02 May 2018   

GST Rebooted | Episode 6 | simply inTAXicating

ICE CUBES

Don't Give Mythological Spin to India's Growth Saga

CASE LAWS

2018-TIOL-167-SC-IT + Story

CIT Vs HCL TECHNOLOGIES LTD: SUPREME COURT OF INDIA (Dated: April 24, 2018)

Income Tax - Sections 2, 10A, 80HHC & 143

Keywords: Beneficial provision - Export of software - export turnover - 'for purpose of this Section Only' - harmonious construction - technical services - total turnover

Whether when the I-T Act has not defined the term 'total turnover' in the statute, the same can be liberally imported from other Sections such as 80HHC and 80HHE for the purpose of Sec 10A - NO: SC

Whether when the Explanation of Section 80HHC clearly uses the expression 'for the purposes of this Section only' in relation to 'total turnover', even then Revenue can import the same to give meaning to the same term in Section 10A - NO: SC

Whether if deductions of certain expenses like freight, telecommunication & insurance attributable to export of software are allowed only from Export Turnover and not from Total Turnover, it would give rise to illogical results - YES: SC

The assessee company is engaged in the business of development and export of computer softwares and rendering technical services. The assessee returned gross income at Rs. 267,01,76,529/- while claiming deductions under Section 10A to the tune of Rs. 273,45,39,379/- showing a net loss of Rs. 6,43,62,850/-. The assessee for the AY 2004-05 also declared the undisclosed income at Rs. 91,25,68,114/-. Thereafter, on 31.03.2005, a revised return of income for Rs. 91,16,99,060/- was filed which was selected for scrutiny. And the AO held that the software development charges were nothing but in the nature of expenses incurred for technical services provided outside India.

Further, in view of the fact that it was not purely technical services and some elements of software development were also involved in it and in the absence of such bifurcation, the Assessing Officer estimated such expense at the rate of 40% and remaining 60% for providing technical services in foreign exchange to its offshore clients and re-assessed the taxable income at Rs. 137,20,34,576/- and penalty to the tune of Rs. 21,81,90,239/-.

The CIT(A) partly allowed the appeal while estimating 10% as software development charge incurred for technical services provided outside India as against 60% estimated by the Assessing Officer. Both appealed to the Tribunal which rejected the Revenue's appeal and allowed the assessee's appeal. And the HC also rejected Revenue's appeal.

On the appeal, the Apex Court held that,

++ the controversy revolves around the claim of certain expenses attributable to the delivery of software outside India or in providing technical services from ‘total turnover’ under Section 10A of the IT Act. It is an undisputed fact that neither Section 10A nor Section 2 of the IT Act defines the term ‘total turnover’. However, the term ‘total turnover’ is given in clause (ba) of the Explanation to Section 80HHC of the IT Act;

++ when the particular term has not been defined in any particular Section, is it allowed to import the meaning of such term from the other provisions of the same Act? Section 10A is a special beneficial provision and the purpose of deduction under such Section is to encourage and boost the new business undertakings situated in the free trade zone by providing suitable deductions to such business entities. Sometimes, while calculating the deduction, disputes arise regarding the methodology of deduction which ought to be followed. Undisputedly, it is a matter of record that the assessee is engaged in the activity of trading of generic software and providing customized software development services for domestic as well as for foreign clients through its two units situated in Software Technology Park, Gurgaon (Now Gurugram) which falls under the definition of the Section 10A of the IT Act. The contention of the assessee is that it incurred expenditure in foreign exchange in sending professionals abroad as per the agreements with the foreign constituents;

++ the assessee was engaged in the business of software development for its customers engaged in different activities at software development centres. In the process of such customized software development, certain activities were required to be carried out on the customers' site, located outside India for which the employees of the branches of the assessee located in the country of the customers are deployed. It is true that it is not defined that which activity will be termed as providing technical services outside India. Moreover, after delivery of such softwares as per requirement, in order to make it fully functional and hassle free functioning subsequent to the delivery of softwares in many cases, there can be requirement of technical personnel to visit the client on site. The Assessing Officer could not bring any evidence that the assessee was engaged in providing simply technical services independent to software development for the client for which the expenditures were incurred outside India in foreign currency;

