Year: 2019

Unreported Decisions – March 2019

By Ajay R. Singh, Advocate

1. S. 263 : Commissioner – Revision of orders prejudicial to revenue – Held, mere fact that the AO did not make any reference to the issues in the assessment order cannot make the order erroneous when the issues were indeed looked into – Held, AO made enquiries and was satisfied with the replies of the assessee, order of revision was held to be invalid.

The assessee-company is engaged in the business of shipping and forwarding agent. After taking the submission and explanation on record, the assessment was completed u/s. 143(3) of the Act.

The assessment order was revised by ld. PCIT by exercising the power u/s. 263 on 28-02-2018. The ld. PCIT concluded that the AO passed the assessment order without making enquiry that should have been made, which has rendered the assessment order erroneous and so far as prejudicial to the interest of revenue and that Explanation 2 of section 263(1) is clearly attracted. The ld. PCIT set-aside the assessment order and directed the AO to make fresh assessment order after making the detailed enquiry.

The Tribunal held that in the assessment order, the AO has not discussed the issue, which is sought to be revised by ld. PCIT. However, the AO during the assessment vide its notice dated 18-12-2015 raised the specific enquiry vide question no. 19, which we have reproduced below: “19. Please file copies of service tax return along with the enclosures. It is observed that higher turnover reported in service tax return than the IT Return please reconcile.” The assessee vide its reply dated 29-01-2016 furnished re-conciliation income as per income tax return as well as service tax return. The assessee also furnished the complete details of service tax return. The assessee furnished note on return filed with service tax authority and has clearly mentioned that assessee is an agent of various foreign shipping lines. Thus, it can be seen that the assessee has furnished complete details to the AO. The AO after his satisfaction and without mentioning anything about the issue accepted the contention of assessee. The Hon’ble jurisdictional High Court in CIT vs. Gabriel India [1993] [203 ITR 108 (Bom)], held that when the A.O made enquiries with regard to the expenditure incurred by assessee. The assessee furnished detailed explanation in this regard by a letter in writing. All are part of the record of the assessee and the claim was allowed by ITO on being satisfied with the explanation of assessee. Such decision of ITO cannot be held to be erroneous in his order; he has not made elaborate discussion in this regard. Similarly, the ITAT relied on Hon’ble Gujarat High Court in CIT vs. Arivind Jewellers [259 ITR 502 (Guj)] and the Hon’ble Delhi High Court in CIT vs. Ashish Rajpat [2010] [320 ITR 674(Del.) and held that merely because the assessment order does not refer to query raised by A.O during the scrutiny and response of the assessee thereto it cannot be said that there was no enquiry and the assessment order is erroneous and prejudicial.

Held that the Assessing Officer made specific enquiry with regard to service tax return and receipt of income in the original assessment and accepted the same, therefore, the order passed by assessing officer is not erroneous. Therefore, appeal of the assessee is allowed.

M/s. Poseidon Shipping Agency P. Ltd. vs. Pr. CIT-5, ITA No. 2446/Mum/2018, DOH: 14/12/2018 (Mum)(Trib.)

M/s. Poseidon Shipping Agency P. Ltd.

2. S. 9(1)(vii) : Income deemed to accrue or arise in India – Fees for technical services – Testing & Certification service – TDS – DTAA – India – USA.[Art. 12(4)][ u/s 40(a)(i) & 195 of the Act] : PRINCIPLE OF CONSISTENCY EXPLAINED :

The assessee is engaged in the business of manufacturing of switch mode power supplies and other computer peripherals in its factory located in SEEPZ and the products were being mainly exported to US and European countries. The assessee availed certification services from non residents in US for certifying its products to be sold in USA and Europe which was a pre condition for selling the products in those markets as the assessee has to ensure that the products meet the minimum quality standard. For the said purpose the assessee paid ₹ 29,77,958/- to five parties as mentioned above and to the remaining two parties assessee paid professional charges for compilation of documents in USA for the purpose of transfer pricing requirements. The assessee made the payment towards the services rendered out in USA by these certification agencies and professional firms.

The AO was of the view that the said testing and certification was required to be utilized in the manufacturing activity of the assessee company. The appellant, while making the payment to the foreign entities, had not deducted TDS. Accordingly, the AO has made the disallowance to the income of the appellant u/s. 40(a)(i). The AO treated the same as fees for technical services and stated the same to be covered under Article 12(4) of the DTAA between India and USA and accordingly held that withholding of tax was required under section 195 failing which the provisions of section 40(a)(i) of the Act were invoked and the expenditure was disallowed.

The Tribunal held that the payments were made to non residents for rendering services outside India and the recipients were not having any PE in India and thus income does not accrue or arise in India as there was no business transactions in India. Since the recipients do not have any PE in India and under Article of “Business Profit” of Double Taxation Avoidance Agreement such payments are not chargeable to tax in India unless the services were made available to the assessee in India. Article 12(4) of DTAA between India and USA, such fee is chargeable to tax in India if such services “make available”, technical knowledge, experience, skill, knowhow and a process or transfer of technical plans or designs. However, all these certification agencies and professional firms have not made available such services to the assessee such as knowhow. Therefore, service rendered by them outside India is not chargeable to tax in India and the provisions of section 195 of the Act are not applicable and consequently the assessee is not liable to deduct TDS at source. Therefore disallowance under section 40(a)(i) of the Act is not correct. The ITAT relied on the decision in the case of DIT vs. TUV Bayren India Ltd. (2015) 234 Taxman 388 Bom wherein the Hon’ble Bombay High Court has held that audit work and certification would not come within the realm of fees for technical services under section 9(1)(vii) and under 12(4) of Indo-German DTAA. In the case of Diamond Services International P. Ltd. vs. UOI (2008) 304 ITR 201 (Bom.) it was held by the Hon’ble Bombay High Court that payment without TDS made for grading certificate issued by foreign company to Indian clients involving no transfer of technical knowledge or skill. There was no imparting of its experience by the institute in favour of client. Similarly, in the case of Inspectorate International Ltd. vs. Asst. CIT (2018) 95 taxmann.com 229 (Delhi Trib.) it was held by the co-ordinate bench of the Tribunal that where inspection and testing services rendered by a UK based company to Indian customers but no technical knowledge, etc. were made available so as to enable recipients to use those services independently, payments received could not be termed as fee for technical services.

Moreover, on the principle of consistency also the Hon’ble Bombay High Court has held in the case of Pr. CIT vs. Quest Investment Advisors Pvt. Ltd (2018) 409 ITR 545 held that on the principle of consistency no disallowance is warranted when a fundamental aspect is accepted in other years. There is no change in facts and in law in the present case also. The expenses were allowed under similar facts by the Revenue in the earlier and succeeding years. Therefore, on this ground also disallowance is not called for. Accordingly, the order of Ld. CIT(A) was set aside and the AO was directed to allow the deduction. In the result, appeal of the assessee was allowed. 

M/s. EOS Power India P. Ltd. vs. DCIT-9(1)(1), ITA No.1043/Mum/2017, DOH: 15/01/2019 (Mum)(Trib.)

M/s. EOS Power India P. Ltd.

3. S. 40A (3) : Expenses or payments not deductible – Aggregate cash payments exceeding prescribed limits – Payment made to same person in a day was less than ₹ 20,000 – Provision restricting payment in excess of ₹ 20,000 to a person in a day applicable from A.Y. 2009- 10 only. [40A (3)]

Cash payments exceeding prescribed limits – payment to transporter is more than ₹ 20,000/- – the assessee has furnished the particulars of parties to whom the payment was made – parties are identifiable – set aside the finding of the CIT(A) on this issue and direct the A.O to examine the claim of the assessee.

During the assessment proceeding the A.O noticed that the assessee made the payment in cash to transporters in excess of ₹ 20,000/- in violation of provisions of Sec. 40A(3) of the I.T. Act. There were two categories of such payments in which one category is in connection with the aggregate payment to a single party in a single day exceeded ₹ 20,000/-. The other category is where the single payment was made in excess of ₹ 20,000/-.

