HC directs ITAT to decide on tax cases within three months

Corporate taxpayers can now hope for speedy justice. The Bombay High Court has set aside an order of the Income Tax Appellate Tribunal (ITAT) on the ground that the tribunal took four months to deliver the order.

Delivering the order, a division bench comprising Justice VC Daga and Justice S Radhakrishnan observed that justice delayed is justice denied, but justice withheld is even worse. Observing that often orders are passed four to 10 months after the tax cases have been heard, the court issued a guideline to the ITAT asking it not to take more than three months to give an order. The division bench also directed ITAT that its order should be self-containing and reasoned.

HC gave this order on an appeal filed by Shivsagar Veg Restaurant. The appeal was based on the inordinate delay by ITAT in giving out the order. The taxpayer also alleged non-application of mind as the order did not furnish reasons in detail, did not discuss the issues raised by the taxpayer and did not cite the case laws.

The HC said that since ITAT is the final authority on facts, the tribunal is required to appreciate the evidence, consider the reasons of the authorities below and assign its own reasons as to why it disagreed with the findings of the authority below. This would help the HC, where appeals are filed on questions of law, to have a clearer understanding of the issues that come up before it, the division bench said.

“Merely because the tribunal happens to be an appellate authority, it does not get the right to brush aside reasons or the findings recorded by the first authority or the lower appellate authority. It has to examine the validity of the reasons and findings recorded,” the bench added. K Shivram, who appeared for Shivsagar Veg Restaurant told ET: “ITAT president Vimal Gandhi had issued detailed guidelines (on speedy clearance) to ITAT members sometime ago. However, those guidelines are not being followed by the ITAT members.”

[Source: The Economic Times]

Pending tax refund up to Rs 25,000 to be given soon

Quick income-tax refunds may come because the government has asked the I-T department to soon process refund claims up to Rs 25,000 for every assessee whose tax is deducted at source (TDS) for 2007-08.

"The Income-Tax Department has instructed the field formations to accept the TDS-payer's claim, with certain exceptions ... where the refund computed does not exceed Rs 25,000," a Finance Ministry official said.

Taxpayers for long have been complaining about delays in getting refunds. The department, though, holds a different view and says that it has been making efforts for speedily processing refund payment.

"We have given refunds of about Rs 41,000 crore in 2007-08, and about Rs 25,000 crore in 2008-09 till November 30," the official said.

The problems arise because taxpayers are also not careful about giving relevant information on their returns, he said, adding I-T authorities are often not informed when taxpayers change residence.

[Source: The Times of India]

Service exporters yet to get Rs 1k cr in tax refunds

Even as the government steps up efforts to stimulate flagging exports, more than Rs 1,000 crore in refund claims to services exporters are believed to be pending with the Services Tax Commissionerate in various parts of the country.

There are 104 services that form a part of the export status category, including banking and financial services, insurance, telecom and supporting businesses, such as BPOs and KPOs.

The sticking point, according to services exporters, is a condition that puts the onus on the exporter to prove that the services executed in India are used outside the country to claim a refund on input services. In Delhi, for instance, exporters are asked to establish the export nature of their transactions. The other common reason for claims being withheld is non-submission of documents like foreign inward remittance certificate — which details that convertible foreign currency has been remitted from overseas and has to be acquired from the bank in which the exporter has an account.

Exporters maintain that while on the one hand the government has issued clarifications directing its officers to sanction 80% of the refund amount within 15 days of filing of the claim, notices were issued to recover the same refund granted along with interest under the above procedure.

There are several instances, they said, where the local officer has passed the claim and the pre-audit wing within the department sits on it for a number of days and then, just to suppress its inefficiency, generates a query to return the file back to the local officer.

“The sheer size of refunds scares the tax officer to take upon himself the onus of sanctioning refund claims. He then finds excuses to pass the buck to a higher forum by rejecting the claim, which in turn results in exporters’ funds being locked up and undue litigation cost and time,” said an exporter with a “sizeable” refund claim. “Fortunately,” added the exporter, “the principle of export is by and large settled by the courts and, hence, the objections earlier being raised on proving export status are diminishing, though in certain jurisdictions these objections are taking new form and shape.”