++ the assessee has claimed deduction under Section 10A as per certificates filed on Form No. 56F. The assessee, while computing the deduction, has taken the same figure of export turnover as of total turnover. We are of the opinion that the definition of total turnover given under Sections 80HHC and 80HHE cannot be adopted for the purpose of Section 10A as the technical meaning of total turnover, which does not envisage the reduction of any expenses from the total amount, is to be taken into consideration for computing the deduction under Section 10A. When the meaning is clear, there is no necessity of importing the meaning of total turnover from the other provisions. If a term is defined under Section 2 of the IT Act, then the definition would be applicable to all the provisions wherein the same term appears. As the term ‘total turnover’ has been defined in the Explanation to Section 80HHC and 80HHE, wherein it has been clearly stated that “for the purposes of this Section only”, it would be applicable only for the purposes of that Sections and not for the purpose of Section 10A. If denominator includes certain amount of certain type which numerator does not include, the formula would render undesirable results;

++ the formula for computation of the deduction under Section10A of the Act would be as follows:

Export Profit = total Profit of the Business X	Export turnover as defined in Explanation 2 (IV) of Section 10A of IT Act __________________________
	Export turnover as defined in Explanation 2(IV) of Section 10A of the IT Act + domestic sale proceeds

++ in the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the assessee which could have never been the intention of the legislature;

++ even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well;

++ on the issue of expenses on technical services provided outside, we have to follow the same principle of interpretation as followed in the case of expenses of freight, telecommunication etc., otherwise the formula of calculation would be futile. Hence, in the same way, expenses incurred in foreign exchange for providing the technical services outside shall be allowed to exclude from the total turnover.

Revenue's appeal dismissed

2018-TIOL-170-SC-IT + Story

CIT Vs CONTAINER CORPORATION OF INDIA LTD: SUPREME COURT OF INDIA (Dated: April 24, 2018)

Income Tax - Section 80-IA - CBDT Notification No. S.O.744(E) dated 01.09.1998 - Customs Act, 1962 - Section 2(12) & CBEC Notification dated 24.04.2007.

Keywords: Customs port - Finance Acts, 1995, 1998 & 2001 - Inland Container Depots - ICD - Inland Port.

The Assessee-company is engaged in the business of handling and transportation of containerized cargo. In its return it claimed deduction under various heads including deduction u/s 80-IA. However, the claim for deduction on the profits earned from the Inland Container Depots (ICDs) and further the deduction on account of rolling stocks was rejected by the AO. The CIT(A) partly allowed the appeal while rejecting the deduction claimed u/s 80-IA. The assessee further filed an appeal before the Tribunal, which again partly allowed the appeal and held that the deduction u/s 80-IA can be claimed with regard to the rolling stocks of the company but not with regard to the ICDs. On further appeal by the assessee, the High Court allowed the appeals and held that the assessee was entitled to claim deduction on the income earned from the ICDs for the relevant period u/s 80-IA.

On hearing the parties, the Apex Court held that,

Whether the term 'Inland Port' which has not been defined in the I-T Act, can be disputed to exclude the expression Inland Container Depot - NO: SC

Whether income earned from Inland Container Depots is eligible for deduction u/s 80-IA - YES: SC

Whether the expression 'Port' as used in Sec 80IA(4) carries maritime connotation - YES: SC

++ the ICDs function for the benefit of exporters and importers located in industrial centers which are situated at distance from sea ports. The purpose of introducing them was to promote the export and import in the country as these depots act as facilitators and reduce inconvenience to the person who wishes to export or import but place of his business is situated in a land locked area i.e., away from the sea. These depots reduce the inconvenience in import and export in the sense that it reduces the bottlenecks that are arising out of handling and customs formalities that are required to be done at the sea ports by allowing the same to be done at these depots only that are situated near to them. The term ICDs was inserted in 1983 under Section 2(12) of the Customs Act, 1962 which defines 'customs port' and by the provisions of Section 7(1)(aa) of the Customs Act,1962 power has been given to the Central Board of Excise and Custom(CBEC) to notify which place alone to be considered as Inland Container Depots for the unloading of imported goods and the loading of export goods by Notification in the official Gazette;

