Issue 03 March, 2011

DIRECT TAXES …... 1-9

INDIRECT TAXES …….… 9

OTHER LAWS ………... 9 - 12

SN K

IMPORTANT DUE DATES… 12

Website : www.snkca.com Email: newsletter@snkca.com

DIRECT TAXES
Judicial pronouncements Newsletter
St. Lawrence Educational Society vs. CIT (Delhi High
Court)(W.P.(C) 1254/2010)

S. 10(23C)(vi) exemption cannot be rejected merely be-

cause there is a surplus

The assessee, a society running a school, applied for ex-

emption u/s 10(23C)(vi) on the ground that it was existing
“solely for the purpose of education and not for the purpose
of profit”. The CCIT followed CIT vs. Queens’ Educational
Society 319 ITR 160 (Utt) and rejected the application on
the ground that as the assessee had made a surplus from
its activities, it did not exist “solely” for educational pur-
poses. On a Writ Petition to challenge the rejection, HELD
allowing the Petition:
(i) To decide whether the institution exists solely for educa-
tion and not to earn profit the test of predominant object
of the activity has to be seen to decide. The purpose
does not lose its character merely because some profit
arises from the activity. It is not possible to carry on
educational activity in such a way that the expenditure
exactly balances the income and there is no resultant
profit, for, to achieve this, would not only be difficult of
practical realization but would reflect unsound principles
of management. In order to ascertain whether the insti-
tute is carried on with the object of making profit or not it
is duty of the prescribed authority to ascertain whether
the balance of income is applied wholly and exclusively
to the objects for which the applicant is established
(Aditanars Educational Institution 224 ITR 310 (SC) &
American Hotel and Lodging Association 301 ITR 86
(SC) followed);
(ii) Accordingly, the opinion expressed by the CCIT that the
educational institution seeking exemption should not
generate any quantitative surplus is legally untenable
and incorrect. The assumption that for exemption there
should not be any surplus and if it is otherwise the insti-
tution society exists for profit and not charity is not justi-
fied (Vanita Vishram Trust 327 ITR 121(Bom), Maa
Saraswati Trust 194 TM 84 (HP) and Pinegrove Interna-
tional Charitable Trust 327 ITR 73 (P&H) followed).
Disha India Micro Credit vs. CIT (ITAT Delhi)(ITA
No.1374/Del/2010)
Activity of giving micro-finance & earning interest is
“charitable purpose”
The assessee, a micro-finance company, applied for regis-
tration u/s 12A for exemption u/s 11. The CIT rejected the
application on the ground that (a) the objects showed a
profit motive, (b) the assessee was charging an interest rate
which was higher than that charged by banks & (c) the ac-
tivity of giving loans was a business activity and not a
“charitable purpose” u/s 2(15). On appeal by the assessee,
HELD allowing the appeal:
(i) On the issue whether the assessee has a “profit motive”
in pursuing its objects, the fact that the assessee is reg-
istered u/s 25 of the Companies Act prima facie shows
that the assessee is set up to promote “charity or any
other useful object” and intends to apply its profits in
promoting those objects.
1
DIRECT TAXES
Judicial pronouncements
The assessee is prohibited from
making payment of any dividend to
its members. The Objects provide
that the assessee has to promote
micro finance services to poor per-
sons and to help them rise out of
poverty without the motive of profit;
(ii) On the issue whether the activity of
promoting micro finance services is
a “charitable purpose” u/s 2(15), as
per CBDT Circular No.11 of 2008
dated 19.12.2008, a wide range of
objects for the welfare of economi-
cally and socially disadvantaged
people are covered and entities
which pursue these objects will be
eligible for exemption even if they
incidentally carry on a commercial
activity, subject, however, to the
conditions stipulated in s. 11(4A) or
the seventh proviso to s.10(23C)
(Bharatha Swamukhi Samsthe 28
DTR (Bang)(Trib) 113 followed);
(iii) The fact that there is a surplus from
the activity of micro financing can-
not by itself be a ground to say that
the assessee does not exist for
charitable purpose particularly
when the MOA & AOA provide that
the profit shall not be distributed
amongst the members but shall be
utilized towards the objects
(Thanthi Trust 247 ITR 785 (SC) &
Agricultural Produce and Market
Committee 291 ITR 419 (Bom) fol-
lowed).
CIT v. Oswal Agro Mills Ltd. [2011]
197 TAXMAN 25 (Delhi)
Depreciation is allowed on block of
assets and Revenue cannot segre-
gate a particular asset therefrom on
ground that it was not put to use
For relevant assessment year, as-
sessee claimed depreciation on its vari-
ous assets which included claim of de-
preciation in respect of a closed unit.
According to assessee, depreciation
was to be allowed as assets of that unit
remained part of block of assets and
were ready for passive use, which was
as good as real use. Assessing Officer
disallowed depreciation on closed unit.
Commissioner (Appeals) upheld disal-
lowance. On second appeal, Tribunal,
however, accepted assessee’s claim
and allowed depreciation on said unit. It
was held that when aforesaid unit re-
mained non-functional for a number of
years and there was no sign of that unit
becoming functional, principle of
‘passive user’ could not be extended to
said unit, however, as it was a case of
depreciation on block of assets, assets
of aforesaid closed unit could not be
segregated for purpose of allowing de-
preciation and depreciation had to be
allowed on entire block of assets.
Sponge Iron India Ltd. v. DCIT (ITA
No. 410 & 411/Hyd/2007)
Assessee not entitled to deprecia-
tion on a plant which is not in opera-
tion since its capitalization
Even after introduction of concept of
block assets, identity of the individual
assets are not lost and the Assessing
Officer can restrict the depreciation
having regard to the usage of a plant.
Logitronics Pvt Ltd vs. CIT (Delhi
High Court)(ITA No.1623 of 2010)
Question whether waiver of loan is
income or not depends on whether
loan was used for capital or revenue
purposes
The assessee, engaged in manufacture
of electronic products, took a loan from
SBI of which Rs. 4.76 crores was due
towards principal and Rs. 1.90 crores
was due towards interest. Owing to its
inability to repay the amounts, the as-
SNK
sessee entered into a settlement under
which an amount of Rs. 1.85 crores
was agreed to be paid towards the prin-
cipal and the balance was waived. The
whole of the interest was also waived.
The assessee offered the amount of
interest waived to tax though it claimed
that the principal sum waived was a
capital receipt. On appeal, the Tribunal
held that the question whether the prin-
cipal sum waived was income or not
would depend on whether the loan was
utilized for capital or revenue purposes
and directed the AO to go into the mat-
ter. On appeal by the assessee, HELD:
The answer to the question whether the
waiver of a loan is taxable as income or