Even as services exporters now look up to the finance ministry to get a tax refund on inputs for providing such services, Gautam Bhattacharya, commissioner (service tax), Central Board of Excise and Customs (CBEC), said he hadn’t been approached so far with any problems related to procedural issues.

“I would like any affected party to come up and make a representation to me if there has been an issue. So far, there has been a representation by services exporters in respect of the condition that puts the onus on exporters to prove their services performed here were used outside the country. I haven’t come across any problem of a procedural nature,” said Mr Bhattacharya.

When contacted, Sachin Menon, executive director, indirect tax, PricewaterhouseCoopers, said the need of the hour was to “fix” personal accountability on officers and to follow judicial discipline in allowing credits based on court rulings. He added that while the service tax commissioner in Mumbai has done a commendable job in personally taking an initiative and issuing a diktat to his officers to process refund claims on a priority basis, the results were yet to be seen.

[Source: The Economic Times]

I-T department to investigate frozen demat accounts

The income-tax department will start investigation into lakhs of frozen demat accounts to unearth black money and undisclosed transactions in them.

The money in these accounts could run into thousands of crores, sources in the department said. Certain preliminary checks have revealed undisclosed transactions and accounts that have not been disclosed, have been used to hide black money, a tax department source said. The accounts were frozen by the two depositories, National Securities Depository Ltd (NSDL) and Central Securities Depository Services Ltd (CDSL), on January 1, 2007.

This move came after lakhs of investors failed to comply with the government’s directive to furnish details of their Permanent Account Number (PAN) while transacting in the financial markets.

“We have received a list of suspicious accounts and investigation (into those) will start,” the source said.

Tax department sources said that with the help of the unique PAN numbers they have been able to track down shareholders who are not running their accounts. In certain cases the account-holder may have died, and some may have changed addresses and did not inform the department, a source said.

Even after the accounts were frozen, some investors are receiving money in the form of allotment of shares in IPOs and certain other ways, they said. According to the data available on December 15, about one lakh accounts with cash balances in them are with CDSL while about 5.5 lakh such accounts are with NSDL.

While there were 2.6 lakh such accounts with CDSL on December 31, 2006, with NSDL it was 18 lakh. The government made quoting PAN mandatory with effect from April 1, 2006, and, with the help of the two depositories, started freezing non-PAN accounts beginning Jan 1, 2007. Securities in the frozen accounts consist mostly of shares from primary and secondary markets.

[Source: The Financial Express]

Speedy disposal of I-T cases

The Bombay High Court has directed the president of the Income Tax Appellate Tribunal to frame and lay down the guidelines for speedy disposal of the matters pending before the Tax Tribunal.

Moot question before the HC was whether the order passed by the Tribunal after more than four months from the date of hearing without dealing with propositions and case laws relied by the appellant is bad in law.

The court held that the omission to make reference to the contentions canvassed can only be attributed to the delayed delivery of judgement. The court also directed that suitable guidelines should be framed and issued by the president within shortest possible time and followed by all the benches of the Tribunal.

All the revisional and appellate authorities under the I-T Act are also directed by the HC to decide the matters heard by them within three months from the date case is closed for judgement.

[Source: The Economic Times]

Now, brokerage & insurance services likely to come under TDS ambit (2008-09)

Brokerage, insurance and business auxiliary services are some of the services which may soon be brought under the tax deducted at source net and taxed at the rate of 10%. These are some of the professional services that a high-level committee set up by the Central Board of Direct Taxes (CBDT) has recommended should be brought under the TDS net.

The committee, which was set up to study the possibility of expanding the scope of TDS by including more professional services, has said in its report that most of the over 100 services under the service tax net can be brought under the ambit of “professional services”. It has compiled a list of such services which also include professionals such as brand ambassadors, management consultants and financial planners. At present, the income of such professionals attracts only 12.36% service tax.

Professional services are taxed in accordance with Section 194J of the Income Tax Act. This implies if the fee for professional or technical service contract undertaken by any of the listed professionals is more than Rs 20,000, the contract awardee has to deduct tax at the rate of 10%.