The Tribunal held that regarding the first category of the payment in which the assessee paid the aggregate amount more than ₹ 20,000/- paid to a single party in a single day was prospectively amended w.e.f. 01-10-2009 i.e., from A.Y.2009-10 in view of the amendment made in provision of section 40A(3) of the Act by Finance Act 2008, therefore, the addition raised by the A.O and confirmed by the CIT(A) is not liable to be sustainable because the present assessment year is A.Y. 2005-06, therefore, undoubtedly, the provision of aggregate payment to a single party in a single day would not applied in the present assessment year of the assessee i.e.2005-06. In support of the claim, the assessee placed reliance upon the decision of the Hon’ble High Court of Karnataka in case titled as A. N. Swarna Prasad Vs/ Additional Commissioner of Income Tax Range – 2 [2015] 230 taxman 536/56 taxman.com 138 and decision of ITAT, Hyderabad ‘A’ Bench in case titled as Sonali Castings (P.) Ltd. vs. Deputy Commissioner of Income tax [2017] 88 taxmann.com 869. The addition made by the A.O and confirmed by the CIT(A) on account aggregate payment to a single party in a single day is not liable to be sustainable in the eyes of law.

Regarding the other category of the payment the assessee has explained the payment and also furnished the particulars of parties to whom the payment was made and the parties are identifiable and the list of the parties are given, therefore, the payment of amount is well explained. It is not in dispute that the assessee made the payment is in excess of ₹ 20,000/- in cash, it is noticed that the assessee has given the PAN Nos. of some parties to whom the payment was made. Since the claim of the assessee has not been verified on the basis of evidence given by the assessee, therefore, issue was set aside and directed the AO to examine the claim of the assessee afresh after providing an opportunity of being heard to the assessee in accordance with law.

M/s. Regent Steel Ltd. vs. ACIT-7(2), ITA No.2061-2062/Mum/2016, DOH: 30/01/2019 (Mum) (Trib.)

M/s. Regent Steel Ltd.

Unreported Decisions – ST – January 2019

By Vinay Jain & Sachin Mishra, Advocate

1. Whether leasing of the entire club property under a joint venture agreement is liable to service tax under the category of ‘Renting of Immovable Property Services’?

Facts & Pleadings: 

M/s. Ambience Hospitality Pvt. Ltd. (hereinafter referred to as “appellants”) entered into a Joint Venture Agreement with Ambience Hospitality Management (P) Ltd. (“AMPL”), for running a club on “Revenue-Sharing Basis”. Under the agreement, AMPL was responsible for operating, running and maintaining the club and to share a percentage of the revenue earned per month with the appellants which was subsequently modified to be a fixed monthly payment. During the period, June 2007 to March 2009, appellants filed refund application as they had wrongly paid service tax considering the said activity to be ‘Renting of Immovable Property Services’.

The department contended that the appellants were receiving a monthly rental from AMPL and the same was taxable under ‘Renting of Immovable Property Services’. Further, department also contended that part of the demand is also barred by limitation.

The appellants contended that lease of a club does not fall under the meaning of “immovable property” under Section 65 (105)(zzzz) of Finance Act, 1994, inasmuch as clause (d) excludes building used solely for residential purposes & building used for the purposes of accommodation including hotels, boarding house, holiday resort, tents, camping facilities. The appellants further claimed that it is not a ‘simple leasing of immovable property’ but ‘leasing of entire business of club’ to the lessee under Joint venture. Hence not covered under the definition of ‘renting of immovable property services’. The appellants also argued that they had paid service tax under mistake of law hence, provisions of 11B of the Central Excise Act, 1944 are not applicable. In support of the same the appellants relied upon the decision of Union of India vs. ITC Limited reported in 1993 (67) ELT (SC) and K.V.R Constructions vs. CCR Bangalore 2010 (17) STR 6.

Judgment: The Hon’ble CESTAT held that the appellants and AMPL intended to run the club on principal to principal basis and the method of arriving at the value of consideration shall not determine the nature of the contract. Hence, the change in the revenue sharing clause of the agreement did not change the colour of the revenue sharing arrangement between the parties to that of tenancy. As per the Hon’ble CESTAT, there was no delivery of possession of club to AMPL by way of tenancy but only the right to manage and operate the club for mutual benefit was given by the appellants on a principle to principle basis. This does not attract the provisions of Service Tax. The Hon’ble CESTAT finally observed that in view of Union of India vs. ITC Limited reported in 1993 (67) ELT (SC), a tax wrongly realized is made outside the provisions of the Act and such amount cannot be retained by department, conflicting with Article 265 of the Constitution.

M/s. Ambience Hospitality Pvt. Ltd. vs. CCE, Delhi-IV, CESTAT, New Delhi decided on 17.12.2018 in Appeal No. 05/ST/Appeal/DLH-IV/2013.

M/s. Ambience Hospitality Pvt. Ltd.

2. Whether the remittance of ‘certain foreign exchange’ for ‘foreign expenditures’ in relation to ‘expenses incurred outside India’ amount to repatriation of export proceeds received in convertible foreign exchange?

Facts & pleadings: M/s. IMRB International (hereinafter referred to as the ‘appellants’) are inter alia engaged in rendering services under the category of ‘Market Research Agency Services’. The appellants have been rendering such services to their clients situated in India as well as abroad. The appellants were not paying service tax on the amount received for services rendered to foreign clients as the same amounted to export of service.

The department alleged that in respect of such foreign currency receipts, the appellants are liable to pay service tax in terms of proviso provided in Notification Nos. 6/1999-ST and 21/2003-ST. The department contended that in view of the above notifications, as a part of the amount received in foreign convertible exchange was repatriated outside India, the benefit of export of service will not be allowed.

The appellants contended that the appellant has made certain remittances in foreign exchange in connection with the foreign jobs of the appellant, purchase of software licences and other expenses. The appellants argued that this cannot be considered as repatriation in foreign currency rather this was in the nature of remittances, which cannot attract the provisions of the above Notifications. The appellants further contended that the services provided to overseas clients should be considered as services consumed abroad and hence not liable for service tax. Hence the appellants need not take recourse to the exemption notification to claim immunity from payment of service tax on the foreign currency receipts.

Judgment: The Hon’ble CESTAT observed that the appellants have made certain remittances in foreign currency for purchase of software licences and other expenses connected with providing services to foreign clients. The CESTAT held that such remittances will not fall within the mischief of the proviso in Notification No. 6/1999-ST and 21/2003-ST. In this regard, Hon’ble CESTAT followed the principle that the intention of the Government is always not to tax “Export of Services”. The Hon’ble CESTAT further held that the appellant was fully entitled to make remittances in foreign exchange outside the country for legitimate business expenses as per the guidelines issued by Reserve Bank of India from time to time. In this regard, the CESTAT relied upon the decision of the Tribunal in the case of SGS India Pvt. Ltd. vs. CST, 2011 (24) STR 60 (Tri.Mumbai) to set aside the demand.

M/s. IMRB International vs. CST, Kolkata, CESTAT, Kolkata, decided on 6-12-2018 in Appeal No. 171/2008.

M/s. IMRB International

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.

Unreported Decisions – January 2019

By Ajay R. Singh, Advocate

1. 1. S. 37(1) : Business expenditure – Feature film – Cost of production – Rule 9A(4) stipulate that even after getting the Censor Certificate, if the film has not been released or sold – the cost of production shall be carried forward as deduction in the next year and allowed

The assessee being the producer of feature films, TV serials. During the year Censor Certificate obtained by the assessee on 08-09-2004 i.e., during the F.Y. 2004-05 relevant to A.Y. 2005-06. Accordingly, as per Rule 9A(4) the assessee is eligible to claim the cost of production in the A.Y. 2006-07. While passing the order in the A.Y. 2006-07, the AO has not allowed the cost of production on the basis as per provisions of section 9A(5) and 9A(7) of the Income-tax Rules 1962

Meanwhile while filing the return of income for A.Y. 2007- 08 under abandoned caution the appellant company has claimed the cost of production as deduction while computing the income wherein also the AO has not allowed the cost of production as a deductible one.

