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Digest of important case law January 2013 to October 2013
January, 08th 2014

S.2(IA): Agricultural income-Ownership of land is not a prerequisite-Firm can also claim exemption in respect of agricultural income derived from agricultural activity. [S.2(23)]
Assessee firms claimed exemption in respect of its agricultural Income. The AO rejected assessee’s claim on two grounds one is assesee was not the owner of the land and secondly being an artificial person, created by law; it could not be an agriculturist, conducting any of the agricultural activities of its own. The CIT(A) allowed assesee’s claim. On revenue’s appeal in Tribunal, Tribunal dismissed the appeal of the revenue and held that in order to come within the ambit of the Act, the person has to be an agriculturist and it was sufficient if revenue was derived from agricultural activities conducted on a land situated in India which is to be an agriculturist which derives revenues from agricultural activity. Tribunal further held that a cultivator may be the owner but it is not necessary that he has to be the owner. The revenue was derived from land or from agricultural operations only. Relationship between MSFC Ltd and the assesee firm could be described as that of the landlord and a tenant. The assessee firm had to make the payment of a fixed sum of Rs. 70 Lakhs every year to “M’ during the subsistence of the agreement regardless of production from the agricultural farm. Therefore AO was not correct in taking such a view. (A.Ys. 2002-03 & 2003-04)
ITO v. Gajanan Agro Farms (2013) 142 ITD 571 (Pune)(Trib.)

S.2(24): Income–Interest on loan – Resolution not to charge interest-Mercantile system of accounting.[S.145]
The assessee company passed a resolution not to charge interest in view of financial difficulties of borrowing companies. However, in the year under consideration, it was found that the borrowing companies were in sound financial position. Therefore, the addition of interest was held to be justified. (A. Y. 2007-2008)
CIT v. Brahmaputra Capital and Financial Services Ltd. (2013) 357 ITR 241 (Delhi)(HC)

S.2(47): Transfer–Capital gains–Accrual–consideration received in installments of four years – Capital Gains assessable in the year transfer took place. [S. 45]
The assessee having parted with the possession of the property in January, 2006 and received part consideration during the year ending 31.03.2006, the capital gains arising on the sale of the lands was assessable in A.Y. 2006-07 only, notwithstanding the fact that the consideration was received in installments covering a period of four years. (A. Y. 2008-09 & 2009-10)
Anwar Sadath & Ors. v. ACIT (2013) 90 DTR 362 (Coch.)(Trib.)

S.4: Income-Deposit–Levy of sales tax-Amount is not trading receipt. [S.2(24)]
The deposits were received by the assessee were neither collected ‘as sales tax” nor were they collected ‘by way of tax” .They were towards possible levy of sales tax on packaging charges and freight. Amounts to be returned if sale tax were not levied .Deposit cannot be assessed as trading receipt. (A.Y. 1985-1986)
Dalmia Cement (Bharat) Ltd. v. CIT (2013) 357 ITR 419 (Delhi) (HC)

S.4: Charge of Income-tax-Dharmada receipt.
Assessee collected 2 per cent in bill amounts from purchasers as dharmada for charitable purposes. Assessing Officer treated the said amount as income of in the hands if the assessee . Tribunal endorsed finding of Assessing Officer observing that there was no material to show that assessee made contribution to some of institutions on regular basis. High Court answered reference in favour of revenue. Assessee claimed that impugned decision of High court was not good law in light of decision of Apex Court in CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60. Since in impugned order High Court clearly stated that finding recorded by Tribunal purely related to appreciation of evidence and it did not give rise to any question of law and had answered question accordingly, High Court did not lay any law in respect of issue of Dharmada. therefore, impugned order was not contrary to decision of Apex Court in Bijli Cotton Mills (P.) Ltd. ‘Decision of Division Bench of Madhya Pradesh in Lilasons Breweries (P.) Ltd. v. CIT [MCC No. 668 of 1993, dated 16-7-1996] did not lay down any law in respect of issue of Dharmada and, hence, the same could not be held contrary to decision of Apex Court in CIT v. Bijli Cotton Mills (P.) Ltd. [1979] 116 ITR 60 [AY. 1981 -82, 1984-85 to 1986-87]
Lilasons Breweries Ltd. v. CIT (2013) 260 CTR 73 (Cal.)(HC)

S.4: Charge of income-tax-Mutual concern-Miscellaneous expenses and meeting expenses were incurred in pursuit of objects-No third party benefitted, status of mutuality could not be denied.
The Tribunal held that where miscellaneous expenses were incurred by assessee-association in pursuit of its objects and it could not be said that some third parties were benefited by incurring these expenses by assessee, status of mutuality could not be denied to assessee. (A.Ys. 2000-01 & 2003-04)
Tiruchirapalli District Bus Operators Association v. Dy. CIT (2013) 144 ITD 382 / 24 ITR 242 (Chennai)(Trib.)