But while the department is quite keen to levy TDS on these services immediately, officials said this may not be an appropriate time for such a move. “Given the economic downturn where services such as brokerage and insurance have already taken a hit, this may not be the right time to increase the tax on them,” an official said. Hence, in a partial relief to such professionals, the department plans to bring these services under the TDS net in the Budget next year.

With direct tax receipts slowing down, the CBDT is focusing on strengthening collections through the TDS mechanism. It has already re-structured its TDS administration. Earlier this year as well, the CBDT had classified sportspersons, umpires, referees, coaches, trainers, team physicians and physiotherapists, event managers, commentators, anchors, and sports columnists as “professionals” and brought them under the 10% TDS rate. Earlier they had to deduct tax at source on their earnings at merely 1% to 2%.

Corporate advance tax collections in Mumbai falls first time in 5 years

Corporate advance tax collections in Mumbai, which contributes about 35-40% to the country's tax kitty, have fallen below last year's level,
thanks to the general slowdown in the economy. This is the first time in the last five years that advance tax collection from Mumbai has fallen.

Advance tax collection from various industries in the April-December period have fallen 12% to Rs 40,600 crore, belying initial government estimates that the collections would at least increase by 20%. Last year, the collection in the same period grossed Rs 44,230 crore.

As per the advance tax figures up to December 26, the sectors which recorded a fall in collections include oil, petroleum, petroleum products, manufacturing, automobiles, pharmaceuticals, cement and others. However, industries that saw a considerable growth in tax outgo included banking, engineering and insurance sectors.

Tax collection by way of TDS (tax deducted at source) registered an increase of over 34% to Rs 29,000 crore, taking the total tax collection to Rs 83,400 crore. The rise in TDS collection marginally helped the department to offset the drop in advance tax collection and take the consolidated tax collection higher than the collections last December, said tax department officials.

For now, the total collection from Mumbai, including advance tax and TDS, is 6% more than that collected in the April-December period last fiscal year. This however, does not offer any solace to tax collectors as rate of growth in collection last year exceeded 60%.

The collection figures offer a grim picture as about 75% of the advance tax is collected in December, when the third of the four instalments of advance tax payment is due. So far, Mumbai has managed to collect Rs 83,400 crore, while the projection for the whole fiscal is Rs 157,000 crore.

This, according to tax officials, was largely due to the slow performance of corporates in most sectors. The oil sector recorded a 71% decline over last year's payments, while the software sector saw a 21% fall; pharmaceutical companies' tax fell 27% and cement by 23%. The tax outgo from domestic banks surged 34%, while revenue from foreign banks rose 23%. Tax collections engineering industry has risen 30%.

Collection via the securities transaction tax was another blow. STT figures which is a reflection of the dynamism of the stock market, plunged 32% to Rs 4,455 crore.

The projection for all India tax collection this fiscal year is Rs 4,00,000 crore, out of which Rs 157,000 crore is expected to be generated from Mumbai. Meeting the target is going to be difficult unless there is a dramatic improvement in the economic situation in the next couple of months, said tax officials. The department is currently exploring all available channels for meeting the target, they added.

CBDT has issued a new Form of report for claiming deduction u/s 80-IB(11C)

CBDT has issued a new Form of report for claiming deduction under sub-section (11C) of Section 80-IB of the Income-tax Act vide Notification dated 22nd October, 2008.

Notification

CBDT gives new meaning to charity

Chambers and other such trade organisation that were apprehensive of coming under tax net after the government expanded the dfinition of
"charitable organisations" in the budget 2008-09 can breathe easy now.

To clear the air on the issue, the Central Board of Direct Taxes has issued a detailed circular defining what constitutes charitable.

Industry bodies claim exemption from income tax under Section 11 on the ground that their objects are for charitable purpose as they are covered under 'any other object of general public utility'. "Under the principle of mutuality, if trading takes place between persons who are associated together and contribute to a common fund for the financing of some venture or object and in this respect have no dealings or relations with any outside body, then any surplus returned to the persons forming such associations is not chargeable to tax," the circular said. But, there would have be complete identity between contributors and participants.

If industry or trade associations claim both to be charitable institutions as well as mutual organsiation and their activities are restricted to contributions from and participation of only their members, these would not fall under the purview of the new provision on charitable organisations owing to principle of mutuality. However, if such organisations have dealings with non-members, their claim to be charitable organsiation would no be governed by the additional conditions stipulated in the new provision.

