CASE LAWS

2016-TIOL-1694-HC-MUM-IT

CIT Vs CABLE CORPORATION OF INDIA LTD: BOMBAY HIGH COURT (Dated: August 9, 2016)

Income tax - Actionable claims - Allowable deduction - Business loss - Investment - Non recovery of advances.

Whether grant of advances by an entity to another concern is liable to be considered as an 'investment' only and not 'loans', merely because such entity does not grant loans in its normal course of business - NO: HC

Whether any loss on account of non-recovery of such advances, would necessarily be a business loss in computing the profits and gains from business - YES: HC

Whether even a single transaction can by itself be classifiable as a business transaction - YES: HC

A) The assessee during the subject year had advanced an amount of Rs.103 lakhs in M/s. Varun Shipping Company Ltd., on account of business expediency. This advance of Rs.103 lakhs was only to ensure that the State Bank of India did not enforce the guarantee given by the assessee to the Bank in respect of the loan advanced by it to M/s. Varun Shipping Company Ltd. The AO while passing the assessment order had treated the interest on the amount advanced to M/s. Varun Shipping Company Ltd., as income of assessee, chargeable to tax under the head 'profit and gains of business'. This loss on account of nonrecovery of advances to Varun Shipping Company Ltd., was treated as a business loss and allowed by the impugned order of the Tribunal.

B) The assessee during the subject year had entered into an agreement with one of its Director. By the arrangement, its Director agreed to takeover the actionable claim of Rs.103 lakhs for consideration of Rs.45 lakhs either in his own name or in the name of his nominee. This resulted in a loss of Rs.58 lakhs. This loss of Rs.58 lakhs was allowed for the accounting period 31st December, 1977 relating to the A.Y 1978-79.

Having heard the parties, the High Court held that,

Non recovery of advances/Business loss

++ the primary submission on behalf of the Revenue is that the assessee is not in the business of advancing loans. However the same is not supported by any evidence such as the object clause of the MoA. It is found that merely because normally the assessee does not grant loans, it does not follow that the grant of advance to M/s. Varun Shipping Company Ltd., cannot be considered to be a loan but has to be considered as an investment. It is a settled position in law that even a single/ solitary transaction could by itself be classified as a business transaction. The other contention on behalf of the Revenue is that no prudent businessman would advance a loan to a company making a loss. This is not acceptable for the reason that the manner in which an Assessee carries out its business is entirely for the Assessee to decide. The Assessee is under no obligation to maximize its profits. The submission of Assessee was that the amount of Rs.103 lakhs were advanced to M/s. Varun Shipping Company Ltd., was on account of business expediency so as to ensure that the State Bank of India does not adopt proceedings to enforce the guarantee given by the Assessee for the loan granted to M/s. Varun Shipping Company Ltd. This, is a possible course of action adopted by a business;

++ it is further found that the investment of the Assessee in M/s. Varun Shipping Company Ltd., is reflected in its contribution to the share capital of M/s. Varun Shipping Company Ltd. This contribution can be considered to be an investment as any increase in profitability of M/s. Varun Shipping Company Ltd., would result in dividends and likely appreciation of the share price resulting in the investor earning more than the investment made. The advance of Rs.103 lakhs is not with the above objective/intention. In any case, it is very clear from the Assessment Order that the interest to the extent to which the Assessee had waived, on the advance of Rs.103 lakhs to M/s. Varun Shipping Company Ltd., was treated as business income and not as income from other sources. In the above view, the amount of Rs.103 lakhs advanced to M/s. Varun Shipping Company Ltd., cannot be considered to be an investment in the present facts but appropriately a loan in the course of carrying on of business. Consequently, any loss on account of non-recovery of Rs.103 lakhs or any part thereof, would necessarily be a business loss in computing the profits and gains from business;

Loss on sale of actionable claims

++ it was the case of the Revenue before the Tribunal that the sale of actionable claim only takes place when the deed of transfer is executed and not prior thereto. Consequently, the loss on sale actionable claim can only take place on the date of execution of the deed of transfer i.e. 30th March, 1978 i.e. next Assessment Year. This was an issue which did arise before the Tribunal, as it was urged on behalf of the Revenue. However, the Tribunal did not deal with the issue as urged and held that the loss was allowable in the subject A.Y 1978-79 as the Assessee itself had considered the same to be a bad debt/loss consequent to an arrangement dated 27th October, 1977. It was under this arrangement that one of its director agreed to purchase the actionable claim at Rs.45 lakhs either in his own name or in the name of his nominee viz: Pearl Threads Ltd., being subsequently nominated. We find that the impugned order of the Tribunal has proceeded on the basis that the amount of Rs.58 lakhs has been written off as loss in the year ending of 31st December, 1977 i.e. the previous year relating to A.Y 1978-79. This loss was claimed in its Profit & Loss Account and Balance Sheet for the year ending 31st December, 1977. Therefore, we need not examine the applicant's submission that the loss can only be claimed in the following A.Y 1979-80, as the finding of the Tribunal that the writing off of Rs.58 lakhs in the subject A.Y 1979-80 was on account of the arrangement dated 27th October, 1977 is not even attempted to be shown as not permissible in law. The arrangement dated 27th October, 1977 was one by which one of the directors of the Assessee had agreed to take actionable claim at a consideration of Rs.45 lakhs. This resulted in the Assessee being able to quantify the loss at Rs.58 lakhs on account of the actionable claim of Rs.103 lakhs being the amounts advanced to M/s. Varun Shipping Company Ltd. In these circumstances, the aforesaid subquestion as framed need not be answered.

