SOP ON FILING OF APPEALS TO HIGH COURT_CBDT INSTRUCTIONS

CBDT'S INSTRUCTIONS REGARDING STANDARD OPERATING PROCEDURE ON FILING OF APPEALS TO HIGH COURT

Section 260A of the Income-tax Act, 1961 - High Court - Appeal to - Instructions regarding Standard Operating Procedure on filing of appeals to High Court under section 260A and related matters

INSTRUCTION NO. 7 /2011 [F.NO. 279/MISC./M-42/2011-ITJ], DATED 24-5-2011

The Government has formulated the National Litigation Policy 2010, for conduct of litigation on its behalf. The policy declares:

"Government must cease to be a compulsive litigant. The philosophy that matters should be left to the courts for ultimate decision has to be discarded. The easy approach, 'let the court decide', must be eschewed and condemned."

2. In furtherance of the above stated policy and to achieve the 'zero delay regime' in matters of filing appeals and in suppression of the existing Instructions on the subject of filing of appeals to High Court, in general, and Instruction No. 1038 dated 3-2-1977; Instruction No. 1777 dated 4-11-1987; Instruction No. 1957 dated 22-12-1998; Letter Dy No. 111 /Ds (J)/2004-ITJ dated 25-3-2004; Letter No. 272/77/2007-ITJ dated 24-9-2008; Letter No. 279/Misc.l42/2008-ITJ(Pt) dated 23-10-2008; Letter No. 279/Misc/142/2008 dated 19-11-2008 and Letter No. 279/Misc/M-29/2010-ITJ dated 31-8-2010, in particular, the following Instructions are issued herewith for compliance by all concerned:

Responsibility for Filing of Appeal to High Court

3. Subject to the Instructions for the time being in force on the monetary limits for filing appeals issued by CBDT under section 268A, the jurisdictional CCIT shall be the authority to decide whether to contest an order of the ITAT, in the light of the facts and circumstances of a particular case and the statutory provisions. He shall take a view in the matter after taking into consideration the recommendations of the authorities below. Once the CCIT communicates his decision to contest a particular order of ITAT, it shall be the responsibility of the CIT to ensure timely and proper filing of appeal in the High Court and consequential follow up actions.

Time Lines for Filing of Appeals in the High Court under section 260A of the Act

4. Time lines indicating clearly the responsibilities of each level involved in the process of filing appeal to High Court have been laid down in Annexure-I to this instruction for strict adherence by all concerned.

5. Appeal Effect and Scrutiny Report:

i. On receipt of the order of the ITAT, the Assessing Officer (Assessing Officer) shall ensure that appeal effect is given timely and properly. The Range Head and the CIT shall monitor timely appeal effect in all the orders of the ITAT.

ii. With a view to provide relevant inputs to the decision making authority, a format for scrutiny report is prescribed herewith at Annexure-II, which envisages basic record based information to be filled-in by the Assessing Officer and inferential analysis beginning at the level of the Range Head. The parts to be filled-in by the Assessing Officer and Range Head have been specified. However, the CIT may, in his discretion, allow the Assessing Officer to fill up the sections meant for Range Head or vice versa, if the situation so demands, to avoid delay.

iii. In respect of appeals decided in favour of revenue, the Assessing Officer shall submit only Part I of the proforma in Annex II to the CIT through Range Head and there will be no need to fill in other parts of the proforma in such cases.

iv. Appeal effect should be particularly monitored by the CIT in the cases in which the ITAT has decided certain issues in favour of the assessee and set-aside/ remanded back other issues to the Assessing Officer. The set-aside issues must be decided on priority.

6. Quality of Appeals:

i. An appeal to the High Court or the Supreme Court can be filed only on 'Substantial Questions of Law'. The CCsIT/ CsIT have to bestow their personal attention on this issue while taking decision to file appeal under section 260A of the Act. The Substantial Questions of Law arising out of the order of ITAT must be clearly identified and suggested draft question of law should be sent to the Standing Counsels for their consideration

ii. Although the expression 'substantial question of law' has not been defined anywhere in the statute, the Supreme Court in the case of Sir Chunilal Mehta & Sons v. Century Spinning & Mfg. Co. Ltd. AIR 1962 SC 1314 (applied by the Apex Court in M Janardhana Rao v. JCIT 273 ITR 50, has laid down the following tests to determine whether a 'substantial question of law' is involved:

a. Whether the issue directly or indirectly affects substantial rights of the parties?

b. Whether the question is of general public importance?

c. Whether it is an open question in the sense that the issue has not been settled by pronouncement of Supreme Court?

d. Whether the issue is not free from difficulty?

e. Whether it calls for a discussion for alternative views?

iii. Perversity of facts also constitutes 'Substantial Question of Law' as it falls in (d) and (e) above. Hon'ble Supreme Court in Sudarshan Silk & Sarees v. CIT 300 ITR 205 has laid down the attributes of perversity by holding that an order or finding is perverse on facts if it falls under any of the following categories:

(a) The finding is without any evidence.

(b) The finding is contrary to the evidence.

(c) There is no direct nexus between the conclusion of fact and primary fact upon which that conclusion is based?

(d) When an authority draws a conclusion which cannot be drawn by any reasonable person or authority on the material and facts placed before it.

7. Proper Judicial Record Management System:

(i) A proper judicial record management system is essential for meaningful conduct of litigation. The CIT has to, inter alia, ensure that once appeal to ITAT is authorized against the order of CIT(A), a separate judicial folder for the assessee for a particular year is maintained in his office. Among other things, the folder should have a copy of relevant assessment order, the remand report of the Assessing Officer on the order of the CIT(A), if any, and the scrutiny report submitted by the authorities below.

(ii) This folder should be retrieved as soon as the order of ITAT in the case is received. The scrutiny report on the order of the ITAT may be processed through this folder (where other relevant papers including the scrutiny report while filing appeal to ITAT should be available). If the appeal to High Court is filed under section 260A, the relevant papers (scrutiny report, memo of appeal etc) should also be linked to the same folder.