++ with the purpose of boosting country's infrastructure and specially the transport infrastructure, the Finance Act, 1995 which came into effect from 01.04.1996 brought an amendment to the provisions of Section 80-IA of the IT Act. Section 80-IA talks about deduction in respect of profits and gains from industrial undertaking or enterprises engaged in the infrastructure development etc. The said amendment for the first time brought a provision under which a percentage of profits derived from the operation of infrastructure facility was allowed as deduction while computing the income of the assessee. A ten years tax concession allowed to the enterprises in accordance with the provisions of the Section subject to fulfillment of conditions given therein, which develops, maintains and operates any new infrastructure facility such as roads, highways, expressways, bridges, airports, ports and rail system or any other public facility of similar nature as notified. The assessee has been held entitled for the benefit of Section 80IA of the IT Act much before the Finance Act, 2001 which came into force on 01.04.2002 and exemption for the period of 10 years cannot be curtailed or denied by any subsequent amendment regarding the eligibility conditions under the period is modified or specific provision is made that the benefit from 01.04.2002 onwards shall only be claimed by the existing eligible units if they fulfill the new conditions;

++ the term port, in commercial terms, is a place where vessels are in a habit of loading and unloading goods. The term 'Port' as is used in the Explanation attached to Section 80-IA(4) seems to have maritime connotation perhaps that is the reason why the word airport is found separately in the Explanation. Considering the nature of work that is performed at ICDs, they cannot be termed as Ports. However, taking into consideration the fact that a part of activities that are carried out at ports such as Customs clearance are also carried out at these ICDs, the claim of the assessee can be considered within the term 'Inland port' as is used in the Explanation. It is significant to note that the word 'Inland Container Depots' was first introduced in the definition of 'Customs Port' as is given in Section 2(12) of the Customs Act, 1962, through amendment made by the Finance Act, 1983 with effect from 13.05.1983;

++ the term 'Inland Port' has been defined nowhere. But the Notification that has been issued by the Central Board of Excise & Customs (CBEC) dated 24.04.2007 in terms holds that considering the nature of work carried out at these ICDs they can be termed as Inland Ports. Further, the communication dated 25.05.2009 issued on behalf of the Ministry of Commerce and Industry confirming that the ICDs are Inland Ports, fortifies the claim of the assessee. Though both the Notification and communication are not binding on CBDT to decide whether ICDs can be termed as Inland Ports within the meaning of Section 80-IA of the IT Act, the Revene is unable to put forward any reasonable explanation as to why these notifications and communication should not be relied to hold ICDs as Inland Ports. Unless shown otherwise, it cannot be held that the term 'Inland Ports' is used differently under Section 80-IA of the IT Act. All these facts taken together clear the position beyond any doubt that the ICDs are Inland Ports and subject to the provisions of the Section and deduction can be claimed for the income earned out of these Depots. However, the actual computation is to be made in accordance with the different Notifications issued by the Customs department with regard to different ICDs located at different places.

Revenue's appeal dismissed

2018-TIOL-169-SC-IT

DCIT Vs CORRTECH INTERNATIONAL PVT LTD: SUPREME COURT OF INDIA (Dated: April 27, 2018)

Income Tax - Writ - Sections 143(1D) & (2) & 241.

Keywords - Expeditious disposal - Release of refund & Suspension of refund.

The Assessee-company, engaged in the business of undertaking turnkey projects for pipeline construction, HDD, and cathodic protection services, had filed its return declaring a total loss of Rs. 36.03 crores and claimed refund of Rs. 1.39 crores for the AY 2015-16. The Assessee had deposited sizeable tax principally through suffering TDS during the FY. The AO did not pass any order u/s 143(1), but, a notice u/s 143(2) was issued. The assessment proceeding was pending before the AO. For the AY 2016-17, the Assessee filed its return declaring a loss of Rs. 21.28 crores and claimed a refund of tax already paid of Rs. 1.58 crores. Thereafter, a revised return was filed by the Assessee, in reponse to which, neither oder u/s 143(1) was passed nor any notice was issued u/s 143(2). Consequently, the Assessee wrote a letter to the DCIT and requested for refund and pointed out the tax and refund liabilities of the Assessee for the last few AYs. The Assessee did not receive any response from the DCIT, upon which, the Assessee made several further representations along the same line. When the matter reached High Court, it was held that mere issuance of notice u/s 143(2) for extended period of return processing u/s 143(1) did not empowers the AO to sit tight over refund claims. The High Court further held that suspension of the refund arising out of the return filed was not automatic on issuance of notice u/s 143(2), till the passing of order u/s 143(1).

