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Unreported Decisions – February 2020

By Ajay R. Singh, Advocate

1. S. 50C: Capital Gains – Full value of consideration – stamp valuation – Landlocked property – DVO given 50% discount on account of encumbrances – the entire basis of valuation adopted by the DVO is devoid of any legally sustainable foundation – there is nothing sacrosanct about discounting @ 50% for arriving at fair market value.

The assessee is an individual who had sold a piece of land at ₹ 50 lakh. The deed of conveyance was registered on 20-08-2010 and the stamp duty valuation of the said deed of conveyance was ₹ 2,31,70,000/-. As the assessee challenged this stamp duty valuation being adopted for the purpose of computation of capital gains, the matter was referred to DVO, who valued the fair markets value of the said land as on 20-08-2010 at ₹ 1,11,30,000/-. Accordingly long term capital gains were computed at ₹ 92,76,967/-. The ld CIT(A) did not accept the Assessee contention and upheld the addition of the AO.

The assessee carried the matter in appeal before the ITAT. The Tribunal summoned the valuation officer. The Tribunal observed that in the sale deed, not only the property in question was in possession of a third party, it also did not have any direct access from the public road and the access thereto was only through a property which the end buyer had already purchased. The Tribunal questioned that with these serious restrictions on the right of the seller, which are also fully recognized in the DVO’s report, can the stamp duty valuation report be adopted as a fair market price in this case. More so when DVO himself has given a discount of 50% on account of these encumbrances.

Whether in these circumstances, there are any good reasons to reject the valuation of ₹ 50 lakh on which the sale deed as entered into and adopt 50% of the fair market value as deemed sale consideration?

The ITAT held that there is no basis whatsoever for adoption of 50% of the fair market value as deemed sales consideration, and this deemed sale consideration is purely based on the estimation. In a situation in which the assessee has no choice but to sell the land to a particular person and take on board a consenting party which is in possession and control of the said property, the assessee has no choice but to accept whatever is being offered to him in consideration of parting with assessee’s legal title over the said property. The entire basis of valuation adopted by the DVO is devoid of any legally sustainable foundation in as much as there is nothing sacrosanct about discounting at the rate of 50% for arriving at fair market value. In view of entirety of the case the Assessing Officer was directed to adopt the sale consideration at ₹ 50 lakh as referred in deed of conveyance and compute long term capital gains on that basis. Accordingly assessee’s ground was allowed.

Wenceslaus Joseph D’souza v. Income Tax Officer (1)(2), ITA No. 4732/Mum/2016, A.Y: 2011-12, Bench. “C”, DOH: 26/12/2019 (Mum)(Trib)

Wenceslaus Joseph D’souza

2. S. 14A : Disallowance of expenditure – Exempt income – absence of recording non-satisfaction about the correctness of assessee’s suo motu disallowances under section 14A – the further disallowance calculated by invoking the provisions of Rule 8D is not justified. [R. 8D].

The assessee is an individual, engaged in the business of dealing in high-tech printing machinery, computer software and other annual maintenance contract. The assessee filed his return of income for AY 2013-14 declaring total income at ₹ 2.48 crore. In the computation of income, the assessee has shown following exempt income

Dividends from companies	₹ 54,74,290/-
Interest from tax free PSU bonds	₹ 1,50,24,289/-
Share in profit from a partnership firm	₹ 1,32,123/-
Total	2,60,30,702/-

The AO invoked the provisions of Rule 8D and made disallowance under – (i) ₹ 2,022 being demat charges; (ii) disallowance u/r. 8D(2)(ii) and (iii) ₹ 13,16,100 being 0.5% of average value of investment.

The Ld. AR for the assessee submits that he has not incurred any direct or indirect expenditure of any nature for the purpose of earning tax free income. Considering the status of the assessee, the assessee is getting free “Home Delivery” services from the mutual funds/ agents/ brokers and fund managers. The assessee doesn’t have any dedicated staff for handling portfolio. The portfolio analysis is made by the fund manager in order to get more business from the assessee. Demat charges of ₹ 2,022/- are debited to capital account and not claimed as deductible expenses. Therefore no disallowance made by invoking the provisions of Rule 8D is not justified.

To support the disallowance made by AO and confirmed by ld CIT(A), the revenue strongly relied on the decision of Tribunal for AY 2012-13 dated 30-01-2019. On the contrary the ld AR for The assessee vehemently submitted that the facts for A.Y. 2012- 13 are at variance as no suo motu disallowance under section 14A was offered by the assessee in that year.

The Tribunal held that the AO on verification of the return of assessee noted that the assessee has made suo motu disallowance of ₹ 4,12,614/-. The AO recorded that basis of working suo motu disallowance under section 14A, is not furnished by assessee. On show cause the assessee explained that provisions of section 14A is not applicable to the assessee for the reason that assessee has made suo motu disallowance of 2% of tax free income as per CIT(A)’s order for AY 2009-10. The assessee also explained that he has not deployed any borrowed funds for earning tax free income and that disallowance as per Rule 8D was not made as the formula was giving absurd results. It was explained that the assessee was availing services of Fund Manager, who are getting hefty commission from mutual funds because of huge investments made by assessee. As per assessee the suo moto disallowance was quite enough. The AO without expressly recording his dis-satisfaction about the correctness of the suo moto disallowance invoked the provisions of Rule 8D and in addition to direct expenses of ₹ 2,022/- under Rule 8D(2)(i) also disallowed ₹ 13,16,100/- under Rule 8D(2)(iii) being average value of investment.

Shri Jayant R. Pardiwala vs. ACIT-24(1), ITA NO.: 270/M/2018, A.Y. 2013-14, Bench. “F”, date 11-12-2019 (Mum)(Trib).

Shri Jayant R. Pardiwala

3. S.139 r.w.s. 80 : Return of income – original return filed within the due date prescribed u/s. 139(1) – revised return filed, subsequently within the due date prescribed u/s. 139(5) – the nature of original return filed u/s. 139(1) and consequently, the conditions prescribed u/s. 139(3) of the Act, is fulfilled – loss claimed shall be allowed to be carried forward:

The assessee had filed its return of income for AY 2012-13 on 29/11/2012, declaring total income of ₹ Nil, being income from business of ₹ 8,18,81,234/-, less set off of brought forward loss of earlier years. The assesee has considered brought forward losses for AY 2009-10 at ₹ 5,75,97,803/- as per revised return filed for that year. The Ld. AO, however restricted the brought forward loss for AY 2009-10 to ₹ 1,33,52,450/-, as per original return of income filed for that year by invoking the provisions of section 80 of the Act, and accordingly, disallowed excess loss claimed by the assessee, as per the revised return of income.

The ld. CIT(A), allowed brought forward loss claimed by the assessee, on the basis of revised return filed for that year, on the ground that provisions of section 80 cannot be invoked, when the assessee has filed revised return of income within the due date allowed under the Act, because, the revised return would take place of the original return for that year.

The Tribunal held that the assessee has claimed set off for brought forward business loss, as per revised return of income filed for that year. The ld. AO has allowed loss, as per original return of income filed for that year. According to the ld. AO, losses of earlier years can be allowed to be set off, as per the provisions of section 80, which states that any loss return filed, as per the provisions of section 139(3) only can be allowed to be set off, but not loss as per revised return of income filed u/s 139(5) of the Act . As per the provisions of section 80 of the Act, loss determined in pursuance of return filed in accordance with the provisions of Sec. 139(3) of the Act, shall be allowed to be carried forward under the relevant provisions of the Act. Sec. 139(3) of the Act, specifies that loss sustain made under the head Income from Business shall be allowed to be carried forward under the relevant provisions of the Act, provided the return is filed within the due date as prescribed under the provisions of section 139(1) of the Act. Similarly, as per section 139(5) of the Act, an error or omission in the return filed u/s. 139(1) can be rectified by filing a revised return on or before the expiry of one year from the end of relevant assessment year or before the completion of assessment whichever is earlier.

In the present case, the original return was filed on 24-09-2009, which is before the due date of filing return u/s. 139(1) of the Act. Similarly, the assessee has filed revised return on 26-03-2011, which is before the due date of filing revised return i.e 31/03/2011. From the plain reading of section 139(3) r.w.s. 80 of the Act, it is clear that if assessee incurred a loss, which it claims to be carried forward, then it has to file its return of income within the time stipulated in section 139(1) of the Act, otherwise, the loss will not be carried forward. Since, the assessee has filed original return within the due date prescribed u/s. 139(1), then any revised return filed, subsequently within the due date prescribed u/s. 139(5) partakes, the nature of original return filed u/s. 139(1) and consequently, the conditions prescribed u/s. 139(3) of the Act, is fulfilled and accordingly, loss claimed shall be allowed to be carried forward under the relevant provision of the Act. Therefore, the ld. AO was incorrect in invoking the provisions of section 80 of the Act.

ACIT – 4(2)(2) vs. Marks & Spencer Reliance India Pvt. Ltd, ITA No.6703/Mum/2018, AY: 2012-13, Bench. “D”, DOH: 22/01/2020 (Mum)(Trib).

Marks & Spencer Reliance India Pvt. Ltd.