(iii) These judicial folders should be easily retrievable once the judgment of the High Court in the case is received, so that the decision to file SLP is taken without making reference to the Assessing Officer / Range Head and proposal to file SLP is processed in the office of the CIT timely.

(iv) Likewise, a separate judicial folder should be maintained in case of assessee's appeal under section 260A / writ petitions filed in High Court, which should contain relevant documents including copy of counter & rejoinder affidavits filed in the Court proceedings.

(v) The CIT should evolve a system through which a digital copy of relevant documents such as Appeal Memo and its enclosures (assessment order, CIT(A)'s order, ITAT order etc.) are retained for use at the time of sending SLP proposal in the case, if the need arises.

Preparation of Memorandum of Appeals / Papers etc.

8. The CIT shall evolve a system in his charge to ensure that:

(i) There is proper vetting of Memorandum of Appeals as regards relevant facts therein before the appeal is actually filed;

(ii) Necessary particulars including the correct PAN and CIT charge is mentioned;

(iii) All annexures including copies of orders of authorities below are properly typed as per High Court Rules to avoid defect/office objections.

(iv) In case, any document like agreement, depositions etc. crucial to the issue involved and considered by lower authorities, a copy of the same must be referred to at relevant place in appeal memo and its copy annexed thereto.

An illustrative list of precautions to be taken to avoid defective appeals/objections being raised in filing appeals to High Court and guidelines for typing of appeal papers etc. are enclosed as Annexure-III to this Instruction. However, the Standing Counsels representing the Department's case may be further consulted on procedural aspects, wherever considered necessary.

Filing of Appeal and Subsequent Monitoring

9. The CIT should put in place proper mechanism with defined responsibility of different levels of officials to ensure that:

(i) The appeal is filed in the registry of High Court within prescribed time limit as in Annexure-I.

(ii) Diary Number / Lodging Number and ITA Number allotted by the registry is obtained and recorded in judicial folder in CIT's office as mentioned in check list / proforma for scrutiny report on ITAT order at Annexure-II.

(iii) In case, the registry of the High court notifies any defect or office objection, immediate steps are taken to remove the same with the assistance of the filing Counsel and compliance is reported to him.

(iv) One set of appeal memo is sent to the Assessing Officer for linking the same with the relevant assessment record.

(v) In case, the assessee files counter affidavit, the appearing counsel makes available the same to the CIT/Assessing Officer to file Rejoinder affidavit to rebut the contention of the assessee.

(vi) The appeals are followed up and the Department is effectively represented at every hearing/stage.

(vii) Proper coordination with the appearing counsel is maintained at every stage.

(viii)The details and information called for by the High Court/ appearing counsels should be furnished (in quadruplicate) at the earliest and, in any case at least three days before the date fixed for hearing before the High Court.

Appeal/Writ Petition Filed by the Assessee

10. As soon as the memo of appeal / writ petition filed by the assessee is received, a file should be opened in the office of CIT and assigned a proper identification number incorporating the ITA No. /WP No. allotted by the High Court. Factual comments on the memo of appeal / writ petition and judicial precedents in support of the Revenue's stand should be forwarded by the CIT to the Departmental Counsel for drafting counter-affidavit. The CIT should ensure that the counter-affidavit is filed within time allowed by the Court and further follow up actions taken in consultation with the counsel.

Power to defend Union of India, Ministry of Finance, Secretary (Revenue), Chairman CBDT etc. in cases before High Court

11. All the cases before High Court, pertaining to Direct Taxes, wherein Union of India, Ministry of Finance, Secretary (Revenue), Chairman CBDT, or any of these figure as respondents, should be defended by the CCIT/ DGIT concerned. Powers may be delegated to appropriate officers nominated for the purpose stated above.

The Board may be approached immediately for guidance/ Instructions in case any difficulty is experienced in exercising these powers. In Writ matters against orders under section 119(2) of the IT Act, 1961 etc, appropriate instructions may be obtained from the concerned division of the Board under intimation to ITJ section.

Compliance of High Court Directions

12. The CIT shall personally ensure compliance of directions of the High Court like Dasti service, filing of counter or rejoinder affidavit or other specific directions within time frame to avoid adverse observations.

There should be close co-ordination between field officers and Standing Counsels in the High Court so that directions are communicated in time and proper compliance is made to the satisfaction of the Court.

Judgments of High Court containing strictures etc.

13. Judgments of the High Court containing strictures or which are contrary to Board's orders, notifications, instructions, circulars etc. shall be brought to the notice of the Board (concerned division) immediately by the CCIT/DGIT under intimation to ITJ section of the Board.

Assistance to Departmental Counsels

14. The CIT should ensure that whenever the Departmental Counsel seeks Instructions / clarifications in a case, the same are attended to by the officers concerned promptly. The counsel should be briefed properly to strengthen Revenue's case. The CIT should personally involve himself in cases involving intricate issues of facts / law having wide ramifications or involving high revenue stake.

A copy of the scrutiny report for filing appeal to High Court should invariably be made available to the appearing counsel for his assistance in preparation of the case and arguments.

15. Monitoring Mechanism:

i. The CCIT/ CIT shall ensure due adherence to this instruction. In order to facilitate monitoring, a Register shall be maintained in the office of CIT as per the format prescribed at Annexure-IV to this instruction.

ii. Quarterly Report of appeals filed in the High Court as prescribed at Annexure-V to this Instruction shall be furnished by the CIT to the CCIT (CCA) through his controlling CCIT by the 15th of the month following each quarter. The CCIT (CCA) in turn shall compile the report and send to the DGIT (L&R) at DELHI_DGIT-L&R@incometax.gov.in in digital form by E-mail before end of the month following each quarter. The DGIT (L&R) shall put up an analysis of such reports to the Member (A&J) with his comments.

16. This Instruction shall apply in all the appeals being filed in High Courts and matters related thereto with effect from 1-6-2011.

Note: Reference to the CCIT/DIT in this Instruction includes DGIT/DIT as the case may be.