To ensure that only genuine charity is able to get tax benefits, the government had modified the definition of charitable by adding a new provision. The Income Tax recognises "charitable purpose" to cover acitivities related to relief of poor, education, medical relief and advancement of any other object of general public utility. Since, the last activity "advance ment of any other object of general public utility" had made the definition very open ended, the government amended it saying if the charitable purpose involved any other activity in nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess or fee or any other consideration, it will not be charitable.

Relief of poor will cover wide range of objects for the welfare of the economically and socially disadvantaged or needy and will include within its ambit purposes such as relief to destitute, orphans or the handicapped, disadvantaged women, children, small and marginal farmers, indigent artisans or senior citizens in need of aid."Entities who have these objects will continue to be eligible for exemptions even if they incidentally carry on a commercial acitivity, subject to conditions-- the business should be incidental to the attainment of the objectives of the entity and separate books of accounts are maintained for each business.

However, if the taxpayer is engaged in any activity in the nature of trade, commerce or business or service in relation to trade, commerce or business, it would not be entitled to claim that its object is charitable purpose." In such a case, the object of 'general public utility ' will be only a mask or a devise to hide the true purpose which is trade, commerce or business and each case would be decided on its own facts, the circular said.


Get Circular Here - Circular Free Download

No tax on membership fee of industry bodies

Industry chambers apprehensive of losing tax benefits can breathe easy. The Central Board of Direct Taxes has issued a circular
clarifying activities that are termed as charitable and be eligible for income tax benefits.According to the circular, industry associations generating income from membership fees will not come under the tax net.

”Under the principle of mutuality, if the trading takes place between people who are associated with each other and contribute to a common fund for the financing of some venture, any surplus returned to members is not taxable,” the circular said.

To ensure that only genuine charitable bodies are able to get tax benefits, the government had modified the definition of a charitable body by adding a new provision. The income tax department recognised a "charitable purpose" as an organisation that covered activities related to the relief of poor, education, medical relief and the 'advancement of any other object of general public utility'.

Since the last definition made the definition very open ended, the government amended it by adding: “If the charitable purpose involves any other activity in nature of trade, commerce or business or any activity of rendering any service in relation to any trade, commerce or business for a cess, or fee, or any other consideration, it will not be considered a charitable body.”

The amendment had led to a huge hue and cry with many organisations, such as key industry chambers representing the government.

To clear the air on the issue, the CBDT has now issued a detailed circular defining what is a charitable body.Industry bodies claim exemption from income tax under Section 11 on grounds that their objects are for a charitable purpose as they are covered under 'any other object of general public utility'.

If industry or trade associations claim to be charitable institutions as well as mutual organisations and their activities are restricted to contributions from and participation of only their members, they would not fall under the purview of the new provision on charitable organisations owing to the principle of mutuality.

However, if such organisations have dealings with non-members, they will incur tax.

New tax code to stop treaty shopping

The government may introduce provisions in the new direct tax code to prevent misuse of double taxation avoidance agreements India has
with other countries.

The new code is likely to be unveiled before the year ends. A government official said a discussion paper on the code, a major initiative undertaken under the guidance of the former finance minister and present home minister P Chidambaram, is being fine-tuned.

“A discussion paper on the code explaining the rationale behind every change would be placed in the public domain,” the official added. A draft bill on the code may also accompany the paper to enable everyone to express their views on the proposed changes.

Double taxation treaties are essentially agreements between two countries that seek to eliminate the double taxation of income or gains arising in one country and paid to residents/companies of the other country. The idea is to ensure that the same income is not taxed twice. In many instance, however , these agreements are misused to evade taxes. This is called ‘treaty shopping,’ where usually residents of a third country take advantage of a tax treaty between two countries.

For example, many companies in other countries route their investments into India through Mauritius or Cyprus to take advantage of the tax treaty that these countries have with New Delhi. Both, India-Mauritius and India-Cyprus tax treaties provide that capital gains arising in India from the sale of securities can only be taxed in Mauritius and Cyprus. This means no capital gains tax on investments in securities routed through Mauritius and Cyprus, as they do not levy tax on capital gains.

