CIRCULAR

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Clarifications on Indirect Transfer provisions under the Income Tax Act, 1961

MIXED BUZZ

PSBs directed not to charge fees for IMPS and UPI in excess of NEFT

CASE LAWS

2016-TIOL-3079-HC-PATNA -VAT

SAMSUNG INDIA ELECTRONICS PVT LTD Vs STATE OF BIHAR: PATNA HIGH COURT (Dated: December 14, 2016)

Bihar VAT Act, 2005 – 24, 25, 27, 31 & 33.

Keywords: writ - re-assessment – escapement of tax – change of opinion - deemed assessment

The assessees are registered dealers under the Act. The assessee Samsung India Electronics Pvt. Ltd. is engaged in the business of manufacture of consumers electronic IT and telecom products including mobile phones, electronic goods, home appliances etc. The other assessees are dealers of, among other things, mobile phones. The assessees had filed their returns for different assessment years. A composite pack of mobile phone along with mobile charger and other accessories is sold by them and the commodities mentioned therein are mobile phones and chargers are supplied with the mobile phones to charge the battery which are provided free of cost along with the mobile phones. No separate payment is made for the charger but only for the mobile phone. Accordingly, tax under the VAT Act is paid on the mobile phone at the rate specified for Entry 68 of Part 1 of Schedule-III read with Entry 14 of Part-II of the said Schedule which is exigible to a lower rate of tax. Where the assessees sell the battery charger an independent tax is paid upon it for non-specified goods. Out of 16 returns for different financial periods involved, in eight of them assessment/re-assessment has been made under Sections 31 or 33 and in the remaining also the returns having been duly filed and accepted, they would be deemed to have been assessed under Section 26.

Recently, the Supreme Court by its judgment dated 17.12.2014 in the case of State of Punjab and others vs. Nokia India Ltd. held that the mobile/cell phone charger is an accessory to cell phone and is not a part of the cell phone and further held that the battery charger is an independent product which can be separately sold. Assessing officers of the assessees thereafter issued notices to the assessees, stating that the charger and other goods sold along with the mobile phone come in the non-specified category but the assessees had included their price in the value of mobile hand-set and have been paying tax at the rate of 5% and, therefore, they were directed to produce details of the sales of hand-set for the last four years, i.e., for the financial year 2009-10 till date by 05.02.2015, on failure of which further action would be taken under the provisions. Thereafter the notice was issued u/s 31. Demand notices along with interest were also issued.

On appeal, the HC held that,

Whether a subsequent reversal of legal position by the judgment of Supreme Court, would authorize the Department to reopen the assessment which stood closed on the basis of law at the relevant time – NO: HC

+ There has been no concealment, omission or failure to disclose full and correct particulars by the assessees. Reassessment cannot be made on a mere change of opinion. A subsequent reversal of legal position by the judgment of the Supreme Court does not authorize the Department to reopen the assessment which stood closed on the basis of law at the relevant time. In the first category of 8 writ petitions assessment/reassessment had been made earlier under the provisions of Section 31 and/or Section 33. It is also evident from the notice issued under Section 31 that the sole reason for initiation of proceedings under Section 31 is the decision of the Supreme Court in the case of Nokia India. There was no other material which has come into the possession of the Department which was already not known to it. The fact that there had been earlier assessment/reassessment under Section 31 or Section 33 goes to show that any further issuance of notice under Section 31 in such matters without anything more, except the decision of the Supreme Court in Nokia's case would, on the same materials, amount to a mere change of opinion by the prescribed authority in the matter. Thus, any action on the said basis would clearly be without jurisdiction and therefore without authority of law;

++ For the remaining eight matters, they are cases of deemed assessments on the basis of the provisions of Section 26 or assessment under Section 27. No doubt under Section 25, the prescribed authority is required to look into and scrutinize the return filed under Section 24 (1) and (3) but that is not the same thing as making a proper assessment. If the assessing authority had no occasion to form an opinion during the course of such deemed assessment of the returns filed by the assessee, and subsequently a notice was issued under Section 31 (1), or assessment made under Section 27, albeit on the ground of decision rendered by the Supreme Court, it could not be said that there has been any change of opinion. For the said reason, the plea of the assessees regarding change of opinion is not applicable.