not depends on the purpose for which
the loan was taken. If the loan was
taken for acquiring a capital asset, the
waiver thereof would not amount to any
income exigible to tax u/s 28(iv) or 41
(1). On the other hand, if the loan was
taken for a trading purpose and was
treated as such from the very beginning
in the books of account, its waiver
would result in income more so when it
was transferred to the P&L A/c in view
of Sundaram Iyengar 222 ITR 344
(SC).
Dr. Aswath N. Rao v. ACIT (ITA No.
2900/2005)
Second hand machinery purchased
for use as spare parts for existing
old machineries has to be consid-
ered as an allowable expenditure on
revenue side
When an assessee purchases the
spare parts for the existing machiner-
ies, same cannot be treated as capital
expenditure and it has to be treated as
revenue expenditure since these spare
parts are purchased for the mainte-
nance of the existing equipments.
2
DIRECT TAXES
Judicial pronouncements
Teja Constructions v. ACIT (ITA NO.
308/HYD/2009)
Once estimation of income is made,
further disallowances u/s. 40(a)(ia)
are not warranted
Where income of the assessee having
been determined by resorting to esti-
mation, there is no scope for any fur-
ther disallowance either in terms of sec-
tion 40(a)(ia)/40A(3) or otherwise.
CIT v. Surinder Pal Anand (ITA No.
156 of 2010)(P & H HC)
Where assessee files its return u/s
44AD, it is not under obligation to
explain individual entry of cash de-
posit
Once under section 44AD exemption
from maintaining of books of account
has been provided and presumptive tax
@ 8% of the gross receipt itself is the
basis for determining the taxable in-
come, the assessee is not under obli-
gation to explain individual entry of
cash deposit in the bank unless such
entry has no nexus with the gross re-
ceipts.
ACIT vs. R.K.B.K Fiscal Services Ltd
(ITAT Kolkata)(ITA No. 770/
KOL/2010)
Share sale price cannot be appor-
tioned towards transfer of
“controlling interest”
The assessee sold (off-market) shares
of Gujarat Ambuja Cements Ltd to Hol-
cim Mauritius for a consideration of Rs.
105 per share. The assessee claimed
that the consideration for the share had
(as per a valuation report) to be taken
at Rs.74.20 and the balance of
Rs.30.80 had to be treated as consid-
eration “for parting with managerial
control”. It was claimed that the said
sum of Rs.30.80 was not assessable as
there was no “cost of acquisition” of the
SNK
“controlling interest”. The AO rejected interest;
the contention on the ground that
(iv) As the agreement fixes the consid-
managerial control is not a separate
eration for the share at Rs. 90, the
asset and assessed the entire capital
valuation report splitting the consid-
gain as LTCG/STCG. On appeal, the
eration has no relevance. While Rs.
CIT (A) purportedly followed Vodafone
90 is assessable as LTCG/STCG,
International vs. UOI 311 ITR 46 (Bom)
Rs. 15 is assessable as “business
and held that the consideration had to
income”.
be apportioned towards the transfer of
the share and transfer of controlling
interest (as done by the assessee) and
the amount attributable to the latter was
not assessable to tax. On appeal by the
department, HELD reversing the CIT
(A):
(i) It is very unusual that the AO & CIT
(A) did not notice that under Article
5 of the agreement, the assessee
ACIT vs. Naishadh V. Vachharajani
was to receive Rs. 15 per share
(ITAT Mumbai)(ITA No. 6429/
towards non-compete undertaking
Mum/2009)
which was included in the sale con-
Despite high volume & short holding
sideration. This amount is assess-
period, shares gain is STCG
able as “business income” u/s 28
(va); The assessee, a marine consultant,
(ii) The argument that “controlling in- offered income by way of LTCG,
terest” was transferred with the STCG, speculative profit & profit from
shares is not acceptable because futures trading. The AO held that as the
the assessee is not a signatory to volume of transactions was high (222),
the period of holding of the STCG
the share purchase agreement and
shares was short (2 -5 Months) & there
the POA claimed was being given
was speculation & F&O profit, the
by the assessee to Mr. Narattom S.
Sekhsaria, who signed the said LTCG & STCG was assessable as
agreement on its behalf, was not business profit. On appeal, the CIT (A)
produced and it is not known reversed the AO. On appeal by the de-
whether the POA holder was au- partment, HELD dismissing the appeal:
thorized to transfer the “controlling (i) As regards the LTCG, the shares
interest”; were held for several years and so
(iii) The share transfer agreement the assessee has acted as investor
merely refers to the sale of shares and not as a trader and so the
and the non-compete covenant and gains are assessable as LTCG;
fixes the consideration at Rs. 90 & (ii) As regards the STCG, the view of
Rs. 15 respectively but does not the CIT(A) had to be upheld be-
refer to any “transfer of controlling cause
interest”. The other circumstances
(a) there was no intra-day trading,
(AoA etc) support the view that
there was no transfer of controlling
3
DIRECT TAXES
Judicial pronouncements
(b) most of the shares were held
for a period of 2 to 5 months,
(c) In the preceding AY, the AO did
not assess the STCG as busi-
ness income and on the princi-
ples of consistency, a different
view cannot be taken on the
same facts,
(d) the assessee has no borrow-
ings and
(e) merely because there was a
speculative busin``ess does not
mean that even delivery based
transactions of shares should
be assessed under the head
business.
Gagan Trading Co. Ltd vs. DCIT
(ITAT Mumbai)(ITA NO.591/MUM/07)
B/fd Business Loss can be set-off
against dividends assessed
“income from other sources”
shares held for business
The assessee, engaged in the business
of purchase and sale of shares, earned
dividend income of Rs. 43.48 lakhs
which it offered to tax as “income from
other sources”. The assessee set-off
the dividend income against its brought
forward business loss. The AO & CIT
(A) rejected the set-off on the ground
that u/s 72 business losses can only be
set-off against business income and not
“income from other sources”. On ap-
peal by the assessee, HELD allowing
the appeal:
U/s 72(1)(i), the brought forward busi-
ness loss can be set-off against “the
profits and gains of any business or
profession carried on” by the assessee.
S. 72 (1)(i) does not use the word
“assessable under the ‘head‘ profits &
gains of business”. So, the question is
whether the securities formed part of
the trading assets of the business and
the income there from was income from
the business. The answer to this ques-
tion has to be decided on commercial
principles and not on the basis of the
classification of ‘heads of income’ in s.
14. Though for the purpose of computa-
tion of the income, dividends are as-
sessable under the head “Other
Sources”, it does not cease to be part
of the income from business if the se-
curities are part of the trading assets.
Accordingly, the assessee is eligible for
set-off as claimed (Cocanada Rad-
haswmi Bank 57 ITR 306 (SC) & New
