2017-TIOL-379-SC-CT
SHANTI FRAGRANCES Vs UoI : IN THE SUPREME COURT OF INDIA (Dated: September 21, 2017)
Delhi Sales Tax Act, 1975 - Central Sales Tax Act, 1956 – Sections 3(1) 4 & 7.
Keywords – Taxability of Pan Masala containing Gutka & Tobacco
The issue at hand in the present case pertains to the taxability of Pan Masala containing tobacco and Gutka, under three state legislations, namely, the Delhi Sales Tax Act, 1975, the U.P. Trade Tax Act, 1948 and the Tamil Nadu General Sales Tax Act, 1959. The Delhi High Court in its judgment had held that on a reading of the aforesaid provisions, a notification dated 31.03.2000, which introduced as Item 46 in the First Schedule “Pan Masala and Gutka” w.e.f. 01.04.2000, would have to be read as eating into the exemption for “tobacco” generally. Therefore, on and from such date, Pan Masala which included tobacco would become exigible to sales tax. Such reasoning had two bases - firstly, as was held by the Kerala High Court in Reliance Trading Company vs. State of Kerala, that if there were two entries, one general and another specific, the general entry would have to give way to the specific entry. Therefore, the exemption entry being general in nature, would give way to the specific entry contained in the First Schedule. Thereby, sales tax became payable on Pan Masala which included tobacco.
The other basis of the judgment was that there was a dichotomy between two lines of Supreme Court judgments. The first line is contained in Kothari Products Ltd. vs. Government of A.P., and State of Orissa vs. Radheshyam Gudakhu Factory,; the second line of decisions being Commissioner, Sales Tax U.P. vs. M/s Agra Belting Works, Agra as followed in Sales Tax Officer, Section IX, Kanpur vs. Dealing Dairy Products and Another, and State of Bihar and Others vs. Krishna Kumar Kabra and Another. Whereas the Kothari Products line of judgments had held that an entry under a sales tax statute which only specified rates could not be used to eat into an exemption entry, the Agra Belting Works line of judgments states the exact opposite, which is that the charging section, the rate of tax section, and the exemption section all form part of one scheme, and when a notification is issued under a rate of tax section, which was subsequent to a notification exempting certain goods, the intention of the legislature is that such exemption then gets withdrawn and makes the sale of such goods liable to tax. The Delhi High Court preferred to follow the Agra Belting Works line, and therefore, dismissed the writ petition of the assessees.
On hearing the appeal, the Supreme Court held that,
Whether when there is a serious conflict of judgements resulting in a conundrum where the doctrine of precedence needs to be interpreted, it is a fit case to be referred for constitution of a larger bench - YES: SC
++ it does appear that there is a direct conflict between Kothari Products, Radheshyam Gudakhu Factory and Reliance Trading Company judgments on the one hand, and Agra Belting Works , which was also followed by two other judgments, on the other. We may hasten to add that there are three Judge Bench decisions on both sides;
++ in the present case, if numbers are toted up, the Kothari Products line, as followed in Radheshyam Gudakhu Factory and Reliance Trading Company, will go to a Bench strength, numerically speaking, of eight Judges, as against the Agra Belting Works line, which goes up to a numerical strength of six Judges. If the dissenting judgment of B.C. Ray, J. is to be added to the Kothari Products line, then we have a numerical strength of 9:6. The question of numerical strength gains poignancy when one judgment is overruled by another, as has been pointed by Beaumont C.J. in Ningappa Ramappa Kurbar, and by Lokur, J. in Supreme Court Advocates-on-Record;
++ considering a hypothetical example, where a two Judge Bench has laid down the law in a particular way. If nine other two-Judge Benches have followed the first 2 Judge Bench decision, is it open for three Judges to overrule all of the 2 Judge Benches i.e. twenty Judges? The obvious answer would be yes, because the 3 Judge Bench is really overruling the first 2 Judge Bench decision, which was merely followed by nine other 2 Judge Benches. As against this, however, if an unanimous 5 Judge Bench decision is overruled by a 7 Judge Bench, with four learned Judges speaking for the majority, and three learned Judges speaking for the minority, can it be said that the 5 Judge Bench has been overruled? Under the present practice, it is clear that the view of four learned Judges speaking for the majority in a 7 Judge Bench will prevail over a unanimous 5 Judge Bench decision, because they happen to speak for a 7 Judge Bench. Has the time come to tear the judicial veil and hold that in reality a view of five Judges cannot be overruled by a view of four Judges speaking for a Bench of 7 learned Judges? This is a question which also needs to be addressed and answered;
++ given the head on conflict between the Kothari Products line of judgments and the Agra Belting Works line of judgments, together with the conundrum insofar as the doctrine of precedence qua this Court is concerned, we request the Chief Justice of India to constitute an appropriate Bench in order to decide as to whether the Kothari Products line or the Agra Belting Works line is correct in law, and also to lay down, as a matter of law, as to whether and to what extent the propositions contained in Ningappa Ramappa Kurbar, Lokur, J.’s observation in Supreme Court Advocates-on-Record Association, and the Harper judgment of the Court of Appeal in U.K. should guide us for the future.
