Outsourcing of Manufacture attracts 194C--Nova Nordisk--Karnataka HC

COMMISSIONER OF INCOME TAX  Vs NOVA NORDISK PHARMA INDIA LTD--HC of Karnataka

Income tax - Sections 194C, 201(1A)

Where assessee outsources manufacturing of a pharma product for which raw materials are supplied by a foreign company having interest in the assessee company and trade mark of assessee to be labelled on such products, conversion charges attract provisions of Sec 194C

Assessee, an Indian Company, marketed pharmaceutical products. It had outsourced one of its products to M/s.Torrent Pharmaceuticals Limited. The raw materials were supplied for the jobwork by a foreign company NOVA Nordisk, Denmark. It also transpired that the assessee company was a subsidiary of M/s NOVA Nordisk Singapore but had no direct contract or relationship with the Indian manufacturer, but under another agreement between the Indian manufacturing company and the raw material supplying foreign company, the product produced by the use of raw material for manufacture of the product was stipulated to be exclusively supplied to the assessee company and the manufacturing company was under compulsion that the entire product or the output after the consumption of the raw material supplied to the manufacturing company was to be in turn sold only to assessee company in India.

One of the conditions in the agreement between the raw material supply foreign company and the Indian manufacturing company was that even if the agreement expired or the transaction came to an end and if some surplus product was left over with the manufacturing company, the product so left over was not to be sold outside in the market, but necessarily be sold to the assessee company.

In the agreement between the assessee company and its supplier a price fixation formula had been worked out and it was called as conversion charges. The assessee company was to pay the supplier/manufacturing company 19% of the landing cost of the raw material, consumed into the production of the product. This was the interrelation linking the three companies viz, the raw material supplying foreign company, the raw material receiving Indian manufacturing company and the product buying assessee company. The Indian manufacturing company manufactured the products making use of the raw material supplied by the foreign raw material supplier company.

There was another agreement between the assessee company and the manufacturer company also which provided for supply of technical know-how for the manufacture of the product, but at no cost and know-how to be exclusively utilised for converting the raw material received by the Indian manufacturing company from the raw material supplying foreign company. There was yet another agreement between the assessee and the supplier company known as trade mark licence agreement under which the product manufactured by the manufacturing company was to be labelled with the name of the assessee company for marketing and the entire manufactured product was to be restored to the buying company viz. the assessee company, in the even of termination of the contract.

Assessee paid 2% of total amounts paid to the supplying company to the manufacturing company in India. This amount was worked out to be at a sum of Rs.5,10,49,267/- by the assessing officer applying the formula of multiplying payments made by the assessing company to the supplier company using the multiplier 19/119 as being the value of conversion charges which alone was taken to be a payment by the assessing company towards the manufacturing cost or conversion charges paid by the assessee to the manufacturing company though the actual payments included the price of the raw materials, but that amount having been paid by the supplier directly to the foreign raw material supplier company, that was not included in the value of payments by the assessee company for the purpose of computing the amount that was required to be deducted under Section 194C of the Act.

But the price of the raw material having been paid by the supplier company to the raw material supplying foreign company, the income tax officer was of the view that a reading of the agreement between the assessing company and the supplier company and the agreement between the supplier company and the raw material supplying foreign company has linked one another and ultimately the manufacturing company being required to supply the entire product produced by utilising the raw material procured from abroad only to the assessee company, it cannot be held that it was a contract for sale of a product in the sense it was a sale of a product, but it was only a contract for manufacturing and therefore, was of the opinion that there was an obligation on the part of the assessee company to effect deduction of tax at source and there being a failure on the part of the assessee company while noticed that the tax liability had been met by the manufacturing company being an assessee under the Act and having independently filed its return, but at the same time the assessee company being not absolved of the liability of the provisions of Section 201(1A) of the Act proceed to compute the interest in terms of the statutory provisions and worked out to be 7,60,570/- starting from 1.4.1997 till the date of the order under the provisions of Section 201(1A) of the Act which was on 30.7.2001.

The CIT(A) opined that the assessee company not having supplied the raw material, the price paid by the assessee company was to be construed only as a price for the sale of the product and not a contract for manufacturing and therefore, Section 194C was not attracted. Tribunal agreed with the CIT(A).