India Investment 130 ITR 778 (Cal) fol-
lowed).
as
if
Paharpur Cooling Towers Ltd vs. CIT
(Calcutta High Court)(ITA 256 OF
2002)
Under Expl to s. 73 even delivery-
based loss on shares is
“speculation” loss
The assessee, a company, was en-
gaged in the business of purchase &
sale of shares. It suffered a loss of Rs.
1.41 crores and claimed that this could
not be treated as “speculation loss” un-
der the Explanation to s. 73 on the
ground that (i) the assessee had taken/
given delivery of the shares and they
were not “speculative transactions” as
defined in s. 43 (5), (ii) the object of the
Explanation to s. 73 (as per CBDT Cir-
cular dated 24.7.1976) was to curb
“manipulation” and artificial loss and it
had to be confined to only such cases
& (iii) the loss was only on account of
SNK
fall in value of shares held as closing
stock and not on account of purchase
and sale of shares. The AO, CIT (A) &
Tribunal {85 ITD 745 (Kol)} rejected the
assessee’s claim. On further appeal,
HELD dismissing the appeal:
(i) The Explanation to s.73 creates a
fiction that the loss suffered by cer-
tain companies from the business
of purchase & sale of shares shall
be deemed to be speculation loss.
The Explanation is not inconsistent
with the object of introduction. The
CBDT Circular dated 24.7.1976
cannot be treated as guide for inter-
pretation of s. 73 when the provi-
sion is very clear and free from any
ambiguity;
(ii) The definition of “speculative trans-
action” in s. 43(5) is not applicable
to the Explanation to s. 73. The fact
that the assessee settled the trans-
actions by physical delivery is ir-
relevant. CIT vs. Arvind Invest-
ments 192 ITR 365 followed);
(iii) The fact that the Explanation to s.
73 was introduced to curb manipu-
lation does not mean that it has to
be confined to only those cases in
view of the clear language of the
provision.
Hyderabad Chemicals Supplies Ltd
vs. ACIT (ITAT Hyderabad)(ITA
No.352/Hyd/2005)
Despite absorption in earlier year, s.
80-IA unit loss to be set-off against
s. 80-IA profits
The assessee set up a windmill unit in
AY 1999-2000 which was eligible for
deduction u/s 80IA. The unit suffered
losses in AY 1999-2000 & 2000-01
which, together with the depreciation
thereon, was absorbed by the other
income of the assessee. In AY 2001-
02, the assessee claimed s. 80IA
4
DIRECT TAXES
Judicial pronouncements
deduction on the profits of the unit
without setting off the loss/depreciation
of the unit of earlier years and this was
allowed by the AO. Later, the CIT re-
vised the assessment u/s 263 and held
that pursuant to s. 80-IA(5), the loss
and depreciation of the unit had to be
notionally set off against the profits of
the unit. On appeal by the assessee,
HELD dismissing the appeal:
(i) That s. 80-IA deduction has to be
computed after deduction of the
notional brought forward losses
and depreciation of business even
though they have been allowed set
off against other income in earlier
years is concluded by the ITAT
Special Bench judgement in ACIT
vs. Gold Mine Shares & Finance
(P) Ltd 113 ITD 209 (SB) (Ahd)
against the assessee;
(ii) As regards the High Court judge-
ments in Mewar Oil & General
Mills 271 ITR 311 (Raj) (not fol-
lowed by the Special Bench) &
Velayudhaswamy Spinning Mills
vs. ACIT 38 DTR 57 (Mad)
(delivered after referring to the
Special Bench), though a judge-
ment of a non-jurisdictional High
Court prevails over a judgement of
the Special Bench, the former can-
not be followed, even though it is
the only High Court judgement on
the point, if “rendered without hav-
ing been informed about certain
statutory provisions that are di-
rectly relevant“.
CIT vs. M/s Brahma Associates
(Bombay High Court)(ITA No. 1194
of 2010)
Pre AY 05-06, a project approved as
“housing project” by local authority
eligible for deduction u/s 80-IB(10)
irrespective of extent of commercial
user
SNK
In AY 2003-04 the assessee undertook eligible for deduction;
the construction of a project at Pune
(ii) While the Special Bench was right
which was approved as a “residential
in holding that a project with resi-
plus commercial” project. The commer-
dential and commercial user to the
cial area of the plot was 20.83% of the
extent permitted under DC Rules
total area. The assessee claimed de-
would be a “housing project” and
duction u/s 80-IB(10) which was de-
eligible for deduction, it was not
nied by the AO & CIT (A) on the
justified in confining the deduction
ground that the expression “Housing
only to projects having commercial
Project” in s. 80IB(10) applied only to
area upto 10% of the BUA be-
projects consisting of residential units
cause once the basic argument of
and not to projects having commercial
the revenue that the housing pro-
units. On appeal, the Special Bench
jects with commercial user are not
(119 ITD 255) held that pre the amend-
entitled to Section 80IB(10) deduc-
ment in AY 2005-06, if the project was
tion is rejected, no restriction could
approved by the local authority as a
be imposed. If the project is ap-
“housing project” or if the project was
proved as a “housing project” de-
approved as “residential plus commer-
duction u/s 80-IB(10) is allowable
cial” and the commercial user did not
irrespective of the commercial
exceed 10% of the BUA, deduction
area;
was allowable in entirety. However, if
the commercial user exceeded 10%, (iii) The insertion of clause (d) to s. 80-
deduction was allowable only on the IB(10) w.e.f. 1.4.2005 to deny s.
residential units. On appeal by the de- 80-IB (10) deduction to projects
partment to the High Court, HELD: having commercial user beyond
the prescribed limits is not retro-
(i) S. 80-IB(10) (pre amendment
spective.
w.e.f. AY 2005-06) does not define
the expression ‘housing project’ Dhanesh Gupta & Co. v. CIT(C) [WP
but refers to housing projects (C) 2560/2008]
which are approved by the local Special Auditor, to whom work is
authorities. Under the local laws, assigned, is very much at liberty, to
the authorities are empowered to insist upon payment of such fee/
approve projects as “housing pro- remuneration as he may deem ade-
jects” with commercial user to the quate for work assigned to him
extent permitted under the DC
If the remuneration demanded by the
Rules framed by the respective
person proposed to be appointed as
local authority. Accordingly, if the
Special Auditor is not acceptable to the
legislature intended to restrict the
Chief Commissioner or the Commis-
benefit of deduction only to the
sioner, as the case may be, he may
projects approved exclusively for
not assign the work to him; but, it
residential purposes, then it would
would be difficult to accept that the
have stated so. However, as the
special audit can be assigned to a per-
legislature has provided that the
son without fixing either the remunera-
deduction is available to all hous-
tion or the norms on which the remu-
ing projects approved by a local
neration is to be calculated after the
authority, the result is that even
work is completed and conveying the
projects with commercial user ap-