Tribunal found that the CIT(A) rightly held that Rule 9A(4) stipulates that even after getting the Censor Certificate, if the film has not been released or sold, the cost of production shall be carried forward as deduction in the next year. In the assessee case, the Censor Certificate was obtained in the A.Y. 2005-06 accordingly, the assessee is eligible to claim cost of production in the A.Y. 2006-07. From the above facts one thing is very clear that the cost of production was not allowed to the assessee in the year production i.e., in the F.Y. 2004-05 relevant to A.Y. 2005-06. Further, as per Rule 9A(4), the appellant has claimed cost of production in the F.Y. 2005-06 relevant to A.Y. 2006-07, which was not entertained by the AO. As per Rule 9A(4), the appellant has rightly claimed the cost of production in the A.Y. 2006-07, which is supposed to be allowed by the AO.

The AO nowhere mentioned in clear terms as to how the provisions of rule 9A(7)(ii) and 9A(5) of the Act are applicable to the facts of the present case. Hence, the findings so recorded by the Ld. CIT (A) were upheld. The revenue appeal was dismissed.

DCIT vs. Smt. Smita Jayedev Thackeray, ITA No. 3115/ Mum/2016, DOH: 26/11/2018 (Mum)(Trib)

Smt. Smita Jayedev Thackeray

2. S. 68 : Cash credits – Unsecured loans received – Confirmation, balance sheet and bank accounts of creditor was produced – Repaid the loan along with interest to the creditor – deletion of addition was held to be justified

The assessee, an individual, during the assessment proceedings, the A. O noticing that the assessee has shown unsecured loan availed from Animation Marketing Pvt. Ltd. called upon the assessee to prove the genuineness of the loan transaction by furnishing supporting documentary evidences. As observed by the A.O, vide submissions dated 25th February 2015, the assessee submitted loan confirmation from animation marketing along with its bank statement and balance sheet. On perusing the bank statement of Animation Marketing Pvt. Ltd., the A.O was of the view that it did not have the creditworthiness to advance the loan to the assessee. He observed, the company has made losses in financial year 2011–12 and the year before that. He also observed that the share capital of the company as on 31st March 2012, stands at ₹ 17,42,800. Thus, he concluded that Animation Marketing Pvt. Ltd. lacks creditworthiness to advance loan to the assessee. Accordingly, he treated an amount of ₹ 70 lakh out of the unsecured loan claimed to have been availed from Animation Marketing Pvt. Ltd. as unexplained cash credit and added it to the income of the assessee.

Tribunal held that as observed by the ld CIT (A) and which is also revealed from the financial statements of the assessee, the reserve and surplus of the creditor company for the relevant financial year stood at ₹ 6.16 crore. It is also a fact that before the A.O. not only the assessee had furnished a confirmation from the concerned creditor confirming the advancement of loan but he has also produced the ledger account copies, balance sheet and income tax assessment particulars of the creditor company before the A.O. It is also relevant to observe that the assessee has also furnished assessment order passed under section 143(3) of the Act for A.Y 2012–13 in case of Animation Marketing Pvt. Ltd., wherein the A.O has not recorded any adverse opinion either with regard to the activities of the creditor company or the genuineness of the loan transaction between the assessee and the creditor company. In contrast, the A.O has not conducted any independent enquiry to ascertain the creditworthiness of the creditor. Thus, from the aforesaid facts, it becomes clear that the assessee has discharged the primary onus cast under section 68 of the Act by proving the identity of the creditor, genuineness of the transaction as well as the creditworthiness of the creditor. It is also a fact that the assessee has re–paid the loan along with interest to the creditor subsequently which is not only reflected in the respective books of account but also bank statements. The assessee has also deducted tax on the interest paid to the creditors and filed TDS return. Though, the A.O has alleged about suspicious entries in the bank account of Animation Marketing Pvt. Ltd., however, he has not elaborated why the entries in the bank account are suspicious. Further, on a perusal of the extracted portion of the Bank account it appears that subsequent to advancement of loan to the assessee there are further deposits and withdrawals of substantial amounts in the said bank account. Thus, it cannot be said that the loan transaction with the assessee is only a one off instance of transaction appearing in the bank account. The Revenue appeal is dismissed.

ACIT vs. Shri Rajiv Saini, ITA No.2168/Mum/2017, DOH: 14/12/2018 (Mum)(Trib)

Shri Rajiv Saini

3. S. 154 : Assessment – Rectification of mistake – does not involve a wholesale review of the earlier order – what is permissible only to rectify an obvious and patent mistake – there was no mistake apparent from records and rectification order was liable to be quashed. [115B]

The assessment under Section 143(3) of the Act dated 28-02-2013 was completed by the A.O. determining the total income at NIL, which corresponded to the returned income. Subsequently, the A.O issued a notice under Section 154 of the Act dated 06-12-2013 proposing to rectify an error in the assessment as, according to him, a mistake apparent from record had crept into the assessment order dated 28-02-2013. The A.O. noted that while the assessee had returned NIL income under the normal provisions of the Act after setting-off past losses, it had not offered any income in terms of book profit determinable under Section 115JB of the Act. As per the A.O, the book profit for the purposes of Sec. 115JB of the Act was liable to be determined at ₹ 6,95,57,438/-.

In response, assessee furnished an explanation pointing out that the computation of book profit for the purposes of Sec. 115JB of the Act was duly reflected in the returned income as per Form 29B and, in terms of such computation, the book profit determinable in terms of Sec. 115JB of the Act was a negative figure and thus, there was NIL tax liability even in terms of Sec. 115JB of the Act.

The A.O., however, was not satisfied with the explanation furnished by the assessee and passed order u/s. 154 of the Act, the book profit under Section 115JB of the Act was determined at ₹ 6,95,57,438/- as against NIL determined by the assessee.

Tribunal found that Pertinently, Sec. 154 of the Act permits the A.O. to amend an order only with a view to rectify a mistake apparent from the record. It is judicially well-settled that the power to rectify a mistake apparent from record in Sec. 154 of the Act does not involve a wholesale review of the earlier order and rather, what is permissible is only to rectify an obvious and patent mistake. It is also well understood that even debatable points of law would not fall in the meaning of the expression “mistake apparent” for the purposes of Sec. 154 of the Act.

As per the relevant observation of the A.O. in the notice issued u/s. 154 of the Act as well as in the order passed under Section 154 of the Act, invoking of Sec. 154 of the Act has been justified to determine the liability under Section 115JB of the Act primarily on the ground that the “assessee had not offered tax under Section 115JB of the Act” and therefore, there was an under-assessment of income. In this context, it has been consistently asserted before the lower authorities that assessee had duly furnished the computation of book profit for the purposes of Sec. 115JB of the Act in the prescribed Form 29B, which had resulted in NIL liability. Therefore, so far as the assessee was concerned, it had cleared its stand which was very much before the A.O. when he passed the original assessment order. Thus, the error of assessee not having declared its manner of computation of book profit under Section 115JB of the Act is not something which is reflected by the record. Even otherwise, the adjustment which has been made by the A.O., disagreeing with the determination of book profit made by the assessee under Section 115JB of the Act, involves a debatable issue which is outside the purview of Sec. 154 of the Act. If these aspects are kept in mind, the determination of book profit made by the A.O under Section 115JB of the Act is clearly untenable. Thus, in sum and substance, it was held that invoking of Sec. 154 of the Act by the A.O. in the present case is unjust in law as well as on facts also.

M/s. Maccaferri Environmental vs. I.T.O-3(2)(2), ITA No.7105/ Mum/2014, DOH: 12/12/2018 (Mum)(Trib)

M/s. Maccaferri Environmental

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.