On appeal, the HC held that,

++ we find that this is not simply a situation of a product manufactured to the specifications of the assessee, being sold to the assessee at the price fixed by the supplier but this is a situation where a product manufactured out of raw materials supplied by a foreign company who had direct interest in the assessee company so manufactured to the specification of the assessee company utilising the technical know-how supplied by it and also labelling the product with the brand name of the assessee and supplying the entire product only to the assessee company and not to anyone else and it is throughout to be held as a specific contract for manufacturing of a particular product notwithstanding the fact that the supplier had paid the price for the raw-material directly to the foreign company which supplied the raw material to the manufacturer, but had interest in the assessee company in India while bearing the trade mark of the foreign supplier, but having a definite communication and in such a situation one has to really look into the real nature of the transaction that emerges on the conjoint reading of the three agreements and the assessing officer in fact having undertaken this exercise and having arrived at the conclusion that the assessee company is one who fits into the definition and situation contemplated u/s.194C of the which on an examination is found is a proper reasoned approach and in consonance with the statutory provision.

++ we are also of the view that the situation contemplated u/s.194C of the Act i.e. the payment for carrying out any work which is to improve the situation of such nature and of course preceded between the contract between the assessee and the manufacturer company;

++ it was a situation where the provisions of Section 194C of the Act applied to the assessee and is clearly attracted to the present situation. The assessing authority has rightly applied the provisions of Section 194 of the Act to the present situation and has very correctly estimated the interest payable in terms of Section 201 (1A) and the Appellate Commissioner and the Tribunal are in error in taking the contrary view.

Revenue's appeal allowed

JUDGEMENT

The appeal by the Revenue u/s.260A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act') against the order dated 22.3.2005 passed by the Income Tax Appellate Tribunal, Bangalore Bench in ITA No.688/Bang/02 and posing the following substantial questions of law for our answer:-

1. Whether Appellate Authorities were correct in holding that the transactions entered into between the assessee and the TPL is a contract for sale and not contract for work, when the entire transaction under the agreement were in the nature of work contract, and TDS was deductible?

2. Whether the Appellate Authorities committed and error in terming the transactions entered into between the assessee and the TPL as contract for sale of goods when on examination of the agreements and the transactions, work entrusted to TPL was only a work contract and not contract for sale of goods and consequently provisions of section 194C of the Act were applicable?

2. The appeal had been admitted on 10.9.2007 to examine these two questions.

3. The respondent had been put on notice and is represented by counsel M/s.Harish and Co., but unfortunately at the time of hearing of the appeal we had the benefit of hearing only Shri. Thirumalesh, learned Standing Counsel appearing for the appellant-Income Tax Department.

4. The assessee is an Indian Company and assessment year is 1997-98. The assessee company markets pharmaceutical products and one of its products had been got prepared from M/s.Torrent Pharmaceuticals Limited, a product which perhaps was being used as insulin in medically presentable form, raw material for the manufacture of this product was being supplied to M/s Torrent Pharmaceuticals Ltd. by a foreign company by name NOVA Nordisk, Denmark.

5. It also transpires that the assessee company was a subsidiary of M/s NOVA Nordisk Singapore but had no direct contract or relationship with the Indian manufacturer, but under another agreement between the Indian manufacturing company and the raw material supplying foreign company, the product produced by the use of raw material for manufacture of the product was stipulated to be exclusively supplied sold to the assessee company and the manufacturing company was under a compulsion that the entire product or the output of the consumption of the raw material supplied to the manufacturing company should be in turn sold only to assessee company in India.

6. One of the conditions in the agreement between the raw material supply foreign company and the Indian manufacturing company was that even if the agreement should expire or the transaction should come to an end and if some surplus product is left over with the manufacturing company, the product so left over should not be sold out side in the market, but necessarily be sold to the assessee company.

7. In the agreement between the assessee company and its supplier a price fixation formula had been worked out and it was stipulated therein and that was called as conversion charges. The assessee company was to pay the supplier/manufacturing company 19% of the landing cost of the raw material, consumed into the production of the product. This is the interrelation linking the three companies viz, the raw material supplying foreign company, the raw material receiving Indian manufacturing company and the product buying assessee company. The Indian manufacturing company manufactured the products making use of the raw material supplied by the foreign raw material supplier company.

8. There was another agreement between the assessee company and the manufacturer company also which provides for supply of technical know-how for the manufacture of the product, but at no cost and know-how to be exclusively utilised for converting the raw material received by the Indian manufacturing company from the raw material supplying foreign company.

9. There was yet another agreement between the assessee company and the manufacturer/supplier company known as trade mark licence agreement under which the product manufactured by the supplier/manufacturing company was to be labelled with the name of the assessee company for marketing and the entire manufactured product was to be restored to the buying company viz. the assessee company, in the even of termination of the contract.

10. While these are the relevant conditions for the purpose of resolving the dispute particularly, the question arising in the context of the provisions of Section 194C of the Act because of which proviso the respondent-Company is treated as an assessee, an assessee so deemed because of the default committed in not deducting the commensurate amount in respect of the payments mae by the assessee company in favour of the Indian Manufacturing company which was as per the provision at 2% of the total amounts paid by the assessee company to the supplying company.