The discussion paper on the code would explore ways to check this treaty-shopping. Mr Chidambaram was actively involved in the exercise of drafting the code. At the Economic Editors Conference in November, he had said the draft code would be placed in the public domain soon. “I have to read another 19 pages of the discussion paper. The discussion paper and the draft is ready,” he had said.

Some options like a general anti avoidance rule(GAAR), provisions allowing examination of the real nature of a transaction and a limitation of benefits clause are being actively examined. Many countries like Singapore and Canada have a general avoidance provision, GAAR in their domestic income-tax laws to ensure that treaty benefits accrue only to genuine investors. Singapore also allows examination of the real nature of a transaction.

Earlier, an internal panel in the income-tax department, which examined the issue of treaty abuse and ways to prevent it, had also made recommendation in favour of GAAR and a special provision for examination of real nature of transaction.

A special provision allowing for examination of the real nature of a transaction in the present income-tax law would have given Indian tax authorities a natural right to examine Vodafone Group Plc’s $11.2-billion transaction to acquire controlling stake in Hutchison Essar, a company based in India.

Vodafone has not given the income-tax (I-T ) department the confidential documents related to the transaction that involved transfer of stake by the offshore entity which held stake in Hutchison Essar to another offshore entity owned by Vodafone.

Indian tax authorities want to tax the transaction on the ground that it involved transfer of an Indian asset and have got a major boost after the Bombay High Court dismissed the telecom company’s writ petition against the show-cause notice of the I-T department.

The government had attempted to bring in some antiabuse provisions in the Union Budget, 2007-08 , but had dropped the idea in favour of the code, work on which had already begun by then.

Advance warning, Tax mop-up dips 22% for Dec 2008

Indicating slowdown in economic growth, advance tax collections declined in the third quarter, ending December, by over 22% to Rs 42,600
crore from Rs 54,900 crore a year ago. For the first three quarters ended December 15, advance tax collection fell 2.6% to Rs 1,13,000 crore from Rs 1,16,000 crore in the corresponding period last year, a finance ministry official, who did not wish to be identified, said.

This brings down the growth rate in direct tax collections for the first nine months to 12% and raises the distinct possibility of the government missing the budget target of a 15% increase in direct tax collections this fiscal to net Rs 3,65,000 crore. Personal income tax deducted at source has shored up aggregate collection of direct taxes, which comprise taxes on corporate incomes — including dividend distribution tax and fringe benefit tax, taxes on personal incomes, securities transaction tax and a minuscule amount of wealth tax, apart from collections of arrears on these counts.

Advance tax is paid in four instalments by corporate and non-corporate assessees other than salaried employees in June, September, December and March, and is based on the taxpayers’ own estimates of their incomes. It, thus, gives an indication of overall economic health. The last date for payment of the third instalment of advance tax was December 15. The fourth and the last instalment will fall due on March 15. Salaried employees have their tax deducted at source on a monthly basis.

Direct tax collections in November 2008 had dropped 36.09% to Rs 10,346 crore from Rs 16,189 crore in November 2007.

The drop in direct tax collections in November and subsequently in advance tax has pulled down the cumulative growth rate from 22% in April-November, 2008 to about 11% in April-December, 2008. Collections stood at Rs 2,32,000 crore till December 24, 2008, compared to Rs 2,08,000 crore in April-December, 2007. A growth rate of 15% is required to meet the budget estimate of Rs 3,65,000 crore in the current financial year. The official said it may now be difficult to achieve the Central Board of Direct Taxes' internal target of Rs 3,95,000 crore.

Last four financial years have been a sort of a dream run for direct taxes, which witnessed an over 30% compound annual growth rate in the period on the back of a booming economy. But the slowing economy has cast its shadow on the direct taxes as well. India’s GDP grew 7.8% in the first six months of the current fiscal against 9.3% in the same period last fiscal. Industrial production in October declined by 0.4% for the first time in 15 years, clearly indicating that the manufacturing sector had been impacted by the global financial meltdown.

HC relief for foreign law firms on tax payment

In a significant order, a division bench of the Bombay high court has ruled that foreign law firms, even though working as solicitors for
multinational corporations with operations in India, will pay tax only in those countries where they give legal advice and not in India.