Case deferred
2017-TIOL-378-SC-ST-LB
AIR FORCE AUDITORIUM Vs CST: SUPREME COURT OF INDIA (Dated: October 9, 2017)
ST - Appellant is Air Force Auditorium - Department alleged that service tax liability arises under the category of Business Auxiliary Service (BAS) in respect of empanelment fees recovered from the vendors as commission and which is shown under the head "Rebate" - Demand confirmed, and in appeal, the CESTAT held that the business of " Vendors " gets promoted by the appellant for which they are collecting the said empanelment fee and, therefore, the same is taxable under BAS - Tribunal further held that since extended period is not invokable, the matter is remanded to Adjudicating authority for re-computing the demand for the normal period and also to consider the eligibility of credit of tax paid by caterer - appeal by assessee before Supreme Court.
Held: No merit in the appeal, hence admission refused and Civil Appeal is dismissed: Supreme Court [para 3]
Appeal dismissed
HUGHES & HUGHES CHEM LTD Vs UNION OF INDIA : DELHI HIGH COURT (Dated: October 9, 2017)
GST - No appearance on behalf of the GST council although dasti was served - CGSC appearing for UOI stated that he has no instructions to appear on behalf of GST council - since it is also not known as to whether the GST council has disposed of the petitioner's representation, the High Court is constrained to direct the Secretary of the GST Council to remain present in Court on the next date of hearing - Matter listed on 6 November 2017: High Court [para 2, 3, 5]
Matter listed
2017-TIOL-2141-HC-MAD-ST
PRIYA CONSTRUCTION Vs JOINT COMMISSIONER OF CENTRAL EXCISE : MADRAS HIGH COURT (Dated: October 5, 2017)
ST - duty demand was imposed on the assessee along with interest & penalties u/s 77(2) and 78 of the Finance Act, 1994 - The assessee claimed that in a composite contract involving both supply of goods and provision of services, service tax could be demanded only on the service component and that the revenue lacked the jurisdiction to tax the value of material supplied - Hence the present writ petition.
Held - the assessee has the option of appeal before the Commr.(A), which was not exercised - The High Court can invoke extraordinary jurisdiction only in exceptional cases only when there is an adequate effective and efficacious alternate remedy available - The issues at hand involve both legal and factual aspects, which cannot be adjudicated in a Writ Petition - Moreover, the matter as such does not warrant bypassing of the efficacious remedy available: High Court (Para 2,4,5)
Writ petition dismissed
2017-TIOL-2140-HC-MAD-CUS
SURIYA GARMENTS Vs JOINT DIRECTOR GENERAL OF FOREIGN TRADE : MADRAS HIGH COURT (Dated: September 22, 2017)
DGFT - an SCN was issued to the assessee proposing penalty for non-fulfilment of export obligations and the same was confirmed in the impugned O-i-O - The assessee claimed to have not received any notice of hearing due to shifting of office premises, and that such non-appearance resulted in penalty - Later before the Joint Director General of Foreign Trade (R1) the assessee filed an application, enclosing requisite certificates issued by the assessee's banker - Such application was pending disposal - Such application for redemption along with the bank realization certificates was not brought to the notice of the Zonal Addl. Director General of Foreign Trade (R2), who considered the date of the O-i-O and dismissed the assessee's appeals as being time barred.