Unreported Decisions – January 2020

By Ajay R. Singh, Advocate

1. S. 143 – Assessment – General (Assessment on non-existing company) – Amalgamation – The assessment framed by Assessing Officer on a nonexisting company would be void ab initio.

The assessee is a registered NBFC and mainly involved in the business of investment, trading in shares and securities, promotion of companies and to have financial and equity participation in various fields, temporary lending of funds available with or without interest, with a view to have a commercial expediency or to have a business strategic interest in the borrowing companies. This company i.e., Churu Trading Company Pvt. Ltd. was amalgamated and got merged with Sprit Textiles Pvt. Ltd., with appointed date effective from 01-10- 2012 pursuant to the scheme of arrangement approved by the Hon’ble Bombay High Court vide its order dated 08-03-2013. The assessee had duly intimated this fact of merger with Sprit Textiles Pvt. Ltd., before the ld. AO vide letter dated 20-03-2015.

The ld. AO vide letter dated 23-03-2015 addressed to the Principal Officer of Churu Trading Company Pvt. Ltd., had taken cognizance of the fact of amalgamation with Sprit Textiles Pvt. Ltd. by referring the letter dated 20- 03-2015 supra of the assessee, had expressed his inability to grant further time to the assessee for furnishing of balance details that were originally called for by him. This letter dated 23-03-2015 addressed by the ld. AO to the amalgamating
company i.e. Churu Trading Company Pvt. Ltd., clearly goes to prove that the ld. AO was conscious of the fact of merger of Churu Trading Company Pvt. Ltd., with Sprit Textiles Pvt. Ltd. Despite this, the ld. AO proceeded to frame the assessment u/s. 143(3) of the Act on 31-03-2015 in the name of amalgamating company i.e., Churu Trading Company Pvt. Ltd.

Tribunal held that the appeal was preferred before the ld. CIT(A) wherein the case title was clearly mentioned as Churu Trading Company Pvt. Ltd., (now merged with Sprit Textiles Pvt. Ltd.). However, the assessee had not challenged this jurisidictional issue of framing of assessment on a non-existent company by the ld. AO in the grounds of appeal raised before the ld. CIT(A). This ground has been raised vide additional ground before us wherein the assessee seeks to challenge the validity of assessment framed by the ld. AO on a non-existent company. The additional ground raised in this regard by the assessee goes to the root of the matter and does not involve fresh investigation of facts and accordingly the same is admitted for adjudication.

It is not in dispute that assessee had duly intimated the fact of merger with Sprit Textiles Pvt. Ltd., to the ld. AO vide its letter dated 20-03-2015 referred supra. It is not in dispute that the ld. AO had taken due cognizance of fact of merger by addressing a specific letter to the assessee dated 23-03-2015 expressing his inability to grant further time for furnishing of remaining details that were called for. Hence, it could be safely concluded that assessment per se has been framed by the ld. AO in the instant case in the hands of amalgamating company which had ceased to exist with effect from 01-10-2012 onwards pursuant to the scheme of merger approved by the Hon’ble Bombay High Court. We hold that no assessment could be framed on a nonexistent entity. This issue is now well settled by the recent decision of Hon’ble Supreme Court in the case of PCIT vs. Maruti Suzuki India Ltd. reported in (2019) 107 Taxman.com 375 (SC). The ld. AO was wrong in framing the assessment in the hands of the non-existent entity i.e., Churu Trading Company Pvt. Ltd. and accordingly, the entire assessment framed thereon, had to be declared as null and void ab initio. In view of this decision, where the entire assessment has been quashed.

2. S. 145 : Addition to closing stock – Assessee is dealer – typographical error in audit report in Form No. 3CD – Assessing Officer treated assessee as manufacturer having stock of raw materials – hence deletion of addition was held to be justified.

The assessee is a partnership firm engaged in the business of trading of acids and chemicals. The assessee is reseller in acids. The assessee is a wholesale selling agent of Gujarat Narmada Valley Fertilizers and Chemicals Limited (GNFC). During the course of assessment proceedings, the AO noted from audit report filed in Form No. 3CED, item No. 35bA and 35bB that the assessee has disclosed the raw material and finished products which is applicable in the case of manufacturing concern, whereby the quantitative details of items of raw materials, finished products and byeproducts is given.

The assessee explained before the AO that in view of the information regarding manufacturing details there was a typographical error due to computer cut and paste operation switching between the files, while preparing audit report in Form No. 3CD clause 10A,11,35(aB) and 35(bB). It was explained that due to that error, the details of another assessee are posted in the said form of the assessee and it is not a manufacturer firm. The assessee filed the copy of purchase summary with sample of bills, soft copy of sale summary with summary bills, expenses of ledger account and stock register and also furnished requisite trading details. For this, he gave various explanation but the AO did not accept. The Assessing Officer noted that the assessee is in manufacturing and hence, he added the estimated closing stock of ₹ 2,62,92,142/- being manufacturing stock.

The CIT(A) held that the AO has not specified for reasons of rejecting the books of account. The AO should have recorded clear findings that correct profits cannot be deduced from the method of accounting adopted by the appellant before rejecting the books of account. It is difficult to accept that the books of account of the assessee are defective or incomplete from which the correct profit cannot be computed. Therefore, the addition made by AO cannot be justified.

The Tribunal held that the above typographical error was explained to the AO vide letter dated 20-12-2017 along with other proof that the dealer is not a manufacturer having stock of raw materials and finished goods. The books of account and final accounts did not show any manufacturing account. No manufacturing expenses such as wages, processing charges were claimed by the assessee. The accounts did not show any factory nor any depreciation on any factory, the items stated in Clauses 35(bA) and 35(bB) were not borne out by any purchase or sales invoices. The AO has rejected books of account u/s. 145(3) on the doubt that the assessee was engaged in manufacturing of chemicals which activity was not disclosed by the assessee.

Tribunal noted from the above facts that the assessee is able to explain that there was typographical error due to switching between two different clients screens simultaneously and as a result, the data of the other client was cut and pasted in clauses 10(a) and 11 and corresponding clauses 35(bA) and 35(bB) in Form No. 3CB and CD of the assessee’s report. Hence, there is no manufacturing and it is only dealing in the business of trading of acids and chemicals. In view of the above facts of the case, we are of the view that the CIT(A) has given reasonable finding and rightly deleted the addition. Therefore Revenue’s appeal is dismissed.

3. S 263 – Revision – Of orders prejudicial to interest of revenue – Since closing stock was never subjectmatter of limited scrutiny, Assessing Officer could not have considered same – Therefore, Commissioner was not justified in invoking jurisdiction under Section 263 on issues other than those decided in limited scrutiny assessment.

The assessee company which is engaged in the business of manufacturing, trading, import & export of diamonds, jewellery, gold & silver had e-filed its return of income for A.Y. 2014-15 on 29-11-2014. Subsequently, the case of the assessee was selected for “Limited scrutiny through CASS” and notice under Sec. 143(2) was served upon the assessee. The case of the assessee was selected for “Limited scrutiny” under CASS for two reasons viz. (i) Large other expenses claimed in the P&L A/c.; and (ii) Low income in comparison to High Loans/advance/Investment in shares. On the basis of the order passed under Sec. 143(3), dated 08- 12-2016 the income of the assessee was assessed by the AO under the normal provisions at a loss of (-) ₹ 6,31,90,753/-, while for the “book profit” under Sec. 115JB was worked out at a loss of (-) ₹ 6,65,17,726/-.

In exercise of the powers vested with him under Sec. 263 of the Act, the Pr. CIT called for the records of the assessee. After perusing the financial statements of the assesssee company, it was observed by him that the assessee during the year under consideration had out of its manufactured goods of ₹ 14,78,69,007/- sold goods worth ₹ 6,86,49,334. Observing, that the “closing stock” of the finished goods with the assessee company should have been reflected at ₹ 7,92,19,673/- [₹ 14,78,69,007/- (-) ₹ 6,86,49,334/-] as against that shown by it at Nil, the Pr. CIT held a conviction that the AO had prima facie failed to carry out a proper investigation.

It was observed by the Pr. CIT, that as the case of the assessee was selected for “Limited scrutiny” under CASS for two reasons viz., (i) Large other expenses claimed in the P&L A/c.; and (ii) Low income in comparison to High Loans/advance/Investment in shares, therefore, the AO had no occasion to carry out a comprehensive scrutiny of the issues relating to “closing stock” in the course of the assessment proceedings. Accordingly, the Pr. CIT holding a view that the assessment order passed by the AO under Sec. 143(3), dated 08-12-2016 was erroneous, insofar it was prejudicial to the interest of the revenue, therefore, set aside his order, with a direction to examine the issue relating to “closing stock” after affording an opportunity of being heard to the assessee.