Unreported Decisions – ST – February 2019

By Vinay Jain & Sachin Mishra, Advocate

1. Whether royalty paid for ‘know-how’ received from outside India for technological enhancement of manufacturing facility in India be chargeable to Service tax under the category ‘Intellectual Property Services’ under reverse charge?

Facts & Pleadings: 

M/s. Welspun Maxsteel Ltd. (hereinafter referred to as ‘Appellant’), subsequently amalgamated into JSW Salav Steel Ltd., is engaged in the business of manufacturing hot briquettes, iron and sponge iron. For technological enhancement of their processes, they entered into an agreement with a M/s. HYL Technologies, a Mexican entity, for basic engineering for a consideration of USD 900,000, for providing Know-how for a license fee of USD 200,000 and royalty of USD 900,000. The appellant discharged Service Tax on consideration for basic engineering and license fee, under the reverse charge as ‘Engineering Consultancy Services’.

The Department alleged the Royalty paid by the appellant is consideration for transfer of ‘Intellectual Property Right’. Therefore, service tax is leviable on the same under reverse charge.

The appellant contended that the definition of ‘Intellectual Property Right’ in Section 65(55a) of the Finance Act, 1994, prior to the amendment of 2012, restricts the scope of the term to only those rights which are enforceable in India. Since know-how has not been recognised in Indian Laws, royalty cannot be subjected to service tax. The appellant further stated that no demand of service tax can be raised on royalty payments made by the appellants to the foreign collaborator as royalty is not a consideration for rendering any service.

Judgment: The Hon’ble CESTAT observed that any service which cannot be included within the ambit of Rule 3 of the Taxation of Service (Provided from Outside India and Received in India) Rules, 2006 shall be considered to be exempt from levy of service tax. The Hon’ble CESTAT followed Catapro Technologies vs. CCE, 2017 (48) STR 94 (T), to held that in order to fall under the provision of Section 65(55a) of Finance Act, 1994 the ‘Intellectual Property Right’ must be acknowledged in India under the laws governing IPR. The Hon’ble CESTAT further observed that the provisions of the Finance Act, 1994 deem a service recipient to be the provider in cases where the service is being provided from outside India, however, there is no such provision that deems service recipient to be the possessor of intellectual property. The same can only be determined by laws governing Intellectual Property Rights. Therefore, the demand was held to be unsustainable in law.

JSW Salav Steel Ltd. v. CCE Raigad, CESTAT Mumbai, decided on 14-01-2019 in Appeal No. ST/85777/2013

JSW Salav Steel Ltd.

2. Whether providing cranes on hire to ONGC along with operators and operated as per the requirement of ONGC can be subject to service tax under the category of “Business Auxiliary Service” as “procurement of goods for client” for the period 01-07-2003 to 30-04-2006?

Facts & pleadings: Dewanchand Ramsaran Corporation Pvt. Ltd (hereinafter referred to as the ‘Appellants’) entered into an agreement with ONGC to provide cranes on a hire basis, along with manpower to operate them. The cranes were made available along with operators and operated as per the requirement of ONGC. For this, the appellant received consideration in the form of operational charges and empty run charges.

The Department alleged that the services provided by the assessee will qualify as “Business Auxiliary Service” as “procurement of goods which are inputs for clients”.

The appellant contended that the contract was purely that of hiring of cranes and the same cannot qualify as “Business Auxiliary Service”. The appellant also contended that service, at best, qualifies as “Supply of Tangible Goods for Use”, which was introduced only in 2008. Therefore, the demand is unsustainable.

Judgment: The Hon’ble CESTAT held that the contract for hiring of cranes is only between two parties and in no way involves any third person, hence the same cannot be considered as “procurement of goods which are inputs for clients”. Evidently the activity has not been carried out on behalf of ONGC. Accordingly, the Hon’ble CESTAT held that since the appellant is not doing any act on behalf of the other party, there is no “Business Auxiliary Service” being provided by them in present matter. The Hon’ble CESTAT further observed that at best, this transaction could be covered under the category of “Supply of Tangible Goods for Use” which was introduced in 2008, which cannot be retrospectively invoked. Therefore, the demand for tax was held to be unsustainable in law.

Dewanchand Ramsaran Corporation Pvt. Ltd vs. Commissioner of Central Excise, Dibrugarh, CESTAT Kolkata, decided on 11-12-2018 in Appeal No. ST/102/2009 and ST/129/2009.

Dewanchand Ramsaran Corporation Pvt. Ltd.

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.

Unreported Decisions – February 2019

By Ajay R. Singh, Advocate

S.45 : Capital Gains — Sale of land – Business income — The objects clause is not determinative – income received by Co-operative Society — Finding that lands did not constitute stock-in-trade of assessee, therefore gains on sale assessable as Capital Gains and not as Business Income:

S. 4 : Charge of income-tax – Mutuality-transfer charges receipts by Co-operative society from its members – exempt from Income-tax Act based on the principle of mutuality:

The assessees hitherto are part of 14 Co–operative Housing Societies formed in the year 1947 for providing housing to middle class persons in the suburbs of Vile Parle, Mumbai. The Government of Bombay Province (Housing Board) allotted plots to these housing societies in the year 1960. Out of the plots allotted to the housing societies, the Housing Board earmarked certain Plots for amenities and public utilities and share of each housing society in the said plot was also specified. The area comprising the various amenities plots and the purpose thereof was also specified by the Government while conveying the land to the Societies. Since, a part of amenities plot was encroached by some people and the Co–operative Housing Societies could not evict them, all the 14 Co–operative Housing Societies decided to dispose off the said plot on “as is where is” basis in the previous year relevant to assessment year 1995–96. The sale proceeds received from sale of the said plot was divided amongst all the 14 Co–operative Housing Societies in the ratio of their respective shares in the said land. The income received by each Co–operative Society towards their respective shares in the sale proceeds of the land was offered to tax under the head Capital Gains. However, the Assessing Officer while completing the assessment treating the income received from sale of land as business income of the assessees.

The Tribunal held that the identical dispute came up for consideration before the Tribunal in case of two of the Housing Societies viz., The Nutan Laxmi Co–operative Housing Society Ltd. and the Swarna Nagar Co–operative Housing Society Ltd. in ITA No. 4255/Mum./2014 and ITA No. 4802/Mum./2014, the Tribunal vide order dated 7th September 2018, accepted the claim of the assessee holding as under:–

“We notice that the AO has mainly treated the impugned receipts as Business Income for the reason that the object clause mentions that they are involved in trading in plots. Another reason cited is that these societies could not prove their ownership rights. The Hon’ble Supreme Court has held in the case of Raj Dadarkar & Associates (supra) that the object clause is not determining factor and the circumstances of each case should be examined to determine the nature of receipt. We notice that these Societies have sold the plot as its owner and the buyer has also accepted the same as owner. According to the societies, these common amenity plots have been owned by them jointly for about 15 years or more. When there is no dispute on this aspect, we are unable to understand as to how the AO was questioning the ownership. We also notice that the AO has not conducted any enquiry with any of the authorities to disprove the claim of the societies. We have noticed that these societies have sold another plot in the year relevant to AY 2004-05 to Indian Police Service, in which police quarters were proposed to be constructed. It can be noticed that the above transaction has taken place with a Government Agency. Had these societies not been the owners of the plots, a Government agency, which is a part of Police department, would not have acquired the plot from these Societies. Hence we do not find any reason to suspect the ownership claim of the plots. Further our foregoing discussions would show that the reasoning given by the AO fails. There is no other instance to show that these societies were indulging in purchase and sale of plots. Accordingly we are of the view that there is no reason to assess the impugned receipts on sale of plot as Business income of the assessee. Accordingly we set aside the orders passed by tax authorities in the hands of both the assessees herein and direct the AO to compute the income under the head Capital Gains as provisions of the Act.”