The order came after legal eagle Harish Salve argued that courts must consider the place where a solicitor gives professional advice and not the place of the project for which such advice is sought. "A legal professional has no stake or interest in the project, he is available at any time to the client for advice on all legal issues,'' Salve said.

The appelant before court was Clifford Chance, a top-notch legal firm from London which acted as solicitors for several multinational corporations interested in four major power projects in India. The clients included big names such as GEC Alsthom Group, and Electricite de France.

Clifford Chance told court that it billed its clients on an hourly basis and maintained detailed "time sheets'' that showed whether the legal advice was given in India or abroad. On that basis, the firm calculated that it had earned a little over Rs 5 crore from its India operations during 1996-97. Ispat Industries was the only Indian firm involved in one of the four power projects.

On the contrary, the income tax department said that Clifford Chance had received more than Rs 17 crore in legal fee for acting as advisors on the four power projects and it was immaterial whether the advice was given in India, UK or any other country. It said that the whole income was taxable in India as the projects from which it was derived were in India.

However, Salve argued that legal service given by a solicitor from his home country to a client who was overseas could be taxed only in the country of residence of the solicitor.

Finally, justice S Radhakrishnan and V C Daga ruled that under statutory provisions, services which are to be taxed must be both "rendered in India'' and "utilized in India'' for them to fall under the income tax bracket. The court held that this was not the case with Clifford Chance's earnings which came from giving legal advice to its clients in other countries, even though the power projects were in India. Thus it said that tax could be levied only on Rs 5 crore that the solicitors had earned by giving legal advice to firms in India.

PENDING TAX REFUND UP TO RS 25,000 TO BE GIVEN SOON: GOVT

The government has asked the I-T department to soon process refund claims up to Rs 25,000 for every assessee whose tax is deducted at source (TDS) for 2007-08. “The Income- Tax Department has instructed the field formations to accept the TDS-payer’s claim, with certain exceptions … where the refund computed does not exceed Rs 25,000,” a Finance Ministry official said.

Taxpayers for long have been complaining about delays in getting refunds. The department, though, holds a different view and says that it has been making efforts for speedily processing refund payment. The problems arise because taxpayers are also not careful about giving relevant information on their returns, he said, adding I-T authorities are often not informed when taxpayers change residence.

Income Tax exemption on home loans may be doubled

The government is considering a proposal to double the income tax exemption limit on housing loans to Rs 3 lakh from the current level of Rs 1.5 lakh, according to government sources. The proposal is being discussed by the committee of secretaries that was set up in the wake of the global financial crisis affecting the Indian economy. Industry lobby groups have been urging the government to raise the limit as it will reduce the cost of borrowing on home loans.

On December 7, the government had virtually unveiled a mini-budget that included Rs 20,000 of additional spending on infrastructure and cut excise duty across-the board. It also provided a package for banks aimed at making home loans cheaper.

CAs to be restricted from taking non-audit work

The government will be preventing Chartered Accountants from offering consultancy and advisory services to the companies which hire them for auditing their accounts. This is being done to lend greater credibility to company accounts. The statutory auditors, who vet the financial accounts of a company, will be restricted from providing their corporate clients services such as investment management, actuarial services and investment banking.

The proposal forms part of the Companies Bill 2008, currently pending before the Lok Sabha. The move is expected to usher in greater independence in the audit function and infuse greater confidence in the minds of investors on the credibility of financial statements. At present, the statutory auditors are barred from providing accounting and internal audit services for their clients, but are allowed to deliver consultancy and advisory services. Under the guidelines proposed in the new legislation, statutory auditors will also be prohibited from providing services like design and implementation of financial information system, investment advisory, rendering of outsourced financial work and management services.

The initiative assumes significance in the wake of a slowdown in the economy where companies may hire consultancy services from their statutory auditors who may turn a blind eye to discrepancies in financial statements. “The proposal seeks to place specific restrictions on the services which a chartered accountant, acting as a statutory auditor, can provide for his client,” says Institute of Chartered Accountants of India president Ved Jain, adding the proposal will help avoid conflict of interests. The move may come as a major damper for many practising CAs who have been providing audit as well as consultancy services for their clients.

