthrough costs and payments to media companies, which were recovered at cost by it from itscustomers. However, the TPO held that the costs recovered from customers had to begrossed up with the revenue from services and that the payments to media companies andother costs had to be reduced in determining the net margins. Further, the TPO concludedthat the pass through costs had to be included in the operating costs for computing the profitmargin earned on costs by the taxpayer. On appeal, the Tribunal noted that the taxpayer wasan advertisement agent for its customers and merely acted as an intermediary between thecustomers and the media companies. It referred to the OECD guidelines and held that thepass through costs had to be excluded in computing the net operating profits and operatingcosts and accordingly, held in favor of the taxpayer.DCIT vs Cheil Communications India Pvt Ltd (2010 TII 60) (Delhi)Penalty cannot be levied for non-maintenance of documentation when the transactions are atheld to be at arm’s lengthThe taxpayer had undertaken international transactions with its AE. The taxpayer filed theAccountant’s report in the prescribed form along with its return of income. The TPO reviewedthe transactions and accepted them to be at arm’s length. However, he noted that thetaxpayer had failed to maintain documentation as required and levied penalty for nonmaintenanceof documentation. On appeal, the Revenue contended even though theaccountant’s certificate was furnished, the taxpayer failed to maintain or furnish thedocumentation. However, the Tribunal noted that the TPO had accepted the transactions tobe at ALP and therefore, levy of penalty was not justified.ACIT vs Foster Wheeler India Pvt Ltd (2010 TII 56) (Chennai)DRP should pass speaking orders recording the reasons for its directionsSnippetThe implementation of the revised taxtreaty between India and Switzerland,which was to take effect from January1, appears to have hit bureaucratichurdle as the two Governments areyet to notify each other on therequired legal and proceduralapprovals. The treaty is expected toenable India access to Swissaccounts of tax evaders. InSwitzerland the Parliament has notagreed upon the protocol yet.Source: The Hindustan Times January9, 2011The taxpayer applied to the DRP objecting to the draft assessment order of the Tax Officer.During the proceedings before the DRP, the taxpayer had filed voluminous documents andelaborate argued its case. However, the DRP had disposed off the application by upholdingthe draft order of the Tax Officer without discussing any of the taxpayer’s submissions. Onappeal, the Tribunal noted that the DRP had a role of supervising the Tax Officer’s draft orderand it has to pass orders in compliance with the rules of natural justice. Accordingly, theTribunal remanded the case back to the DRP for fresh adjudication after providing adequateopportunity of being heard to the taxpayer.GAP International Sourcing India Pvt Ltd vs. DCIT (2010 TII 59) (Delhi)Expenses incurred in foreign currency for onsite software development cannot be excludedfrom export turnover under section 10B of the ActThe taxpayer was an Export Oriented Unit (“EOU”) claiming tax deduction under section 10Bof the Act. It was engaged in the onsite and offshore development of software. It had abranch in the US in respect of which separate accounts were maintained. While computingthe profits eligible for deduction as per the formula prescribed under section 10B of the Act,the Tax Officer excluded the expenses incurred in foreign currency for onsite development atthe client place from the export turnover. On appeal, the case was referred to a Specialbench. The Special Bench noted that only expenditure on rendering technical servicesincurred in foreign exchange could be excluded as per section 10B of the Act. It held thatSnippet

explanation 2 to section 9(1)(vii) of the Act should be applied in determining whether thetaxpayer was rendering any technical services. It held that the taxpayer was not renderingany managerial or consultancy or technical services and accordingly, the expenditure incurredin foreign currency for the purpose of export of software cannot be excluded from the exportturnover.ITO vs Zylog Systems Ltd (2010 TIOL 779) (Chennai Special bench)STPI unit rendering onsite services without new infrastructure or machinery cannot beconsidered as formed by splitting up of existing businessThe taxpayer was a provider of engineering and construction services. It claimed a tax holidayunder section 10A of the Act in respect of the profits derived by one of its units, which wasregistered under the Software Technology Parks of India (“STPI”) Scheme. The STPI unitprovided on-site software services at client locations in Korea. The STPI unit was in the samepremises where the taxpayer was carrying on its existing business. It did not acquire anyplant or machinery for the business of the STPI Unit. The employees of the existing businessunit were involved in the setting up of the STPI unit. The Revenue concluded that the STPIunit was formed by the ‘splitting up’ or ‘reconstructing’ the existing business and hence, noteligible for the tax holiday under section 10A of the Act. Further, the taxpayer had a loss onan aggregate basis from all its business units. The Revenue contended that the tax holidaywould not be available when the total income of the taxpayer is negative. On appeal, theTribunal noted that the Central Board of Direct Taxes (“CBDT”) had clarified vide circular 694of 1994 that