Following the aforesaid decision of the Co-ordinate Bench ITAT directed the AO to compute the income received by the assessees from their respective shares in the sale proceeds of the land sold under the head Capital Gains.

The next common issue is that the assessees in the relevant previous year received transfer fees of different amounts for giving no objection certificate to Members who sold their Plots / structures to incoming Members. The assessees claimed the amount received towards transfer fee to be exempt from taxation under the principle of mutuality. However, the AO rejecting the claim of the assessee assessed the amount received towards transfer fee to tax.

The Tribunal relying on the decision of Venkatesh Premises Co-op Hsg. Society Ltd. (402 ITR 670)(SC) rendered by Hon’ble Supreme Court directed the AO to delete the addition relating to Transfer fees in both the cases.

DCIT vs. Vallabhnagar Co–operative Housing Society Ltd., ITA No.4256-4257/Mum/2014, Bench F, AY 1995-96; DOH: 23/01/2019 (Mum.)(Trib.)

Vallabhnagar Co–operative Housing Society Ltd.

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.

Unreported Decisions – ST – December 2018

By Vinay Jain & Sachin Mishra, Advocate

1. Whether an institute having approval/accreditation of another institute constituted under law is excluded from the ambit of ‘Commercial Training or Coaching Services’ under Finance Act, 1994?

Facts & Pleadings: 

M/s. Bitcom Services P. Ltd. (hereinafter “appellants”) are inter alia engaged in imparting training or education to different professionals/students in various fields such as insurance, information technologies, etc. The appellant are imparting training or education essential in obtaining degree course, certificate courses and training classes of Indira Gandhi National Open University (IGNOU) and from Punjab Technical University (PTU). Appellants are a credited institute with both the universities which are recognised by law.

The Department alleged that benefit of Notification No. 10/2003 dated 26-6-2003 cannot be given to appellants as they have not reproduced any evidence to show that the fee for the said courses have been directly received by IGNOU and PTU.

Judgment: The Hon’ble CESTAT held that the said activity does not fall within the ambit of ‘Commercial Training or Coaching Services’ and hence there is no question of determining the applicability of Notification No. 10/2003 dated 26-6-2003. While setting aside the demand of service tax on income from IGNOU and PTU, the Hon’ble CESTAT distinguished the expression “recognised by law” and “Conferred by Law” or “Conferred by Statute”. It was noted that the term “recognised by law” is very wide and covers cases in which the certificate/degree/diploma/qualification is only required to be the product of a statute and not the institute per se. Institutes having approval/accreditation of an institute constituted under statute is sufficient to claim exclusion from ‘Commercial Training or Coaching Services’. Thus, the Hon’ble CESTAT held that as the appellants are accredited from IGNOU and PTU which are recognised under statute, the appellants are also excluded from the ambit of ‘Commercial Training or Coaching Services’.

M/s. Bitcom Services P. Ltd. vs. CCE, CESTAT, New Delhi decided on 05-11-2018 in Appeal No. ST/52804/2014-ST [DB].

M/s. Bitcom Services P. Ltd.

2. Whether service tax is payable on the ‘Fixed Facility Charges’ received from customer for transportation of gas within the facility of the manufacturer, when the Central Excise Duty has been paid on the same total value of gas including the said charges?

Facts & pleadings: M/s. BOC India Ltd. (hereinafter referred to as ‘appellants’) are manufacturers of various gases including oxygen, nitrogen etc. The appellants entered into an agreement for supply of oxygen with M/s. Tata Steel Ltd. (hereinafter referred to as ‘Tata’). For that specific purpose, the appellants installed a pipeline from their premises to Tata’s facility. The consideration for the same was received by them in two parts: – 1. Variable charges (based upon quantum of gas supplied) 2. Monthly Fixed Facility Charges (for transportation of gas). The appellants duly discharged excise duty on the quantity of gas ascertained through the meter installed at the boundary wall between the appellants factory and Tata’s premises.

The department alleged that the amount in regards of Fixed Facility Charges, which were being recovered by the appellants were in lieu of transportation of gas through pipeline, and the same was liable to service tax under Section 65(195)(zzz) “transport of goods though pipeline or other conduit” of the Finance Act, 1994. In this regard, the department relied upon the judgment of Kolkata Tribunal Bench in M/s. BOC India Ltd. vs. CCE, Jamshedpur (2005) to state that as the facility charges are not includible in the assessable value for payment of excise duty, the same should be subjected to service tax.

The appellants contended that the appellants were paying adequate central excise duty on the value of gas up to the point of removal i.e., the boundary wall of the facility, where meter was fixed. The said amount was inclusive of the cost of the gas as well as portion of facility charges up to the boundary wall. It was also submitted that service tax was duly paid on the supply of gas within the premises of Tata under the head of “transportation of gas through pipeline”. In this regard, the appellants relied upon the Final Order No. 57664-57665/2017 dated 1-11-2017 of the CESTAT, Delhi in respect to the appellant’s own plant in Rajasthan, where it was held that “no service tax will be payable once the facility charges are included in the assessable value for payment of Central Excise Duty.”

Judgment:  The Hon’ble CESTAT held that even though the Delhi CESTAT order was in relation to transport of gas through tankers, the ratio of the said decision is equally applicable in the present case. As per the Delhi CESTAT, the Fixed Flexible Charges form part of the transaction value for the purposes of central excise duty and the same cannot be subject to service tax. In this regard, the Hon’ble CESTAT also relied upon the clarifications issued by CBEC in respect of M/s. Inox Air Products Ltd., Bombay.

M/s. BOC India Ltd. vs. CCE, Jamshedpur CESTAT, Kolkata decided on 13-11-2018 in S.T. Appeal No. 21/08 [DB].

M/s. BOC India Ltd.

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.

Unreported Decisions – December 2018

By Ajay R. Singh, Advocate

1. S. 68: High Seas trading loss – disallowed the losses on the basis that the goods are sold at the price lower than the purchase price – Law cannot oblige or compel a trader to make or maximise its profits – addition not justified

The assessee is closely held company–mainly engaged in the business of trading in edible oil. During the year the AO noted that assessee-company makes a High Seas transaction. The sale price is lower than the purchase price. Thus, the assessee incurs artificial losses & creates artificial profit to other company, Therefore, the A.O. held that total losses to the tune of ₹ 4,93,44,276/- should not be allowed to the assessee and the same was added to the total income of the assessee.

The Tribunal found that during the assessment proceedings the assessee had produced all sales and purchase bills for verification by AO. The books of account of the assessee are duly audited. The ledger accounts as well as bank statements have also been verified by AO. The AO has not found any discrepancies therein. It is also a fact that overall the assessee has made profit on forward trading. The AO has not disputed or doubted those transactions where it resulted in profits. The AO disputed or doubted those transactions where it resulted in losses. Therefore, the learned AO has adopted only onside approach, that is, he picked only those transactions which has resulted into losses. Tribunal noted that profit making transactions and loss making transactions, both have settled through banking channels and no difference at all so that contractual terms are concerned, hence by the same logic, even the transactions resulting in losses should be taken as genuine unless proved otherwise. Parties have submitted confirmation before CIT(A). The confirmation was not available when the assessment proceedings were going on, therefore assessee could not submit before A.O. Hence, there is no sustainable logic for presuming that the forward trading losses were effected to transfer benefit to certain trading partners. The AO has not disproved any of the contentions or explanations of the assessee and the addition is solely on suspicion. That being so, the order of learned C.I.T.(A) deleting the aforesaid addition was upheld . In the result, appeal filed by the Revenue is dismissed.

ITO-12(2)(4) v Inu Exports Pvt. Ltd, ITA No.786/Mum/2016, DOH: 29/06/2018 (Mum.)(Trib.)

Inu Exports Pvt. Ltd

2. S. 36(1)(iii) : Deductions – Advances to purchase of machinery – Interest on borrowed capital – Owned funds – no disallowance.