11. This amount was worked out to be at a sum of Rs.5,10,49,267/- by the assessing officer applying the formula of multiplying payments made by the assessing company to the supplier company using the multiplier 19/119 as being the value of conversion charges which alone was taken to be a payment by the assessing company towards the manufacturing cost or conversion charges paid by the assessee to the manufacturing company though the actual payments include the price of the raw materials, but that amount having been paid by the supplier directly to the foreign raw material supplier company, that was not included in the value of payments by the assessee company for the purpose of computing the amount that was required to be deducted under Section 194C of the Act.

12. But the price of the raw material having been paid by the supplier company to the raw material supplying foreign company, the income tax officer was of the view that a reading of the agreement between the assessing company and the supplier company and the agreement between the supplier company and the raw material supplying foreign company has linked one another and ultimately the manufacturing company being required to supply the entire product produced by utilising the raw material procured from abroad only to the assessee company, it cannot be held that it was a contract for sale of a product in the sense it was a sale of a product, but it was only a contract for manufacturing and therefore, was of the opinion that there was an obligation on the part of the assessee company to effect deduction of tax at source and there being a failure on the part of the assessee company while noticed that the tax liability had been met by the manufacturing company being an assessee under the Act and having independently filed its return, but at the same time the assessee company being not absolved of the liability of the provisions of Section 201(1A) of the Act proceed to compute the interest in terms of the statutory provisions and worked out to be 7,60,570/- starting from 1.4.1997 till the date of the order under the provisions of Section 201(1A) of the Act which was on 30.7.2001.

13. It is aggrieved by this order the assessee carried the matter in appeal to the Appellate Commissioner. The Appellate Commissioner examining the agreement between the assessee and its supplier company and being of the view that in terms of the Board circular No.681 of 83/84 dated 8.3.1984 which is also applicable to the assessment year 1997-98, in terms of his order dated 8.2.2002 opined that the assessee company not having supplied the raw material, the price paid by the assessee company has to be construed only as a price for the sale of the product and not a contract for manufacturing and therefore, Section 194C is not attracted and in this view of the matter set aside the order of the assessing authority.

14. The revenue carried the matter further to the Tribunal, but without success as the Tribunal also affirmed the order of the Appellate Commissioner being of the view that, in terms of the Board circular the assessee being not the supplier of the raw material was not under any obligation to deduct any tax at source u/s/194C of the Act and therefore, dismissed the appeal in terms of the order dated 22.3.2005.

15. It is aggrieved by this order of the Tribunal, the present appeal by the Revenue posing the questions as indicated above for our consideration.

16. Appearing on behalf of the Revenue, Shri Thirumalesh, learned Standing counsel has drawn our attention to the orders, the relevant clauses in the agreement particularly, Articles 3 and 4 of the agreement between the assessee company and the supplier company which reads as under :-

ARTICLE 3: PURCHASE AND SALE OF INSULIN FORMULATIONS

3.1. During the terms, the supplier shall supply to the buyer and the buyer shall purchase from the Supplier, Formulations meeting the applicable requirements contained, and as more particularly specified in Appendix 2 on the following basis.

a) The supplier shall supply and the buyer shall purchase. Formulations manufactured from the Insulin Crystals strictly in accordance with the Know how licensed to the supplier by the buyer under the Know how License Agreement, and strictly in accordance with the Current Good Manufacturing practice(CGMP) as being defined by the relevant authorities in the territory from time to time.

b) The supplier's selling price to the Buyer for the Formulations shall be determined in accordance with conditions stipulated in Appendix-4.

ARTICLE-4 : PAYMENTS TERMS

4.1. Payment of the purchase price for each consignment of Formulations shall be made by the Buyer within thirty (30) days from the date of invoice, which should be issued simultaneously with the supply of formulations

4.2. Any amount due under this agreement from the Buyer that is not paid when due shall bear interest at a rate per year equal to eighteen (18) percent upto the date of final payment.

The terms of the agreement between the manufacturing company and the foreign raw material supplying company reading as under :-

That this agreement between TPL and NNAS would be co-terminus with the following separate agreements:-

i) "Insulin Formulation Supply Agreement" between the purchaser (i.e., TPL) and NNPL whereby TPL was to supply specified formulations to NNPIL which were formulated using crystals supplied by NNAS and know-how supplied by NNPIL.

ii) "Know-how Licence Agreement" between the purchaser and NNPIL whereby the "know-how" to manufacture such formulation was transferred from NNPIL to TPL for no apparent consideration.

iii) "Trade Mark Licence Agreement" between the purchaser and NNPIL.