on-site delivery of software services would also be eligible for the tax holidayunder section 10A of the Act. It noted that the taxpayer did not require any infrastructurefacilities or machinery in India, as its personnel were delivering the services stationed at theclient’s location. It also noted the decision of the Supreme Court in Bajaj Tempo Ltd, where itwas held that payment of rent by new unit to existing unit for the leased premises would notconstitute splitting up of existing business. Accordingly, it held that the taxpayer was eligiblefor the tax holiday under section 10A of the Act.ACIT vs Valdel Engineers and Constructions Pvt Ltd (2010 TIOL 756)(Bangalore)Payment for national roaming services between two mobile operators is not liable towithholding of tax under section 194I of the ActThe taxpayer, engaged in the business of providing mobile telephone services did notwithhold tax on payments made to other mobile service providers for allowing use of theirnetwork under the national roaming service. The Revenue held that such payments wouldamount to Fees for Technical Services as per section 194J of the Act and that alternatively itshould be treated as hiring of plant and machinery attracting section 194I of the Act. Onappeal before the Tribunal, the taxpayer referred to the language used in section 194I of theAct and contended that only ‘agreements or arrangements’ which are similar to a ‘lease, subleaseor tenancy’ would fall within the ambit of that section. Since the service provided byother mobile service providers was not in the nature of lease of equipment, the paymentswould not require withholding of tax under section 194I of the Act. However, the Tribunal heldthat section 194I of the Act would cover any agreement or arrangement so long as thecondition of ‘use’ of the assets stated in section 194I of the Act was satisfied. Nevertheless, itobserved that if at all anyone can be said to have used the equipment of the other mobileIndia and Malaysia would sign theComprehensive EconomicCooperation Agreement (“CECA”)next month to enhance trade andeconomic activities between the twocountries as well as explore newareas of cooperation. This is enteredinto to strengthen Malaysia'seconomic activities with India.Source: The Economic TimesJanuary 31, 2011SnippetIndia and Norway has signed arevised tax treaty for exchange ofinformation between the two countriesto prevent flows of black money andcheck tax evasion. The new tax treatywould provide for exchange ofinformation, especially the sharing ofbanking data, between the twocountries and would replace the oldtreaty once it enters into force.Source: The HinduFebruary 3, 2011Snippet

service providers, it can only be the taxpayer’s subscriber, but not the taxpayer. The taxpayerwas a mere facilitator between its subscriber and the other service provider. Accordingly, itheld that the payments would not require withholding of tax under section 194I of the Act. Onthe applicability of section 194J of the Act to the payments, it remanded back the same to theRevenue to decide the issue after taking into account the observations of the Supreme Courtin Bharti Cellular Ltd (See Tax Edge Special).Vodafone Essar Ltd vs DCIT (2010 TIOL 789) (Mumbai)Section 50C of the Act applies for transfer of development rights in propertyThe taxpayer inherited a property along with four co-owners and entered into an agreementwith a developer for development of the said property for an agreed consideration. In the taxreturn filed for the year, the taxpayer admitted income based on its share of the consideration.However, the Revenue noted that the property was valued at a higher rate for levy of stampduty, invoked section 50C of the Act and determined the income on the basis of the stampduty valuation. On appeal, the taxpayer contended that he transferred only the developmentrights in the property, not the property itself and that he continued to be the owner of theproperty as per municipal records. Consequently, the provisions of section 50C of the Actwould not apply. The Revenue contended that when the taxpayer had itself admitted that thetransfer of development rights in the property was subject to capital gains, he could notcontend the applicability of section 50C of the Act. The Tribunal noted that the transfer ofdevelopment rights amounted to a ‘transfer’ under the Act, as granting of possession in partperformance of a contract as per section 53A of the Transfer of property Act was deemed tobe a ‘transfer’ as per section 2(47)(v) of the Act. It held that merely because the taxpayer’sname continued to appear in the Municipal records cannot change the nature of transaction.As the parting of possession and granting of development rights in respect of the propertyamounted to a transfer under the Act, the Tribunal held that section 50C of the Act would alsobe applicable. Accordingly, the tribunal upheld applicability of section 50C of the Act andallowed the stamp duty valuation to be the basis of computing capital gains.Arif Akhatar Hussain vs ITO (Unreported) (Mumbai)Interest on borrowed funds cannot be disallowed under section 14A of the Act wheninvestment in shares was out of own fundsThe taxpayer earned dividend income and claimed the same as exempt under section 10(34)of the Act for the financial year 2004-05. The Revenue disallowed certain interest and theadministrative expenses under section 14A of the Act holding that these expenses wereattributable to the earning of the dividend. Further, the disallowance was computed