Tribunal held that when the case of the assessee was selected for limited scrutiny for the reasons viz., (i) Large other expenses claimed in the P&L A/c.; and (ii) Low income in comparison to High Loans/advance/ Investment in shares, therefore, no infirmity could be attributed to the assessment framed by the AO on the ground that he had failed to deal with other issues which though did not fall within the realm of the limited reasons for which the case was selected for scrutiny assessment. In other words, the Pr. CIT in the garb of his revisional jurisdiction u/s. 263 cannot be permitted to traverse beyond the jurisdiction that was vested with the AO while framing the assessment. In sum and substance, revisional jurisdiction cannot be exercised for broadening the scope of jurisdiction that was vested with the AO while framing the assessment. As a matter of fact, what cannot be done directly cannot be done indirectly. Accordingly, in terms of our aforesaid observations, we are of the considered view that as the AO had aptly confined himself to the issues for which the case of the assessee was selected for limited scrutiny, therefore, no infirmity can be attributed to his order, for the reason, that he had failed to dwell upon certain other issues which did not form part of the reasons for which the case was selected for limited scrutiny under CASS. We thus not being able to concur with the view taken by the Pr. CIT that the order passed by the AO under Sec. 143(3), dated 08-12-2016 is erroneous, therefore set aside his order and restore the order passed by the AO. The appeal of the assessee is allowed in terms of our aforesaid observations.

Unreported Decisions – ST – January 2020

By Vinay Jain & Sachin Mishra, Advocates

1. Whether ‘other charges’ such as processing charges, administrative charges, etc., collected by the Insurance Company from its customers in addition to the risk cover shall be considered as ‘exempted service’ for the purposes of reversal of CENVAT Credit under Rule 6 of CCR, 2004? Whether investment portion shall also be included in the value of such ‘exempted service’ for the purposes of reversal of CENVAT Credit under Rule 6 of CCR, 2004?

Facts and Pleading: M/s. SBI Life Insurance Company Ltd. (hereinafter referred to as the ‘Appellant’) is inter alia engaged in business of providing Life Insurance services. The appellant is offering Term Policy, Endowment Policy, ULIP Scheme as insurance schemes to policyholders/customers. The appellant duly discharged service tax on the risk cover of the Endowment Policy and Term Policy. The Appellant discharged service tax on risk cover and management fees in case of ULIP schemes. The appellant availed CENVAT credit on all the input services utilised for providing such insurance services.

The Department alleged that ‘other charges’ such as processing charges, administrative charges, etc. collected by the Insurance Company from its customers in addition to the risk cover shall be considered as ‘exempted service’ for the purposes of reversal of CENVAT Credit under Rule 6 of CCR, 2004 as the appellant has not paid service tax on the same. Herein the department extrapolated the demand by including the value of investment portion in the taxable value. Further, the department alleged that services related to management of investment were exempted during the Period 01-04-2008 to 15-05-2008 i.e., prior to introduction of the ‘Management of Investment under ULIP Scheme’.

With respect to first issue, the appellant submitted that there is only one integrated service provided by the appellant i.e., Life Insurance Service. Appellant also submitted that within the Endowment Policy, no services are being provided with respect to service of management of investment. It is a component of the Life Insurance Service and only risk cover charges are subject to service tax. It further submitted that Life Insurance Service is not wholly exempt from service tax and the same cannot be treated as exempted service. In cases of Endowment Policy, ULIP Scheme or Term policy, the appellant is discharging service tax liability on risk cover under the category of ‘Life Insurance Services’. It was also submitted by the appellant that pre-2008, management of segregated funds under ULIP Scheme is not a service in itself and hence, cannot be treated as exempted service. It also submitted that investment portion of premium under ULIP Scheme is excluded from exempted services as tax is levied on the amount of premium reduced by the amount allocated for investment or savings on behalf of the policyholder. Amount of investment is not part of the taxable value of service.

Judgment: The Hon’ble CESTAT agreed with the appellant submission that the service of the appellant remains single and indivisible as ‘Life Insurance Business’. The Hon’ble CESTAT further held that services related to that part of premium, other than risk cover charges, are not exempted services. The Hon’ble CESTAT noted that Rule 6 of CCR, 2004 requires that in the definition of exempted services, the whole of the service needs to be exempt for the restriction of Rule 6 of CCR, 2004 to be applicable. Hence, Life Insurance Service is a taxable service not wholly exempt from service tax. The charges including investment portion other than risk portion Life Insurance Service shall not be considered as exempted service for the purpose of reversal of CENVAT Credit under Rule 6 of CCR, 2004. It also held that the investment portion of premium does not represent service and amount of investment made out of the premium cannot be included to calculate the value of exempted service. Accordingly, the Hon’ble CESTAT set aside the orderin- original and allowed the appeal.

SBI Life Insurance Company Ltd. vs. Commissioner of Central Excise, Mumbai-II, decided on 18.12.2019 in the Final Order No. A/87354 /2019.

SBI Life Insurance Company Ltd.

2. Whether CENVAT Credit on input services used for broadcasting channels of overseas entity can be availed by the appellant, which has the exclusive right to distribute channels owned by the overseas entity and is discharging service tax, wherever applicable on the revenue generated from such activities? Whether CENVAT credit on ‘rent-a-cab service’, ‘outdoor catering service’ and ‘club and association service’ for business purposes post 1-4-2011 shall be considered as ‘input service’?

Facts and Pleading: M/s. Sony Pictures Networks India Pvt. Ltd. (hereinafter referred to as the ‘Appellant’) entered into agreement with M/s. MSM Satellite (Singapore) Pte. Ltd. (hereinafter referred to as the ‘overseas entity’). As per the agreement, the appellant was appointed as the exclusive agent of the overseas entity in India to have the exclusive right to distribute channels owned by the overseas entity, to sell air time slots for advertisements on such channels and further to conclude agreement on behalf of such channels. Further, the appellant collected revenue generated from aforesaid activities and remitted the same to the overseas entity. The appellant also discharged service tax liability wherever applicable on the said revenue. The appellant also availed credit on the input services utilised for the said services.

The Department alleged that credit availed on 12 of the input services were utilised for the broadcasting of channels by the overseas entity. Appellant is the agent of the broadcaster and not the provider of broadcasting service. The department alleged that the broadcasting service requires certain ‘input services’ entitling the provider of service to be eligible for credit of tax discharged, the agent of such broadcaster cannot lay claim to it. With respect to remaining input services, Department alleged that the appellant wrongly availed credit on ‘rent-a-cab service’, ‘outdoor catering service’ and ‘club and association service’ as the same falls under the exclusion component of the definition of ‘input service’. The department alleged that the CENVAT credit of tax paid on these three activities which are specifically excluded from the ambit of input service after 1-4-2011 is liable to be recovered.

The appellant submitted that the appellant acted on behalf of the overseas entities for sale of channel subscription, from sale of slots to advertisers and sponsors and conclusion of contract within the domestic territory. Appellant further submitted that they are the provider of broadcasting service. The appellant further submitted that part of the credit availed on the remaining three services is with respect to corporate membership fee which is paid for various association and is not personal in nature and availing credit with respect to receiving ‘outdoor catering service’ cannot be denied.

Judgment: The Hon’ble CESTAT agreed with the submissions of the appellant and held that for the eligibility to avail credit, there are two conditions: Levying of tax and being provider of taxable service. After July 2012, the levy of tax from the appellant suffices to bring them within the definition of ‘provider of taxable service’ in CCR, 2004. The Hon’ble CESTAT also held that the tax liability has been discharged by the appellant. According to the Hon’ble CESTAT, the CENVAT Credit can be taken only by the entity burdened with the incidence of tax. Once the tax liability is accepted by the appellant and discharge has been acknowledged by the State, CENVAT credit cannot be denied, save for express exclusion in the CCR, 2004. The Hon’ble CESTAT held that exclusions incorporated in April 2011 are intended to disallow those services which are patently not for use in rendering ‘output service’. The exclusion is contingent only upon utilisation for personal benefit. As per the Hon’ble CESTAT, there is no allegation of personal benefit and the appellant utilises the services for the business purpose only. Hence, CENVAT credit was allowed.

Sony Pictures Networks India Pvt. Ltd. vs. Commissioner of Service Tax, Mumbai-VI, decided on 18-12-2019 in the Final Order No. A/87355- 87357/2019.

Sony Pictures Networks India Pvt. Ltd.

Unreported Decisions – ST – December 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether amount of commission received by Air Travel Agent from General Sales Agents (GSAs) for the bookings done through them is taxable under “Business Auxiliary Service”? Whether the commission amount received by one branch of the Air Travel Agent from another branch, for bookings done through them is taxable under “Business Auxiliary Service?

Facts and Pleading: M/s. Riya Travel & Tours (India) Pvt. Ltd. (hereinafter referred to as “Appellant”) is inter alia, engaged in rendering services as an air travel agent. For booking of air tickets, the airlines appoint General Sales Agents (GSAs), entrusted with the task of soliciting, promoting and selling the tickets for the airlines; the tickets are issued by the GSAs only and other travel agents are not allowed to sell the tickets of such airlines. Any customer intending to book a ticket, approaches the agent i.e., Appellant (other than GSA), who obtains the details such as name of the passenger, etc. and approaches the GSA of the particular airline for booking of ticket, which is issued directly in the name of the passenger. In certain cases, the Appellant is also receiving service tax on the commission amount from the branch offices under “Business Auxiliary Services.”