17. Drawing our attention to the relevant terms of the three agreements Mr.Thirumalesh, learned counsel for the revenue submits that the Appellate Commissioner as well as the Tribunal have adopted a very simplistic approach in adopting the Board circular without even applying their mind as to applicability of the notification in a situation, of the present nature; that the present situation was not one of a simple agreement between the manufacturer and its buyer or, the seller of goods and buyer of manufactured goods by the very raw material supplied, but this was a rather complicated interlinking arrangement amongst the three parties viz. the assessee company, its supplier the manufacturing company and the foreign raw material supplier company and that the terms of agreement between the raw material supplying company virtually, dictating terms to the raw material receiving Indian manufacturing company to supply the entire product, manufactured by the utilisation of the raw materials and applying the technical know-how as supplied by the assessee company, this was not a case of the supplier or the manufacturer having produced an independent product out of its own ability or on its own but being guided, regulated and restricted in the marketing of the product only in favour of the assessee company and more so, the price fixation mechanism as stipulated under the agreement taking care of the value with reference to the quantity and quality of the product produced with the supplied raw material, the situation is not one governed by the Board circular and the Appellate Commissioner and the Tribunal ignoring the facts and circumstances of the case as had been discussed by the Income Tax Officer, have simply set aside the order passed by the Assessing Authority on the premise of the board circular. The situation does not fit into the board circular. It called for a proper view to be taken independent of the circular. This was a clear case where there was payment made by the assessee to the supplier in respect of a property supplied to it and on specifications and therefore, the orders passed by the Appellate Commissioner and the tribunal is to be set aside and the order passed by the Assessing Authority is to be restored.

18. We have bestowed our attention to the submission made at the bar and also perused the orders passed by the Assessing Authority as well as of the Appellate Commissioner, Income Tax Appellate Tribunal and also the provisions of Section 194C and Section 201 of the Act.

19. Section 194C of the Act is an enabling provision A provision introduced into the parent Act for the purpose of advance recovery of income tax and in certain circumstances in a situation where payment is made by a person for carrying out any work in pursuance of a contract between the contractor and the person then, an obligation is imposed on such person responsible for payment to deduct an amount equal to 2% and the consequence of failure to so deduct and remit to the account of the revenue are spelt out in Section 201 of the Act. We are particularly concerned with Section 201(1A) of the Act which provides for levy of simple interest at 15% p.a. during the relevant year on the ground not so deducted and it is this sum which is levied by way of interest, which is the bone of contention in this appeal.

20. Section 194C applies to all such situations where there is a contract of the nature as is indicated in this Section and in existence between a person and the company etc. Here the person is an assessee company and 'company' as indicated in Section 194C (1d) is the supplier company.

21. On a perusal of all the agreements which have a bearing on the transaction of sale of the product or sale or supply of the product by the supplier/manufacturer of the assessee company, we find this is not simply a situation of a product manufactured to the specifications of the assessee, being sold to the assessee at the price fixed by the supplier but this is a situation where a product manufactured out of raw materials supplied by a foreign company who had direct interest in the assessee company so manufactured to the specification of the assessee company utilising the technical know-how supplied by it also labelling the product with the brand name of the assessee and supplying the entire product only to the assessee company and not to anyone else and it is throughout to be held as a specific contract for manufacturing of a particular product notwithstanding the fact that the supplier had paid the price for the raw-material directly to the foreign company which supplied the raw material to the manufacturer, but had interest in the assessee company in India while bearing the trade mark of the foreign supplier, but having a definite communication and in such a situation one has to really look into the real nature of the transaction that emerges on the conjoint reading of the three agreements and the assessing officer in fact having undertaken this exercise and having arrived at the conclusion that the assessee company is one who fits into the definition and situation contemplated u/s.194C of the which on an examination is found is a proper reasoned approach and in consonance with the statutory provision. We answer the questions posed for our examination in the negative and in favour of the revenue.

22. We are also of the view that the situation contemplated u/s.194C of the Act i.e. the payment being carrying out any work which is to improve the situation of such nature and of course preceded between the contract between the assessee and the manufacturer company.

23. In the circumstance, we hold that it was a situation where the provisions of Section 194C of the Act applied to the assessee and is clearly attracted to the present situation. The assessing authority has rightly applied the provisions of Section 194 of the Act to the present situation and has very correctly estimated the interest payable in terms of Section 201 (A) and the Appellate Commissioner and the Tribunal are in error in taking the contrary view particularly, in the facts and circumstances of the case and therefore, the orders passed by the Appellate Tribunal and the Appellate Authority are both set aside and the order passed by the Assessing authority is restored.