as perRule 8D of the Rule 8D of the Income tax Rules, 1962 (“Rules”). On appeal, the taxpayerargued that a separate current account was opened and operated wherein surplus funds weredeposited for investments in shares and hence the interest expenditure incurred was notattributable to the earning of dividend. The Tribunal held that Rule 8D of the Rules would benot be applicable for the said financial year. The Tribunal further observed that the taxpayerhad raised funds through borrowing in the earlier years and the Revenue had accepted thatthe investment in shares was out of taxpayer’s own funds. Hence, the Tribunal held thatdisallowance under section 14A of the Act would not be sustainable and restricted thedisallowance to 2 percent of the dividend income for other administrative expenses related toearning of the dividend income.The OECD's latest CompositeLeading Indicators (“CLIs”) for China,the United States, France and Japanindicate accelerating economicactivity, while the one for Russiapoints strongly to steady expansion.Germany’s data shows signs of acontinued, stable pace of expansion.Signs of stabilization in the pace ofeconomic expansion are also presentin the CLIs for Canada, Italy, theUnited Kingdom and India. In Brazil,the CLI continues to point to aslowdown in economic activity.Source: The HinduJanuary 11, 2011SnippetIndia and Denmark have agreed to setup a Joint Working Group to enhancetheir Cooperation in Shipping andMaritime Sector. The two sidesagreed to explore possibilities forcooperation in the areas of ShipDesigning, Maritime Training &Education, Off-shore Wind Energy,GHG Emissions and for addressingchallenges facing the shippingindustry and investment possibilities.Source: The Press Information BureauJanuary 11, 2011

Godrej Agrovet Ltd vs ACIT (2010 TIOL 616) (Mumbai)Disallowance under section 14A of the Act would be applicable only when nexus betweenincome and expenditure is establishedThe taxpayer earned dividend income, which was exempt under the Act. The Revenuedisallowed certain expenses on an adhoc basis claiming that such expenses were attributableto earning the dividend income by applying section 14A of the Act. On appeal, the taxpayercontended that nexus between exempt income and expenses had to be established fordisallowance under section 14A of the Act. The Tribunal held the AO has made only anadhoc disallowance and has not established any nexus between the expense and thedividend income. The taxpayer claimed that there was no expenditure related to earning ofthe dividend income and the lower authorities have not rebutted it. It also held that rule 8D, aformula prescribed for computing the expenses to be disallowed under section 14A of the Act,would not be applicable to the taxpayer, as the year under appeal relates to a period prior tothe introduction of the Rule. It held that the Revenue could adopt any reasonable basis toquantify the expenditure attributable to the dividend income, but since an adhoc disallowancehas been made, the disallowance was deleted and the appeal of the taxpayer was allowed.Minda Investments Ltd vs DCIT (2010 TIOL 699) (Mumbai)SnippetThe State of Haryana has decided toreserve up to 10 percent of industrialplots or sheds for NRIs and persons ofIndian origin (PIO). Industrial unitswith 33 percent or more Foreign DirectInvestment (FDI) can also avail thebenefit of reservation of industrialplots.Source: The Economic TimesJanuary 10, 2011Hiring of vehicles for transportation of employees is liable to deduction of tax under section194C of the ActThe taxpayer company was engaged in the business of providing IT enabled services. It hiredvehicles for transportation of its employees and incurred hire charges. Such hire chargeswere paid after withholding taxes under section 194C of the Act. The Revenue noted that allthe vehicles remained at the disposal of the taxpayer and concluded that it was not a simplecase of hiring vehicles for a particular destination, but should be treated as a lease ofvehicles. Accordingly, the Revenue held that the taxpayer was liable to withhold tax at ahigher rate under section 194I of the Act for use of plant and machinery. On appeal, theTribunal noted that the vehicles were provided with the driver, who was under the control ofthe service provider and the maintenance and running costs of the vehicle were borne by theservice provider. Hence, the legal obligations of the service remained with the serviceprovider and the taxpayer was only utilizing the transportation services. Accordingly, it heldthat the payments were only covered as contract payments under section 194C of the Act andcannot be treated as rental payments as referred to under section 194I of the Act and held infavor of the taxpayer.ACIT vs Accenture Services Pvt Ltd (2010 TIOL 618) (Mumbai)SnippetIndia is considering various options tocreate infrastructure debt fundsaccording to a statement issued bythe Finance Ministry. Earlier, thePlanning Commission had proposedthe setting up of a USD 11 billioninfrastructure fund and also aseparate fund also for powergeneration.Source: The Economic TimesJanuary 19, 2011Reimbursement of actual expenses would not require withholding of taxesThe taxpayer company had two separate agreements, one for renting of office premises andthe other for certain common services towards office maintenance. It paid rent for thepremises and reimbursed expenses on the office maintenance to the property owner. Thoughthe taxpayer withheld tax at source on the office rent paid, it did not do so for thereimbursement. The Revenue disallowed the office maintenance expenses under section 40(a)(ia) of the Act for default in withholding taxes on the reimbursements. On appeal, theTribunal noted that there was no finding by the Revenue that the payments were notreimbursements. It held that as the payments amounted to reimbursement of actualSnippet