The assessee is engaged in the business of Offset Printing Press and Typesetter, dealing in Printing Machinery. During the course of assessment, it was noticed that the assessee has paid an amount of ₹ 28.61 lakh to Herzog and Heymanin Gmbh & Co. as advance towards purchase of plant and machinery. The interest upon the said amount is liable to be capitalized.

The AO was of the view that the assessee has paid the advance of ₹ 28.61 lakh from the common funds comprising of borrowed and own funds, therefore, proportionate interest expenses must be calculated and is required to be disallowed having direct nexus with the purchase of plant & machinery. The interest was calculated to the tune of ₹ 2,17,097/-.

Tribunal held that the assessee’s own fund is more than the investment. The assessee was having own fund to the tune of ₹ 2,11,06,831/- which is excess to the impugned advance. ITAT relied on the case of Reliance Utilities & Power Ltd. (2009) 313 ITR 0340 Bombay High Court).

In the case of ACIT vs. Khoday India Ltd. Hon’ble ITAT Bangalore Tribunal has held that in the case where the assessee had made advances to purchase of capital assets or the machinery and other material, the interest paid on such borrowed fund to be allowed u/s. 36(1)(iii) of the Act.

In the present case also the assessee was having own fund more than the investment, therefore, no doubt the interest is not liable to be disallowed in view of the law settled in Reliance Utilities & Power Ltd. (2009) 313 ITR 0340 Bombay High Court), Khoday India Ltd. (2014) 39 CCH 0044 Bang. Trib.) & SRS Ltd. (2016) 47 CCH o121 Del Trib).

Budhraja Packaging P. Ltd. v ACIT(OSD)-10(1), Mumbai, ITA No. 5125/Mum/2015, DOH: 31/10/2018 (Mum)(Trib)

Budhraja Packaging P. Ltd.

3. S. 50 : Capital gains – Depreciable assets – Block of assets – sale of flat – no depreciation was claimed and assets were held for more than 36 months, assets were to be treated as long term capital gains [S. 45]

The assessee sold the flat at Elicid Premises for a sum of ₹ 75,50,000/-. During the year, the assessee computed the long term capital loss of ₹ 1,42,40,336/- on this transaction.

The AO held that the said flat was the part of the schedule of fixed assets of the assessee who claimed the depreciation @ 5% on this flat, therefore, the capital gain on the sale of flat was treated the short term capital gain hence rejected the claim of the assessee of long term capital gain. The contention of the assessee is that the assessee did not claim the depreciation in respect of this flat. Therefore on the sale of the flat, the consideration is liable to be treated as long term capital gain.

ITAT held that on appraisal of the finding of the CIT(A), we noticed that the assessee prepared the return in accordance with companies Act as well as in accordance with normal provision of the Act. The return as per the schedule VI of the Companies Act, the flat Elicid was appearing in the return of income and in the another chart which is under the normal provision of the Act and the working of depreciation u/s. 32 of the I.T. Act, 1961, the assets was not appearing. In the computation of the income, the assessee added back the depreciation computing as per the provision of the Companies Act and the claimed depreciation on this flat though the depreciation on the other properties have been claimed. The CIT(A) while deciding the matter of controversy relied upon both the chart in his order as annexures. According to the said facts, the sale of the flat was not found within the ambit of provision u/s. 50 of the Act hence the CIT(A) has treated the long term capital gain on account of sale of the said flat. The facts are not distinguishable at this stage also. No distinguishable material has been placed on record for deviating the finding of the CIT(A) in question. Accordingly, issue is being decided in favour of the assessee.

DCIT Central Circle-2(3) vs. M/s. N.S. Guzder & Co. Ltd, Mumbai, ITA No. 239/Mum/2017, DOH: 31/10/2018 (Mum.) (Trib.)

M/s. N.S. Guzder & Co. Ltd.

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.

Unreported Decisions – ST – November 2018

By Vinay Jain & Sachin Mishra, Advocate

1. Whether additional charges such as Preference Location Charges (PLC), External Development Charges (EDC), Internal Development Charges (IDC), Club charges, etc. recovered by the assessee from its customers while rendering Residential Complex Service are eligible for benefit of abatement under Notification No. 26/2012-ST?

Facts & Pleadings: Logix Infrastructure Pvt. Ltd. (hereinafter “appellants”) are providers of Residential Complex Service. The appellants were charging amounts from their customers under various heads such as Base Value, Preference Location Charges (PLC), External Development Charges (EDC), Internal Development Charges (IDC), Club charges, etc. The appellants paid service tax on the entire amount charged after claiming 75% abatement under Notification No. 26/2012-ST.

The Department contended that abatement in Service Tax is granted only in respect of such services where there is transfer of materials along with provision of service. While rendering Preferential Location Services and Internal or External Development Services, there is no transfer of material involved. Further, ‘Construction of a Complex/ Building’ is an independent activity, even without such services. Hence, abatement cannot be availed for such sundry services. Relying on CBEC-TRU on 26-02-2010, the Department contended that PLC, EDC, IDC, etc., are not covered by the provisions of Section 66F of the Finance Act, 1994 and deserve to be bifurcated into two components, ‘Residential Complex Services’ and ‘Special Services’.

The appellants contended that the provisions of 66F of the Finance Act, 1994 provide for taxation of bundled service. As per Section 66F, provision of bundled services shall be treated as provision of single service which gives the bundle its essential character. PLC, EDC and IDC do not have an independent existence and are associated with provision of Residential Complex Services. They are essentially components of the predominant Residential Complex Services and hence cannot be vivisected and treated separate. Further, there is no separate contract with customers for base value and separate contract for other charges..

Judgment: The Hon’ble CESTAT held that the CBEC letter issued by TRU about scope of valuation in respect of Residential Complex Service was introduced in 2010, when there was no provision of Section 66F of the Finance Act, 1994. After the introduction of the Section, its provisions would prevail over any clarification or view taken by the CBEC. The Hon’ble CESTAT further held that the components such as PLC, EDC and IDC are part and parcel of the main services i.e., Residential Complex Service. Thus, the entire consideration received by the appellants is eligible for abatement under Notification No. 26/2012-ST.

Logix Infrastructure Pvt. Ltd. vs. CCE & ST, CESTAT, Allahabad decided on 20-9-2018 in Appeal No. ST/70752- 70763/2018-CU[DB].

Logix Infrastructure Pvt. Ltd.

2. Whether ‘Crossing Over Charges’ charged by the assessee from their sub-franchisee courier agencies for enabling further movement of documents is taxable under Business Auxiliary Service (BAS) till September 2006 and under Business Support Service (BSS) thereafter?

Facts & pleadings: M/s. The Professional Couriers (hereinafter referred to as ‘appellants’) are inter alia engaged in providing courier services. The appellants were collecting certain charges as ‘crossing over charges’ from their subfranchisee agencies for enabling further movement of documents which originated from such sub-franchisees. The appellants contended that the disputed transaction is a continuous service of courier by a single network. Also, all the transactions are taking place in the name of the appellants. Further, no service is being rendered to a third party and hence there is no rendering of ‘Business Support Services’. Relying on the case of Concord Express Logistics India Pvt. Ltd., 2018-TIOL-2710-CESTAT-MAD, the appellants stated that the definition of ‘Business Auxiliary Services’ cannot be applied to the disputed transaction as it is within the same network for completion of services. There is no client-service provider relationship in the transaction. The appellants also contended that their activities are like that of a co-loader, and relying on Board Circular No. 341/43/96- TRU dated 01-11-1996, no service tax can be demanded from a co-loader. Further, the appellants contended that the very same service cannot fall under two different headings. The Department contended that there is no bar for the same activity to fall under ‘Business Auxiliary Services’ up to 2006 and ‘Business Support Services’ thereafter. The service category of ‘Business Support Services’ had been carved out of ‘Business Auxiliary Services’ only. The department alleged that the above Board Circular is not applicable in the present case as the same is applicable in case of co-loader and appellants cannot be considered as co-loaders. Department also alleged that the crossing over charges were collected towards logistic support and other support activities provided to the sub-franchisees and hence, taxable.