Case disposed of

2016-TIOL-1693-HC-KAR-IT

CIT Vs VODAFONE SOUTH LTD: KARNATAKA HIGH COURT (Dated: July 28, 2016)

Income Tax - Sections 9(1)(vii), 194I, 194J, 201 & 201(1A).

Keywords - revenue sharing contract - technical services - human intervention - non deduction of tax - assessee as a defaulter.

Whether when the Tribunal, being a fact finding authority has found that the roaming process between participating entities is fully automatic and does not require any human intervention, can the same still be considered as Technical service on which TDS is deductible - NO: HC

The assessee is a mobile service provider Company. As per the assessee, whenever any roaming facilities was provided to the customer and subscriber, it was taking connectivity of that with another mobile service provider Company. As per the assessee, the payment made to the another mobile service provider Company was by way of revenue sharing contract and no technical services are involved nor any payment is made for technical services. However, as per the appellants - Revenue, the payment made by the assessee to the another mobile service provider Company for utilization of the roaming mobile data and the connectivity would fall in the arena of “technical services” and, therefore, TDS was required to be deducted under Section 194H read with Section 194J. AO held that the TDS was deductible and as TDS was not deducted, the amount as per Section 201 and 201(1A) were ordered to be recovered. On appeal, CIT(A) confirmed the view of AO and the appeals to that extent were dismissed. But other part of the allowing of the appeals was of the verification in the reduction of the liability under Section 201(1) read with Section 201(1A) and the directions were given by the Appellate Authority. But it was found in the appeal that the TDS was deductible. Tribunal by relying upon the decision of the Delhi High Court found that the fact situation are also the same and the payment made for roaming connectivity cannot be termed as “technical services” and, ultimately, it was found that the assessee could not be said as in default for non deduction of TDS at source on the roaming charges paid by it to the other service provider and the appeals were allowed to that extent.

Held that,

++ the contention made by the Revenue is not only misconceived, but is on non existent premise, because the subject matter of the present appeals is not roaming services provided by mobile service provider to its subscriber or customer, but the subject matter is utilization of the roaming facility by payment of roaming charges by one mobile service provider Company to another mobile service provider Company. Hence, we do not find that the observations made are of any help to the Revenue. As such, even if we consider the observations made by the Apex Court in the case of Bharti Cellular Limited, whether use of roaming service by one mobile service provider Company from another mobile service provider Company, can be termed as “technical services” or not, is essentially a question of fact. The Tribunal, after considering all the material produced before it, has found that roaming process between participating entities is fully automatic and does not require any human intervention. Coupled with the aspect that the Tribunal has relied upon the decision of the Delhi High Court for taking support of its view. In our view, the Tribunal is ultimately fact finding authority and has held that the roaming process between participating company cannot be termed as technical services and, therefore, no TDS was deductible. We do not find that any error has been committed by the Tribunal in reaching to the aforesaid conclusion. Apart from the above, the questions are already covered by the above referred decision of the Delhi High Court, which has been considered by the Tribunal in the impugned decision. In view of the above, we do not find that any substantial question of law would arise for consideration. Hence, the appeals are dismissed.

Revenue's appeal dismissed

2016-TIOL-16-ARA-CX + Story

DHUNSERI PETROCHEM LTD Vs CCE: AUTHORITY FOR ADVANCE RULINGS (Dated: May 13, 2016)

Application disposed of

2016-TIOL-15-ARA-CX + Story

NUCLEUS SOFTWARE EXPORTS LTD Vs CCE: AUTHORITY FOR ADVANCE RULINGS (Dated: July 15, 2016)

Application disposed of

Observations of Authority -

++ Loading of software only enhances the utility of Nucleus Device, hence, loading of software cannot be said to be incidental or ancillary to completion of manufactured product as envisaged under Section 2 (f) (i) of the Central Excise Act, 1944.

++ No section or chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 treat process of recording of sound or data or other phenomena of product of heading 8517 as amounting to manufacture. (section 2(f)(ii) refers)

++ Furthermore, Section 2 (f)(iii) ibid is applicable only in respect of goods which fall under Third Schedule to the Central Excise Tariff Act, 1985. Nucleus Device classifiable under heading 8517 does not fall under said Schedule.

++ It is observed from the submissions made by the Revenue that they have claimed that subject activity of loading of software into the Nucleus Device is manufacture but for this assertion they have not invoked sub-clause (i), (ii) and (iii) of Section 2 (f) of Central Excise Act, 1944.

++ The character, usage and identity of the Nucleus Device on loading of software remain the same. Further, the original commodity i.e. Nucleus Devise proposed to be imported, will not cease to exist on up-loading of software into the Nucleus Device and would also continue to serve its functions. Therefore, loading of business software would not ipso facto amount to manufacture in the scope of its natural meaning as interpreted by the Courts. [Union of India vs. Delhi Cloth and General Mills Co. Ltd. [2002-TIOL-12-SC-CX-CB]; Union of India vs. J.G. Glass Industries - 2002-TIOL-112-SC-CX refers.]

++ We are in agreement with the applicant that Chapter Note 10 or any other Note to Chapter 85 is not applicable in the present case to consider the activity of up-loading of business software in the Nucleus Device as deemed manufacture. If the intention of the legislature was to treat uploading of software into devices like Nucleus Device as manufacture, Note(s) to Chapter 85 would have included goods of heading 8517, deeming such activity to be manufacture.

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