2016-TIOL-3078-HC-MUM -IT

RELIANCE INFRASTRUCTURE LTD Vs CIT : BOMBAY HIGH COURT (Dated: December 20, 2016)

Income Tax - Sections 2(15), 35B, 40(a)(ii), 80-O, 80HHB, 80HHC, 90, 91 & 256(1)

Keywords: foreign project reserve account - reference - claim of deduction - deemed to accrue or arise - double taxation - global income & weighted deduction

A) The assessee executed some projects in Saudi Arabia, the profits earned on which were claimed as deduction u/s 80HHB on satisfaction of various conditions specified in the section. In the previous year relevant to the subject AY, assessee had in respect of its profits and gains derived on execution of foreign projects complied with all the conditions specified in Section 80HHB. Thus AO had allowed deduction u/s 80HHB. On appeal, CIT(A) held that deduction u/s 80HHB was available only on crediting the entire amount of which deduction was sought to ‘Foreign Projects Reserve Account'. During the pendency of its appeal before Tribunal, assessee had credited a further amount of Rs.50 lakhs in the Foreign Projects Reserve Account by transferring it from the General Reserve Account. The delay in crediting the above amount of Rs.50 lakhs to the Foreign Projects Reserve Account was explained by stating that for the subject AY, and up to the date of assessment order passed, its application for relief/deduction u/s 80-O was pending with CBDT. The application for deduction u/s 80-0 was rejected by CBDT only in March 1986. Therefore during the pendency of its appeal before the Tribunal, assessee transferred a sum of Rs.50 lakhs from its General Reserve Account to the Foreign Project Reserve Account. Tribunal dismissed the appeal of the assessee holding that on reading of Section 80HHB, it was clear that deduction was allowable in terms of clause 3 thereof only on the assessee satisfying the conditions set out therein.

B) Assessee had in the previous year relevant to AY 1983-84 executed projects in Saudi Arabia. The income earned in Saudi Arabia had been subjected to tax in Saudi Arabia. Therefore, while determining the tax payable under the Indian law, the assessee sought benefit of Section 91, which gives relief from double taxation on the same income. During the assessment proceedings, the assessee claimed the benefit of double taxation relief on the sums of Rs.47.30 lakhs being the amount deducted u/s 80HHB and Rs.5.59 lakhs being the amount on which weighted deduction was claimed u/s 35B. AO negatived the applicant's claim for relief u/s 91 on the ground that it would only apply / be available when the amount of tax paid under foreign income was again included in the taxable income earned in India i.e. the same income must be taxed in both the countries. On appeal, CIT(A) dismissed the applicant's appeal upholding the view of AO that the benefit of Section 91 can only be given if the very income has suffered tax in both the countries i.e. where the project is executed and also in India. In the present case, the amount claimed by way of deduction u/s 80HHB and Section 35B was not suffering any tax in India for the purposes of Section 91. On further appeal, Tribunal dismissed the applicant's appeal.

C) Assessee claimed that it should be allowed a deduction of the tax paid in Saudi Arabia, if it was held that the benefit of Section 91 was not available. This deduction was claimed only to the extent tax had been paid in Saudi Arabia on the income which has accrued / arisen in India. This claim was made on the basis of Real Income Theory. It had argued that in respect of the project in Saudi Arabia, Income which was taxable was Rs.1000/-. The tax payable in Saudi Arabia was 10% of income. This amount of Rs.1000/- includes an amount of Rs.150/- which has accrued in India and, therefore, outside the scope of doubly taxed income for the benefit of Section 91. Nevertheless, assessee paid the tax on Rs.1,000/in Saudi Arabia @ 10%. The credit which would be given to the assessee u/s 91 was to extent of Rs.85/- i.e. doubly taxed income amounting to Rs.850/-. However, as no credit was given for the tax of Rs.15/- paid in Saudi Arabia on income which was accrued in India, the deduction of Rs.15/- should be given as an expenditure from the income of Rs.150/- which had accrued / arising of in India. This issue was not raised before AO nor decided by CIT(A). However, before Tribunal, assessee urged that CIT(A) ought to have held that in respect of such percentage of income which was deemed to accrue in India and on which the benefit of Section 91 was not available then, the tax paid in Saudi Arabia should be treated as an expenditure incurred in earning income which was deemed to have accrued / arisen in India and reduced therefrom. Tribunal decided against the assessee as this was not an issue raised before CIT(A) and therefore could not be urged before Tribunal.