The appeal is allowed. However, the parties to bear their own cost

Regards,

Praveen Boda

Taxability in respect of International Private Leased Circuit (IPLC)--Telegraph Authority u/s 65 (111) of the Finance Act, 1994 – reg

F. No. 137/21/2011 – Service Tax

Government of India

Ministry of Finance

Department of Revenue

(Central Board of Excise & Customs)

New Delhi,

Dated: December 19, 2011

Subject: Taxability in respect of International Private Leased Circuit (IPLC) charges and amendment in the definition of Telegraph Authority u/s 65 (111) of the Finance Act, 1994 – reg.

Please refer to the clarifications issued vide Board's letter of even number dated 15.07.2011 on the subject mentioned above.

2. The matter has been re-examined and it is seen that the IPLC is specifically covered by the definition of the telecommunication service given in clause 65 [109a(iv)] of the Finance Act, 1994. As per the said section these services are taxable only when provided by a person who has been granted a licence under the first proviso to sub-section (1) of section 4 of the Indian Telegraph Act, 1985. It is only because the foreign telecom service provider cannot constitute a telegraph authority under an Indian law that they remain outside the taxability clause of the telecommunication service.

3. Therefore, the view taken in the said letter that what otherwise constitutes a “telecommunication service” would amount to “business support service” is erroneous.

4. The clarification issued vide the above mentioned letter stands corrected accordingly.

Deepankar Aron

Director (Service Tax)

CBEC, New Delhi

Clarification issued earlier in Julu 2011:

F.No.137/21/2011-Service Tax

Government of India

Ministry of Finance

Department of Revenue

Central Board of Excise & Customs

New Delhi

Dated: July 15, 2011

Subject: Taxability in respect of International Private Leased Circuit (IPLC)charges and amendment in the definition of Telegraph Authority u/s 65 (111) of the Finance Act, 1994-reg.

1.Representations have been received seeking clarification regarding taxability of IPCL charges incurred in foreign currency by BPO/MNCs against receipt of services from the service provider situated outside India/group companies under reverse charge mechanism [Section 66A of the Finance Act, 1994 read with Rule 2 (1) (d) (iv) of the Service Tax Rules 1994].

2. The matter has been examined. The activities are in the nature of Leased Circuit services presently covered under Telecommunication service. However, for getting classified under Telecommunication service, Section 65 (105 (zzzx) of the Finance Act, 1994 provides that the service should be provided by a Telegraph authority. Telecommunication service as defined under Section 65 (109a) covers services which are provided by a person who has been granted a licence under the first proviso to sub-section (I) of section 4 of the Indian Telegraph Act, 1885. In this situation in the instant case since the service provider is located abroad, he is not covered under the definition given in Section 65 (109a), Thus the service provided by foreign vendors cannot be taxed under Telecommunication service.

3. Section 65 (105) (zzzq) read with Section 65 (104c) of the Finance Act, 1994, defines Business Support Service as services provided in relation to business or commerce and includes evaluation of prospective customers, telemarketing, processing of purchase orders and fulfilment services, information and tracking of delivery schedules, managing distribution and logistics, customer relationship management services, accounting and processing of transactions, operational assistance for marketing, formulation of customer service and pricing policies, infrastructural support services and other transaction processing.

Explanation - For the purposes of this clause, the expression "infrastructural support services" includes providing office along with office utilities, lounge, reception with competent personnel to handle messages, secretarial services, internet and telecom facilities, pantry and security.

4. It is clarified that the above activity of receiving IPCL service from abroad is chargeable to Service Tax under Business Support Service [Section 65 (105)(zzzq) ibid] at the hands of recipients situated in India in terms of Section 66A of the Finance Act, 1994, read with Rule 2 (1) (d) (iv) of the Service Tax Rules. 1994 and provisions of Taxation of Services (Provided) From Outside India and Received in India, Rules 2006 apply.

All pending issues may be decided accordingly.

(R K Kapur)

OSD (Service Tax)

CBEC, New Delhi

S. 9: Profits from offshore supply of equipment & software not taxable in India--Delhi HC

DIT vs. Ericsson AB (Delhi High Court)

The assessee, a Swedish company, entered into contracts with ten cellular operators for the supply of hardware equipment and software. The contracts were signed in India. The supply of the equipment was on CIF basis and the assessee took responsibility thereof till the goods reached India. The equipment was not to be accepted by the customer till the acceptance test was completed (in India). The assessee claimed that the income arising from the said activity was not chargeable to tax in India. The AO & CIT (A) held that the assessee had a “business connection” in India u/s 9(1)(i) & a “permanent establishment” under Article 5 of the DTAA. It was also held that the income from supply of software was assessable as “royalty” u/s 9(1)(vi) & Article 13. On appeal, the Special Bench of the Tribunal (Motorola Inc 95 ITD 269 (Del)) held that as the equipment had been transferred by the assessee offshore, the profits therefrom were not chargeable to tax. It was also held that the profits from the supply of software was not assessable to tax as “royalty”. On appeal by the department to the High Court, HELD dismissing the appeal:

 

(i) The profits from the supply of equipment were not chargeable to tax in India because the property and risk in goods passed to the buyer outside India. The assessee had not performed installation service in India. The fact that the contracts were signed in India could not by itself create a tax liability. The nomenclature of a “turnkey project” or “works contract” was not relevant. The fact that the assessee took “overall responsibility” was also not material. Though the supply of equipment was subject to the “acceptance test” performed in India, this was not material because the contract made it clear that the “acceptance test” was not a material event for passing of the title and risk in the equipment supplied. If the system did not conform to the specifications, the only consequence was that the assessee had to cure the defect. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. Consequently, the assessee did not have a “business connection” in India. The question whether the assessee had a “Permanent Establishment” was not required to be gone into (Ishikawajma Harima 288 ITR 408 (SC), Skoda 172 ITR 358 (AP) & Mahavir Commercial 86 ITR 147 followed);

 

(ii) The argument that the software component of the supply should be assessed as “royalty” is not acceptable because the software was an integral part of the GSM mobile telephone system and was used by the cellular operator for providing cellular services to its customers. It was embedded in the equipment and could not be independently used. It merely facilitated the functioning of the equipment and was an integral part thereof. The fact that in the supply contract, the lump sum price was bifurcated is not material. There is a distinction between the acquisition of a “copyright right” and a “copyrighted article” (Tata Consultancy Services 271 ITR 401 (SC) Sundwiger EMFG 266 ITR 110 & Dassault Systems 229 CTR 125 (AAR) followed).

Source: ITATOnline

Changes in e-furnishing form 15CA

Procedure for furnishing information under sub-section (6) of section 195 of the Income-tax Act, 1961 read with rule 37BB of the Income-tax Rules, 1962.

General:

Form 15CA should be used for furnishing information of remittances in e-mode in accordance with the provisions of section 195 (6) of the Income-tax Act, 1961. The information should be furnished after obtaining a certificate in Form 15CB from an accountant as defined in the Explanation to section 288 of the Income-tax Act, 1961. The print out Form 15CA should be signed and submitted to the Reserve Bank of India/authorized dealer prior to remitting the payment.

Tin.nsdl has changed some guidelines for e-furnishing form 15CA. There are some changes in the form 15CA with which e-furnishing of the form 15CA will be completely different. The guidelines for e-furnishing form 15 CA are as follows.

Procedure for furnishing information under sub-section (6) of section 195 of the Income-tax Act, 1961 read with rule 37BB of the Income-tax Rules, 1962.

• The Form should be furnished at the website of the Tax Information Network www.tin-nsdl.com.

• Fields marked with (*) are mandatory.

• Select the values from the drop down wherever provided.

• Each transaction detail should be filled in separately.

Guidelines for Part A of Form 15CA:

Remitter:

• Permanent Account Number (PAN) and Tax Deduction and collection Account Number (TAN) allotted by the Income Tax Department should be mentioned. TAN is mandatory in cases where-

a)tax has been deducted or will be deducted at source;

b)the remitter has obtained an order under section 195 (2) of the Income-tax Act from the Assessing Officer.

• In case an invalid PAN and/or TAN is filled in by the remitter, the Form will not be generated.

• In case the remitter does not have a TAN, it is mandatory to quote PAN of the remitter.

• PAN of the remitter should invariably be given. However, the same is mandatory if status of entity is Company or Firm. If PAN is not given in such cases, the remitter will not be allowed to generate the Form.

• Details in at least two address fields for remitter should be mentioned.

• Name of the entity should be mentioned in the “Name of remitter” field.

• No value is to be provided in Area code, AO type, Range code & AO number. The fields will be entered by the system after validating the PAN and/or TAN.

• Email id and mobile no., if any, should be provided.

Recipient of remittance:

• Complete address of recipient of remittance, separated by coma, should be provided.

• PAN, allotted by the Indian Income Tax Department should be mentioned.

• If status of entity is “company”, then provide type of company i.e., “domestic” or “other than domestic”.

• In the field “ Principal Place of Business”, the country of tax residence of the recipient of the remittance should be mentioned.

Information for accountant:

• Enter name of the Chartered Accountant in the field “Name of the accountant”.

• Details in at least two address fields should be mentioned.

• Date of certificate should not be a future date.