Held - Since the assessee filed applications for redemption along with bank realisation certificates in 2015, the same ought to be considered by the R1, regardless of the fact that the impugned O-i-O was passed in 2008 - This is so because the scheme was evolved under the Foreign Trade (Development and Regulation) Act, 1992 for the benefit of exporters and to promote exports - Thus, if the assessee has fulfilled the export obligations and produced necessary documents to prove the same, the R1 ought to consider such applications and examine as to whether the assessee had fulfilled their obligations - Hence the Joint Director General of Foreign Trade directed to consider and dispose off the assessee's application - Meanwhile, the impugned O-i-O be stayed pending disposal of such application: High Court (Para 2,3,4,5,6,7,8)
Writ petition allowed
2017-TIOL-2139-HC-AHM-IT
SUNRISE BROKING PVT LTD Vs ITO : GUJARAT HIGH COURT (Dated: September 20, 2017)
Income Tax - Writ - Sections 2(22)(e) & 143(1).
Keywords: Deemed dividend - Escaped assessment - Other tax authorities - Relevant materials - Re-opening & Reasonable cause to believe.
The Assessee-company was engaged in the business of brokerage. The Assessee filed its return and showed the total income. The assessment was completed without scrutiny. However, a notice was issued by the AO to reopen the assessment proceeding. While issuing the notice for reopening, the AO recorded that the Assessee had received an amount from M/s. C. D. Integrated Services Ltd. during the relevant AY and such advance had to be taxed u/s 2(22)(e) as deemed dividend whereas from the return it appeared that the Assessee had not offered such income to tax. In reponse, objections were raised by the Assessee, which were subsequently disposed of. It was also observed that the original assessment was not framed after scrutiny. Therefore, on relying upon the decisions of the Apex Court in the cases of Rajesh Jhaveri Stock Brokers P. Ltd and Zuari Estate Development and Investment Company Ltd., the AO believed that the reasons stated for issuing the notice of reopening was valid.
In Writ, the High Court held that,
Whether when the AO has reasonable cause to believe for reopening of the assessment, therefore, the same doesnot lack validity and hence, cannot be terminated - YES: HC
++ there is nothing on record to suggest that the AO was acting as per the directives of the audit party or any other officer or authority. Merely because the relevant material was brought to his notice by an AO of another Assessee would not per-se vitiate his satisfaction that income chargeable to tax has escaped assessment. This aspect of law is sufficiently clear. Reference in this respect can be made to the decision of the Supreme Court in case of P.V.S. Beedies Pvt. Ltd.;
++ u/s 2(22)(e), any payment by a company not being a company in which the public are substantially interested of any sum by way of advance or loan to a shareholder being a person who is the beneficial owner of the shares holding not less than 10% of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has substantial interest or any payment by any such company on behalf or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits, would be treated as dividend. The Assessee has not disputed that the other conditions of section 2(22)(e) are satisfied in the present case;
++ the issue of applicability of section 2(22)(e), when the recipient of loan or advance by the company is not a shareholder but is a concern in which the shareholders are having substantial interest, is not free from any doubt. The judgment of Delhi High Court in the case of National Travel Services is not accepted by the department and is in challenge before the Supreme Court. The Supreme Court itself in the later judgment in case of Gopal and Sons (HUF), had opened a new dimension to the whole controversy;
++ in the present case, the return of the Assessee was accepted u/s 143(1) without scrutiny. Considering such facts, we cannot hold that the reasons recorded by the AO for issuing notice of reopening lack validity so that the notice for reopening can be terminated at this stage itself on such ground. Petition is dismissed. Interim relief, if any, stands vacated. Rule is discharged.
Assessee's Writ dismissed
2017-TIOL-2138-HC-MUM-IT
HERDILLIA CHEMICALS LTD Vs CIT : BOMBAY HIGH COURT (Dated: September 29, 2017)
Income Tax - Surtax Act - Section 2(5) & 2(8).
Keywords: Additional tax - Capital base - Depreciation - Different methods - Differential - Straight line method - Surtax assessment & Written down value.