expenses, there is no element of income in the payment and consequently, there was norequirement to withhold taxes. On this basis, it deleted the disallowance made by theRevenue under section 40(a)(ia) of the Act and allowed the appeal of the taxpayer.Utility Powertech Ltd vs ACIT (2010 TIOL 545) (Mumbai)Notifications and CircularsIndia ratifies double taxation avoidance pacts with SAARC nationsIndia has ratified the Double Taxation Avoidance Agreements with SAARC nations in an effortto track and unearth black money. The revised treaties would come into effect from April 1,2011. The treaty would be applicable on avoidance of double taxation and mutualadministrative assistance in tax matters in the member states.Notification No. 3 dated January 10, 2011The Securities Exchange Board ofIndia (“SEBI”) has designed a formatto streamline the process for theintermediaries to furnish the details ofregistrations of the company applyingfor forming a wholly owned subsidiaryor entering into a joint venture in othercountries. This is to enable SEBIprocess the applications expeditiously.Source: The Economic TimesJanuary 11, 2011India has signed tax exchange data pact with BernudaIndia has entered into a tax information exchange agreement with Bermuda. The agreementhas a specific provision for providing banking and ownership information. It also allowsexchange of past information in criminal tax matters.Notification No. 5 dated January 24, 2011India and Isle of Man signs Tax Information Exchange AgreementIndia has signed a tax information exchange agreement with Isle of Man for facilitatingexchange of potential cases of tax evasion. This is the second information exchangeagreement after the agreement with Bermuda. The information would be disclosed only tospecified person or authorities. According to the agreement, the banking and ownershipinformation on companies would be exchanged besides exchange of past information incriminal tax matters.PIB Press Release dated February 7, 2011Easy Exit Scheme 2011 for defunct companies extended till April 30, 2011The Ministry of Corporate Affairs (“MCA”) had introduced the “Easy Exit Scheme 2010” undersection 560 of the Companies Act, 1956, which was in operation from May 30, 2010 toAugust 31, 2010. The purpose of this scheme is to provide an opportunity to the defunctcompanies for getting their names struck off from the Register of Companies by a simplifiedprocedure. Considering the demands from corporate sectors, the scheme was re-launchedas “Easy Exit Scheme 2011”, in December 2010 to be operative till January 31, 2011. TheScheme has now been extended till April 30, 2011MCA Circular 1 of 2011 dated February 3, 2011SnippetWith different tax rates leading to fuelprices varying from state to state, theoil industry has demanded inclusion ofcrude oil and its products, and naturalgas in the reformist GST regime.Petrofed, a body representing bothpublic and private sector companieshas written to the government seekinginclusion of crude oil, petrol, diesel,aviation turbine fuel and natural gas inGST. Petrofed said the exclusion ofthese items from GST through aconstitutional amendment was notdesirable, since any changes in futureto bring the above products underGST would need the amendment tothe Constitution.Source: Business StandardJanuary 4, 2011INDIRECT TAXExciseSupreme Court DecisionsIntermediate goods are liable to duty if they are marketable, even if they have short shelf lifeThe taxpayer was engaged in manufacturing certain Vitamin and animal feeds (final

M/s Sri Venkateshwara Precision Components vs. CCE (2010 TIOL 1544)(Madras)CustomsHigh Court DecisionsEarnings from sale of immovable property is not eligible for benefit of Served From IndiaSchemeThe taxpayer is engaged in development and construction of residential and commercialproperties in India and selling them to the customers in India and abroad. The taxpayerapplied for the grant of Duty Free Credit Entitlement certificate (“DFCE / duty free scrips”)under the Served From India Scheme (“SFIS”) against the exports made which was grantedby the Directorate General of Foreign Trade (“DGFT”). The taxpayer produced certificate ofearnings in foreign exchange which included sale consideration for properties sold. TheJDGFT contended that only earnings for rendering real estate services can be considered forthe SFIS benefit and not earnings on sale of immovable properties. The taxpayer relied on aclarification issued by the, Ministry of Commerce (“MOC”) that real estate services under theExport Import Policy (“FTP”) are classified on the basis of United Nations Central ProductClassification (“UNCPC”). However, the MOC subsequently dissociated from the earlier standtaken.The Centre is planning to levy exciseduty on processed food items likenoodles, ketchup and pre-mixes in theBudget 2011-12. The move is a stepto broaden the tax base for the GSTregime. Considering the high foodinflation and the need to avoid anymeasure that could boost it, theFinance Ministry may opt for an exciseduty rate of 4 percent for these items.Currently the industry enjoys taxconcessions in the form of excisewaiver for finished goods as well ascertain inputs.Source: Financial ExpressJanuary 11, 2011The Court observed that the title “Served” from India Scheme emphasizes the servicecomponent of the transaction and that earnings for rendering services alone would qualify forthe DFCE under SFIS. The Court referred to the inclusion of sale of immovable propertyunder real estate services in UNCPC and observed that this was only to emphasise thatamounts by way of brokerage or commission on such sales, and not the entire saleconsideration, will qualify as real estate service receipts. The Court thus held that sale ofimmovable property is not included within the expression 'real estate services' and onlycommission or brokerage on such sales is eligible for DFCE under the FTP.DLF Ltd. vs. UOI and Others (2010 TIOL 823) (Delhi)Mere production of CA certificate would not establish unjust enrichmentThe issue which arose for consideration was whether the Tribunal was right in allowing refundunder the Customs Act, 1962 (“Customs Act”) merely on the basis of a CharteredAccountant’s (“CA”) Certificate without any corroborative evidences such as balance sheet,ledger accounts etc. for proving that the duty has not been passed on to the buyer.The Court observed that the presumption under section 28C and 28D of the Customs Act thatthe duty has been passed on has to be rebutted and that the importer has to satisfy theauthorities with relevant documents. The Court further observed that the decision of the HighCourt in Flow Tech Power cannot be construed to lay down a proposition of law that thecertificate issued by the CA would automatically enable a person to get exemption in theabsence of any other evidence to support the claim. The Court permitted the taxpayer tofurnish other substantial evidence and remitted back the matter to Tribunal.CC vs. BPL Ltd. (259 ELT 526) (Madras)SnippetThe Central Government is planningto slash the excise duty on petrol byINR 5-6 a litre from INR 14.45 atpresent to benefit the consumers fromthe rising price of crude oil in theglobal markets. It is also consideringscrapping of customs duty on crude(5 percent at present). Both measurescould be announced in theBudget 2011-12.Source: Financial ExpressJanuary 11, 2011

Tribunal DecisionsRefund of ACD eligible if VAT liability is discharged by utilizing VAT creditThe taxpayer filed refund claim of Additional Customs Duty (“ACD”) under the Notification No.102/2007-Cus (“notification”) in respect of goods imported. The claim was disallowed on theground that the taxpayer could not prove that VAT has been paid on the sale of goods. TheCommissioner (Appeals) allowed the claim based on a certificate from the AssistantCommissioner of Sales Tax which stated that VAT liability has been discharged by thetaxpayer by debiting the VAT credit account. The Tribunal observed that the taxpayer hadcomplied with the conditions of the notification and upheld the order of the Commissioner(Appeals).CC vs. Poonam Steel Industries, Pankaj Steel Corporation (2010 TIOL 1464)(Mumbai)Service TaxSupreme Court DecisionComputer training institutes are liable to service tax from September 10, 2004The issue arose as to whether computer training institutes were exempted from payment ofservice tax under commercial training or coaching centre for the period September 10, 2004to June 15, 2005. A notification dated June 20, 2003 originally exempted vocational traininginstitutes, recreational training institutes and computer training institutes from payment ofservice tax and was effective till February 29, 2004. A fresh notification dated September 10,2004 was issued which exempted only vocational and recreational training institutes. Thiswas further amended on June 7, 2005 by inserting a proviso to specifically exclude computertraining institutes from the exemption. This proviso was given effect from June 16, 2005. Thetaxpayer contended that since the specific exclusion from the exemption was effective onlyfrom June 16, 2005, the computer training institutes were exempted prior to the exclusion.The Court observed that a computer training institute was not included in the amendmentnotification dated September 10, 2004 and that the Central Government was fully consciousof what constitutes a computer training institute (defined in 2003 notification) and also theimplication of the removal. The Court observed that the insertion of the proviso in thenotification dated June 16, 2005 was to make it abundantly clear that computer traininginstitutes should not get the exemption to tax and held that the liability subsisted for the periodfrom September 10, 2004.CCE vs Sunwin Technosolution (P) Limited (2010 TIOL 108)SnippetThe Supreme Court has held thatexcise duty is payable on supply ofpromotional samples to doctors. TheSupreme Court observed that sale isnot a necessary condition for chargingexcise duty under the Central ExciseAct, 1944. The Court further observedthat the companies made the productsfor selling them in the market and thenchose to give away some units as freesamples; they were simply advertisingtheir goods.Source: Times of IndiaJanuary 14, 2011Tribunal DecisionsConstruction of residential quarters for employees of Income Tax department is not liable toservice taxThe taxpayer was awarded a contract for construction of residential quarters for income taxdepartment by Central Public Works Department (“CPWD”). The contract was executedbetween the periods from June 16, 2005 to July 30, 2007. Revenue demanded service taxclassifying the construction activity under “construction of complex service”.