The department alleged that Appellant is liable to pay service tax on the commission amount received by it from the GSAs under the taxable head of “Business Auxiliary Service” (‘BAS’) as they are promoting the business of the GSA’s. Further, the Department also alleged that the appellant was liable to pay service tax on the commission amount received from the branch offices under BAS.

The appellant submitted that the services provided are in connection with the booking of passage by air, taxable under the category of “Air Travel Agent Service” and not under a general category of BAS. The activities undertaken by the Appellant cannot be equated with the term “promotion” or “marketing” of General Sales Agents. The appellants further submitted commission amount received by one branch from another branch of the same company cannot be subjected to levy of service tax in as much as the branch offices and the head office are belonging to one corporate entity and there is no involvement of two separate persons in the transactions.

Judgment: On the first issue, the Hon’ble CESTAT held that, in order to be classifiable under the head of BAS, all three parties involved in the contract namely GSA, the appellant and the customer must be known to each other. Thus, in absence of any connection between them, the activities cannot be considered as a “Business Auxiliary Service”. It held that both the appellants and the GSAs are classifiable under air travel service on the basis of nature of service provided by them that is booking of tickets for the benefit of both airlines and customers. On the second issue, it further held that the head office and the branch offices of the appellant run their business under one umbrella i.e., the appellant’s. Thus, they cannot be termed as separate persons, one as the service provider and the other as the service receiver. Hence, in absence of any provider-receiver of service relationship, the commission amount shared by the branch office with the head office cannot be subjected to tax under such category of BAS.

M/s. Riya Travel & Tours (I) vs. Commissioner of Service Tax, CESTAT, Mumbai, decided 19-11-2018 in the final order no. A/88533-88534/2018..

M/s. Riya Travel & Tours (I)

2. Whether the service tax paid on commission paid to insurance agents under “Insurance Auxiliary Service” under reverse charge mechanism and then recovered from insurance agents is required to be deposited to the government as per Section 73A(2) of Finance Act, 1994? Whether pre-recruitment training and post-recruitment training expenses should be included in the taxable value of commission paid to the insurance agents for the purposes of discharging service tax?

Facts and Pleading: (i) Max Life Insurance Co. Ltd. (herein referred to as “appellants”) are inter-alia engaged in the business of providing life insurance. The appellants have entered into agreements with individuals/corporates who act as the insurance agents of the appellants for a fixed commission. The appellants are discharging service tax on the same under RCM. As per an understanding with all the agents, the agents are entitled to only net commission (net of service tax) or the aforesaid service tax is recovered from them. (ii) The appellants incur certain business expenditure in relation to its insurance agents such as pre-recruitment training expenses, sales training & other training, refresher/renewal training expenses and business promotion Expenses.

(i) The department alleged that appellants have wrongly collected the said service tax from the insurance agents and have not deposited the same with government exchequer. Thus, appellants are liable to deposit the said amount to government exchequer under Section 73A(2) of the Finance Act, 1994. (ii) Further, the department alleged that the aforesaid pre-recruitment training and post-license training expenses incurred by appellants on the insurance agents should be included in the gross taxable value of the services rendered by such insurance agents.

1. The appellants argued that Section 73A(2) of the Finance Act, 1994 will apply only in cases wherein the person is not liable to pay service tax. When the person is liable to pay service tax, the same is covered under Section 73A(1) of the Finance Act, 1994. The appellants are covered under Section 73A(1) and not under Section 73A(2). However, present demand is under Section 73A(2) and therefore, not sustainable. Otherwise also, whatever amount was collected from the insurance agents the same has been paid to the government exchequer. Therefore, the second recovery will not lie. Reliance was also placed upon Mafatlal Industries Ltd. & Ors. vs. UOI, (1997)5 SCC 536 to contend that that once the excise duty is paid on clearance, it will not be payable again on collection from the buyers. Further, the appellants contended that contractually tax liability can be shifted from one person to another and relied upon decision of Supreme Court in the case of Rashtriya Ispat Nigam Limited vs. Dewan Chand Ram Saran, 2012 (26) STR 289 (SC).

2. Further, the appellants argued that the pre-recruitment expenses were not liable to be included in the taxable value of the services rendered by the insurance agents on the count that the persons who received such pre-recruitment training were not registered as insurance agents under Insurance Act. Further, on post-licence training expenses, the appellants submitted that these expenses incurred by the appellant in providing training facilities to the insurance agents are in fact used by the appellant itself in furtherance of their own routine insurance business.

Judgment: (i) The Hon’ble Appellate Tribunal accepted the submissions of the appellants and relied upon the decision of HDFC Standard Life Insurance Co. Ltd. vs. Commr. C.E., Mumbai-II 2017 (49) STR 301(Tri-Mum.) and Bajaj Alliance Life Insurance Co. Ltd. vs. CCE & ST, 2019-VIL-322-CESTAT-MUM-ST to grant relief to assessee. The Appellate Tribunal after extensive analysis of Section 73A(1) and (2) of the Finance Act, 1994 held in favour of assessee that once the tax has been discharged, no further liability will arise. (ii) Further, the Hon’ble Appellate Tribunal agreed with the submission of the appellant that expenses incurred in pre-recruitment training and post-license training of insurance agents by the appellants cannot form part of the gross taxable value of commission paid to the insurance agents in determining the service tax liability as reimbursement of expenditure cannot form part of taxable value

M/s. Max Life Insurance Company Ltd. vs. Commissioner of C.E. & S.T., CESTAT, New Delhi, decided on 15-11-2019 in the final order no. A/51498/2019.

M/s. Max Life Insurance Company Ltd.

Unreported Decisions – ST – December 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether amount of commission received by Air Travel Agent from General Sales Agents (GSAs) for the bookings done through them is taxable under “Business Auxiliary Service”? Whether the commission amount received by one branch of the Air Travel Agent from another branch, for bookings done through them is taxable under “Business Auxiliary Service?

Facts and Pleading: M/s. Riya Travel & Tours (India) Pvt. Ltd. (hereinafter referred to as “Appellant”) is inter alia, engaged in rendering services as an air travel agent. For booking of air tickets, the airlines appoint General Sales Agents (GSAs), entrusted with the task of soliciting, promoting and selling the tickets for the airlines; the tickets are issued by the GSAs only and other travel agents are not allowed to sell the tickets of such airlines. Any customer intending to book a ticket, approaches the agent i.e., Appellant (other than GSA), who obtains the details such as name of the passenger, etc. and approaches the GSA of the particular airline for booking of ticket, which is issued directly in the name of the passenger. In certain cases, the Appellant is also receiving service tax on the commission amount from the branch offices under “Business Auxiliary Services.”

The department alleged that Appellant is liable to pay service tax on the commission amount received by it from the GSAs under the taxable head of “Business Auxiliary Service” (‘BAS’) as they are promoting the business of the GSA’s. Further, the Department also alleged that the appellant was liable to pay service tax on the commission amount received from the branch offices under BAS.

The appellant submitted that the services provided are in connection with the booking of passage by air, taxable under the category of “Air Travel Agent Service” and not under a general category of BAS. The activities undertaken by the Appellant cannot be equated with the term “promotion” or “marketing” of General Sales Agents. The appellants further submitted commission amount received by one branch from another branch of the same company cannot be subjected to levy of service tax in as much as the branch offices and the head office are belonging to one corporate entity and there is no involvement of two separate persons in the transactions.

Judgment: On the first issue, the Hon’ble CESTAT held that, in order to be classifiable under the head of BAS, all three parties involved in the contract namely GSA, the appellant and the customer must be known to each other. Thus, in absence of any connection between them, the activities cannot be considered as a “Business Auxiliary Service”. It held that both the appellants and the GSAs are classifiable under air travel service on the basis of nature of service provided by them that is booking of tickets for the benefit of both airlines and customers. On the second issue, it further held that the head office and the branch offices of the appellant run their business under one umbrella i.e., the appellant’s. Thus, they cannot be termed as separate persons, one as the service provider and the other as the service receiver. Hence, in absence of any provider-receiver of service relationship, the commission amount shared by the branch office with the head office cannot be subjected to tax under such category of BAS.

M/s. Riya Travel & Tours (I) vs. Commissioner of Service Tax, CESTAT, Mumbai, decided 19-11-2018 in the final order no. A/88533-88534/2018..

M/s. Riya Travel & Tours (I)

2. Whether the service tax paid on commission paid to insurance agents under “Insurance Auxiliary Service” under reverse charge mechanism and then recovered from insurance agents is required to be deposited to the government as per Section 73A(2) of Finance Act, 1994? Whether pre-recruitment training and post-recruitment training expenses should be included in the taxable value of commission paid to the insurance agents for the purposes of discharging service tax?

Facts and Pleading: (i) Max Life Insurance Co. Ltd. (herein referred to as “appellants”) are inter-alia engaged in the business of providing life insurance. The appellants have entered into agreements with individuals/corporates who act as the insurance agents of the appellants for a fixed commission. The appellants are discharging service tax on the same under RCM. As per an understanding with all the agents, the agents are entitled to only net commission (net of service tax) or the aforesaid service tax is recovered from them. (ii) The appellants incur certain business expenditure in relation to its insurance agents such as pre-recruitment training expenses, sales training & other training, refresher/renewal training expenses and business promotion Expenses.