The Assessee-company was liable for levying additional tax on the total income in the manner stipulated by the Surtax Act. The accounting year for the surtax assessment was 1986-87. Under the Surtax Act, capital of the assessee as on the first day of the accounting year namely 1st July 1984 was to be computed. The capital was computed by taking into consideration the fact that the Assessee charges depreciation in its books of account under straight line method, which was permitted under the Companies Act. However, under the provisions of Income Tax Act, the Assessee was required to claim deduction for depreciation only on the basis of written down value and in the income tax assessment, depreciation was allowed on a written down value basis. As a consequence of two different methods of computing the depreciation, there was a difference in the quantum of depreciation as per books of account and depreciation as per income tax assessment. That also resulted into diminished value under the straight line method exceeding the corresponding diminished value under the written down value basis, over the years. The position on 1st July 1984 was noted and the difference was worked out at Rs.2,43,11,321/. In spite of the objection of the Assessee, the AO reduced that amount from the capital. That exercise of the AO was confirmed in appeal by CIT(A) by relying on the decision in Court in Zenith Steel Pipes.
Before the Tribunal the argument of Assessee was that the decision was distinguishable on facts, particularly because the entire differential which would had swelled the reserve, had been depleted by the amount of dividend declared over the years. The Tribunal did not agree. The Assessee moved a miscellaneous application seeking to rectify the mistake and then relying upon an order passed by the Tribunal's coordinate Bench at Madras, which distinguished the view taken by Court in Zenith Steel Pipes.
On reference, the High Court held that,
Whether when due to two different methods of computing depreciation, there was a difference in quantum of depreciation as per Companies Act and as per IT assessment, deduction of the amount of depreciation differential from the capital is justified, for computation of additional tax under Surtax Act - YES: HC
Whether therefore, the contention of the assessee that though the entire differential which would had swelled the reserve, had been depleted by the amount of dividend declared over the years, not to be accepted - YES: HC
++ the Tribunal found on facts that the issue of Companies (Profits) Surtax Act, 1964 levying additional tax on the total income of a company in the manner stipulated by the Act, was brought in issue by the assessee. The assessee argued that Surtax is charged over and above the statutory deductions. The First Schedule to the Act contains the rules for computing the chargeable profits and Second Schedule contains rules for computing the capital base of the company. The assessee raised for consideration the question whether investment allowance granted to assessee under Section 32(1) of the Act could be treated as income, profits and gains not includible in the total income. The Tribunal held that neither in law nor in logic is there any warrant for treating the said allowance as income not includible in the total income of the assessee. The Tribunal then considered in one set of appeals an issue with which the court is not concerned. However, as per interpretation of Rule 1(iii) of the Second Schedule is concerned, it found that the case of the assessee there was that the amount of depreciation allowed as deduction, was in excess of the amount of depreciation charged on the tax of amount of the assessee. The argument of the assessee was that Rule 1 of the Second Schedule does not contemplate any adjustments as regards paid up capital. Therefore, even on footing that the aggregate differential went to augment the general reserve, as long as the amount capitalised out of the general reserve is more than the amount represented by the aggregate differential, the department cannot insist on tracing the aggregate differential to general reserve alone. The alternate argument was that a part of the general reserve might well have been declared as dividend. In such case also the assessee could attribute such payments to the aggregate differential. The Tribunal then went on to refer to the law and equally to all other aspects but what it found that conditions and three in number as enumerated in Rule 1(iii) would have to be satisfied. Firstly there should be reserve; secondly amount should have been credited to such reserve, by conscious overt act on the part of Board of Directors. Thirdly, the amount credited to reserve must have been allowed as deduction in computing the income of the company for the purposes of income tax. The Tribunal found that in the case before it, these conditions have not been satisfied. In the case before the Tribunal in respect of differential, there is no reserve credited by the board of directors through a conscious overt act, nor is there any crediting of amount to any reserve by a conscious overt act on the part of board of directors. Of course, a large amount has been allowed in the income tax proceedings as and by way of depreciation. But the other two conditions were not satisfied. That is why the Tribunal found that there was no need to reduce the capital base by differential.