Having heard the parties, the Supreme Court condoned the delay and issued notices to respective parties directing their appearences for further hearing on the matter of suspension of refund by issuing notice u/s 143(2).

Notice issued

2018-TIOL-168-SC-IT

CIT Vs ODEON BUILDERS PVT LTD: SUPREME COURT OF INDIA (Dated: May 1, 2018)

Income tax - Sections 132, 133A, 153A

Keywords - third party information - bogus purchase - non existent entity - inflated expenditure

The assessee company filed its return declaring an income of Rs.6,16,40,171/-. Subsequently, a search u/s 132 was conducted in the Suncity Group of cases and consequently, a notice u/s 153A was issued to the Assessee. The case of the Revenue was that during the course of the assessment proceedings, the AO observed that the Assessee had entered into purchase transactions with PRPL. The AO required the Assessee to furnish the address of the said company. On the addresses furnished by the Assessee Company, a survey was conducted u/s 133A. However, on the given addresses, the said entity was found to be non-existent. Accordingly, the AO concluded that PRPL was only used as a conduit to inflate the expenditure of the Assessee. On account of the bogus purchase, the aforementioned addition was made by the AO. On appeal, the CIT(A) deleted the addition after concluding that entire disallowance was based on third party information gathered by the Investigation Wing of the Department, which have not been independently subjected to further verification by the AO. When the matter reached High Court, it was held that the mere fact that the seller did not have godown facilities, would have no relevance while examining the invoices of purchase transaction.

Having heard the parties, the Supreme Court dismisses the SLP preferred by Revenue Department, thus concurring with the opinion of High Court on the issue of relevance of godown facility for purpose of examining veracity of purchase invoices.

Revenue's SLP dismissed

2018-TIOL-819-HC-MAD-VAT

STATE OF TAMIL NADU Vs SHREE ENTERPRISES: MADRAS HIGH COURT (Dated: April 12, 2018)

Tamil Nadu General Sales Tax - Sections 3(3), 16(1)(b) & 16(2)

Keywords - Concessional rate of tax - Pulpwood - Timber

THE assessee, engaged in dealing in timber, was assessed for the relevant AY. Subsequently, the assessment was revised to levy a higher tax rate of 8% on the turnover declared, instead of the earlier tax rate of 3% u/s 16(1)(b) of the Act. Further, a penalty was imposed on the assessee u/s 16(2) of the Act. On appeal, while the Appellate Authority confirmed the higher tax rate of 8%, the penalty imposed was set aside. Subsequently, the Tribunal held that the tax rate of 3% was leviable upon the assessee's turnover. In arriving at such conclusion, the Tribunal relied on the decision of the Madras High Court in M/s.T.S.R.Company, Madras Vs. State of Tamil Nadu as well as the decision in the case of Madras Electrical Conductors (P) Ltd., vs. State of Tamil Nadu. It also relied on the decision of the Apex Court in Mukesh Kumar Aggarwal & Co., Vs. State of Madhya Pradesh and others.

On hearing the matter, the High Court held that,

Whether pulpwood is equivalent to timber and the concessional rate of tax is not available to it - NO: HC

Whether timber is taxable at the concessional tax rate of 3% instead of the regular rate of 8% - YES: HC

++ though the counsel for the state sought for reversal on ground that pulpwood falls under entry 84(1) of First Schedule which relates to Timber and which is not eligible to purchase against Form XVII for the period from 01.04.1994 to 16.07.1996, this court is not inclined to accept the same and reverse a well-considered order of the Tribunal, which has relied on the decision of the Supreme Court in Mukesh Kumar Aggarwal & Co., Vs. State of Madhya Pradesh and others dated 18.12.1987 and decision of this Court in M/s.T.S.R.Company, Madras Vs. State of Tamil Nadu;

++ moreover,the counsel for the state further submitted that considering the nature of case, the Government had also issued orders for waiver of differential concessional rate of sales on the sale of eucalyptus timber payable under Tamil Nadu General Sales Tax Act, 1959 for the period between 01.04.1994 and 16.07.1996 in G.O.Ms.No.92, Commercial Taxes and Registration (D2) Department dated 06.06.2016. Considering relevant portions of the G.O.Ms.No.92, Commercial Taxes and Registration (D2) Department dated 06.06.2016., the order passed by the Tribunal is sustained.