(i) The department alleged that appellants have wrongly collected the said service tax from the insurance agents and have not deposited the same with government exchequer. Thus, appellants are liable to deposit the said amount to government exchequer under Section 73A(2) of the Finance Act, 1994. (ii) Further, the department alleged that the aforesaid pre-recruitment training and post-license training expenses incurred by appellants on the insurance agents should be included in the gross taxable value of the services rendered by such insurance agents.

1. The appellants argued that Section 73A(2) of the Finance Act, 1994 will apply only in cases wherein the person is not liable to pay service tax. When the person is liable to pay service tax, the same is covered under Section 73A(1) of the Finance Act, 1994. The appellants are covered under Section 73A(1) and not under Section 73A(2). However, present demand is under Section 73A(2) and therefore, not sustainable. Otherwise also, whatever amount was collected from the insurance agents the same has been paid to the government exchequer. Therefore, the second recovery will not lie. Reliance was also placed upon Mafatlal Industries Ltd. & Ors. vs. UOI, (1997)5 SCC 536 to contend that that once the excise duty is paid on clearance, it will not be payable again on collection from the buyers. Further, the appellants contended that contractually tax liability can be shifted from one person to another and relied upon decision of Supreme Court in the case of Rashtriya Ispat Nigam Limited vs. Dewan Chand Ram Saran, 2012 (26) STR 289 (SC).

2. Further, the appellants argued that the pre-recruitment expenses were not liable to be included in the taxable value of the services rendered by the insurance agents on the count that the persons who received such pre-recruitment training were not registered as insurance agents under Insurance Act. Further, on post-licence training expenses, the appellants submitted that these expenses incurred by the appellant in providing training facilities to the insurance agents are in fact used by the appellant itself in furtherance of their own routine insurance business.

Judgment: (i) The Hon’ble Appellate Tribunal accepted the submissions of the appellants and relied upon the decision of HDFC Standard Life Insurance Co. Ltd. vs. Commr. C.E., Mumbai-II 2017 (49) STR 301(Tri-Mum.) and Bajaj Alliance Life Insurance Co. Ltd. vs. CCE &

M/s. Max Life Insurance Company Ltd. vs. Commissioner of C.E. & S.T., CESTAT, New Delhi, decided on 15-11-2019 in the final order no. A/51498/2019.

M/s. Max Life Insurance Company Ltd.

Unreported Decisions – December 2019

By Ajay R. Singh, Advocate

1. S. 68 : Cash credits – Unsecured loans received – The AO without using the statutory powers vested in him u/s. 133(6) or u/s. 131 of the Act cannot simply make an addition towards the unsecured loans.

The assessee is an individual and had filed his ROI comprising of income from house property, business & profession and other sources. The Id AO observed that the assessee had shown unsecured loan of ₹ 1,18,00,000/- from four parties as Arabian Sea Food – ₹ 78,00,000/- Shatrunjaya Estate Pvt. Ltd. – ₹ 20,00,000/- Nikita M. Sagar – ₹ 10,00,000/- Usha J. Chauhan ₹ 10,00,000/-

The assessee furnished a copy of acknowledgement of return of income and confirmation of said parties etc. The AO concluded that the assessee had failed to prove the genuineness and hence rejected the evidence produced as not having any evidentiary value. The Id AO added the loan as unexplained cash credit u/s. 68 of the Act in the assessment.

The assessee had submitted following documents before A.O. like: a) Name and address of the lenders together with their PAN. b) Copy of loan confirmation duly signed by the assessee as well as the concerned lender from whom the loan has been taken. c) Copy of return of income of the parties from whom loan has been taken. d) Bank pass book of two parties highlighting the relevant loan transactions. e) PAN card copy of lenders. f) Affidavits from Smt Nikita Mahesh Sagar and Smt Usha Chauhan wherein they had affirmed that they were carrying on business of tailoring and embroidery works for the past 15 and 30 years respectively. The said affidavit also contained their income tax assessment particulars and also their respective source for advancing loans to the assessee herein. It was further pleaded that all the loan transactions were carried out through regular banking channels by account payee cheques and that the said loans were also duly repaid by the assessee in subsequent years.

The ITAT held that the assessee had furnished the complete details of the loan creditors in the instant case before the ld AO as detailed hereinabove. With regard to Arabian Sea Food and Shatrunjaya Estates Pvt. Ltd., the assessee had not produced the bank statement of the loan creditors as the same was not in the control of the assessee and this fact was also informed to the Ld. AO at the time of assessment proceedings.

The Ld. AO having known that the assessee was not having control over the bank statements of lending entities, could have issued notice u/s. 133(6) of the Act or summons u/s. 131 of the Act to those parties seeking for their bank statements. In the instant case, the Ld. AO had failed to do so. All the primary documents that are in possession of the assessee as a borrower were duly placed on record before the Ld. AO and thereafter the onus shifts to the Ld. AO, which was not discharged by the Ld. AO in the instant case. This would be more so, when the assessee had submitted his bank statements even for the subsequent year to prove that the said loans were duly repaid by him to the concerned lenders. It is not in dispute that these loan creditors are duly assessed to income tax and their income tax assessment particulars together with their addresses were on record. The AO without making even the basic verification with the lenders by using the statutory powers vested in him u/s. 133(6) or u/s. 131 of the Act, cannot simply make an addition towards the unsecured loans as unexplained cash credit merely on surmise and conjecture. Hence deleted the addition made in respect of loans received from Arabian Sea Food and Shatrunjaya Estate Pvt Ltd in the sums of ₹ 78 lacs and ₹ 20 lacs respectively.

With regard to loans received from Smt Nikita Mahesh Sagar and Smt Usha Chauhan, it was held that the Ld AO had merely disregarded the affidavit by stating that the same lacks verification. Even in this case, no verification was carried out by the Ld. AO either u/s. 133(6) or u/s. 131 of the Act to clear the doubts that were in mind of the Ld. AO with regard to the veracity of the loan creditors. Hence the availability of source in their hands stands proved beyond doubt. Hence by mere surmise and conjecture, the Ld. AO had resorted to disbelieve the loan transactions with these two parties, hence the addition was deleted. Accordingly, the grounds raised by the revenue was dismissed.

ACIT-33(3) vs. Mr. Vinodkumar Shyamsingh Yadav, ITA NO.: 4281/M/2015, dated: 18/09/2019 (Mum.)(Trib.)

Mr. Vinodkumar Shyamsingh Yadav

2. S 92D r.w.s 271G: – Transfer pricing – failed to maintain documentation – diamond trade – substantial compliance – no adjustment made in the ALP – penalty u/s. 271G could not be sustained

The assessee being resident corporate assessee is stated to be engaged in the business of manufacturing of cut and polished diamonds studded jewellery. Certain international transactions carried out by the assessee with its Associate Enterprises (AE) during the year under consideration, were referred to Ld. TPO for determination of Arm’s Length Prices. These transactions were in the nature of purchase / sale of rough as well as polished diamonds and sale of diamond studded jewellery. The approximate sale to AE was 23% of assessee’s turnover whereas purchases were approx. 56% of total purchases. The assessee benchmarked the same using entity level TNMM. Although Ld. TPO accepted the transactions to be at Arm’s Length Price, but initiated penalty u/s. 271G in view of the fact that the assessee was unable to submit internal TNMM by working out the profitability of AE and non-AE segment.

The assessee explained that owing to its nature of business, it was not practical to identify and bifurcate the stock, cost and revenue between AE and non-AE segment and work out profitability of the two segments separately. However, concluding that the assessee failed to maintain documentation as required under Clause (g) and (h) of Rule 10D(1), the aforesaid penalty was initiated.

The assessee submitted that the rough diamonds were procured from both AEs and non-AEs. The finished product of cut and polished diamonds would pass through a lengthy manufacturing process including assortment / re-assortment of rough diamonds and at initial stages, it would not be possible to forecast the final outcome of rough diamonds. During the process of manufacturing, a semi-manufactured diamond would be assorted many times and handled by many craftsmen. Various direct and indirect expenditure would be incurred at various stages of manufacturing process and the rough diamond would ultimately lose its identity as to source of purchase due to inherent nature of diamond manufacturing process. Therefore, due to peculiar nature of the product and constant mixing and re-mixing of diamonds obtained from AEs and non-AEs, it would not be feasible to maintain records to determine segmental profitability to work out internal TNMM.

The learned CIT(A), held that in facts of the case, viz., the nature of diamond trade, substantial compliance made by the assessee and the reasonable cause showed by the assessee and above all, when there is no adjustment made in the ALP, the levy of penalty under Section 271G of I.T. Act, 1961 was not justified.

Tribunal held that the only basis of levying impugned penalty against the assessee is the fact that the assessee did not furnish internal TNMM by providing segmental profitability of AE and non-AE transactions. The same stood explained by the inherent nature of business being carried out by the assessee. In course of transfer pricing proceedings, revenue could not point out any specific non-compliance on part of assessee regarding production of documents maintained under section 92D(1), impugned penalty order passed u/s. 271G was to be set aside

In view of the aforesaid position, CIT(A) order in deleting the penalty u/s. 271G is upheld.