++ It is these facts of the matter which enabled the coordinate Bench of the Tribunal at Madras to observe that true it is that in the case of Zenith Steel Pipes this Court has taken a view which supports the revenue, but the contentions advanced before the Tribunal's coordinate Bench at Madras and considered by it, were not advanced before the Bombay High Court. It is in these circumstances that the coordinate Bench of the Tribunal distinguished it. The court do not see how in the abstract and dehors the factual backdrop assessee can rely upon the view of the coordinate Bench of the Tribunal. As far as the Income Tax Appellate Tribunal, Mumbai Bench is concerned, it was bound by the judgment of this Court in Zenith Steel Pipes and when it applies with full force to the facts also. None of the contentions of the assessee can be accepted. The questions which have been forwarded for opinion by the Tribunal are answered against the assessee and in favour of revenue. Moreso, when there is no scope for reading anything further in the provision namely Rule 1(iii) after the conditions set out therein are satisfied. The reference is thus disposed off.
Reference answered in favour of Revenue
2017-TIOL-1404-ITAT-HYD + Story
VODAFONE MOBILE SERVICES LTD Vs DCIT : HYDERABAD ITAT (Dated: September 29, 2017)
Income Tax - Sections 194H, 201, 271C & 273B.
Keywords: Cellular operator - Distributorship agreement - Discount given to distributor - Pre-paid products - Principal to agent - Principal to principal - Post-paid services - Reasonable cause - Sale of service - TDS - Talk-time - Ultimate subscriber
The Assessee-company was engaged in providing two types of cellular mobile telephone services i.e., post-paid and pre-paid to its customers in Andhra Pradesh. The Assessee filed its return for the relevant AY and had not deducted tax at source upon receiving advance amount from distributors for its pre-paid services. For post-paid services, the Assessee appointed number of distributors to manage the distribution business, hence, a commission was paid for the services and on the said commission, tax was deducted at source u/s 194H. On the other hand, for the pre-paid services, the Assessee offered services through State-wide distributors to identify and distribute pre-paid products to customers. In this segment, distributors were paying in advance to the Assessee and consumers in turn pay in advance to distributors. The Assessee believed that there was principal to principal relationship between the Assessee-company and its various distributors and hence, section 194H was not applicable.
During the assessment proceeding, the AO noticed that a survey action was conducted where Assessee-company was made clear of its liability much before the begining of the financial year relevant to the AY 2010-11 and also about the applicability of TDS provisions. A demand u/s 201(1) and 201(1A) was raised by the AO for the AYs 2007-08 to 2009-2010, which were confirmed by CIT(A), the Tribunal, Hyderabad Bench and Andhra Pradesh High Court. Instead of furnishing a reasonable cause for non-compliance to TDS provisions, the Assessee merely submitted that there was no case for levy of penalty. The said action of Assessee appeared that it was under bonafide belief that pre-paid distributor was not subject to TDS u/s 194H and hence was not required to deduct any tax on discount offered to the distributors. It was then contended by the Assessee that the transfer of "talk time" to pre-paid distributors did not result into income in the hands of distributors and hence, there was no reason for the Assessee to withhold taxes. Further, the Assessee also contended that non-deduction of tax did not emanate from any malafide intention on part of the Assessee to evade tax or to circumvent the law and hence, was not fit to levy penalty u/s 271C. However, all the Assessee's explanation was not accepted as a reasonable cause u/s 273B. An alternative contention was also placed by the Assessee, where it argued that no penalty should be levied when taxes were paid by the payee. However, the Assessee was not sure as to whether the distributors had paid taxes, therefore, the claim was not accepted by the AO. The AO completed the assessment by imposing penalty u/s 271C for the failure to deduct tax at source, for the AYs 2010-2011 to 2014-2015. The CIT(A) rejected the Assessee's appeal.