Judgment:  The Hon’ble CESTAT held that the disputed activity is a continuous service of courier by a single network i.e., service if any, is service to self only. Further, Hon’ble CESTAT noted that the amount charged for enabling such services approximately covered the expenditure involved in the re-routing of the packages. Since all centres of the appellants belonged to a single network, the concept of both ‘service’ and ‘client’ ceased to exist. The Hon’ble CESTAT further held that the various franchisees of the appellants are operating on a hub and spoke model, and that the crossing over charges, being collected only within the hub and spoke arrangement, cannot be said to be towards provision of any service. The disputed activity is only a continuation or culmination of courier services, and it cannot be alleged that the appellant is receiving or giving services within its own network. Accordingly, Hon’ble CESTAT held that there is no rendition of service in the present case.

Professional Couriers vs. CGST & CE, CESTAT, Chennai decided on 26-9-2018 in Appeal Nos. ST/54/2012 and ST/57/2012

Professional Couriers

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.

Unreported Decisions – November 2018

By Ajay R. Singh, Advocate

1. S. 271(1)(c) : Penalty – furnishing inaccurate particulars – Bogus purchases – Levy of penalty was held to be not justified.

The assessee is engaged in the business of trading in chemicals and also dealing in shares & securities, filed his return of income for AY 2009-10 on 30-09-2009 declaring total income of Rs.15,90,000. The case was selected for scrutiny and the assessment was completed u/s 143(3) r.w.s. 147 of the Income-tax Act, 1961 determining the total income at Rs.15,90,000 by making addition towards 25% gross profit on alleged bogus purchase made from hawala dealers.

Thereafter, the AO initiated penalty proceedings u/s 271(1)(c) for furnishing inaccurate particulars of income and after considering relevant submissions of the assessee levied penalty of Rs.3,40,980 which is 100% tax sought to be evaded on the ground that the assessee has failed to offer any explanation with regard to the alleged bogus purchases made from hawala dealers.

The assessee claims that it has accepted addition made by the AO considering the fact that even after disallowance of gross profit on alleged bogus purchases, income from business in the year continued to be net loss, therefore, he was under the bona fide belief that penalty provisions for concealment of particulars of income u/s 271(1)(c) will not attract. The assessee further contended that he has agreed for estimation of gross profit on alleged bogus purchases, it was only for the purpose of avoiding litigation at the stage of assessment proceedings itself, but fact remains that he has furnished complete evidences to prove such purchases and also filed quantitative details of purchase and sales alongwith comparable gross profit ratio.

Tribunal found that the AO has estimated 25% gross profit on alleged bogus purchases, never made any observations with regard to the incorrectness in details filed by the assessee to prove such purchases. The AO never disbelieved information filed by the assessee, but he proceeded on the basis of information received from sales-tax department to make additions. The AO has made such addition on adhoc basis by estimating gross profit on alleged bogus purchases. From these facts, it is very clear that the AO failed to make a case of deliberate attempt by the assessee to furnish inaccurate particulars of income. Therefore, we are of the considered view that mere disallowance of purchases on adhoc basis does not tantamount to willful furnishing inaccurate particulars of income within the meaning of section 271(1)(c) of the Income-tax Act, 1961. Hence, we are of the considered view that the AO was erred in levying penalty u/s 271(1)(c) of the Act. Accordingly we direct the AO to delete penalty levied u/s 271(1)(c) of the Act.

Ajay Loknath Lohia  v ITO 25(2)(1), Mumbai, ITA No.2998/Mum/2017, DOH: 05/10/2018 (Mum)(Trib)

Ajay Loknath Lohia

2. S. 22 : Income from house property – Business income – Property held as stock-in-trade – unsold stock of completed units at various projects – not chargeable as notional rental value of the said units under the  head Income from House Property.

The assessee being resident corporate entity was engaged as Real Estate Developer during impugned AY.  During assessment proceedings, upon perusal of details of closing  stock-in-trade, it was found that the assessee had unsold stock of  completed units in the shape of flats / shops at various projects being  carried out by the assessee during impugned AY. The cost of  construction of these units was reflected as Rs.14.39 Crores.

The AO, in terms of judgment of Hon’ble Delhi High Court rendered in CIT  Vs. Ansal Housing Finance & Leasing Co. Ltd. [354 ITR 180], opined  that notional rental value of the said units was chargeable under the  head Income from House Property. The AO notional rental value of these units @8.5% of cost of construction i.e.  Rs.14.39 Crores which came to Rs.1.22 Crores. After providing statutory  deduction of 30% as per Section 24(b), the net addition thus worked out  came to Rs.85.62 Lacs, which was added to the income of the assessee. 

The assessee submitted that recent judgment of this Tribunal rendered in the case of assessee’s  sister concern titled as ACIT Vs. Haware Construction Private Ltd. [ITA  Nos.3321/Mum/2016 & 3172/Mum/2016 dated 31/08/2018] and also relies on the judgment of the  Hon’ble Gujarat High Court in CIT vs. Neha Builders Pvt. Ltd. 296 ITR 661 (Guj.)  and the order of the Tribunal in M/s. Runwal Constructions vs. ACIT (ITA  No.5408/Mum/2016 dtd.22/02/2018) and Progressive Homes vs. ACIT (ITA  No.5082/Mum/2016 dtd. 16/05/2018).  to submit  that the issues under similar facts and circumstances, has been  adjudicated in assessee’s favour after considering the conflicting judicial  precedents.

Tribunal found that, on the above issue, we come across one decision for the assessee and  another decision for the revenue. The decision in Neha Builders Pvt.Ltd.(supra) is  for the assessee, whereas the decision in Ansal Hsg. Finance & Leasing Co. Ltd.,  (supra) is for the Revenue. The Hon’ble Supreme Court in the case of CIT vs.  Vegetable Products 88 ITR 192 (SC) has held that “if two reasonable constructions of a taxing provisions are possible, that construction which favours the tax payer must be adopted.”  In view of the above position of law, we shall follow the decision in Neha Builders  Pvt.Ltd.(supra).

We now come to the relevant provisions in the Act. The following sub-section  (5) has been inserted after sub-section (4) of section 23 by the Finance Act, 2017,  w.e.f. 01.04.2018: “(5) Where the property consisting any building or land appurtenant thereto is held as stock in-trade and the property or any part of the property is not let during the whole or any part of  the previous year, the annual value of such property or part of the property, for the period up  to one year from the end of the financial year in which the certificate of completion of  construction of the property is obtained from the competent authority, shall be taken to nil.”  Thus, in order to give relief to Real Estate Developers, section 23 has been  amended w.e.f. AY 2018-19 (FY 2017-18).

we hold that if a immoveable property in  the shape of flats / shops is held as stock-in-trade, then it becomes part  of trading operations for the assessee and as a natural corollary, any  income derived there-from would be Business Income and not Income  from House Property. Resultantly, the impugned additions as confirmed by first appellate authority stand deleted.  The appeal stands allowed in terms of our above order. 

Haware Engineers & Builders Private Ltd v DCIT, ITA No.7155/Mum/2016, DOH: 10/10/2018 (Mum)(Trib)

Haware Engineers & Builders Private Ltd

3. S. 68: High Sea trading loss – disallowed the losses on the basis that the goods are sold at the price lower than the purchase price – Law cannot oblige or compel a trader to make or maximise its profits – addition not justified

The assessee is closely held company-mainly engaged in the business of trading in edible oil.