The taxpayer contended that the service has been provided to Government of India and thatthe residential units are for personal use and therefore not taxable as per the definition undersection 65(30a) of the Finance Act, 1994 (“Act”). The Revenue on the other hand contendedthat CPWD is a independent body and not a Government of India Department. The Tribunal,accepting the contentions of the taxpayer observed as follows:●●●The tenders are invited on behalf of the President of India. The agreement andguarantees executed by the taxpayer have been accepted by CPWD for and onbehalf of the President of IndiaThere was no agreement between the CPWD and Income Tax department. Thisis one department taking the help of another department to get work donebasically because of specialization of that department.The service provided by the taxpayer is to be treated as service provided toGovernment of India directly. The end use of the residential complex by theGovernment of India is covered by the definition ‘personal use’ in the explanationto the definition of residential complex serviceSnippetDespite some States refusing tochange their stance onimplementation of the Goods andServices Tax (“GST”), the Centreplans to move ahead with the idea byinitially aligning central excise andservice tax in the Budget 2011-12.The Finance Ministry is contemplatingintroducing two rates for services -one standard and the otherconcessional - in a move towardsalignment of service tax and centralexcise.Source: Indian ExpressJanuary 17, 2011The Tribunal also accepted the alterative submission of taxpayer that the contract betweenthe appellant and the CPWD was a works contract and no service tax was payable prior toJune 1, 2007.Khurana Engineering Limited vs CCE (2010 TIOL 1712) (Ahmedabad)Cenvat credit on input services is not allowed on the basis of debit notesThe issue arose before the Tribunal as to whether Cenvat credit can be allowed on inputservice tax on the basis of the debit note issued by the service provider. The Tribunalobserved that Rule 9(1)(i) of the Cenvat credit rules, 2004 stipulates that Cenvat credit oninput services can be on the strength of invoice, supplementary invoice, challan or bills ofentry and thus held that credit is not permissible based on any other document.Godrej Consumer Products Limited vs CCE (20 STR 609) (Delhi)Overseas commission for business promotion is input service and service tax paid is anallowable creditThe taxpayer paid overseas commission towards business promotion and paid service taxthereon under reverse charge. The issue before the Tribunal as to whether the service taxpaid the taxpayer was allowable as Cenvat credit. The Revenue contended that the overseascommission paid had no connection with the manufacture or sale activities and thus was notan input service.The Tribunal observed that if the business promotion service received by the taxpayer adds tothe revenue by manufacture and sale of incremental quantity and consequently incrementalexcise duty, a nexus to such sale is established. The Tribunal also observed that the word‘includes’ in the definition of “input service” as per rule 2(l) of the Cenvat credit rules, 2004includes broad activities which are having nexus or integrally connected to business and heldthat the credit was eligible.CCCE vs Ambika Forgings (20 STR 662) (Delhi)SnippetThe Central Board of Excise andCustoms (“CBEC”) has entered intoan agreement with the Institute ofChartered Accountants of India, theInstitute of Cost and WorksAccountants of India and the Instituteof Company Secretaries of India, tohelp tax-payers assess their tax withease. The three institutes would setup facilitation centres at points calledcertified facilitation centre (“CFC”).The CFCs would work on behalf ofCBEC and enable a tax-payer take uptasks such as registration, e-filing ofreturns, filing of refund claims,

Excess payment of service tax for service provided to SEZ allowed to be adjusted againstsubsequent payment of service taxThe issue arose before the Tribunal was whether excess service tax paid for servicesrendered to special economic zone (“SEZ”) can be adjusted on subsequent service taxliability. The Revenue contended that the adjustment provided under rule 6(3) of the servicetax rules, 1994 is permissible only when no service has been rendered either in full or in part.The Tribunal observed that suo moto adjustment carried out by the taxpayer has beenaccepted by the Tribunal in other cases and that even if the Revenue was correct in itscontention, a liberal interpretation has to be taken. The Tribunal thus allowed the adjustmentof excess payment of service tax.CCE vs SRC Projects Limited (20 STR 687) (Chennai)digitalisation of documents, filingapplications and checking their statusamong others. The taxpayer will haveto pay a nominal fee for the purpose.Source: Times of IndiaJanuary 19, 2011Production of goods for a client is not taxable prior to June 16, 2005The taxpayer was engaged in electroplating (gold plating) of watch straps for various partieson job work basis. The Revenue demanded service tax under business auxiliary servicetreating the same as production of goods on behalf of clients. The taxpayer contended thatthe process undertaken by them does not amount to production and that the process was notundertaken on behalf of the client and thus was not taxable prior to June 16, 2005 (after thisdate, production or processing of goods for or on behalf of the client is taxable).The Tribunal relied on the earlier decision of the Ahmedabad Tribunal in PSL