On appeal, the Tribunal held that,
Whether when the agreement clearly indicates that the assessee cellular company retains the final right to grant talk-time, the distributor in this case making a request can only be termed as an agent - YES: ITAT
Whether merely providing of connection and talk-time to subscribers by the distributor would characterize the transaction as 'principal to principal' - NO: ITAT
++ while giving a finding in the case on hand we have carefully gone through the distributorship agreements. We are unable to accept the contention of the Assessee that the distributor has complete right and control over the matter of providing "talk-time" to ultimate subscribers; distributor can of course insist upon Assessee while making a request to provide "talk-time" through e-module etc., but the final decision has to be taken by Assessee only upon verification of consumer details which in turn has to be provided by distributor. Assessee can terminate the contract at any time by giving 30 days time without assigning any reason and distributor has to return all equipment and furniture supplied by the VESL upon termination of such contract. Other conditions such as maintaining the confidentiality and limitation of assigning rights or obligations to third party by distributor would also indicate that distributor is merely acting as an agent i.e., as a connecting link between Assessee and ultimate subscriber;
++ we therefore prefer to follow the decision of jurisdictional High Court by holding that though distributor commits Assessee to subscribers and exercise his authority to ensure arranging connection to subscriber, it will not alter the situation since the overall context in which such power is given to distributor has to be looked into in the circumstances of the case and the role of distributor can only be said to be a middleman between service provider on one hand (Assessee herein) and ultimate consumer on the other hand. In otherwords, the distributor can only be termed as an agent of Assessee in which event providing service to ultimate consumer through the medium of distributor cannot be said to be a sale of service by Assessee to the distributor;
++ the observations made therein by the jurisdictional High Court are only in the context of considering balance of convenience while granting stay and such observations need not be considered as a decision doubting the correctness of the judgment delivered by earlier Bench of High Court. In fact, even in that judgment, it was admitted that the earlier Bench affirmed the order of the Tribunal by following judgments of Delhi High Court, Kerala High Court and Calcutta High Court and because a similar issue is pending before the Supreme Court, apart from the fact that there is a favourable decision of Karnataka High Court, Andhra Pradesh High Court thought fit to grant conditional stay. Therefore, observations made by Andhra Pradesh High Court in W.P. Nos. 2456 and others cannot be termed as an order doubting the correctness of earlier judgment of the same High Court;
++ the ITAT Hyderabad Bench is bound to follow the order passed by jurisdictional High Court on merits rather than interpreting / reconsidering the issue based upon certain observations made by a later Bench while granting partial stay. We already noticed that earlier decisions of Delhi High Court and Kerala High Court are on the premise that distributor is merely a link between Assessee and ultimate consumer / subscriber and distributor can at best enforce obligation on the part of Assessee to provide connection / talk-time to subscriber which itself would not change the characteristic of transaction from 'principal to agent' to 'principal to principal'. We therefore hold that the order passed by AO, as confirmed by the CIT(A), by holding that Assessee is a defaulter u/s 201(1) and consequently liable to pay interest u/s 201(1A), subject to certain conditions as prescribed by the Supreme Court (Hindustan Coca Cola Beverage P. Ltd), is in accordance with law.
Whether when the Assessee had 'reasonable cause' backed by the judgments of various High Courts for not to deduct TDS u/s 194H, penalty u/s 271C is not imposable for that relevant AY - YES: ITAT
++ the case of Assessee is that under similar circumstances the ITAT, Hyderabad Bench vide its order dated 26.02.2009 had taken a view that the relationship between a cellular operator and distributor is on 'principal to principal' basis and 'discount' given by the Assessee cannot be considered as 'brokerage' or 'commission'. It had also taken support of an earlier decision of the ITAT, Delhi Bench passed on 28.03.2008 whereby it was concluded that the provisions of section 201(1) and 201(1A) are not applicable, under identical circumstances. In such an event of matter - since the decision of ITAT Delhi Bench was already available before the commencement of Previous Year relevant to AY 2010-2011 - the Assessee's stand that it need not deduct tax at source can be taken as a 'reasonable cause';
++ no doubt Assessee has not specifically submitted before the Tax Authorities that non-deduction of tax at source was based on it's understanding of provisions of section 194H, which in turn constitutes a 'reasonable cause'. But the fact remains that by the time the Assessee was under obligation to deduct tax at source for the AYs under consideration, there were judgments in favour of Assessee and even after the decisions of Delhi High Court and Kerala High Court, the Karnataka High Court had taken a different view of the matter which implies that non-deduction of tax was based on such understanding of relevant provisions of the Act in which even penalty is not imposable u/s 271C. We therefore set aside the order passed by AO as well as CIT(A) on this aspect and hold that penalty u/s 271C is not imposable, in the circumstances of the case.
Assessee's appeal partly allowed