• Registration no. should be numeric.

• Details of accountant are not required if point no. 15 is selected i.e. any order u/s 195 (2)/ 195 (3)/ 197 of the Income-tax Act has been obtained from Assessing Officer.

• Certificate number is an alphanumeric field.

Guidelines for PART B of the Form (Particulars of Remittance and TDS):

• Provide the values as per the accountant certificate obtained in Form 15CB.

• In case name of the country is not available in drop down list, select value “other” from the drop down and provide name of the country.

• In case currency name is not available in drop down then select value “other” from the drop down and provide name of the currency.

• Proposed date of remittance should be current date or a future date.

• Amount of TDS should be less than amount of remittance.

• Actual amount of remittance after TDS should be less than amount of remittance.

• Select type of the bank:

- Indian Bank (Bank of India, Dena Bank, Kotak Mahindra Bank Ltd. etc.)

- Foreign Bank (Standard Chartered Bank, HSBC, Citi Bank etc.)

• In case of “Indian Bank”, user will be required to provide “Name of the branch” and “BSR code”

• In case of “Foreign Bank”, user will be required to provide details of location of bank as below:

- Located in India

- Located outside India

• In case of foreign bank located in India, user will be further required to provide “Name of the branch” and “BSR code”

• In case of foreign bank located outside India, user will be further required to provide:

- Name of the branch

- BSR code (This will be optional)

- Code of branch (This will be mandatory)

• Rate of TDS as per DTAA (if applicable) should be mentioned upto two decimal places.

• Amount should be mentioned upto 2 decimal places.

• Select any one out of fields 12, 13, 14 and 16. One form is to be filled for one type of remittance.

• Details of “responsible person” should be mentioned for verification.

• If no tax has been deducted then value “0.00” should be mentioned in “Amount of TDS” field (foreign currency and Indian Rs.)

• Value for “rate of deduction as per the Income-tax Act” should be “0.00” if no tax has been deducted and “amount of TDS in Indian and foreign currency” should be “0.00”.

Generation of Form 15CA:

• After filling up the information, click “submit”. On submission of details if system shows any errors, rectify and re-submit the form

• A confirmation screen with all the data filled by the user will be displayed. The same can be either confirmed or edited.

• On confirmation, a filled up Form 15CA with an acknowledgement number will be displayed. Print out of the Form should be taken, signed and submitted prior to remitting the payment.

• Form 15CA can be re-printed by selecting the re-print option. For re-printing, please enter “acknowledgement no.”, “PAN” and/or “TAN” mentioned in the Form.

Set-off” of export receivable​s against import payables-L​iberalizat​ion of Procedure

RBI/2011-12/264



A.P. (DIR Series) Circular No. 47


November 17, 2011


To


All Category – I Authorized Dealer Banks


Madam/Sir,


“Set-off” of export receivables against import payables-Liberalization of Procedure

Attention of Authorized Dealer Category – I (AD Category – I) banks is invited to the fact that the requests received from the exporters through their AD branches for set-off of export receivables against import payables are considered by the Reserve Bank of India. As a measure of further liberalization, it has been decided to delegate power to AD Category – I banks to deal with the cases of “set-off” of export receivables against import payables, subject to following terms and conditions:

a.The import is as per the Foreign Trade Policy in force.

b.Invoices/Bills of Lading/Airway Bills and Exchange Control copies of Bills of Entry for home consumption have been submitted by the importer to the Authorized Dealer bank.

c.Payment for the import is still outstanding in the books of the importer.

d.Both the transactions of sale and purchase may be reported separately in ‘R’ Returns.

e.The relative GR forms will be released by the AD bank only after the entire export proceeds are adjusted / received.

f.The ” set-off” of export receivables against import payments should be in respect of the same overseas buyer and supplier and that consent for ”set-off” has been obtained from him.

g.The export / import transactions with ACU countries should be kept outside the arrangement.

h.All the relevant documents are submitted to the concerned AD bank who should comply with all the regulatory requirements relating to the transactions.

2. AD Category – I banks may bring the contents of this circular to the notice of their constituents and customers concerned.

3. The directions contained in this circular have been issued under Sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions / approvals, if any, required under any other law.