 

CBDT notifies revised procedure for refund of excess amount of TDS deducted/paid

CIRCULAR NO. 2/2011 [F.NO. 385/25/2010-IT(B)]



The procedure for regulating refund of amount paid by the deductor in excess of the tax deducted at source (TDS) and/or deductible is governed by Board circular No. 285, dated 21-10-1980.

2. Subsequent to issue of circular No. 285, new sections have been inserted under Chapter XVII-B of the Income-tax Act, 1961. References have been received by the Board regarding inclusion of these sections also for the purpose of issue of refund of excess amount of the TDS deducted/deductible.

3. In consideration of the above and in supersession of the circular No. 285, dated 21-10-1980, the Board prescribes the following procedure for regulating refund of amount paid in excess of tax deducted and/or deductible in respect of TDS on residents covered under sections 192 to 194LA of the Income-tax Act, 1961.

This circular will not be applicable to TDS on non-residents falling under sections 192, 194E and 195 which are covered by circular No. 7/2007 issued by the Board.

4. The excess payment to be refunded would be the difference between:

(i) the actual payment made by the deductor to the credit of the Central Government; and

(ii) the tax deductible at source.


4.1 In case such excess payment is discovered by the deductor during the financial year concerned, the present system permits credit of the excess payment in the quarterly statement of TDS of the next quarter during the financial year.

4.2 In case, the detection of such excess amount is made beyond the financial year concerned, such claim can be made to the Assessing Officer (TDS) concerned. However no claim of refund can be made after two years from the end of financial year in which tax was deductible at source.

5. However, to avoid double claim of TDS by the deductor as well as by the deductee, the following safeguards must be exercised by the Assessing Officer concerned:


5.1 The applicant deductor shall establish before the Assessing Officer that:

(i) it is a case of genuine error and that the error had occurred inadvertently;

(ii) that the TDS certificate for the refund amount requested has not been issued to the deductee(s); and

(iii) that the credit for the excess amount has not been claimed by the deductee(s) in the return of income or the deductee(s) undertakes not to claim such credit.

5.2 Prior administrative approval of the Additional Commissioner or the Commissioner (TDS) concerned shall be obtained, depending upon the quantum of refund claimed in excess of Rupees One Lakh and Rupees Ten Lakh respectively.

5.3 After meeting any existing tax liability of the deductor, the balance amount may be refunded to the deductor.

6. In view of provisions of section 200A of the Income-tax Act prescribing processing of statement of TDS and issue of refund with effect from 1- 4-2010, this circular will be applicable for claim of refunds for the period upto 31-3-2010.








--


Regards,


Praveen Boda


http://praveenboda.blogspot.com/

Payment made to a New Zealand company for rendering liaison & coordinating services qua DNA testing at USA does not fall within ambit of royalty & FTS

Income-tax : Nature of payment made by assessee to New Zealand company is of liaisoning and coordinating to ensure that blood samples collected by assessee is properly received at US and reports are received in time and as per terms fixed by US Embassy; neither of these services can be termed as services in nature of managerial, technical or consultancy nature; it is also not providing services of technical or other personnel; therefore, it also cannot be said that such services fall within term ‘fee for technical services.’ as contemplated by Article 12 [Section 195 of the Income-tax Act, 1961 - Deduction of tax at source - Payment to non-resident - Indo - New Zealand DTAA - Article 12 (Royalties & Fees for Technical Services)]

[2011] 10 taxmann.com 123 (Delhi - ITAT)

ITAT, DELHI BENCH ‘D’, NEW DELHI

DCIT

v.

MRO (India) (P.) Ltd.

ITA NO. 3838/DEL/2007

FEBRUARY 11, 2011

ORDER

I.P. Bansal, Judicial Member. - This is an appeal filed by the revenue. It is directed against the order passed by the CIT (A) dated 4th June, 2007 for assessment year 2004-05. Grounds of appeal read as under:-

1. “Whether on the facts and in the circumstances of the case, the ld. CIT(A) was justified in allowing the deduction of Rs. 27,11,280/- towards operating expenses being amount paid/payable of M/s MRO International New Zealand holding that the services in the filed of DNA testing to the prospective Indian immigrants by USA based certified laboratory, are not covered by the provisions of TDS and section 40(a) of Income-tax Act, 1961.

2. Whether on the facts and in the circumstances of the case, the ld. CIT(A) was justified in holding that the impugned services not liable for TDS and not covered under provisions of section 40(a) even though necessary particulars were not filed before the AO. In doing so, CIT(A) has not adjudicated the applicability of section 44AD of Income-tax Act, 1961 relied upon by the AO.

3. The appellant craves leave to add, to alter, or amend any grounds of the appeal raised above at the time of the hearing.”

2. The assessee company is incorporated in India in the year 2002 with the object of undertaking business in ‘service sector’ ranging from medical testing to tour operators. During the year under consideration it has carried on the activity of providing service in the form of DNA testing to the prospective Indian immigrants for USA Embassy located in Delhi and Mumbai. For this purpose, it had arrived at an understanding with MRO Ltd., New Zealand which has been spelt out in letter issued by them to the assessee dated 29th April, 2002 the copy of which is placed at page 53 of the paper book. The contents of the said letter are as under:-

“Date: 29-4-2002

From:

MRO Ltd. - New Zealand

To:

MRO India Pvt. Ltd.

Sub: Business plan for India operations

Dear Sirs,

As you are aware, MRO International has successfully finalized a long term contract for you whereby you are appointed as the sole authorized representative for Delhi for the purposes of conducting DNA tests for the US Consulate.

The detailed terms of contract are being sent to you. Please organize your facilities in order to provide satisfactory services to the clients.

Initially the US Consulate has agreed to this appointment for only New Delhi but we are also trying to extend this contract for you to Mumbai. The two locations would have their obvious advantages.

As per your request, the MRO group Head Quarters in New Zealand will provide the following services on a regular basis for your business operations: -

1. We shall provide all the necessary data, procedures and documentation formats for the operation of the business.

2. We will pass on all the relevant information on the various DNA labs operating in the USA giving their reliability, capacity, quality of service and charges.