DCIT-5(2)(1) vs. M/s. K. Girdharilal International Ltd., ITA No. 6446/Mum/2016, DOH: 03/10/2019 (Mum.)(Trib.)

M/s. K. Girdharilal International Ltd.

3. S. 263 : Commissioner – Revision of orders prejudicial to revenue – AO made detailed enquiry at assessment stage for accommodation entry provided by assessee – CIT found enquiry inadequate – Revision not permissible

The assessee company return was processed u/s. 143(1) of the Act. Later the assessment was reopened u/s. 148 of the Act. In the re-assessment proceedings, the Ld. AO observed that Sales tax authorities, Maharashtra had conducted search operation in the case of assessee company and other group concerns wherein Shri Abhishek Morarka, Director of assessee company had given a statement on 06-01-2010 u/s.14 of the Maharashtra Value Added Tax Act, 2002. In the said statement, the said Director had categorically stated that no purchase or sales activities were actually carried out by his concern and that they are merely accommodation entries provided to various persons. The Ld. AO based on the conduct of the assessee in the past i.e. A. Yrs 2006-07, 2007-08 and 2008-09 and also in the subsequent years i.e., A.Yrs 2011-12 and 2012-13 rejected the book results of the assessee u/s.145(3) of the Act and proceeded to treat the assessee as an accommodation entry provider and taxed the commission income alone on the total value of purchase and sale transactions at 1% thereon.

The Ld. CIT had sought to revise the said assessment order by treating the same as erroneous and prejudicial to the interest of the revenue by invoking his revisionary jurisdiction u/s. 263 of the Act for the limited purpose of examination of bogus purchases.

Tribunal held that the AO had made proper enquiry with regard to the status of the assessee to be an accommodation entry provider in the facts and circumstances of the instant case. For this purpose, the Ld. AO had also placed reliance on the behaviour of the assessee in the past as well as in the subsequent years. The Ld. CIT(A) for the A. Yrs. 2006-07 and 2007-08 vide its order dated 25-01-2017 had recorded a categorical finding that assessee is indeed an accommodation entry provider and had proceeded to estimate net profit i.e. commission income at 0.15% of the total turnover as against 1% adopted by the Ld. AO. Since a categorical finding is recorded by the Ld. CIT(A) in assessee’s own case in earlier years that assessee is merely an accommodation entry provider and that situation had admittedly not been changed during the year under consideration , there is absolutely no need for the ld. CIT to take a divergent stand by directing the ld. AO to examine the veracity of bogus purchases alone.

Now, the law is well-settled that the order of the ld. AO should be both erroneous and as well as prejudicial to the interest of the revenue in order to enable the Ld. CIT to invoke his revisionary jurisdiction u/s. 263 of the Act. In the instant case, certainly one of the conditions is conspicuously absent. Moreover, the conscious decision has been taken by the Ld. AO by considering the past and future behaviour of the assessee while framing the assessment. Hence, the Ld. AO had indeed taken a possible view in the matter. Hence, on this ground also, the Ld. CIT could not invoke revisionary jurisdiction u/s. 263 of the Act. The revision order passed by the Ld. CIT u/s. 263 of the Act is quashed .

Realstone Exports Ltd v. Income Tax Officer 11(1)(2), ITA No. 3580/Mum/2019, DOH: 04/10/2019 (Mum)(Trib)

Realstone Exports Ltd.

Unreported Decisions – ST – November 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether the provisions of Section 73A is applicable in case the amount is returned to the customer subsequent to issuance of the show cause notice?

Facts and Pleading: RVS Hospitality & Development Private Limited (hereinafter referred to as ‘Appellant) is engaged in providing renting of immovable property service. During the disputed period, the Appellant had rented its property to one of its customers and had issued monthly rental invoices along with service tax. However, while making payment of service tax, the Appellant had claimed the benefit of Notification 24/2007 i.e. reduction of property tax from value of service. Since benefit of said notification was availed and the same was not passed on to the customer, department issued show cause notice under Section 73A for recovery of service tax amount collected from customers.

The department argued that Section 73A is rightly invoked inasmuch as at the time of claiming the benefit of the notification the Appellant had not passed on the benefit of service tax to its customers. Also, there was possibility of availment of excess CENVAT Credit by the customers and under such circumstances, if the amount could not be recovered under Section 73A, the Appellant would be unjustly enriched in context of Section 11D.

The Appellant argued that the benefit claimed was subsequently passed on to the customers and the same was recorded in the adjudicating order as well. Thus, when the Appellant had refunded the amount to its customers, the provisions of Section 73A shall not be applicable for recovery of amount. Reliance was placed on the judgement of Hon’ble Supreme Court in case of Ajit Mills Ltd. [1977 4 SCC 98] and decision of Tribunal in case of Vinayak Agrotech Ltd. [2012 (284) ELT 237].

Judgment: The Hon’ble Tribunal held that in the present case it was not disputed that the amount in question was paid back to the customers subsequent to issuance of the show cause notice. Thus, under such circumstances it cannot be said that the provisions of Section 73A should be applicable considering the same as a collection of excess service tax from the customer. The Hon’ble Tribunal further relied on the decision of Vinayak Agrotech Ltd. (supra).

M/s. RVS Hospitality & Development Private Limited vs. CCE, CESTAT Mumbai decided on 16-9-2019 vide Final Order No. A/86809/2019.

M/s. RVS Hospitality & Development Private Limited

2. Whether the assessee is eligible for refund claim of tax borne on works contract service received from sub-contractors for providing works contract service to JNPT which was subsequently exempted by Notification 9/2016 with retrospective effect. Whether the certificate issued on letterhead of the port and authenticated by Deputy Secretary in Ministry of Shipping suffices as compliance of the condition of exemption?

Facts and Pleading: Bharat Mumbai Containers Terminals Private Limited (hereinafter referred to as ‘Respondent’) had provided service in the nature of works contract to Jawaharlal Nehru Port Trust (hereinafter referred to as ‘JNPT’). The Appellant had subcontracted the work to two other contractors who had charged service tax on services provided to the Respondent. The works contract service provided to ports was exempted by Notification 25/2012 which was withdrawn by Notification 6/2015 and subsequently restored later by Notification 9/2016. By incorporation of Section 103, the exemption was given a retrospective effect. Since the Appellant was entitled to the retrospective exemption accorded to the activity rendered in a works contract awarded by JNPT, the Appellant filed refund claim on 30.08.2016, of the amount of service tax paid on the invoices of subcontractors as ‘person’ who had borne the incidence of tax. The original authority and the first appellate authority, examined the eligibility for application of retrospective exemption vis-à-vis Section 103 and sanctioned the refund claim. Aggrieved by the decision, the department filed the appeal before the Tribunal.

The department argued that the appellate authority while upholding the refund, failed to examine the existence of claim, if any, filed, or benefit availed, by the subcontractors consequent upon restoration of exemption. Furthermore, the appellate authority failed to ascertain if the Respondent had concurred with JNPT to include the tax component in the capitalization to avail higher depreciation. Also, the Respondent had not complied with the certification requirement under Section 103 and the notification as the certificate was issued on the letterhead of the Port Trust, was attested by the Deputy Secretary in the Ministry of Shipping. Further the department relied on the decision of Hon’ble Supreme Court in case of CC vs. Presto Industries [2001 (128) ELT 321 (SC)] and the Tribunal in case of Mars Plastics & Polymers [2003 (156) ELT 941] to contend that the applicant of refund claim is required to establish eligibility for benefit of any exemption notification.

The Respondent submitted that there was no amortization, or capitalization, of the said amount and on contrary, the amount of refund claim was reflected in the books as ‘dues from government’. It was also clarified that the suggested accounting treatment is nothing but a statement of intent of amortization upon commencement of commercial operation. Commencement of commercial operation took place in March 2018 and hence, in view of refund claim having been filed, the amortization had not taken place. Therefore, the apprehension of amortization, or any other downstream benefit of capitalization will not arise.

Judgment: The Hon’ble Tribunal held that the order cannot be assailed for non-compliance with the certification prescribed in the exemption notification as the certificate furnished, though issued on the letterhead of the Port Trust, has been attested by the Deputy Secretary in the Ministry of Shipping. The exemption notification has not prescribed the form or manner in which the certificate of the Ministry is to be authenticated. Attestation of the certificate signed by Chairman, JNPT by the competent authority in the Ministry of Shipping, therefore suffices as compliance. The issue of whether any claim for refund has been preferred by the two sub-contractors who included the tax in the invoice raised on the Respondent or had availed benefit is too vague and merely based on apprehensions. Also, under the scheme of operation of major ports, it is the tariff authority of ports which determines the contract rates and adequate safeguards exist for excluding amount that are not costs. Thus, the Respondent had clearly borne the incidence of tax and is eligible for refund.

CCGST vs. Bharat Mumbai Container Terminals Private Limited, CESTAT Mumbai decided on 3-9-2019 vide Final Order No. A/86588/2019.