On appeal, the High Court held that,

Whether if in order to claim a deduction, an assessee needs to fulfill certain conditions, non-satisfaction of such conditions would automatically imply dis-entitlement from such benefit - YES: HC

A) ++ it is undisputed that amount of Rs.50 lakhs of which deduction is now claimed u/s 80HHB had not been transferred to the Foreign Projects Reserve Account during the previous year relevant to the subject AY from the profits of its projects outside India. Thus, not satisfying the requirement u/s 80HHB(3). The amount of Rs.50 lakhs was transferred into the Foreign Projects Reserve Account from the General Reserve Account only in the year 1991-92, thus, at that time the conditions to be complied with for availing of the benefit of Section 80HHB viz. the amount credited to the Foreign Projects Reserve Account from its profits of exports and utilizing the same during the period of 5 years next of the previous year relevant to the subject AY only for the purposes of business other than for distribution by way of dividend or profits. In this case, the condition specified in sub-section 3(ii) of Section 80HHB is admittedly not satisfied. Consequently, the benefit of Section 80HHB cannot be extended to assessee to the extent of Rs.50 lakhs, which were transferred not in the previous year relating to the subject AY but only in the year 1991-92 from the General Reserve Account to the Foreign Projects Reserve Account. In view of the clear requirement of Section 80HHB to satisfy the requirements of Sub-section(3) thereof to claim the deduction there under, the reason for non-satisfaction urged by the Applicant viz. application u/s 80-0 was pending, becomes academic. The non-satisfaction of the conditions to be satisfied to avail of Section 80HHB cannot be relaxed in the absence of the statute itself providing for it. The non-satisfaction of the conditions necessary to be fulfilled to avail of the benefit of Section 80HHB would dis-entitle a party from claiming its benefit;

Whether in order to claim benefit of double taxation provisions u/s 91, the foreign income which has been subjected to tax must be the same income which is subjected to tax under the Indian Act - YES: HC

B) ++ it is only when the Income has paid tax abroad and also bears the burden of discharging tax thereon under the Indian Act that it would become such doubly taxed income. The appeal before the Apex Court in KVALM Ramanathan Chettiar arose out of the decision of the Madras HC holding that for the benefit of relief under the erstwhile Section 49D of the Income Tax Act, 1922 was that, income to which the double tax relief is available, must necessarily arise from the same head of income or source. This view of the Madras HC was not accepted by SC. In fact, the SC held that it was not necessary that the income should arise under the same head or from the same source, for the benefit of the double tax relief being available. However, the Apex Court emphasized that the foreign income which has been subjected to tax must also be the same income which is subjected to tax under the Indian Act. The amounts claimed as deduction under Section 80HHB and Section 35B admittedly do not bear any tax in India, therefore, no relief can be granted u/s 91 to the deduction claimed of Rs.47.30 lakhs under Section 80HHB and Rs.5.59 lakhs claimed u/s 35B;

Whether the quantum of tax paid in foreign country, attributable to income arising or accruing in India needs to be reduced for the purposes of computing the income on which tax is payable in India u/s 91 - YES: HC

C) ++ this is evident from the Explanatory notes to the Finance Act, 2006 as recorded in Circular No.14 of 2006 dated 28th December, 2006 issued by the CBDT. The above circular inter alia, records the fact that some of the assessee who are eligible for credit against the tax payable in India on the global income to the extent the tax has been paid outside India u/s 90 or 91, were also claiming deduction of the tax paid abroad as it was not tax under the Act. Therefore, on the Explanation being inserted in Section 40(a)(ii), the tax paid in Saudi Arabia on income which has accrued and / or arisen in India is not eligible to deduction u/s 91. Therefore, not hit by Section 40(a)(ii). Section 91, itself excludes income which is deemed to accrue or arise in India. Thus, the benefit of the Explanation would now be available and on application of real income theory, the quantum of tax paid in Saudi Arabia, attributable to income arising or accruing in India would be reduced for the purposes of computing the income on which tax is payable in India. It is not disputed before us that some part of the income on which the tax has been paid abroad is on the income accrued or arisen in India. Therefore, to the extent, the tax is paid abroad on income which has accrued and/or arisen in India, the benefit of Section 91 is not available. In such a case, an assessee is entitled to a deduction u/s 40(a)(ii). This is so as it is a tax which has been paid abroad for the purpose of arriving global income on which the tax payable in India. Therefore, to the extent the payment of tax in Saudi Arabia on income which has arisen / accrued in India has to be considered in the nature of expenditure incurred or arisen to earn income and not hit by the provisions of Section 40(a)(ii). The Explanation to Section 40(a)(ii) was inserted into the Act by Finance Act, 2006. However, the use of the words "for removal of doubts" it is hereby declared "......." in the Explanation inserted in Section 40(a)(ii), makes it clear that it is declaratory in nature and would have retrospective effect. This is not even disputed by Revenue before us as the issue of the nature of such declaratory statutes stands considered by the decision of SC in CIT Vs. Vatika Township (P) Ltd. 2014-TIOL-78-SC-IT-CB and CIT Vs. Gold Coin Health Foods (P) Ltd. 2008-TIOL-152-SC-IT ;

Assessee's appeal partly allowed