3. Once you short list the DNA Lab, we can negotiate with them in order to obtain the most competitive and economical rates. Simultaneously your concern on the timely delivery of test reports at a very nominal extra cost shall be kept in mind, while finalizing terms with the lab.

4. We shall coordinate with your approved DNA Lab and the US Government in the US for the smooth running of your business and timely deliverables. Our representative office in the US can be approached for any specific issues.

5. All the above services shall be rendered in the US and/or in New Zealand.

6. Our charges for providing the above services shall be @ USD 260 per case. We agree to your special request to grant you a moratorium period of nearly a year in respect of our charges. This is for initial establishment and the stream lining of your business operations. The charges shall be levied starting from 1-4-2003 and are to be settled annually. We trust that this special concession will provide a breather to your operations.

In case you have any queries regarding the above, please inform us.

Thanks

Yours Sincerely,

Chris Andersen

For MRO Ltd. (New Zealand)”

3. Accordingly, during the year under consideration, the assessee had incurred a liability towards MRO New Zealand for paying a sum of Rs. 27,11,280/- on account of services rendered by them to the assessee to facilitate to get the DNA test reports of prospective Indian immigrants required to be submitted to US Embassy for immigration of those persons to United States. The assessee was required to show cause as to why such amount could be allowed to the assessee. Vide submissions made vide letters dated 22nd September, 2006, 18th October, 2006 and 27th October, 2006, it was submitted by the assessee that MRO New Zealand (foreign company) has helped the assessee for establishing its business - procurement of work for US Embassy as well as DNA test laboratory by USA at the most reasonable and discounted basis. These services were rendered outside India and income of the recipient company is not taxable in India. Such payment did not attract the provisions of TDS. Section 40 (a) applies only if the payments made by the assessee are in the nature of (a) royalty; (b) fee for technical services; and (c) other sums chargeable under the Act. It was submitted that the foreign company has rendered liaison and coordination services for the assessee company with DNA diagnostic laboratory at USA and with US Federal Company. The coordination and liaison is required for approval and acceptance of DNA test reports submitted by the assessee company to US Embassy. The foreign company was constantly following up the changes in the immigration laws and obtaining all new regulations on DNA testing, immigration and stipulation of USA immigration office and the identity assessments procedure for prospective immigrants. It was further submitted that all USA immigration offices, for ensuring that the country office for DNA test doing the job-wise rule book, used the term “chain of custody.” The Assessing Officer did not accept such submissions of the assessee as, according to the Assessing Officer, the assessee has not filed number and designation of staff during liaison in USA. It did not give the nature and detail of liaisoning done by MRO International each case wise for 237 cases. The assessee has also paid testing charges of Rs. 46,34,422/- in the nature of reimbursement to DNA Laboratory at USA. The nature of business of the assessee company is to provide specialized service to prospective immigrants to US referred by US Embassy. The assessee’s plea for non-deduction of tax also turned down by the Assessing Officer on the ground that simply if outside party does not have permanent establishment in India even then according to the provisions of Service Tax Act, the service tax is chargeable on number of services which are provided by a person who does not have any fixed establishment or permanent address in India. The Assessing Officer has referred to a Circular issued by Central Board of Excise and Customs and has come to the conclusion that tax was deductible. The Assessing Officer has also mentioned about applicability of provisions of DTAA, sections 9(1) and 40(a) and 195 of the Income-tax Act and, accordingly, he disallowed the amount of Rs. 27,11,280/-.

4. Before CIT (A), the assessee had filed detailed submissions and it was submitted that the payments made by the assessee to MRO New Zealand were neither in the nature of “royalty” nor in the nature of “fee for technical services.” It was submitted that it is also not chargeable to tax under “other sum chargeable under the Act.” A certificate was also produced according to which MRO New Zealand had considered the said amount for the purpose of offering the income in New Zealand. After considering all the submissions of the assessee, learned CIT (A) has recorded a finding that MRO New Zealand does not have PE in India. MRO India has paid to MRO New Zealand a sum of Rs. 27,11,280/- for rendering liaison and coordinating services at USA. The said payment does not fall within the ambit of royalty and fee for technical services. According to section 195, the assessee could be under an obligation to deduct tax at source only if the payment/remittance are a sum chargeable to tax in India. In the absence of liability regarding deduction of tax, section 40 (a) could not be applied, hence, he has deleted the disallowance. The department is aggrieved, hence, in appeal.

5. After narrating the facts, Ld. DR relying upon the observations of the Assessing Officer pleaded that the assessee was required to deduct tax at source from the aforementioned payments. As the tax was not deducted at source, the Assessing Officer had rightly disallowed the said amount under the provisions of section 40 (a) of the Act and, thus, he pleaded that the order of learned CIT (A) should be set aside and that of Assessing Officer should be restored.

6. On the other hand, it was submitted by learned AR that MRO New Zealand does not have permanent establishment in India. The services were rendered by the said concern only outside India for facilitating the obtaining of DNA test report from USA approved laboratories. The amount received by MRO New Zealand were not chargeable to tax in India and those were assessable in New Zealand. It was contended that providing liaisoning and coordinating services at USA can neither be termed as right to use the equipment or experience to bring the same within the ambit of “royalty.” Similarly, it was pleaded that it was also not in the nature of “fee for technical services.” He submitted that the term “fee for technical services” as per para 4 of Article 12 of Indo-New Zealand DTAA means payments of any kind to any person, other than payments to an employee of the persons making the payments and to any individual for independent personal services mentioned in Article 14, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel. It was submitted that the services rendered by MRO New Zealand were neither in the nature of managerial nor technical nor consultancy nature. Thus, it was pleaded that learned CIT (A) has rightly held that unless the amount paid by the assessee to MRO New Zealand is chargeable to tax under Indian Income-tax Act, the assessee was not under an obligation to deduct tax at source and, thus, he has rightly held that section 40(a) was not applicable. He submitted that recently Hon’ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. v. CIT 327 ITR 456 (SC) has held that for an obligation to deduct tax at source u/s 195, it is a condition precedent that the amount on which tax is sought to be deducted should be chargeable to tax under Indian Income-tax Act. Thus, it was pleaded by learned AR that learned CIT (A) has rightly deleted the disallowance and his order should upheld.