S.4: Charge of income-tax–Diversion of sale proceeds of property held as stock-in-trade towards discharge of loan liability–loan borrowed on capital account–neither be claimed as deduction nor can be allowed as revenue expenditure. [S.28(i),37(1)]
Repayment of loan amount is application of income as loan is on capital account and therefore, amount diverted by the assessee out of sale proceeds of a property held as stock-in-trade for discharging the loan liability in lieu of its obligation to transfer the said property under the terms of the consent decree was application of income to the extent of the principal amount of loan, and the same can neither be claimed as deduction in the computation of profits and gains from business nor can be allowed as revenue expenditure.
Swan Energy Ltd. v. Addl. CIT (2013) 90 DTR 261 (Mum.)(Trib.)

S.5: Scope of total income–Derivates-Stock in trade-Accrual in case of F&O contracts-Taxable in the year of its actual realization.
Notional gains from derivates held as stock-in-trade is taxable in the year of its actual realization. The notional loss is allowable as no contingencies are attached. (A.Y. 2008-09)
Urudavan Invt. & Tdg. (P.) Ltd. v. Addl. CIT (2013) 56 SOT 69 (Mum.)(Trib.)

S.5: Scope of total income–Accrual-Release of retention money in respect of ongoing project against bank guarantee is not taxable.
Tribunal held that the project was ongoing, so the release of retention money against bank guarantee was not assessable during the relevant year. Tribunal & CIT(A) both followed the decision of Hon’ble Bombay High Court in the case of CIT v. Associated Cables (P) Ltd. (2006) 286 ITR 596 (Bom.) (A.Y. 2003-04)
Addl. DIT (IT) v. Ballast Nedam Dredging (2013) 154 TTJ 280 / 85 DTR 307 (Mum.)(Trib.)

S.5: Scope of total income–Accrual- Advisory fee/commission in connection with grant of loans.
The Tribunal held that the entire fee / commission accrued in this year and no part of it can be spread to next year. The CIT(A) was not justified in directing the spread over of the advisory fee over the period of loan. (A.Y. 2000-01)
Dy. DIT v. Toronto Dominion Bank Ltd. (2013) 153 TTJ 303 / 84 DTR 377 (Mum.)(Trib.)

S.9(1)(ii): Income deemed to accrue or arise in India – Salaries-Dependent personal services-In view of provisions of Treaty between India and Denmark, remuneration paid to Danish nationals was taxable in Denmark and not in India- DTAA-India-Denmark. [S. 5(2), Art.16]
Assessee was a non-resident company engaged in certain businesses in India. In respect of those businesses it employed certain Danish nationals for doing work in India and remunerated them for doing such work. Each of those Danish nationals was remunerated in respect of employment in India for a period not exceeding 183 days in concerned fiscal year and that remuneration was paid by or on behalf of an employer, who was not a resident of country and, in any event, remuneration was not borne by a permanent establishment or a fixed base, which employer had in India. In view of provisions of Treaty between India and Denmark, remuneration paid to Danish nationals was taxable in Denmark and not in India . The court held that where Danish nationals were remunerated in respect of employment in India for a period not exceeding 183 days in concerned fiscal year and such remuneration was paid by or on behalf of an employer, who was not a resident of country and, in any event, remuneration was not borne by a permanent establishment or a fixed base, which employer had in India, said remuneration would be taxable in Denmark and not in India.
DIT (IT) v. Maersk Co. Ltd.(2013) 351 ITR 366 / 215 Taxman 258 (Uttarakhand)(HC)

S.9(1)(vi): Income deemed to accrue or arise in India – Royalty-Copy right-Customized software-Non-exclusive & non-transferable license to use customized software not taxable as “royalty” under Article 12-DTAA- India-USA.[Art 12,Copy right Act,1857, S. 14(1),.]
The assessee, a USA company, set up a branch office in India for the supply of software called “MX”. The software was customized for the requirements of the customer (not “shrink wrap”). The Indian branch imported the software package in the form of floppy disks or CDs and delivered it to the customer. It also installed the software and trained the customers. The AO & CIT(A) held that the software was a “copyright” and the income from its license was assessable as “royalty” under Article 12 of the India-USA DTAA. On appeal by the assessee, the Tribunal held, following Motorola 270 ITR (AT) (SB) 62, that the income from license of software was not taxable as “royalty”. Before the High Court, the Department argued that in view of CIT vs. Samsung Electronics Co. Ltd. (2012) 345 ITR 494 (Kar), the right to make a copy of the software and storing it amounted to copyright work u/s 14(1) of the Copyright Act and payment made for the grant of a license for the said purpose would constitute royalty. HELD by the High Court dismissing the appeal:
In order to qualify as a royalty payment under Article 12(3) of the India-USA DTAA, it is necessary to establish that there is a transfer of all or any rights (including the granting of any licence) in respect of a copyright of a literary, artistic or scientific work. There is a clear distinction between royalty paid on transfer of copyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and non-transferable licence enabling the use of a copyrighted product cannot be construed as an authority to enjoy any or all of the enumerated rights ingrained in Article 12 of DTAA. Where the purpose of the licence or the transaction is only to restrict use of the copyrighted product for internal business purpose, it would not be legally correct to state that the copyright itself or right to use copyright has been transferred to any extent. The parting of intellectual property rights inherent in and attached to the software product in favour of the licensee/customer is what is contemplated by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with the owner/ transferor who divests himself of the rights he possesses pro tanto. The license granted to the licensee permitting him to download the computer programme and storing it in the computer for his own use is only incidental to the facility extended to the licensee to make use of the copyrighted product for his internal business purpose. The said process is necessary to make the programme functional and to have access to it and is qualitatively different from the right contemplated by Article 12 because it is only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. Consequently there is no transfer of any right in respect of copyright by the assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income-tax Act or under the DTAA ( ITA No. 1034 of 2009 dt. 22/11/2013.)