Bharat Mumbai Container Terminals Private Limited

Unreported Decisions – ST – October 2019

By Vinay Jain & Sachin Mishra, Advocates

1. Whether the ‘subvention income’ received by vehicle financing companies from the manufacturers/dealers for providing loan to the buyers of vehicles at lesser rate of interest shall be taxable under ‘Business Auxiliary Service’ for promoting the business of such manufacturers/dealers?

Facts and Pleading: HDFC Bank Ltd. (hereinafter referred to as ‘Appellant’) is inter-alia engaged in the business of financing vehicles. During the course of business operations, the Appellant enters into contractual arrangements with the vehicle manufacturers/dealers for agreeing to undertake special finance schemes under which vehicles are made available against loans offered at nil or low rate of interest and differential interest component which is otherwise recoverable from the borrower is paid by the manufacturer/ dealer in the name of ‘subvention income’. Further, the Appellant and vehicle manufacturer/ dealer jointly also agreed to a financing scheme where they jointly promote their own business activities.

The department alleged that the aforesaid ‘subvention income’ received by the Appellant is consideration for promoting the business of such manufacturer/dealers and hence taxable under the category of ‘Business Auxiliary Service’. The department also relied upon Housing Development Corporation Ltd. (HUDCO) [2012 (26) STR 531 (T-Mum)] wherein it was held that the pre-payment charge is in lieu of some value added service and the method of calculation of charges in case of prepayment based on the outstanding loan is not relevant. The department also alleged that the present issue was squarely covered by the decisions in case of Speed Finance Service [2017-TIOL-2548-CESTAT-DEL], Toyota Lakozy Pvt Ltd [2017 (52) STR 299 (T)] & Tata Motors Ltd. [2019 (1) TMI 511].

The Appellant argued that the Appellant had extended credit facility to the purchaser of vehicle for which consideration is received in the form of “interest subvention” from the vehicle dealer in lieu of “interest on loan” receivable from the borrower in normal course. For the Appellant, it is consideration towards lending of money and nothing but the interest income, and not subjected to tax. The Appellant also submitted that Appellant and vehicle manufacturer/dealer jointly agree to a financing scheme where they jointly promote their own business activities. Vehicle manufacturer/dealer promote their sale and the Appellant its lending business. Artificially vivisecting a single transaction to make the Appellant as service provider in one occasion and recipient of service in another is not permissible in law.

Judgment: The Hon’ble Appellate Tribunal held that by providing or agreeing to provide the loans at lower rate/nil rate to the customers of vehicle manufacturer/dealers, the Appellant has promoted the sale of the vehicle in the hands of such vehicle manufacturer/dealer. Hence, as per the Appellate Tribunal, the facility of nil/ low interest rate provided by the Appellant to the customers of vehicle manufacturer is service classifiable under the category of “Business Auxiliary Service” as defined by Section 65(19) of the Finance Act, 1994 and the amount paid by the vehicle manufacturer/dealer and accounted by the Appellant as subvention income is the consideration for the provision of such service. Rejecting the submission of the Appellant that subvention income is part of the interest recovered from such customers, the Hon’ble Appellate Tribunal relied on HUDCO [2012 (26) STR 531 (T)] to held that the method of calculating the charges has no bearing on the nature of service provided. The Hon’ble Appellate Tribunal also upheld the invocation of extended period and imposition of penalty.

M/s. HDFC Bank Ltd. vs. CCE, CESTAT, Mumbai, decided on 13-09-2019 in Final Order No. A/86593/2019.

M/s. HDFC Bank Ltd.

2. Whether the pre-payment/foreclosure charge collected by Housing Financing Companies from borrowers for premature termination of loan agreements by such borrowers is part of the consideration for the taxable service of “Banking and other Financial Services’ and hence liable to be taxed under the provision of Finance Act, 1994?

Facts and Pleading: LIC Housing Finance Limited (hereinafter referred to as ‘Appellant’) is inter-alia engaged in providing housing finance to individuals. After following the due procedure housing loan is sanctioned to the individual and agreement entered into with the borrower laying down the terms and conditions for grant of loan. The loan advanced is to be serviced by the borrower as per the equated monthly installments mentioned in the agreement. The loan agreement extends the facility of prepayment of the loan amount to the borrower against a prepayment penalty of 2% whenever the borrower intends to make early prepayment.

The department placed reliance upon the Circular of TRU date 11-06-2008 which states that any amount collected by the service provider on account of lending is either interest or service charges. Pre-closure / foreclosure charges are not collected for delayed payment. Thus, according to the department, these charges not being interest, are therefore liable to be treated as consideration for the service provided and accordingly leviable to tax. In this regard, the department also relied upon HUDCO [2012 (26) STR 531 (T)].

The Appellant submitted that the pre-payment charges are not for any activities carried out at the time of prepayment, permitting the borrower to pay the amount. It is for the damages recovered by the Appellant. Foreclosure and prepayment charges are levied for ending the service and not for providing the service as held by tribunal in case of SIDBI [2011 (23) STR 392 (T-Del)]. The Appellant also submitted that decision of HUDCO [2012 (26) STR 531 (T)] will not be applicable to the present facts as in this case, the Appellant did not carry out any activity and the amount is levied as per the agreement entered into the parties. Therefore, the said amount does not form the part of value of taxable service. The Appellant submitted that the pre-payment charges, charged by them from borrower are in nature of liquidated damages to recover the loss suffered by them, for the reason that this amount could not have been lended against the interest to other borrowers. The Appellant further submitted that Prepayment penalty have no nexus with the service of lending and thus are not subject to service tax in view of the decision of Apex Court in case of Intercontinental Consultants and Technocrats Pvt Ltd [2018 (10) GSTL 401 (SC)]. The Appellant also submitted that the pre-payment charges are in the nature of interest.

Judgment: The Hon’ble Appellate Tribunal held that the facility of pre-payment has been extended at the time of entering into the loan agreement and agreement itself allows against payment of certain “levy charges”. These charges are not towards any default on the behalf of customer. As per the Appellate Tribunal, since the pre-payment charge are in nature of charges towards the exercise of an option extended by the loan agreement, Appellants submission that these charges are penalty cannot be acceded to. Hence, the Appellate Tribunal held that the pre-payment charges cannot be held as penalty. The Appellate Tribunal further held that in the case of foreclosure the customer is not holding any money of the Appellant, but is returning back the same much before the appointed date. Hence the return of money cannot be subject to interest charge as claimed by the Appellant, nor can it be the damages as claimed by them. The Appellate Tribunal further relied upon HUDCO [2012 (26) STR 531 (T)] to held that pre-payment charges not being interest, are therefore liable to be treated as consideration for the service provided and accordingly leviable to tax. The Hon’ble Appellate Tribunal also upheld the invocation of extended period, however, set aside the imposition of penalty in lieu of Section 80 of the Finance Act, 1994.

M/s. LIC Housing Finance Ltd. vs. CST, CESTAT, Mumbai, decided on 21-08-2019 in Final Order No. A/86425-86428/2019

M/s. LIC Housing Finance Ltd.

Unreported Decisions – October 2019

By Ajay R. Singh

1. S. 40A(2) : Expenses or payments not deductible – Excessive or unreasonable – Disallowance cannot be made in respect of interest payment made to related parties as interest rate is not in excess of the prevailing interest rate in the market. [S. 40A(2)(a)]

The assessee being resident individual stated to be dealing in gold ornaments and coins under proprietorship concern namely M/s. Shelaji Asaji & Co. During assessment proceedings, it transpired that the assessee paid interest on loans to certain persons as specified u/s. 40A(2)(b) at the rate of 18% as against the rate of 12% paid to other parties. Consequently, invoking the provisions of Section 40A, the AO disallowed differential interest of 6% which gave rise to addition of ₹ 8.41 Lakh in the hands of the assessee.

The ITAT held that as per the provisions of Section 40A(2)(a), any expenditure would not be allowable as deduction, if the same, in the opinion of Ld. AO, was excessive or unreasonable having regard to the fair market value of goods / services for which the payment was made by the assessee. Upon perusal of rate of interest chart as placed before us, it is seen that the assessee has paid interest at the rates ranging between 15% to 18% to unrelated parties whereas it has paid interest of 18% to related parties. Therefore, this being the case, the interest paid to related parties could not be said to be excessive or unreasonable. Nothing has been brought on record by lower authorities to demonstrate that the said rate was excessive or unreasonable, in any manner, having regard to the market rates. Therefore, the assessee appeal was allowed.

Surendrakumar P. Jain vs. ACIT-17(3), ITA NO.: 4993/M/2018, Bench : SMC; AY 2013-14; dated: 11/09/2019 (Mum.)(Trib.)

Surendrakumar P. Jain

2. S. 28(i) : Business loss – Embezzlement – Loss due to misappropriation of funds by the ex-director of the company has to be allowed in the year of detection. [S. 37(1)]

The assessee company was owned and managed by Advani group. In 2004, the assessee company was taken over by Centrum group and name was changed to Centrum Broking Pvt. Ltd. However, Mr. Advani continued as a director of the assessee company till June, 2005. In 2005, due to differences and disputes between Mr. Advani and the Centrum group, Mr. Advani was removed as a director of the company. After the exit of Mr. Advani, the assessee company on perusal of its books of account realised that a sum of ₹ 95,44,693/- was misappropriated by Mr. Advani by debiting the assessee company’s accounts on account of his various personal expenses or non-business expenses. The assessee company recovered a sum of ₹ 40,26,087/- and the balance amount of ₹ 55,18,606/- was written off and claimed as business loss. The A. O. has disallowed the same on the ground that these are personal expenses of the director and hence not allowable. By the impugned order, the LD. CIT(A) has confirmed the action of the A. O.