7. We have carefully considered the rival submissions in the light of the material placed before us. The question that the assessee whether is under an obligation to deduct tax at source has to be considered in the light of the decision of Hon’ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. v. CIT (supra). Now, it has become a settled law that the expression “chargeable under the provisions of the Act” is to be understood as a liability to pay tax under Income-tax Act and unless there is a liability to pay income-tax under the Indian income-tax, it cannot be said that in all cases tax has to be deducted from the payment/remittance made by an assessee in India to a non-resident entity. It has been observed by Hon’ble Supreme Court that one cannot read section 195, as suggested by the department, namely, the moment there is remittance the obligation to deduct tax at source (TAS) arises and if such contention of the department is accepted, that would mean that on mere payment income would be said to arise or accrue in India and such interpretation would mean obliteration of expression “sum chargeable under the provisions of the Act” from section 195 (1). Therefore, to hold that the assessee is under an obligation to deduct tax at source u/s 195, it is necessary that the payment/remission should contain an element of income which is chargeable under the Income-tax Act. Now, therefore, it has to be examined that whether the amount paid by the assessee to MRO, New Zealand is a sum which could be charged to income-tax in their hands in India. The chargeability of tax in India of a resident of New Zealand is governed by the agreement of avoidance of double taxation and prevention of fiscal evasion with New Zealand issued by Notification No. GSR 314 (E) dated 27th March, 1987, as amended by GSR 477 (E) dated 24th April 1988 and GSR 37 (E) dated 12th January, 2000. The assessee has paid liaison and coordination charges to its counterpart at New Zealand and such payment has the possibility of assessment in India under two articles, namely, (i) Article 7 which regulates the business profits; and (ii) Article 12, which regulates income arising out of royalty and fee for technical services.

8. For non applicability of Article 7, it has been the contention of the assessee that unless MRO New Zealand has a PE in India, the Article 7 could not be applied to make the said payment liable for tax in India in the hands of MRO New Zealand. The contention that MRO New Zealand does not have PE was raised by the assessee even before the Assessing Officer. No material has been brought on record by the Assessing Officer to suggest that such contention of the assessee is wrong. Therefore, the applicability of Article 7 is ruled out.

9. Now, coming to Article 12, the term “royalty” has been defined in para 3 of Article 12 and the term “fee for technical services” is described in para 4 of Article 12. Both the paras are reproduced below:-

“3. The term “royalties” as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience.

4. The term “fees for technical services” as used in this article means payments of any kind to any person, other than payments to an employee of the persons making the payments and to any individual for independent personal services mentioned in Article 14, in consideration for services of a managerial, technical or consultancy nature, including the provision of services of technical or other personnel.”

10. As it can be seen, ‘royalty’ can constitute only if it is a payment of any kind received as a consideration for use of, or the right to use, any copyright of literary, artistic or scientific work including cinematographic films, films on video tapes used in connection with television or radio broadcasting and any patent, trade mark, design or model, plan, secret formula or process or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. No material has been brought on record to suggest that the payment made by the assessee to MRO New Zealand qualify for any of the work for which the payment could be termed as payment for royalty as per para 3 of Article 12.

11. Similarly, the term “fee for technical services” mean payment of any kind to any person other than payments to an employee or the persons making the payments or to any individual for independent personal services mentioned in Article 14 in consideration for services of managerial, technical or consultancy nature, including the provision of services of technical or other personnel. The nature of payment made by the assessee to MRO New Zealand is of liaisoning and coordinating to ensure that the blood samples collected by the assessee is properly received at US and the reports are received in time and as per the terms fixed by the US Embassy. Neither of these services can be termed as services in the nature of managerial, technical or consultancy nature. It is also not providing the services of technical or other personnel, therefore, it also cannot be said that such services fall within the term ‘fee for technical services.’

12. The Assessing Officer has drawn analogy from service tax provisions which are totally different from the provisions contained in aforementioned agreement of India with New Zealand and cannot be said to apply on the payments made by the assessee to MRO New Zealand. In our opinion, learned CIT (A) has rightly held that the payments made by the assessee to MRO New Zealand were not the payments in the nature of income which could be assessed as chargeable to tax in India in the hands of MRO New Zealand. If it is so, then, the assessee was not under an obligation to deduct tax at source u/s 195 of the Act and, hence, the question of disallowance to be made u/s 40 (a) of the Act does not arise. He has rightly deleted the addition. We confirm his order and the appeal filed by the revenue is dismissed.

13. In the result, the appeal filed by the revenue is dismissed. The order pronounced in the open court on 11.2.2011.

Non-Compete Fee Not Taxable: Supreme Court

Guffic Chem P. Ltd vs. CIT (Supreme Court)




Pre s. 28(va) inserted w.e.f AY 2002-03, non-compete compensation is a capital receipt


In AY 1997-98 the assessee received Rs. 50 Lakhs from Ranbaxy as a fee for agreeing not to compete for 20 years in the territory of India. The AO assessed the receipt as income though the CIT (A) & Tribunal upheld the assessee’s claim that the receipt was for loss of a source of income and capital in nature. On appeal by the department, the High Court reversed the Tribunal and held the receipt to be revenue in nature. On appeal by the assessee, HELD reversing the High Court:


(i) The position in law is clear and well settled that there is a dichotomy between receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. While the former is a revenue receipt, the latter is a capital receipt. On facts, as the amount was received for a non-compete covenant, it was capital in nature;

(ii) Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till AY 2003-04. It is only by s. 28(va) inserted by FA 2002 w.e.f. 1.4.2003 that the said capital receipt is now made taxable. S. 28(va) is amendatory and not clarificatory.