Tax sword looms large on cross-border acquisitions

Since August last year, the world has been watching. It all began with a show cause

notice issued to Vodafone BV (based in the Netherlands),
holding it to be an
“assessee in default” for not withholding tax at source when it made payments to a Hutchison Group company (based in Cayman Islands) for acquiring shares of another Cayman Island company.

Such change in shareholding resulted in a change in the controlling interest of an operating Indian cellular services company. True, the tax demands raised ran into several millions, $2 billion approximately. But this is not the reason for the attention that this case has attracted.

The main reason is that the very foundation of international tax norms appeared shaken. It has been a well accepted view that while gains arising to a non-resident from transfer of shares in an Indian company are liable to tax in India (subject to tax treaty provisions as in some tax treaties, the gain is not taxable in the source country), the gain arising to a non-resident from transfer outside India of shares of a foreign company to another non-resident would normally not be chargeable to tax in India. This is the case, even if the underlying value is derived from assets belonging to an Indian subsidiary of the company, whose shares are transferred.

Vodafone BV (Vodafone NL), a Dutch subsidiary of Vodafone UK, entered into an agreement with Hutchison Telecommunications Cayman Island (HTIL) for acquiring share capital of CGP Investments (CGP), which is a company incorporated in Cayman Islands.

Through CGP, HTIL — the seller — owned 67% controlling interest in Hutch Essar (HEL, now ‘Vodafone Essar’ — a JV between the Hutch and Essar group), engaged in cellular services business in India.

When it got the show cause notice, Vodafone NL filed a writ petition before the Bombay High Court, which now stands dismissed. The HC made several observations while dismissing it. It did not accept the argument of Vodafone that the transaction was between two foreign companies, involving transfer of shares of another foreign company, and had no nexus or tax implications in India.

In the view of the high court, prima facie, the transaction attracted capital gains tax liability in India as the sole consideration and the predominant object of the transaction was transfer of business or economic interest or controlling interest in the telecom company in India.

According to the high court, post transfer, the Vodafone group acquired interest in the telecom licence, brand and goodwill, right to appoint board of directors, apart from acquiring entry into the telecom business segment in India.

The transaction was regarded as achieving effective substitution of Vodafone Group in the place of Hutch Group in the joint venture/partnership, which the Hutch Group had with Essar Group in India. The transfer of shares of a foreign company was held to be mode of achieving the transfer of valuable assets in India, attracting tax implications.

e high court remarked: “In the instant case, the subject matter of transfer as

contracted between the parties is not actually the shares
of a Cayman Island company,
but the assets situated in India”.

The high court also emphasised that representations made before FIPB and regulatory authorities in the US and Hong Kong made it clear that the Hutch Group was transferring its controlling interest in the Indian companies.

The high court has made fairly strong observations on the petitioner having failed to furnish agreements relating to the transaction, either to the tax department or to the court, despite repeated requests — in the absence of which it was not possible to appreciate the true nature of the transaction and it was left with no option, but to draw an adverse inference against Vodafone NL.

The high court emphasised that the writ jurisdiction is discretionary and that, only in extraordinary cases a mere show cause notice, seeking explanations can be struck down as invalid.

In the light of the developments, the question that now arises is: merely because the Indian company is held by a special purpose vehicle, could such parent company be regarded as the owner of assets belonging to the underlying Indian company?

Reference may also be made to the Supreme Court decision in the case of Mrs Bacha F Guzdar (27 ITR 1), which held that the company is a legal entity, separate and distinct from its shareholders and there is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company.

In the course of its submissions, Vodafone NL did point out on the absurdity of the views of the revenue authorities. To illustrate — would purchase of 1,000 shares of XYZ Inc, a multinational company, with global operations, on the New York Stock Exchange be tantamount to transfer of assets (underlying value) of the Indian subsidiary?

The high court appears to have been guided by cumulative appreciation of the facts of the case viz that, in the facts on hand, there was acquisition of a business presence. But, even assuming that what was transferred was “controlling interest”, the term does not find any reference in tax law pertaining to capital gains and is not an asset separate from shares.