same to him.
proved as a “housing project” are
5
DIRECT TAXES
Judicial pronouncements
CIT vs. M/s India Sea Foods (Kerala
High Court)(ITA.No. 128 of 2010)
AO entitled to issue s. 154 notice,
drop it, & issue s. 148 notice
The assessee claimed deduction u/s
80HHC without reducing 90% of the
items of income referred to in Explana-
tion (baa) to s. 80HHC which the AO
allowed vide s. 143(1) Intimation. To
rectify the mistake, the AO issued a
notice u/s 154 to which the assessee
objected. After the expiry of the period
for rectification, the AO issued a notice
u/s 148 & made a reassessment re-
ducing the s. 80HHC deduction. The
CIT (A) & Tribunal struck down the
reassessment on the ground, relying
on EID Parry 216 ITR 489 (Mad), that
after initiation of rectification proceed-
ings u/s 154, the AO does not have
jurisdiction to drop the same and pass
an assessment order u/s 147. On ap-
peal by the department, HELD allowing
the appeal:
If an assessment happens to be an
under-assessment or a mistaken or-
der, the course open to the AO is ei-
ther to rectify the mistake u/s 154 or to
make a reassessment u/s 147. While,
it is correct, as held in EID Parry 216
ITR 489 (Mad), that the AO has to
choose between the two and cannot
initiate both proceedings at the same
time, the principle of constructive res
judicata made applicable by the Ma-
dras High Court that the AO having
initiated rectification proceedings u/s
154 should stick to the same only and
cannot drop that and proceed u/s 147
is not acceptable. The fact that the AO
invoked s. 154 and dropped it does not
affect the validity of re-assessment u/s
147.
Radha Picture Palace v. DCIT [2011]
196 TAXMAN 534 (Ker.)
Firm - Assessed as such - Section
184 r.w.s. 144
Object of section 184(5) is such that
only assessees, who comply with
statutory provisions which include filing
of regular returns in time and co-
operating with department by comply-
ing with terms of notices issued under
sections 142 and 143(2), are entitled to
benefit of deductions towards payment
of interest, salary, bonus, commission,
etc., to partner of firm. Filing of return
against notice issued under section
148 itself is not same as filing a return
under section 139 and, so much so,
failures referred to in section 144(1),
which attract disallowance of deduc-
tions under section 184(5), are abso-
lute failures which cannot be remedied
by filing returns based on notice under
section 148.
Padam Prakash (HUF) vs. ITO (ITAT
Delhi Special Bench)(MA No. 57/
Del/2010)
Mistake in s. 254(2) order cannot be
rectified
The Special Bench passed an order u/
s 254(1) holding that the enhanced
compensation received by the as-
sessee for acquisition of its land was to
be assessed on receipt basis. The as-
sessee filed a MA claiming that there
were certain mistakes in the order
which was dismissed on the ground
that as the P&H High Court had held
that the order of the Special Bench
was not sustainable, the order of the
Tribunal had merged with the order of
the High Court and there was no ques-
tion of rectification of any mistake (see
117 ITD 129). Against this MA order,
SNK
the department filed a MA pointing out
that as the assessee was based in
Uttar Pradesh, the P&H High Court
had no jurisdiction over the assessee.
The department’s MA was allowed and
it was held that the P&H High Court’s
order was not good law and the obser-
vations made while disposing of the
assessee’s MA were not sustainable in
law and constituted an apparent mis-
take. Against the said MA order, the
assessee filed a MA contending that
the Tribunal could not rectify a mistake
in a MA order. HELD dismissing the
MA:
(i) S. 254 (2) can be invoked only if
there is a mistake in the order
passed by the Tribunal u/s 254(1).
As the MA filed by the assessee is
against an order passed u/s 254(2)
it has to be rejected CIT vs. ITAT
196 ITR 838 (Ori) followed;
(ii) Though the s. 254(2) order against
which the rectification was filed
was also passed in respect of an
earlier s. 254(2), the only course
permissible to the assessee is to
file an appeal against that order
and not to approach the Tribunal
to contend that the said order
should be recalled on the ground
that it was an invalid order.
ITO v. Parikh Investment & Develop-
ment P. Ltd. (ITA No. 4760/
Mum/2009)
Making a wrong claim is not at par
with concealment or giving of inac-
curate information, which may call
for levy of penalty under section 271
(1)(c)
In order to apply the provisions of sec-
tion 271(1)(c), there has to be conceal-
ment of particulars of the income of the
assessee; the assessee must have
furnished inaccurate particulars of his
income.
6
DIRECT TAXES
Judicial pronouncements (International Taxation)
Rajeev Sureshbhai Gajwani vs.
ACIT (ITAT Ahmedabad – Special
Bench)(ITA Nos.1807 & 1978/
Ahd/2006)
Despite bar in s. 80HHE, Non-
Residents eligible for deduction in
view of non-discrimination clause
in DTAA
The assessee, a citizen of America
and a non-resident, exported software
from a PE in India and claimed deduc-
tion u/s 80HHE in respect of the profits
earned from export of computer soft-
ware by invoking the provisions of Arti-
cle 26 (2) of the India-USA DTAA. He
claimed that in view of Article 26(2), he
could not be treated less favourably
than a resident assessee. The AO &
CIT (A) rejected the claim on the
ground that the benefit of s. 80HHE
was available only to Indian compa-
nies & residents. On appeal, the mat-
ter was referred to the Special Bench.
HELD by the Special Bench:
(i) Article 26(2) of the India-USA DTAA
provides that the taxation of a PE of
an enterprise of a Contracting State in
the other Contracting State shall not
be less favorably levied in that other
State than the tax levied on enter-
prises of that other Contracting State
carrying on the same activities. In sim-
ple language, Article 26(2) means that
taxation of a PE of a USA resident
shall not be less favorable than the
taxation of a resident enterprise carry-
ing on the same activities. The result
is that the exemptions and deductions
available to Indian enterprises would
also be granted to the US enterprises
if they are carrying on the same activi-
ties. As the assessee was carrying on
the “same activities” of export of soft-
ware as done by residents, it was enti-
tled to s. 80HHE deduction as admis-
sible to a resident assessee
(Automated Securities Clearance Inc
vs. ITO 118 TTJ (Pune) 619 reversed;
Metchem Canada Inc vs. DCIT 99 TTJ
(Mum) 702 referred to);
(ii) If the provisions contained in the
DTAA are capable of clear and unam-
biguous interpretation, it is not neces-
sary to refer to the commentary on the
OECD Model Convention, the US
Technical Explanation or decisions of
any foreign jurisdiction (CIT vs. PVAL
Kulandagan Chettiar 267 ITR 654
(SC) followed).
Tata Sons Limited vs. DCIT (ITAT
Mumbai)(ITA No: 4978/Mum/04)
Despite DTAA restricting credit to
‘Federal’ taxes, Foreign ‘State’
taxes also eligible for credit u/s 91
In DCIT vs. Tata Sons Limited (43
SOT 27) it was held that the assessee