CorrosionControl Services Limited and held that the process amounts to production. The Tribunal alsoobserved that there should be three parties where the production is ‘on behalf of’ a client andheld that in the facts of case, there were only two parties to the transaction and thus thetaxpayer had not undertaken job work on behalf of their clients. The Tribunal held that theactivity was not taxable under the definition of business auxiliary service prior to June 16, 2005Sonic Watches Limited vs CCE (2010 TIOL 1518) (Ahmedabad)No service tax required to be paid for a composite contract for supply and erection,commissioning and installation of machineriesThe taxpayer was a manufacturer of machineries and entered into contracts with clients forsale of machineries for lump sum price including installation and commissioning charges. Thetaxpayer paid excise duty on the full value. The taxpayer had also engaged sub-contractorsfor the purpose of installation and commissioning and the sub-contractors paid service tax onthe services provided. The Revenue demanded service tax from the taxpayer for theinstallation and commissioning service on the total lump sum price charged.SnippetThe Centre is planning to bring inaround 10-12 services under theservice tax ambit in Budget 2011-12. Itincludes some advisory services asthe Finance Ministry plans to boostservice tax collections withouttinkering too much with tax rates. TheFinance ministry is in two minds aboutincluding potential areas likeElectricity transmission, education andhealth in the tax net.Source: Business StandardJanuary 21, 2011The Tribunal observed that the taxpayer was a manufacturing unit and not a commissioningand installation agency. The Tribunal also observed that if the purchase order is for completeplant and machinery duly commissioned, no separate amount is recovered for erection,installation and commissioning, excise duty is paid on entire contract value and the activity isintegrally related and connected with the manufacturing activity, no service tax is payable.Alidhara Texspin Engineers vs CCE (20 STR 315) (Ahmedabad)VAT/CST

Supreme Court DecisionPenalty for issuing Form C for purchase of items not covered in the certificate of registrationleviable only if there is mens reaThe issue which arose for consideration was whether mens rea is essential for levy of penaltyunder section 10(b) read with Section 10A of the Central Sales Tax Act, 1956 (“Act”) forissuing Form C for purchase of items not covered in the certificate of registration. TheSupreme Court observed as under:●●●●Although the Court has examined the requirement of mens rea on variousoccasions, no abstract principle of law has been evolved which could be appliedto determine the question.In examining whether mens rea is an essential element of an offence createdunder a taxing statute, regard must be had to the following factors: (i) the objectand scheme of the statute; (ii) the language of the section and; (iii) the nature ofpenalty.The object of Section 10(b) of the Act is to prevent any misuse of the registrationcertificate. However, the use of the expression "falsely represents" incontradistinction to "wrongly represents” is indicative of the fact that the offencecomes into existence only where a dealer acts deliberately in defiance of law oris guilty of contumacious or dishonest conduct. The ordinary remedy for thebreach of the provision is prosecution and penalty under section 10A of the Acthas been prescribed in lieu of prosecution. Considering the nature of penalty, alltypes of omissions or commissions in use of Form C will not be embraced in theexpression “falsely represents”.Thus, a finding of mens rea is a condition precedent for levying penalty undersection 10(b) read with section 10A of the Act. The burden would be on therevenue to prove the existence of circumstances constituting the offence.However, the Supreme Court remitted the cases back to the adjudicating authority for freshconsideration as to whether penalty was leviable in the facts and circumstances of the case..CST vs Sanjiv Fabrics (2010 TIOL 71)High Court DecisionsExport sale is not covered under section 3(4) of the TNGST Act to levy the differential taxThe taxpayer effected purchase of chemicals, consumables and packing materials atconcessional rate of tax as per section 3(3) of the Tamil Nadu General Sales Tax Act, 1956(TNGST Act). The taxpayer used the same in the manufacture of goods which were exported.Revenue demanded sales tax under section 3(4) of the TNGST Act, which prescribespayment of the differential tax if the goods procured under concessional rate are not sold butdespatched outside the State for sale or in any other manner, except as a direct result of interstate sale. The High Court held that the differential tax cannot be levied in case of an ‘exportsale’ and observed as under:●Levy of tax on export sale is prohibited in national interest since exports earn