Related Judgements



CIT vs. Eicher Ltd (Delhi High Court) Non-compete compensation paid to an employee for an indefinite period is business expenditure and not capital expenditure as no capital asset or benefit of enduring benefit came into existence. While the lenght of the period of the covenant is important, it is not decisive. What is more important is…


Rohitsava Chand vs. CIT (Delhi High Court) Non-compete compensation received by an employee-director for agreeing not to carry on any business activity relating to software development for a period of 18 months constitutes a capital receipt as it is for loss of a source of income. See also: CIT vs. Narendra Desai (Bom) and Saurabh Srivastava…

CIT vs. Narendra Desai (Bombay High Court) Receipt for agreeing to refrain from carrying on a competing business under a restrictive covenant is a capital receipt and is not chargeable to tax either as a revenue receipt or as a capital gain as ss. 28(va) and 55(2)(a) are prospective and do not apply to the year…



Related Judgements



CIT vs. Eicher Ltd (Delhi High Court) Non-compete compensation paid to an employee for an indefinite period is business expenditure and not capital expenditure as no capital asset or benefit of enduring benefit came into existence. While the lenght of the period of the covenant is important, it is not decisive. What is more important is…






Rohitsava Chand vs. CIT (Delhi High Court) Non-compete compensation received by an employee-director for agreeing not to carry on any business activity relating to software development for a period of 18 months constitutes a capital receipt as it is for loss of a source of income. See also: CIT vs. Narendra Desai (Bom) and Saurabh Srivastava…



CIT vs. Narendra Desai (Bombay High Court) Receipt for agreeing to refrain from carrying on a competing business under a restrictive covenant is a capital receipt and is not chargeable to tax either as a revenue receipt or as a capital gain as ss. 28(va) and 55(2)(a) are prospective and do not apply to the year…

Relevant date for filing of refund of credit in respect of Export services---When Payment is received

Relevant date for filing of refund of credit in respect of Export services is the date when the payment of service (exported) is received and not date of providing the service

COMMISSIONER OF CENTRAL EXCISE, PUNE I Vs EATON INDUSTRIES P LTD

Revenue has filed this appeal against the impugned order wherein the lower appellate authority has given a finding that what should be the relevant date for filing the refund claim in the case of export of services. The Commissioner(Appeals) has held that in such a case the relevant date is the date when the payment of service (exported) is received by the assessee not the date when the service is provided. Against that order, Revenue is in appeal on the premise that the relevant date is the date of service tax paid as per section 11B of Central Excise Act, 1944.


2. Heard and submitted.


3. I have gone through the rule 5 of the Cenvat Credit Rules, 2004 which deals with refund of credit in the case of export. The provisions of rule 5 are:-


“5. Where any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of,


(i) duty of excise on any final product cleared for home consumption or for export on payment of duty; or


(ii) service tax on output service,


and where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification:


Explanation: For the purposes of this rule, the words 'output service which is exported' means the output service exported in accordance with the Export of Services Rules, 2005.”


4. As per the explanation to Rule 5, to claim refund of service tax in the case of export of service, the Export of Service Rules, 2005 are applicable.


5. Export of Service Rules, 2005, rule 3(2) deals with the situation where it has been described that what are provisions of export of service.


6. Rule 3(2) of the export of Service Rules, 2005 are reproduced hereunder:-


“[(2) The provision of any taxable service specified in sub-rule (1) shall be treated as export of service when the following conditions are satisfied, namely:-


(a) [Omitted]


(b) payment for such service [* * *] is received by the service provider in convertible foreign exchange.”


7. From the above provision, it is very much clear in the case of export of service, the relevant date is the date when the payment of service exported has been received by the assessee.


8. In the instant case the lower appellate authority has also held that in the case of export of service the relevant date is the date when the assessee has received the payment of service exported and within one year from the date of receipt of the payment of service exported, the assessee is required to file the refund claim.


9. Accordingly, I do not find any infirmity with the finding of the lower appellate authority on this ground. Hence, the appeal filed by the revenue deserves, no merit therefore is rejected.

Allocation of Expenses – Allowable (Sec-10A)--Sonata

2011-TIOL-61-ITAT-MUM



ASSTT COMMISSIONER OF INCOME TAX


Vs


M/s SONATA INFORMATION TECHNOLOGY LTD




Income tax – Sec 10A - Allocation of Expenses – Whether expenses incurred for service charges on the basis of the agreement and allocated on the basis of various factors, are allowable though the assessee company and the other company are under the same management.






The assessee company is engaged in the business of software and is a fully owned subsidiary of Sonata Software Limited (SSL). The assessee claimed expenditure of Rs.13,02,42,275/- on account of service charges to SSL in accordance with an agreement dated 28.9.2000 entered into for rendering various services such as advice and assistance relating to compliance of various laws, Orders, Regulations, training employees of SITL and liason with various government departments compliance requirements of Companies Act, contractual matters etc. Actual expenses were to be billed separately. The working of the service charges was based on the expenditure incurred by SSL on account of insurance, salaries, allowances, directors’ remuneration’s, electricity & charges, printing and stationery, professional charges, repairs & maintenance, rent for offices, etc. and apportioned to the assessee on the basis of turnover. AO disallowed the expenses observing that service charges are mere diversion of income without rendering any services and to claim more profit in SSL which is eligible for deduction u/s 10A. Further, the commercial expediency could have been considered if the agreement was entered into between two independent entities and not under the common management and control and disallowed the expenses following the judgment of the Supreme Court in the case of McDowell And Co. Ltd. vs. CTO. CIT(A) allowed the appeal of the assessing following the orders of the earlier years.






In appeal, the ITAT held following its own decision in the case of the assessee itself -






++ that the revenue did not find that the agreement was sham or there is no agreement or the payments were not made as per the agreement and it is already held by the Tribunal in the case of the assessee that the assessee has placed each and every head of expenditure and this expenditure has been bifurcated under the three heads – STP unit entitled to deduction u/s.10A, non STP not entitled to deduction u/s.10A and support services and the basis of allocation amongst the three heads is actual expenses, number of employees and ratio of fixed assets, floor area and turnover ratio. Thus, on the basis of above five criteria, expenditure has been allocated to the three heads and the expenditure claimed as service charges is correct.






