MARCH 01, 2010

Finance Bill - A tale of 3 Ms - Money, MAT and Mourning!

By Vaitheeswaran, Advocate

More money in the pocket

THE Finance Minister not only pulled a rabbit out of his magic hat but also provided significant number of carrots to ensure that the rabbit is fed. If one were to compare the rabbit to inflation then the restructuring of the tax slabs would provide money in the hands of the tax payer to combat inflation.

It's a MATter of some more tax

The Minimum Alternate Tax rate has been increased from 15% to 18% and this amendment is effective from 01.04.2011. The larger issue would be the accumulation of MAT credit and the possibility of such credit getting lapsed when the Direct Tax Code is introduced. The DTC in the present form does not have any provision for the adjustment of the MAT credit. The DTC seeks to move from a MAT system to the most criticized GAT system. Unless there are specific transition provisions, the accumulated MAT credit may very well lapse.

Final nail in the coffin

Finance Bill seeks to amend the Explanation to Section 9(2) with retrospective effect from 01.06.1976. The effect is that the income of a non-resident shall be deemed to accrue or arise in India whether or not the non-resident has rendered services in India.

This amendment seeks to effectively and fully negate the Supreme Court's decision in the case of Ishikawajima-Harima Heavy Industries Ltd. Vs Director of Income Tax (2007-TIOL-03-SC-IT) . The Supreme Court held that services provided by a non-resident assessee under a contract should not only be utilised within India, but should also be rendered in India. The services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilised in India, to be taxable in India.

Originally, the Explanation to Section 9 was inserted by Finance Act, 2007 with the same noble purpose of nullifying the decision of the Supreme Court. However, the amendment was not very effective and in fact the Karnataka High Court in the case of Jindal Thermal Power Vs. DCIT (2009-TIOL-302-HC-KAR-IT) pointed out that Ishikawajima case applies even after the amendment. Now this effectively nullifies Jindal case and makes the intention expressly clear.

Now it's the turn of Income Tax

Finance Act 2008 amended relevant provisions of Central excise Act and Customs Act to facilitate the condonation of delay by the High Court. A retrospective amendment w.e.f. 01.06.1981, has been made to Section 256 and Section 260A giving the High Court the power to condone the delay in filing the application or appeal as the case may be subject to sufficient cause. The amendment seeks to override the decision of the Supreme Court in the case of CCE Vs. Hongo India 2009-TIOL-48-SC-CX-LB and the Mumbai High Court's decision in the case of CIT Vs M/s Grasim Industries Limited (2009-TIOL-339-HC-MUM-IT) where it was held that High Court is not empowered to condone delay in filing reference application.