DIT v. Infrasoft Ltd (Delhi)(HC).

S.9(1)(vi): Income deemed to accrue or arise in India – Royalty -Bare-boat charter of a shipping vessel from a foreign party- Equipment rental is taxable as “royalty” even if payer does not have control. The retrospective insertion of Explanation 5 to s. 9(1)(vi) is purely clarificatory-DTAA –India-[S. 163,195 201,Art, 7, 12]
The High Court had to consider the following issues in the context of a bare-boat charter of a shipping vessel from a foreign party, the income whereof was held assessable as “royalty” u/s 9(1)(vi) & Article 12 in the hands of the foreign party: (i) whether the expression ‘use or right to use‘ in clause (iva) of Explanation 2 to s. 9(1)(vi) & Article 12 of the DTAA requires that there should be a “transfer of effective control for use” in favour of the lessee?, (ii) what is the impact of the retrospective insertion of Explanation 5 to s. 9(1)(vi) on the taxability of equipment royalty?, (ii) whether a ship can be regarded as “equipment”?, (iii) whether if the ship is used for plying between coastal waters, it can be said to be used for “international traffic”?, (iv) whether the two berths reserved for the ships chartered by the assessee can be said to be a “permanent establishment” of the foreign owner? & (v) whether a person who is treated as an “agent” u/s 163 can also be proceeded against u/s 201 for failure to deduct TDS? HELD by the High Court:

(i) The assessee’s argument that in a case where physical possession is not with the transferee or the lessee or the hirer, the payment made for the use of or right to use of equipment would not constitute ‘royalty‘ is not acceptable. Under clause (iva) of Explanation 2 to s. 9(1)(vi) ‘royalty‘ means the consideration paid for “the use or right to use“. Irrespective of whether there is any transfer or not, the consideration paid for use or right to use simpliciter is sufficient for the consideration being called as ‘royalty‘. The presence or absence of possession, effective/general control and custody with the assessee, even though may be matters of agreement, are not of any relevance to decide the character of payment. The same result applies under Article 12 of the DTAA (UOI v. Gosalia Shipping (P) Ltd. (1978) 113 ITR 307 (SC), OECD Commentary referred);

(ii) Explanation 5, inserted by Finance Act, 2012, w.r.e.f. 01.06.1976 clarifies that irrespective of control or possession or use or location in India such right, property or information with the payer; the payment is taxable as royalty. The Revenue does not need the assistance of Explanation 5 because even if the possession of the ship is with the owner, he has parted with the “right to use” the ship and the consideration thereof constitutes “royalty” even without Explanation 5;

(iii) The assessee’s argument that ship is not an “equipment” for purposes of s. 9(1)(vi) is not acceptable. The word ‘any‘ preceding an equipment clearly points out the need for construing ‘equipment‘ widely so as to embrace every article employed by the employer for the purposes of his business. A ship is “plant” u/s 43(3). “Plant” includes ‘all equipment’ used by a business man for carrying on his business. As a ship is used to carry on business, it is “equipment”;

(iv) The argument that a ship used for plying between coastal lines on the Indian shore is used in “international traffic” is not acceptable in view of the OECD Commentary;

(v) On the question of permanent establishment, a moving ship is a place of business in the place where the ship is docked. The fact that the ship moved from one point to another is the result of the nature of business contract and the movement is an integrated one having business and geographical coherence. Accordingly, the foreign enterprise has a permanent establishment in India when its ships are in India and the berths are reserved for it. However, the royalties paid are not “effectively connected” or attributable to such permanent establishment. Accordingly, the payment falls for consideration only under Article 12 and not under Article 7;

(vi) The assessee’s argument that a person who is treated as an “agent” u/s 163 cannot be proceeded against u/s 201 for failure to deduct TDS is not correct because the two provisions operate in different spheres. S. 195 casts an obligation on TDS on any person responsible for paying, whereas s. 163 is for assessment purposes. Proceedings u/s 201 has nothing to do with the status of the assessee as an agent u/s 160 and 163 which would assume significance only for assessment purposes.

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