This appeal preferred by the revenue is directed against the order dated 29.10.2009 passed by the ld. CIT(A) for the Assessment Year 2006-07.


2. Briefly stated facts of the case are that the assessee company Sonata Information Technology Ltd. (SITL) is engaged in the business of software . It is a fully owned subsidy of Sonata Software Ltd. It filed return declaring total income of Rs.3,13,88,932/- .During the course of assessment proceeding it was observed by the Assessing Officer that the assessee has claimed expenditure of Rs.13,02,42,275/- on account of service charges to M/s. Sonata Software Ltd. (SSL). This expenditure was claimed in accordance with an agreement dated 28.9.2000 entered into by the assessee with SSL which has been revised on 9.7.2002 and 16.8.2004. As per the said agreement the assessee was to pay service charges to SSL for rendering the following services( extracted from para 4.1 of the assessment order):


“(a) Advice and assistance to SITL relating to compliance of various laws, Orders, Regulations and legal requirements of the Central, State, other governmental and local authorities concerning the conduct of the business and affairs of SITL.


(b) Training employees of SITL in the above areas;


(c) Assist and liaise with various government departments as and when required by SITL.


(d) Overseeing the compliance requirements in regard to Companies Act, including matters related to Board of Directors and shareholders, contractual matters, advice and assistance in maintenance of statutory records, filing required returns and form etc.


Further, all out of pocket expenses including travel, conveyance etc. were to be billed separately by Sonata Software Ltd. and was to be reimbursed by the assessee.


However, it has been observed that the quantum of service charges was determined by adopting the following basis:


The expenditure incurred by SSL on account of insurance, salaries, allowances, directors’ remuneration’s, electricity & charges, printing and stationery, professional charges, repairs & maintenance, rent for offices, etc. and also depreciation has been apportioned to the assessee on the basis of turnover as service charges”.


The assessee was asked to explain the allowability of its claim with documentary evidence. In response, it was interalia explained by the assessee vide letter dated 31.12.2008 that as per agreement SSL has raised debit note of Rs.13,02,42,275/- to the assessee for rendering services. The assessee also filed month wise summary of debit note showing the amount of service charges and TDS. It was further submitted by the assessee that the said expenditure was incurred out of commercial expediency. It was further submitted by the assessee that the agreement was necessitated because the assessee did not have the necessary infrastructure of the services it required. The expenditure incurred out of commercial expediency is genuine and it has been acknowledged by the payee also. The assessee while relying on certain decisions in support of his claim submitted that the similar expenses have been allowed in the assessee's own case by the ld. CIT(A) for the Assessment Year 2001-02 and the order of the ld. CIT(A) was confirmed by the Tribunal , therefore, the same may be allowed as business expenditure. However, the Assessing Officer was of the view that the expenditure of Rs.13,02,42,275/- on account of service charges is not acceptable because of the following reasons(extracted from para 4.3.3 of the assessment order):-


“(i) Payment of service charges from SITL to SSL is mere diversion of income without services rendered by SSL. Mens rea for this claim is to reduce taxable profit and claim more 10- A profit in SSL.


(ii) The receipts on account of Service Charges in the hands of SSL have not been credited separately as the income of its non- 10A activity. However, these receipts have been reduced from the expenditure claimed of 10A activity of SSL. The net implication of this is that the profits of the 10A activity of SSL have increased and on which no tax has been paid. Whereas in fact, these receipts are clearly pertaining to the non 10A activity of SSL and therefore such receipts should have been offered for tax.


(iii) The assessee has contended that the said agreement has been executed in the best interest of the business between two independent corporate entities. It has also been contended that the same has been incurred out of commercial expediency. It has further been submitted that it is prerogative of the businessman as to how to run its business and the Department should not be prescribed the quantum of expenditure etc. These contentions of the assessee would have been acceptable if this agreement was entered into between two independent entities not under the common management and control. In the instant case, the assessee is a 100% subsidiary of SSL. The implication of this agreement is that the taxable profits of the assessee have been reduced and at the same time increasing the nontaxable profits of its holding company –SSL”.


The Assessing Officer for the reasons as mentioned above and keeping in view the ratio of the decision of the Hon'ble Supreme Court in McDowell And Co. Ltd. vs. CTO (1985) 154 ITR 148(SC) disallowed the payment of service charges of Rs.13,02,42,275/- and added to the income of the assessee and accordingly completed the assessment at an income of Rs.16,16,31,210/- vide order dated 31.12.2008 passed u/s.143(3) of the Income tax Act, 1961, (the Act).


3. On appeal, the ld. CIT(A) following the Tribunal order for the Assessment Year 2001-02 and the consistent view of the Tribunal in the subsequent years deleted the disallowance of Rs.13,02,42,275/- and allowed the appeal.


4. Being aggrieved by the order of the ld. CIT(A) the revenue is in appeal before us taking following grounds of appeal :-


“1. On the facts and in the circumstances of the case and in law and without prejudice, the ld. CIT(A) erred in ignoring the fact that the ‘service charges’ reimbursed / paid to the holding company M/s. Sonata Software Ltd. has not been substantiated by proof of the service rendered by the holding company.


2. On the facts and in the circumstances of the case and without prejudice to Ground No.1, the ld. CIT(A) erred in ignoring the fact that the agreement by way of which ‘service charges’ were reimbursed/paid by the assessee company to M/s. Sonata Software Ltd. was only a collusive arrangement to reduce the profits of the assessee company which is not entitled for exemption and increase the profits of Sonata Software Ltd. which is a company enjoying under section10A.


3. On the facts and in the circumstances of the case and in law the ld. CIT(A) erred in deciding the issue on the basis of the orders of the CIT(A) and ITAT for earlier years in the assessee's own case without considering the case on merits even though these decisions have not been accepted by the revenue and appeals have been filed under section 260A to the High court in all the years.


4. The appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer restored. The appellant craves leave to amend or alter any ground or add a new ground that may be necessary.”