Revenue's appeal dismissed

2018-TIOL-818-HC-P&H-IT + Case Story

GREATER MOHALI AREA DEVELOPMENT AUTHORITY Vs DCIT: PUNJAB AND HARYANA HIGH COURT (Dated: April 27, 2018)

Income Tax - Writ - Sections 143(3), 147 & 148.

Keywords - Change of opinion - External Development Charges - Reopening of assessment.

The assessee is a state development authority of Punjab. It had filed its return for relevant AY. The assessee had received certain External Development Charges (EDC) from land developers and real estate builders during the relevant year. The EDC were received from those land developers who had sought approval from the assessee to develop a Residential or Commercial Zones. The EDC was supposed be used by the assessee for executing External Development Works and other related jobs outside the land of the Land Developer who had paid the EDC. The EDCs were not brought to the ambit of tax by the assessee but were instead shown as a liability in its Balance Sheet under the head "Other Liabilities".

The assessment was completed u/s 143(3) of Act. The effect of the EDC upon the assessee's income was not referred in the assessment order. Subsequently AO noted from records that receipt and expenditure of the EDC amount was a regular, routine and re-occurring phenomenon. Thus the receipt of EDC was attributable to its regular business and was clearly revenue in nature. The assessee was required to show receipts of EDC in P&L a/c and debit the expenses incurred on account of the same. The net amount received should be brought to the ambit of tax. However, the assessee had failed to do so. This failure on the part of the assessee had led to escapement of taxable income. Thus AO resorted to re-assessment and the assessee filed objections against the same. The Revenue disposed of the objections. It was held that re-opening of the assessment was not based on a change of opinion and that the proceedings were valid.

In Writ, the High Court held that,

Whether when the assessee has furnished all informations relating to EDC receipts in its return but if the AO fails to examine or raise any query about the same, it can be argued during Sec 147 proceedings that the assessee has provided information not only FULLY but also TRULY - NO: HC

Whether when no inquiry was made by the AO about a particular receipt during assessement, if Sec 147 provisions are invoked, the same is to be described as 'change of opinion' - NO: HC

++ section 147 requires the assessee to declare the material not merely fully but also "truly". These requirements were not met either in the return or in the answer to the query relating to EDC. A questionnaire was indeed issued during the assessment proceedings. There was, however, no specific question with regard to EDC. Moreover from a perusal of the order sheet of the AO it is evident that after the filing of the reply to the questionnaire, details were asked only regarding administrative expenses incurred office-wise, installments received of houses and details of houses and their costs, as to why CPF contribution may not be disallowed. This itself shows that there was no discussion or application of mind by the A.O. on the issue of EDC;

++ this is not a case where any inference had been drawn by the A.O. regarding EDC. The case would have been different if the A.O. during the course of assessment had raised a query with regard to the EDC. The assessee would have produced the material relating to it and thereafter the A.O. would have either accepted the contentions or rejected them. In such circumstances, the primary facts would have been before the A.O. It would have been for him to probe further, if so required. This is not the situation in this case. Hence, the reopening cannot be said to be without jurisdiction;

++ there is no question in the facts of the present case of the re-opening being on account of a change of opinion. The issue of change of opinion could only arise if the issue had been dealt with or the material with regard to EDC was there before the AO at the time of framing the assessment. As is apparent from the record, the issue was not considered at the time of assessment. There was no occasion for the AO to make further inquiry with regard to EDC;

++ there cannot be any quarrel with the proposition that the assessee has no control over the framing of an assessment order. There can be cases where after discussion the A.O. may be satisfied on the issue and does not find it appropriate to discuss the same in the assessment order. This is not the case here. The assessee had failed to establish that there was any discussion or adjudication on the said issue.

Assessee's writ dismissed