During the year the AO noted that assessee-company makes a High Court transaction with M/s. Ruchi Soya Industries Ltd. the sale price is lower than the purchase price. Thus, the assessee incurs artificial losses & creates artificial profit to M/s. Ruchi Soya Industries Ltd, for which assessee incurred loss of Rs. 25,91,875/-  which was the benefit transferred to /s. Ruchi Soya Industries Ltd which cannot allowed and the same was added to the total income of the assessee which came to Rs.25,91,875/-. The A.O also analysed other transactions by following the same method. Therefore, the A.O held that total losses to the tune of Rs.4,93,44,276/- should not be allowed to the assessee and the same was added to the total income of the assessee.

Tribunal found that during the assessment proceedings the assessee had produced all sales and purchase bills for verification by AO. The books of accounts of the assessee are duly audited. The ledger accounts as well as bank statements have also been verified by AO. The AO has not found any discrepancies therein. It is also a fact that overall the assessee has made profit on forward trading. The AO has not disputed or doubted those transactions where it resulted in profits. The AO disputed or doubted those transactions where it resulted in losses. Therefore, the Id AO has adopted only onside approch, that Is, he picked only those transactions which has resulted into losses. We noted that profit making transactions and loss making transactions, both have settled through banking channels and no difference at all so that contractual terms are concerned, hence by the same logic, even the transactions resulting in losses should be taken as genuine unless proved otherwise. M/s Ruchi Soya Industries Ltd has submitted confirmation before CIT(A). The confirmation was not available when the assessment proceedings were going on, therefore assessee could not submitted before A.O.  Hence, there is no sustainable logic for presuming that the forward trading losses were effected to transfer benefit to certain trading partners. The AO has not disproved any of the contentions or explanations of the assessee and the addition is solely on suspicion. That being so, we decline to interfere with the order of Id. C.I T.(A) deleting the aforesaid addition. In the result, appeal filed by the Revenue is dismissed.

ITO-12(2)(4) v Inu Exports Pvt. Ltd, ITA No.786/Mum/2016, DOH: 29/06/2018 (Mum)(Trib)

Inu Exports Pvt. Ltd

Unreported Decisions – ST – October 2018

By CA Vinay Jain & Mr. Sachin Mishra, Advocate

1. Whether services by way of supervision and approvals for ‘construction of railways siding’ from the Railway authorities to the assessee amounts to ‘Business Support Services’ thereby rendering the assessee liable to pay service tax under reverse charge mechanism?

Facts & Pleadings: M/s. Nabha Power Limited (hereinafter referred to as the ‘Appellants’), a wholly owned subsidiary of Larsen and Toubro, has a Thermal Power Plant in Rajpura. The coal required to generate power in the plant is being transported to the power plant through network of railways. However, the last railwaystation was at a considerable distance from the power plant. Therefore, the Appellants required to construct railways siding for transportation of coal from the last station to the power plant. The construction of the siding involved various alterations and modification to the existing station which required mandatory approvals, permits and supervisions of the Railways. Therefore, the Appellants constructed the siding under the mandatory supervision and approval of the Railways and made payment to the Railways in relation to the same.

It is the case of the department that the Appellants have in fact availed ‘Business Support services’ under section 65(105)(zzzq) from the Railways by way of supervision and approvals, and are required to pay service tax under reverse charge mechanism. According to the department, the construction or supervision of ‘private railway sidings’ at hand is not a statutory function. It was also contended that the consideration paid to the Railways for the services at hand does not stem from a statute but is based on the letters issued by the Railways board thereby denying that Railways are rendering statutory functions. The department also relied on the judgment of the Hon’ble High Court of Delhi in the case of Union of India vs. Competition Commission of India to say that the activity undertaken by the Indian Railways amount to ‘Business Support Services’.

The Appellants relied on the Circular dated 10-6-2012 to say that in the present case the supervision services have been provided by Railways (Government) in terms of their sovereign rights to business entities and which are not substitutable in any manner by any private entity. Further, the services at hand cannot be performed by the Appellants themselves. Therefore, these services cannot be termed as Business Support Services. The Appellants also added that the consideration has been paid into the Consolidated Fund of India and has not been retained by the Railways. Additionally, the Appellants contended that services received in relation to construction of siding are exempt from levy of service tax under entry no.14A of the Notification No. 25/2012-ST dated 20-6-2012.

Judgment: The Hon’ble CESTAT held that no service tax is payable by the Appellants considering several grounds. Firstly, ‘siding’ falls within the definition of ‘Railways’ as per the Railways Act. Secondly, the Hon’ble CESTAT noted that the Appellants are making mandatory deposits to the Railways for various approvals and supervisions for construction of siding as per Circular No.1/2012.

The Hon’ble CESTAT also considered the Circular dated 20-6-2012 and held that the supervision services and approvals availed from the Railways cannot be done by the Appellants themselves or any other agency and hence, do not constitute support services. Further, the Hon’ble CESTAT noted that the services by Government or local authority in relation to the transport of goods or passengers are exempt from service tax under the negative list u/s. 66D of Finance Act, 1994 which in turn exempts the services at hand.

The Hon’ble CESTAT also noted that the amount paid by the Appellants to the Railways has gone to the Consolidated Fund of India which shows that the activity undertaken by the Railways are statutory in nature. Therefore, the Appellants are not liable to pay service tax. Lastly, the Hon’ble CESTAT considered the Notification No. 25/2012-ST dated 20-6-2012, Serial No. 14A which exempts the services in relation to ‘construction, erection, commissioning or installation of original works pertaining to railways’ from payment of service tax. It was thus held that since railways include siding and yard, the Appellants are not liable to pay service tax on services (supervision) in relation to construction of railway siding as per the aforementioned Notification.

M/s. Nabha Power Limited vs. Commissioner of Central Excise & ST, Chandigarh decided on 16-8-2018 in Appeal No. ST/52893/2015-DB

M/s. Nabha Power Limited

2. Whether the ‘Dormant Account Charges’ charged by banks for operating an account of a customer which remained inoperative or dormant is leviable to service tax under Finance Act, 1994?

Facts & pleadings: M/s. Karur Vysya Bank Ltd. (hereinafter referred to as the ‘Appellants’) is a banking company which is engaged in providing Banking and other Financial Services. The Appellants were charging ‘Dormant Account Charges’ from its customer for operating their accounts that remained inoperative or dormant for more than 12 months.

It is the case of the department that the Appellants have in fact received the said amount for rendition of ‘Banking and other Financial Services’ as the financial services of ‘operation of bank accounts’ is liable to service tax w.e.f. 19-9-2004. The department further alleged that the ‘Dormant Account Charges’ is directly linked to the services provided by the Appellants to its customers by way of maintaining their inoperative bank accounts and by way of keeping such account in a dormant status in their operating scheme.

The Appellants contended that in a ‘Dormant Account’, there is no ‘operation of bank account’ as such accounts remain inoperative for more than 12 months. Further, the ‘Dormant Account Charge’ is a penalty for a customer who is not operating the bank account on regular basis and the purpose of the implementation of this charge is for regulating the dormant bank account into an operative one (or) to eliminate those accounts from the system for the effective utilisation of the other operative customers.

Judgment:  The Hon’ble CESTAT held that there was no service being provided by the Appellants to its customer in the course of levying ‘Dormant Account Charge’. The Hon’ble CESTAT observed that in any case, the customer was not operating his account for quite some time, only for which reason the account was declared dormant or inoperative by the bank. By levying “dormant account charges” such account holders were not getting any additional services or benefits that they were not getting earlier. Therefore, the Hon’ble CESTAT concluded that levy of such charges are nothing but a penalty imposed on such account holders for keeping their account inoperative. Banks need a constant rolling of money and deposits, and inoperative or dormant account will not help this purpose. The dormant account charges are therefore nothing but a charge in the nature of penalty.

M/s. Karur Vysya Bank Limited vs. Commissioner of Central Excise, Tiruchirappalli, CESTAT Chennai decided on 10-8-2018 in Appeal No. ST/480/2010

M/s. Karur Vysya Bank Limited

Note: The Whole decisions can be downloaded from the CTC website www.ctconline.org under Knowledge Centre.