Yours faithfully,






(Dr. Sujatha Elizabeth Prasad)


Chief General Manager

Expenditure on ‘Application Software’ is revenue in nature

CIT vs. Asahi India Safety Glass Ltd (Delhi High Court)

The assessee, engaged in manufacturing safety glass, entered into an agreement with Arthur Anderson for installation of the “Oracle” software application for financial accounting, inventory and purchase. A Master Software Licence and Services Agreement was also entered into with Oracle. The assessee incurred expenditure of Rs. 1.36 crores & Rs. 1.70 crores in AY 1997-98 & 1998-99. While in the books the expenditure for AY 1997-98 was capitalized, the expenditure for AY 1998-99 was treated as “deferred revenue expenditure”. The AO rejected the claim for deduction of the entire expenditure on the ground that it had resulted in “enduring benefit” and was “capital” in nature though the CIT (A) & Tribunal allowed the claim on the ground that the expenditure had not resulted in creation of new asset or a new source of income. On appeal by the department to the High Court, HELD dismissing the appeal:

(i) The test of enduring benefit is not a certain or a conclusive test which the courts can apply almost by rote. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation of fixed capital for the assessee. Expenditure incurred which enables the profit making structure to work more efficiently leaving the source of the profit making structure untouched is expense in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably; leaving the fixed assets untouched is of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage collapses in such like cases especially in cases which deal with technology and software application which do not in any manner supplant the source of income or added to the fixed capital of the assessee (Alembic Chemical Works 177 ITR 377 followed);

(ii) On facts, the expenditure was for overhauling the accountancy and to efficiently train the accounting staff. It was incurred under various sub-heads such as licence fee, annual technical support fee, professional charges, data entry operator charges, training charges and travelling expenses. None of these resulted in either creation of a new asset or brought forth a new source of income for the assessee. The software was “application software” which enabled it to execute tasks in the field of accounting, purchases and inventory maintenance more efficiently;

(iii) The fact that the expenditure was not written off in the books/ treated as ‘deferred revenue’ is irrelevant (Kedar Nath Jute vs CIT 82 ITR 363 (SC) followed)

Payment on shrink-wrapped software is royalty, rules High court of Karnataka

Payment on shrink-wrapped software is royalty, rules High court of Karnataka

‘Firms have an obligation to deduct tax at source from the amount paid'

In a major setback to information technology companies, the Karnataka High Court on Saturday ruled that payments made by these firms in India to their foreign software suppliers would amount to “royalty” and the companies had an obligation to deduct tax at source from the amount that they paid .

This order enables the Income Tax Department to recover tax dues from major IT companies from 2000 onwards, which may run into crores of rupees.

A Division Bench, comprising Justice V.G. Sabhahit and Justice Ravi Malimath, passed the order while allowing an appeal by the I-T Department, challenging the 2005 order of the Income Tax Appellate Tribunal.

The tribunal, on appeals by major IT companies, including Wipro, Infosys, HP, Samsung, Sonata, GE India and others, had said that the payment did not attract tax in India as there was no permanent establishment of non-resident foreign suppliers here.

Purchase

The IT companies, which had purchased software from Microsoft and other foreign companies, claimed that the software imported by them were shrink-wrapped products and the same was not customised.

Hence no tax was deducted on the payment made to the foreign suppliers as it was not taxable in India.

However, the I-T Department contended that the payment amounted to “royalty” and hence IT companies had an obligation to deduct tax at source under Section 195(1) of the Income Tax Act. The IT companies argued that this transaction did not come under the purview of royalty.

The court found that what had been transferred through the shrink-wrapped software to the IT companies was only the licence to use the copyright belonging to the non-resident companies, subject to various terms and conditions , which ultimately authorised the end-users to make use of the copyright software.

Transfer

“This would amount to transfer of part of the copyright and transfer of right to use the copyright for internal use of the IT companies as per the terms and conditions,” the court said while refusing to accept the contention that there was no transfer or copyright or part of copyright.

Right

“We hold that the right to make a copy of the software and use it for internal business by making a copy, storing it in the hard disk of the designated computers and taking back-up would itself amount to copyright under Section 14 (1) of the I-T Act and licence is granted to use the software by making copies, which work, but for licence granted would have constituted infringement of copyright and having obtained licence, the companies are in possession of legal copy of the software.

The price of this software is not the price of the compact disc alone or software alone nor the price of licence granted. This is a combination of all in substance. Unless the licence is granted permitting the end-users to copy and download the software, the dumb CD containing software would not have any help to the end users (IT companies) as software would be operative only if it is downloaded to a designated computer as per terms and conditions,” the court said while pointing out that this aspect make out the difference between the computer software and the copyright.

Ruling

Based on this observation, the court held that payments made by IT companies to non-resident foreign companies for supply of shrink-wrapped software would amount to “royalty” within the meaning of the Article 12 of the Double Taxation Avoidance Agreement with the respective foreign countries and that the payment made by way of royalty attracted income tax under Section 9(1) of the I-T Act.

________________________________________

• Order enables I-T Department to recover tax dues from major IT companies

• The tax dues from 2000 will run into crores of rupees

Source: THE HINDU