The assessee in arbitration proceedings initiated by Advani group before NSE made a claim of the said amount as evident from the said Award dated 13th December 2011. However, the Tribunal held that since the assessee company has not made a counter claim or filed a separate arbitration for the said amount no relief was granted to the assessee company. The said order became final on 28th August, 2012 whereby consent terms were agreed between the Advani group and the assessee company. As per material placed on record, we found that the claim is made on account of misappropriation of funds by the ex-director of the company. The said director misused his authority while holding the position and incurred various expenses from the company’s funds which were of personal in nature. The fact that out of ₹ 95.44 lakhs, the assessee company is claiming only ₹ 55.18 lakh proves the bonafideness of the assessee in recovering part of the money and writing off the balance.

The Tribunal found that the aforesaid loss has incurred in the course of business of the company and therefore should be allowed as a business loss. Reliance is placed on following decisions: Sassoon J. David & Co. Pvt Ltd. – 98 ITR 50 (Bom), Badridas Daga – 34 ITR 10 (SC). , Harshad Choksi – 349 ITR 250 (Bom), Boots Piramal Health Care Ltd – 3213/ Mum/2009 (now known as M/s Nicholas Piramal Consumer Products Pvt. Ltd). The Hon’ble Supreme Court in the case of Associated Banking Corporation of India Limited vs. CIT reported in 56 ITR 1(SC) has held that “the loss by embezzlement must be deemed to have occurred when the assessee came to know about the embezzlement and realised that the amount embezzled could not be recovered”. In view of the above discussion, the claim was allowed as business loss.

Centrum Broking Ltd DCIT-4(1)(1), ITA No. 4120/Mum/2018, Bench : C; AY 2013-14; DOH: 06/09/2019 (Mum.)(Trib.)

Centrum Broking Ltd.

3. S.147: Reassessment–After the expiry of four years –Reopening of assessment was based on re-appreciation of material already available on record at time of scrutiny assessment which amounted to mere change of opinion hence bad in law.

The assessee company is engaged in providing Engineering and related services. The assessment has been completed u/s. 143(3) of the Act, vide order dated 29/12/2008. Thereafter, the assessment has been reopened u/s. 147 of the Act and the assessment have been completed by making additions towards disallowance on warranty expenses on the ground that warranty provisions has been created on estimation basis, rather than on any scientific basis.

The Ld. CIT(A), observed that in the reasons for reopening, the Ld. AO has mentioned that on review of the assessment, it is observed that there is under assessment of income. This statement shows that after reviewing the case records, he found that certain income had escaped assessment. But, fact of the matter is that the assesee has submitted a letter dated 13/12/2018, during the course of assessment proceedings u/s 143(3), where the issue on which the AO has reopened was already discussed and all the details were submitted before the AO. Therefore, he opined that it is a case of change of opinion, which is not permissible u/s. 147 of the Act. In so far as, second arguments of the assessee, in light of proviso to section 147 of the Act, the Ld. CIT(A) observed that on examination of reasons recorded, it is seen that nowhere, the Ld. AO had stated that there was failure on the part of assessee to disclose fully and truly, all the material facts necessary for reopening assessment. Accordingly, held that reopening of assessment u/s. 147 is invalid.

On appeal by the Revenue, the Tribunal held that the original assessment has been completed u/s. 143(3) of the Act, on 29/12/2018 and the assessment has been reopened after four years from the end of relevant assessment years without making any allegation as to failure on the part of assessee to disclose fully and truly all material facts necessary for assessment. Therefore, reopening of assessment, in this case was made on change of opinion without there being any tangible material in the position of the AO, which suggest escapement of income and also without making any allegation as to failure on the part of assessee to disclose fully and truly all the material facts necessary for assessment. In this view of the matter the Ld. CIT(A) has rightly quashed reassessment proceedings. The appeal filed by the revenue was dismissed.

DCIT-2(2)(1) vs. M/s. Larsen & Toubro Ltd., ITA No. 262/ Mum/2016, AY 2005-06; Bench : A; dated: 06/09/2019 (Mum.) (Trib.)

M/s. Larsen & Toubro Ltd.

Unreported Decisions – September 2019

By Ajay R. Singh

1. SECTION 43 READ WITH SECTION 32 – LIQUIDATED DAMAGES RECEIVED FOR DELAY IN DELIVERY BY THE VENDOR, WHETHER LIABLE TO BE REDUCED FROM COST OF ASSETS – SUCH LIQUIDATED DAMAGES ARE NOT TO BE REDUCED FROM THE COST OF ASSETS

The assessee for purchase of buses placed order worth ₹ 654,62,81,543/- with the condition that for delay in delivery, the supplier would be liable for penalty/ liquidated damages and on that account the assessee received a sum of ₹ 120,11,78,279/- from M/s. Ashok Leyland Ltd. According to the assessee, this amount has to be reduced from the purchase of the business to calculate the depreciation. On this premise. AO held that the value of the bus was only ₹ 534,51,03,270/- and the assessee is entitled for depreciation on this amount only and, therefore, disallowed the balance of depreciation to the tune of ₹ 18,01,76,741/- and added it to the income of the assessee. The. CIT(A) considered the case of the assessee in the light of the decision of the Hon’ble Gujarat High Court in the light of the decision of the Hon’ble Gujarat High Court in the case of Digvijay Cement Co. Ltd. vs. CIT (1982) 138 ITR 45 (Guj) wherein it was held by the Hon’ble High Court that having regard to the nature of the business of the assessee in the light of the terms of contract in respect of the provision for compensation for a delay in delivery, the sum received through compensation was not made with the intention of reducing the cost of machinery but to compensate the loss of profits which the assessee would suffer on account of delay in delivery of the machinery. Admittedly, the assessee in the case in hand is the transport corporation earning income by plying the buses. In case of delay in delivery the assessee would suffer loss on profits and that is the reason there was a stipulation in the agreement for purchase of buses to the effect that delay in delivery shall result in levy of penalty/liquidated damages . On this account, assessee received a sum of ₹ 120,11,78,279/- and having regard to the business of the assessee, this compensation received is not to reduce the cost of the buses but to compensate the loss of income/profits the assessee would have earned had the buses been supplied in time. Therefore, the decision of the Gujarat High Court in the case of Digvijay Cement Co. Ltd. (supra) is applicable to the facts of this case on all fours and the ld. CIT(A) had rightly deleted the addition by following the binding precedent. In the result, appeal of the revenue is dismissed

DCIT vs. Delhi Transport Corporation (ITA No. 6658/D/15) (Dated 16/07/2019)

Delhi Transport Corporation

2. S. 56(2)(viib) – THAT AS PER CLAUSE (b) AND CLAUSE (j) OF RULE 11UA FOR COMPUTING FAIR MARKET VALUE OF THE SHARES THE VALUE OF THE ASSETS AND LIABILITIES AS STATED IN THE AUDITED BALANCE SHEET IMMEDIATELY PRIOR TO THE RECEIPT OF CONSIDERATION SHOULD BE ADOPTED.

A perusal of the Rule 11U(b) as reproduced by CIT(A) at para 5.6 of his order makes it clear that the balance sheet means the balance sheet as drawn up on the balance sheet date which has been audited by the auditor of the company and where the balance sheet on the valuation date has not been drawn up the balance sheet drawn up as on a date immediately preceding the valuation date which has been approved and adopted in the AGM of the shareholders of the company.

We find in the instant case, on the date of receipt of the consideration the balance sheet of the assessee company was not drawn up as the same was drawn up only on 31st July, 2014 which is evident from the audited balance sheet filed. Clause (b) and clause (j) of Rule 11UA makes it clear that for computing fair market value of the shares the value of the assets and liabilities as stated in the audited balance sheet immediately prior to the receipt of consideration should be adopted. If, on the date of receipt of the consideration, the balance sheet was not drawn up, then, the balance sheet drawn up as on a date immediately preceding the valuation date should be adopted i.e., the balance sheet of the immediately preceding year should be adopted. We find, in the instant case, on the valuation date i.e., on 31.03.2004, the balance sheet was not drawn up by the auditor as audited financials were drawn up only on 31st July, 2014 and, therefore, the valuation of assets and liabilities in the balance sheet of the immediately preceding year i.e., 31.03.2013 should have been adopted. Since the valuation done by the assessee was not in accordance with the Rule framed for valuation of unquoted shares i.e., the assessee has not taken the value of assets before introduction of share capital received through fresh allotment and since the Assessing Officer has correctly determined the valuation of the unquoted equity shares which has been upheld by the CIT(A), therefore, the same is upheld and the grounds raised by the assessee are dismissed.

Sadhvi Securities P. Ltd vs. ACIT (ITA No.1047/Del/2019) (Dated : 16.07.2019)

Sadhvi Securities P. Ltd