was not entitled to a deduction of for-
eign taxes such as Federal & State
taxes paid in the USA & Canada in
view of s. 40(a)(ii) which prevented the
deduction of “any taxes”. While Fed-
eral taxes are eligible for credit under
the India-USA & India-Canada DTAA,
State taxes are not eligible. On the
question whether the State taxes can
be allowed as a credit u/s 91 despite
the DTAA, HELD:
(i) The view that State taxes cannot be
allowed as a deduction and also can-
not be taken into account for giving
credit is incongruous and results in a
SNK
contradiction. A tax payment which is
not treated as admissible expenditure
on the ground that it is payment of
income tax has to be treated as eligi-
ble for tax credit;
(ii) While s. 91 allows credit for Fed-
eral & State taxes, the DTAA allows
credit only for Federal taxes. The re-
sult is that the s. 91 is more beneficial
to the assessee & by virtue of s. 90(2)
it must prevail over the DTAA. Though
s. 91 applies only to a case where
there is no DTAA, a literal interpreta-
tion will result in a situation where an
assessee will be worse off as a result
of the provisions of the DTAA which is
not permissible under the Act. S. 91
must consequently be treated as gen-
eral in application and must prevail
where the DTAA is not more beneficial
to the assessee. Accordingly, even an
assessee covered by the scope of the
DTAA will be eligible for credit of State
taxes u/s 91 despite the DTAA not
providing for the same.
Birlasoft (India) Ltd. v. Dy. CIT ITA
NO. 3839/DEL/2010
Internal benchmarking analysis un-
der TNMM based on segmental re-
sults prepared by using allocation
keys is justified
The Tribunal held that where the Tax-
payer had determined the arm’s length
price of their international transactions
on the basis of internal benchmarking
analysis. The Tribunal upheld the
transfer pricing method followed by the
Taxpayer whereby the net cost plus
margin earned from rendering soft-
ware development and related ser-
vices (“software services”) to associ-
ated enterprises (AEs) were compared
with the operating profit margin earned
from rendering software services to
unrelated parties.
7
DIRECT TAXES
Judicial pronouncements (International Taxation) / Circulars / Notification
Clear Plus India Pvt Ltd vs. DCIT
(ITAT Delhi)(ITA No.3944/D/2010)
Transfer Pricing: CUP method is
preferable to TNMM
The assessee sold automobile wipers
to its associated enterprise and
claimed that as per the “Comparable
Uncontrolled Price” (CUP) method, the
transactions were at arms’ length ba-
sis. The TPO rejected the CUP method
on the basis that the comparability of
controlled and uncontrolled transac-
tions was not established with certain
degree of reasonableness and accu-
racy and that the conditions prevailing
in the market were not established to
be identical. The TPO adopted the
TNMM and directed that an adjustment
be made by adopting the mean profit
of comparables. This was confirmed by
the DRP. On appeal, HELD:
(i) U/s 92C read with Rule 10B, the
most appropriate method has to be
applied for determination of arm’s
length price. In principle, the CUP
method (the traditional transaction
method) is preferable to the other
methods because all other things be-
ing equal, the CUP and traditional
transactional methods lead to more
reliable results vis-a-vis the results
obtained by applying transaction profit
method (UCB India 121 ITD 131 and
Serdia Pharmaceuticals followed);
(ii) For the CUP method, the focus is
on the market in which the products
are sold by the assessee and any
unique feature of the market in which
assessee is situated is of no impor-
tance in relative terms. As the goods
were sold by the assessee as well as
the competitive Chinese manufacturers
in the USA market, the market condi-
tions in the territory of sale were the
same. The buyer in the USA market
will be more concerned with quality
and price rather than economic condi-
tions prevailing in China and India
(SNF (Australia) Pty. Ltd. Vs. COT
(2010) FCA 635 referred to);
(iii) As regards the comparability of the
products the assessee has to provide
the sale data of the AE in terms of sale
price of Chinese and assessee’s
goods in the USA market and quantita-
tive data of purchase of Chinese and
Indian wipers by the AE and the terms
of payment and the AO shall compute
the arm’s length price using this data
on CUP method.
Circulars / Notifications
Notification No. 12/2011 [F.NO.
142/20/2010-SO (TPL)], dated 25-2-
2011
Govt notifies United Stock Ex-
change of India Limited as recog-
nized stock exchange u/s. 43(5) of
Income tax Act
In exercise of the powers conferred by
clause (ii) in the Explanation to clause
(d) of the proviso to clause (5) of sec-
tion 43 of the Income-tax Act, 1961 (43
of 1961), read with rule 6DDB of the
Income-tax Rules, 1962, the Central
Government hereby notifies the United
Stock Exchange of India Limited as
a recognized stock exchange for the
purpose of the said clause with effect
from the date of publication of this noti-
fication in the Official Gazette.
Press Release dated the 14th March
2011
No Routine Income Tax Scrutiny of
Senior Citizens and Small Tax pay-
ers Having Gross Income less then
10 Lakh - F.Y. 2011-12
Scrutiny of income tax returns is an
important mechanism for ensuring tax-
payer compliance and to counter tax-
evasion. However, it has evoked some
concern from small taxpayers and sen-
SNK
ior citizens about prolonged enquiries.
Concerns have also been raised about
selection of the same cases in scrutiny
year after year.
Appreciating the concern of these tax-
payers and with a view to mitigate their
hardships, Central Board of Direct
Taxes has reviewed its scrutiny selec-
tion procedure. In order to redress the
grievance, it has been decided that
during the financial year 2011-12,
cases of senior citizens and small tax-
payers, filing income-tax returns in
ITR-1 and ITR-2 will be subjected to
scrutiny only where the Income Tax
department is in possession of credible
information.
Senior citizens for this purpose would
be individual taxpayers who are 60
years of age or more. Small taxpayers
would be individual and HUF taxpayers
whose gross total income, before avail-
ing deductions under Chapter VIA,
does not exceed Rupees ten lakh.
Order [F.No. 225/25/2010/ITA-II], dt.
10-2-2011
Extension of time-limit for filing ITR-
V forms for A.Y. 2010-11 to 31-7-
2011
In exercise of its powers under section
119(2)(b) of the Income-tax Act, 1961,
the Central Board of Direct Taxes
(CBDT) hereby extends the time limit
for filing ITR-V forms relating to in-
come-tax returns for A.Y. 2010-11 filed
electronically (without digital signature)
on or after 1st April, 2010. These ITR-
V forms can now be filed upto 31st
July, 2011 or within a period of 120
days from the date of uploading of the
electronic return data, whichever is
later. This direction is issued to miti-
gate the hardship and grievances of
the tax payers who have been pre-
vented by reasonable causes to file the
ITR-V in time.
8
INDIRECT TAXES / OTHER LAWS