Further the Board has instructed that penalty under Rule 27 of Central Excise Rules, 2002and Rule 15A of Cenvat Rules can be invoked against such errant taxpayers.Instruction F No 267/117/2010-CX8 dated January 14, 2011CustomsExemption on import of goods for setting up of solar power generation projectThe Central Government by supersession of its Notification No 30/2010-Customs ofFebruary 27, 2010 and subject to specified conditions has granted concessional basiccustoms duty at the rate of 5 percent on import of all items of machinery, including primemovers, instruments, apparatus and appliances, control gear and transmission equipmentand auxiliary equipment (including those required for testing and quality control) andcomponents, required for the initial setting up of a solar power generation project or facility.Further, the import would also be exempted from Additional Duty of Customs leviable undersection 3 of the Customs Tariff Act, 1975.Notification No 1/2011 – Customs dated January 16, 2011Board clarifies on provisional release of goods for exportation which got seizedThe Board vide Circular No 33/2005-Customs of August 2, 2005 had allowed provisionalrelease of goods entered for exportation and is seized on the ground of mis-declaration interms of quantity and value. The Board has observed that export consignments continue to bedetained and not allowed clearance on provisional basis on account of pending test reports /investigations for alleged mis-declaration in terms of quantity, value and description of thegoods. In this regard the Board has clarified as under:●●●●In case the export goods are found to be mis-declared in terms of quantity, valueand description and are seized for being liable to confiscation under the CustomsAct, 1962, the same may be ordered to be released provisionally on execution ofa Bond of an amount equivalent to the value of goods along with furnishing anappropriate security in order to cover the redemption fine and penalty.In case the export goods are either suspected to be prohibited or found to beprohibited in terms of the Customs Act, 1962 or ITC (HS), the same should beseized and appropriate action for confiscation and penalty initiated.In case the export goods are suspected of mis-declaration or where declarationis to be confirmed and further enquiry / confirmatory test or expert opinion isrequired (as in case of chemicals or textiles materials), the goods should beallowed exportation provisionally.Export goods detained for purpose of tests etc. must be dealt with on priority andthe export allowed expeditiously unless the prohibited nature of goods isconfirmed. Continued detention of any export goods in excess of 3 days must bebrought to the notice of the Commissioner of Customs, who would safeguard theinterest of the genuine exporters as well as the Revenue.Circular No 01/2011-Customs dated January 14, 2011Board clarifies on monitoring of Export obligation

The Board vide Circular No 26/2009-Cus of September 30, 2009 and Circular No 5/2010-Cusof March 16, 2010 (“2010 Circular”) issued instructions regarding verification mechanism andmonitoring of Export Obligation (“EO”) under duty exemption/reward schemes. The Board hasobserved that detailed verification of reward scrips and the Export Obligation DischargeCertificates (“EODC”) was being conducted inspite of the instructions contained in the 2010Circular. In this regard the Board has instructed the Revenue to rigorously implement the2010 Circular and also instructed the Revenue on the verification/monitoring process.Instruction F NO 609/119/2010-DBK January 18, 2011Procedure for international transshipment of cargo simplifiedThe Board vide Circular No 6/2007-Customs of January 1, 2007 has outlined comprehensiveprocedures and guidelines for transhipment of cargo from one Custom station to otherCustom stations. The procedures regarding international transhipment of cargo arriving froma foreign destination and proceeding to a foreign destination via an airport in India from oneflight to another have been further simplified. Now, for the pre-sorted containers whereincargo does not require segregation, ramp to ramp or tail to tail transfer of cargo can beeffected, provided the same is carried out under preventive supervision on payment ofMerchant's Overtime Charges and observance of Cargo Transfer Manifest procedure. Inthese cases, transhipment Cargo meant for destination abroad need not be sent to cargowarehouses. In the case of containers other than pre-sorted containers, the existingprocedure for transhipment of Cargo (Foreign to Foreign) would continue to apply.Circular No 8/2011-Customs dated January 28, 2011Service TaxFumigation of export cargo is not covered under ‘cleaning services’The issue which arose for consideration was whether the activity of fumigation of export cargoincluding agricultural/horticultural produce, loaded into containers or otherwise, is a taxableservice falling under ‘Cleaning Services’. The Board has clarified that Fumigation of exportcargo does not satisfy the statutory definition of ‘cleaning activity’ under Section 65(24b) ofthe Finance Act, 1994. Further, Notification No 41/2007-ST of October 6, 2007as amended byNotification No 42/ 2007-ST of November 29, 2007 exempts specialised cleaning services ofcontainers used for export goods. This was in line with the international practice of making theexport consignments free from taxation in the country of its origin. Hence fumigation of exportcargo is not covered under Cleaning ServicesCircular No 132/1 / 2011 – ST dated January 12, 2011Disclaimer:This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation and does notexpress views or expert opinions of BMR Advisors. The newsletter is meant for general guidance and no responsibility for loss arising to any person acting orrefraining from acting as a result of any material contained in this newsletter will be accepted by BMR Advisors. It is recommended that professional advice besought based on the specific facts and circumstances. This newsletter does not substitute the need to refer to the original pronouncements.Contact Us | Archives

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