5. At the time of hearing the ld. DR while relying on the order of the Assessing Officer further submits that since the assessee has failed to furnish necessary documentary evidence in respect of services rendered by SSL to the assessee, therefore, the ld. CIT(A) was not justified in deleting the disallowance made by the Assessing Officer. He further submits that in the interest of justice the issue may be set aside to the file of the Assessing Officer.


6. On the other hand the ld. Counsel for the assessee submits that the disallowance was made by the Assessing Officer for the reasons recorded in para 4.3.3 of the assessment order wherein there is no such finding that the assessee has failed to furnish necessary documentary evidence in respect of services rendered by SSL to the assessee, therefore, the new plea taken by the ld. DR is not maintainable. He further submits that the issue is directly covered in favour of the assessee by the orders of the Tribunal in assessee's own case for the assessment years 2001-02 to 2004-05 and also by the order of the Tribunal in the case of SSL for the Assessment Years 2002-03 and 2003-04. He also placed on record the copy of the said orders of the Tribunal alongwith chart showing the Assessment Year wise reference of the impugned issue, appearing at page 1 to 42 of the assessee's paper book. He, therefore, submits that the order passed by the ld. CIT(A) in deleting the disallowance be upheld.


7. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that there is no dispute that the payment of Rs.13,02,42,275/- was made by the assessee on account of service charges to M/s. SSL as per agreement dated 28.9.2000 which was revised subsequently on 9.7.2002 and 16.8.2004. It is not the case of the revenue that the agreement was found to be sham or there is no such agreement or the payment of service charges has not been made in accordance with such agreement. We further find that in all the preceding Assessment Years i.e. in Assessment Years 2001-02 to 2005-06 the similar disallowance was made by the Assessing Officer which was allowed by the ld. CIT(A) and the order of the ld. CIT(A) was upheld by the Tribunal. We further find that the Tribunal in assessee's own case in Sonata Information Technology Ltd. vs. DCIT and vice- versa in ITA N.3702 & 4789/Mum/2004 for Assessment Year 2001-02 dated 11.11.2005 after considering the Tribunal’s order in the case of SSL and the plea of the revenue that allocation of expense requires verification and therefore, the matter may be referred to the Assessing Officer for necessary verification has held vide para-11 of its order as under :-


“11. We have heard both the parties in the light of the material placed before us. We find that the issue regarding allocation of expenses in respect of service charges arose in the case of SSL. In that case, the Assessing Officer was of the view that allocation of expenses for Non-10A unit (not eligible for exemption) was excessive as exempted unit was much more expenditure oriented. The matter ultimately reached the Tribunal which accepted the case of assessee that allocation of support service expenses on the basis of turnover was justified. The Tribunal vide para 34 of its order dated 17.03.2003 in ITA No.495/496/M/02 held as under:-


“We have considered the submissions and we have perused the various records placed in the paper book. In the paper book at page 27 to 34 the assessee has placed each and every head of expenditure and this expenditure has been bifurcated under the three heads – STP unit entitled to deduction u/s.10A, non STP not entitled to deduction u/s.10A and support services. Further it is found that the basis of allocation amongst the three heads is actual expenses, number of employees and ratio of fixed assets, floor area and turnover ratio. Thus, on the basis of above five criteria, expenditure has been allocated to the three heads. Further, it is noticed that the total expenditure allocated under third head i.e. support services, has been again allocated under two heads – 1) STP units entitled to deduction u/s.10A and non STP which is not entitled for deduction u/s.10A on the basis of turnover ratio. In our considered opinion, the allocation of expenditure contained in the paper book at page 27 to 31 appears to be appropriate . As per details contained in pages 27 to 31, it can be seen that the appellant company has only allocated expenses of Support Service Division between 10A and non 10A activities in the ratio of turnover has been called for by the Assessing Officer by his letter dated 20.01.2000 appearing at page 35 of the paper book. Further, direct expenses relating to 10A and non 10A activity has been directly charged against the profits of these activities and do not call for any interference.”


The above observations of the Tribunal resolve the controversy before us. Admittedly, prior to incorporation of assessee company, SSL was carrying on two units independently i.e. unit exempted u/s.10A and the unit not exempted. Direct expenses incurred were separately booked to respective units. Only the support services expenses were allocated on the basis of turnover. Such allocation has been found to be proper and reasonable by the Tribunal. There is no dispute that nonexempted unit was taken over by the assessee company and support services were continued to be rendered by SSL. From the inception, the stand of the assessee has been that such expenses were allocated on the basis of turnover as is apparent from para 4.3.3(ii) of the assessment order, wherein it has been mentioned that expenses were allocated in debit notes as the basis of turnover. Even the CIT(A) has also admitted this factual position at page 23 of his order where he mentioned ‘the details of the expenditure which has been allocated on the basis of respective turnover is given along with debit notes, copies of which were filed before me, as also before the Assessing Officer”. Faced with the same, the learned D.R. had nothing to add except to rely on the order of Assessing Officer. The learned D.R. submitted that allocation of expenses requires verification and therefore the matter may be referred to Assessing Officer for necessary verification. We are unable to accept this request since there is no dispute to the factual position that allocation of service expenses was made on the basis of turnover. No useful purpose would be served in restoring the issue. Accordingly following the finding of the Tribunal in the case of SSL, we set aside the order of CIT(A) on this issue and delete the disallowance sustained by him.”


The above order of the Tribunal has been consistently followed by the Tribunal in the assessee's own cases for the Assessment Years 2002- 03, 2003-04, 2004-05 and 2005-06.


8. In the absence of any distinguishing feature brought on record by the revenue we respectfully following the consistent view of the Tribunal and keeping in view that in the case of SSL the Tribunal has accepted the receipt of corresponding service charges as genuine for the Assessment Years 2001-02, 2002-03 and 2003-04, we are of the view that the ld. CIT(A) was fully justified in deleting the disallowance made by the Assessing Officer and accordingly the grounds taken by the revenue are rejected.


9. In the result, revenue’s appeal stands dismissed.