Judicial pronouncements
Notification No. 14/2011 [F. NO.
142/25/2008-SO(TPL)] dated 9-3-
2011
In exercise of the powers conferred by
section 295 of the Income-tax Act,
1961 (43 of 1961), the Central Board
of Direct Taxes hereby makes the fol-
lowing rules further to amend the In-
come-tax Rules, 1962, namely:-
1. (1) These rules may be called the
Income-tax (First Amendment)
Rules, 2011.
(2) They shall come into force on
the 1st day of April, 2011.
2. In rule 6DDA of the Income-tax
Rules, 1962,–
(a) for clause (iv), the following
clause shall be substituted,
namely: –
“(iv) the stock exchange shall
ensure that transactions
(in respect of cash and
derivative market) once
registered in the system
are not erased”;
(b) after clause (iv), the following
clause shall be inserted,
namely: –
“(v) the stock exchange shall
ensure that the transac-
tions (in respect of cash
and derivative market)
once registered in the
system are modified only
in cases of genuine error
and maintain data regard-
ing all transactions (in
respect of cash and de-
rivative market) registered
in the system which have
been modified and submit
a monthly statement in
Form No. 3BB to the Di-
rector General of Income-
tax (Intelligence), New
Delhi within fifteen days
from the last day of each
month to which such
statement relates.”
3. In rule 6DDB of the Income-tax
Rules, 1962, in clause (iii) of sub-
rule (2), for the word, brackets and
letters “clause (iv)”, the word,
brackets and letter “clause (v)”
shall be substituted.
INDIRECT TAXES
Judicial Pronouncements
CCE v. M/s. Mehta & Co.
Permanently fixed furniture too sub-
ject to excise - SC
The SC held that central excise duty
can be levied on furniture permanently
fixed to the walls or ground. It set aside
the decision of the Customs, Excise
and Service Tax Appellate Tribunal,
Bangalore, which took a contrary view.
This Mumbai Company was engaged
in interior decoration of luxury hotels. It
entered into turn-key contracts with its
clients and furniture was part of the
work contract. When the revenue au-
thorities demanded excise duty, it pro-
tested the woodwork was carried out in
the premises of the hotels and they
were permanent fixtures. They cannot
be removed without causing damage
to the goods or cannibalisation. When
the contention was rejected, the firm
moved the tribunal, which accepted its
SNK
argument. The excise commissioner
appealed to the SC. It quashed the
tribunal’s order.
Textech International (P) Ltd. v.
Commissioner of Service tax [2011-
21- STR- 289-Tri-Chennai]
Refund available to exporters prior
to registration
The issue under consideration was
eligibility of the exporters to claim re-
fund of tax paid on input services per-
taining to the period when they were
not registered with the service tax de-
partment.
The Tribunal, while referring to the pro-
visions of Section 69 of the Act and
Rule 4(1) of the Service tax Rules, ob-
served that only a person who is liable
to pay Service tax is required to apply
for registration. Since the appellant in
this case had exported the entire out-
put service, he was not required to pay
Service tax and hence, the law did not
mandate him to take registration. Ac-
cordingly, non-registration cannot be a
ground for denying refund and hence,
the taxpayer is entitled to claim refund
of tax paid on input services for the
period for which Service tax registra-
tion was not obtained.
OTHER LAWS
COMPANY LAW
General Circular No. 6/2011 F.No.
17/56/2011-CL-V dated 8 March,
2011
Process of incorporation of Compa-
nies ( Form-1) and establishment of
principal place of business in India
by Foreign Companies ( Form-44) –
Procedure simplified.
The Ministry has received various rep-
resentations regarding time taken by
the Registrar of Companies for regis-
tration of Form-1 and Form-44.
9
OTHER LAWS
Circular / Notifications
The Ministry has got the issue exam-
ined by Business Process
engineering Group under MCA-21 and
in order to speed up and simplify the
process of incorporation of Companies
and establishment of principal place of
business in India by Foreign Compa-
nies for reduction in time taken by
Registrar of Companies, the below
mentioned procedure have been rec-
ommended :
1. Only Form-1 shall be approved by
the RoC Office. Form 18 and 32
shall be processed by the system
online.
2. There shall be one more category,
i.e., Incorporation Forms ( Form
1A, Form 37, 39, 44 and 68) which
will have the highest priority for
approval.
3. Average time taken for incorpora-
tion of company should be re-
duced to one (1) day only.
4. A Notification to notify
changes in e-forms 18 and 32 to
enable them to be taken on record
through STP mode for aforesaid
procedure is being issued sepa-
rately.
OTHERS
Press Release : 2010-2011/1276
dated March 7, 2011
RBI sets up Working Group to ex-
amine Issues relating to NBFC Sec-
tor
The Reserve Bank of India has consti-
tuted a Working Group under the
Chairmanship of Smt. Usha Thorat,
Director, Centre for Advanced Finan-
cial Research and Learning (CAFRAL)
to examine a range of emerging is-
sues pertaining to regulation of the
NBFC (non-banking financial compa-
nies) sector.
While examining a range of emerging
Re- issues pertaining to the regulation of
the sector, the Working Group will fo-
cus on the definition and classification
of NBFCs, addressing regulatory gaps
and regulatory arbitrage, maintaining
standards of governance in the sector
and appropriate approach to NBFC
supervision. The scope of examination
will, however, be within the current
legislative framework.
India and Isle of Man Sign Tax Infor-
mation Exchange Agreement dated
February 8, 2011
India and Isle of Man have signed a
Tax Information Exchange Agreement
(TIEA) on 4th February, 2011 in Lon-
don. The agreement has been signed
by Shri Nalin Surie, High Commis-
sioner of India to the United Kingdom
from Indian side and Hon. Anne
Craine, MHK, Minister of the Treasury
from Isle of Man side. This is the sec-
ond TIEA being signed by India. First
minor TIEA was signed by India with Ber-
muda in Delhi on 7th October, 2010.
Salient features of the agreement with
Isle of Man are:
- It is based on international standard
of transparency and exchange of
information.
- Information must be foreseeably
relevant to the administration and
enforcement of the domestic laws
of the Contracting Parties concern-
ing taxes covered by the agree-
ment.
- The requesting State has to provide
some minimum details about the
information requested in order to
justify the foreseeably relevance
criteria.
- Information is to be treated as se-
cret and can be disclosed to only
specified person or authorities,
SNK
which are tax authorities or the au-
thorities concerned with the deter-
mination of tax appeal.
- It also provides for disclosure of
information to any other person or
entity or authority or any other juris-
diction with the written consent of
the competent authority of the re-
quested Party.
- There is a specific provision that
the requested Party shall provide
upon request the information even
though that Party may not need
such information for its own tax pur-
poses.
- There is a specific provision for pro-
viding banking and ownership infor-
mation.
- The Agreement also allows ex-
change of past information in crimi-
nal tax matters.
India-Norway Tax Treaty renegoti-
ated dated 7 February 2011
The India-Norway tax treaty has been
renegotiated and signed on 2 Febru-
ary 2011, to replace the existing tax
treaty between the two countries upon
entering into force. The key highlights
of the renegotiated tax treaty are as
follows:
- The place of effective management
of an entity can now be determined
through Mutual Agreement Proce-
dure, in case it cannot be deter-
mined otherwise
- Provision for insurance Permanent
Establishment (PE) inserted
- Lower rate of taxation of dividend
and interest in the source country
i.e. 10 percent;
- Removal of limited tax sparring
contained in the Article on ‘Method
for Elimination of Double Taxation’
10
OTHER LAWS
Circular / Notifications
- The scope of Article on ‘Associated
Enterprise’ is wider to enable reso-
lution of Transfer Pricing matter
through Mutual Agreement Proce-
dure
- Article on Exchange of Information
which, inter alia, provides for ex-
change of banking information and
- Article on Limitation of Benefit has
been incorporated.
Press Release No. 402/92/2006-MC
(04 of 2011), dated 12-2-2011
India has signed its fourth TIEA with
Bahamas
India has entered into a Tax Informa-
tion Exchange Agreement (TIEA) with
the Bahamas. The Agreement was
signed on 11th February 2011 by the
High Commissioner of India to Ja-
maica (concurrently accredited to the
Commonwealth of The Bahamas) on
behalf of India and the Minister of
State for Finance on behalf of the Gov-
ernment of the Commonwealth of The
Bahamas.
The agreement provides for sharing
information, including exchange of
banking and ownership information.
Although the information shared will be
covered under the secrecy clause, it
can be shared with specified tax au-
thorities or authorities concerned with
determination of tax appeals. Informa-
tion can also be shared for other pur-
poses with the prior consent of the giv-
ing party.
This is the fourth TIEA entered into by
India in recent months. Earlier, India
had signed similar TIEAs with Ber-
muda, Isle of Man and British Virgin
Islands.
Individuals cannot trade in forex
market: RBI
The Reserve Bank said resident Indi-
ans cannot trade in forex market as
per the existing regulation.
The existing regulations under Foreign
Exchange Management Act (FEMA),
1999, do not permit residents to trade
in foreign exchange in domestic or
overseas markets, RBI said in a state-
ment.
The clarification of the RBI assumes
significance in the light of several peo-
ple losing heavily in forge trade
through internet portals in the recent
past.
It also said, remittance in any form to-
wards overseas foreign exchange trad-
ing through electronic/internet trading
portals is not permitted under the
FEMA.
RBI cautioned investors against adver-
tisements issued by certain electronic
and internet portals offering trading or
investing in foreign exchange with
guaranteed high returns.
Many companies even engage agents
who personally contact gullible people
to undertake forex trading and invest-
ment schemes and entice them with
promises of disproportionate or exorbi-
tant returns.
Notification No. S.O. 479(E), dated 4-
3-2011
Merger Combination provisions un-
der Competition Act notified
The Competition Act, 2002 as
amended (the Act) was partly made
operative on different dates starting
from 31 March 2003. However, Sec-
SNK
tions 5 and 6 which deals with
“Regulation of Combinations” were not
yet notified to be operative.
On 4 March 2011, the Ministry of Cor-
porate Affairs has issued notification to
the effect that Sections 5, 6, 20, 29, 30
and 31 of the Act will come into force
from 1 June 2011. The Ministry has
also issued notifications providing re-
vised threshold limits of turnover and
value of assets for determining trans-
actions which will be covered under
Section 5 of the Act and laying down
certain exemptions from applicability of
Section 5 of the Act.
It should be noted that the combina-
tions covered under Section 5 of the
Act will need to be pre-notified to the
Competition Commission of India (CCI)
for approval prior to closing.
Electronics Corporation of India Ltd
vs. UOI (Supreme Court – 5 Judge
Bench)(Civil Appeal No. 1883 of
2011)
Supreme Court recalls law requiring
PSUs to obtain COD approval
In ONGC vs. CCE 104 CTR (SC) 31,
the Supreme Court directed the Cen-
tral Government to set up a
‘Committee on Disputes’ to monitor
disputes between the Government and
Public Sector Enterprises and give
clearance for litigation. It was held the
no litigation could be proceeded with in
the absence of COD approval. This
was followed in ONGC vs. CIDCO
(2007) 7 SCC 39 and it was held that
even disputes between PSUs and
State Governments would require
COD approval.
In CCE vs. Bharat Petroleum Corpora-
tion, a 2 Judge Bench of the Supreme
Court held that the working of the COD
had failed and that the time has come
to revisit the law.
11
OTHER LAWS
Circulars / Notification
The matter was referred to a Larger
Bench for reconsideration.
HELD by the Larger Bench recalling its
orders in ONGC vs. CCE 104 CTR
(SC) 31, (2004) 6 SCC 437 and ONGC
vs. CIDCO (2007) 7 SCC 39:
The idea behind setting up of the …
“Committee on Disputes” (CoD) was to
ensure that resources of the State are
not frittered away in inter se litigations
between entities of the State, which
could be best resolved, by an empow-
ered CoD … Whilst the principle and
the object behind the aforestated Or-
ders is unexceptionable and laudatory,
experience has shown that despite
Due Dates of key compliances pertaining to the month of March 2011:
best efforts of the CoD, the mechanism
has not achieved the results for which
it was constituted and has in fact led to
delays in litigation …. on same set of
facts, clearance is given in one case
and refused in the other.
This has led a PSU to institute a SLP
in this Court on the ground of discrimi-
nation. We need not multiply such illus-
trations. The mechanism was set up
with a laudatory object. However, the
mechanism has led to delay in filing of
civil appeals causing loss of revenue.
For example, in many cases of exemp-
tions, the Industry Department gives
exemption, while the same is denied
SNK
by the Revenue Department. Similarly,
with the enactment of regulatory laws
in several cases there could be over-
lapping of jurisdictions between, let us
say, SEBI and insurance regulators.
Civil appeals lie to this Court. Stakes in
such cases are huge. One cannot pos-
sibly expect timely clearance by CoD.
In such cases, grant of clearance to
one and not to the other may result in
generation of more and more litigation.
The mechanism has outlived its utility.
In the changed scenario indicated
above, we are of the view that time has
come under the above circumstances
to recall the directions of this Court.

5th Mar. Payment of Service Tax & Excise duty for February
th
6 Mar. Payment of Excise duty paid electronically through internet banking
7th Mar. TDS/TCS Payment for February
10th Mar. Excise Return ER1 / ER2 /ER6
15th Mar, PF Contribution for February
th
15 Mar, Payment of last installment of Advance Tax
st
21 Mar. ESIC Payment for February
st
31 Mar. Service Tax payment for Individual/HUF for the period Jan to March
Excise/Service Tax payment for March
Filing of belated pending returns

OUR OFFICES:

• MUMBAI • SURAT
• 303, Konark Shram, 3rd Floor, 156 Tardeo Road, Tardeo, 'SNK House' 31-A, Adarsh Soc, Opp. Seventh Day Adventist High
Mumbai-400 034. School, Athwalines, Surat-395 001.
• 49/2341, M.H.B. Colony, Ghandhinagar, Bandra(E) Tel. : 91-261-2656273-4 & 6544791-2 & 3299540 & 47
Mumbai-400 051 Fax : 91-261-2656868

Tel. : 91-22-26428494, 26451439, 26515396 • AHMEDABAD

Fax : 91-22-26455586 111, Nalanda Enclave, Opp. Chicago Hotel, Pritamnagar, Ellisbridge
• PUNE Ahmedabad-380 006.

E-2-B, 4th Floor, The Fifth Avenue, Dhole Patil Road Pune. Tel-fax: 91-79-26586348 & 30006348

Tel. : 91-20-32549007-8 Fax : 91-20-30529401

The information contained in this newsletter is of a general nature and it is not intended to address specific facts, merits and circumstances of any individ-
ual or entity. We have tried to provide accurate and timely information in a condensed form however, no one should act upon the information presented
herein, before seeking detailed professional advice and thorough examination of specific facts and merits of the case while formulating business deci-
sions. This newsletter is prepared exclusively for the information of clients, staff, professional colleagues and friends of SNK.

12