In the absence of a specific provision in the Indian law, taxation in respect of such a transaction should ordinarily not arise in India, when shares of a foreign company are transferred between two non-residents, merely because on such transfer there is an indirect shareholding in an Indian business entity.

It should be noted that, even today, transfer of shares in an Indian company by a Mauritius company — which submits tax residency certificate — does enjoy exemption from capital gains in India, as in this case the treaty provides that the taxing rights of the capital gains vest with the country of residence and not the source country (where capital gains arise).

The SC, in Azadi Bachao Andolan case (263 ITR 706), has held that an Act, which is otherwise valid in law, cannot be treated as non est (non-tenable) on the basis of the underlying motive.

While the high court has not given any definite conclusion, it has made observations that may be followed by the revenue authorities in assessing similar transactions. Such actions, if any, could spell uncertainty for and cause anxiety in respect of all genuine international takeovers merely because there may be a change in controlling or business interest in the underlying Indian subsidiary.

(The author is tax partner, Ernst & Young)

COST INFLATION INDEX (CII) for FY 2008-09 (AY 2009-10)

SECTION 48, EXPLANATION (V) OF THE INCOME-TAX ACT, 1961 - NOTIFIED COST INFLATION INDEX FOR FINANCIAL YEAR 2008-09


NOTIFICATION NO. 86/2008, DATED 13-8-2008


In exercise of the powers conferred by clause (v) of the Explanation to section 48 of the Income-tax Act, 1961 (43 of 1961), the Central Government, having regard to seventy-five per cent of the average rise in the Consumer Price Index for the Financial Year commencing from the 1st day of April, 2007 and ending on the 31st day of March, 2008 for the urban non-manual employees, hereby specifies the Cost Inflation Index for the Financial Year commencing from the 1st day of April, 2008 and ending on the 31st day of March, 2009 and for that purpose further makes the following amendment in the notification of the Government of India in the Ministry of Finance (Department of Revenue), Central Board of Direct Taxes number S.O.709(E), dated the 20th August, 1998, namely:-

In the said notification, in the Table, after serial number 27 and the entries relating, thereto, the following serial number and entries shall be inserted, namely
2008-09 582

1981-82 - 100 1993-94 - 244

1982-83 - 109 1994-95 - 259

1983-84 - 116 1995-96 - 281

1984-85 - 125 1996-97 - 305

1985-86 - 133 1997-98 - 331

1986-87 - 140 1998-99 - 351

1987-88 - 150 1999-00 - 389

1988-89 - 161 2000-01 - 406

1989-90 - 172 2001-02 - 426

1990-91 - 182 2002-03 - 447

1991-92 - 199 2003-04 - 463

1992-93 - 223 2004-05 - 480

2005-06 - 497

2006-07 - 519

2007-08 - 551

2008-09 - 582

MVAT E-FILING OF RETURNS MADE APPLICABLE TO ALL DEALERS

The Commissioner of Sales Tax, Maharashtra State has issued Notification dated 20th December, 2008 making the E-filing of Returns applicable for ALL the registered dealers.

Mandatory E-filing of Returns is applicable for -

* Registered Dealers to whom the Explanation to clause (8) of Section 2 applies and whose tax liability during the previous year was rupees one crore or less, in respect of the period starting on or after 1st April, 2008.

* Other Dealers, in respect of the period starting on or after 1st October, 2008.

Service Tax For Dry cleaning Services

Dry cleaning services provided to a customer by a dry cleaner is liable to service tax. Dry cleaner has been defined as any commercial concern providing service in relation to dry cleaning.

The term commercial concern denotes a firm or a business entity or organisation engaged in commercial activities like sale, purchase or providing services for consideration with a profit motive.

Thus, a hotel’s in-house dry cleaning facility is a commercial concern and liable for service tax if charged for separately. Dry cleaning of own clothes, linen and bedding is not covered. For the service to be taxable, it must be rendered to the guests/customers.

However, if the hotel engages a dry cleaning concern to do the job, then the hotel will step into the shoes of the customer and the dry cleaning concern will be liable to pay service tax.

Service tax Levy For Fashion Designers

The government, in a circular dated 1 August 2002, has clarified that sometimes fashion designers not only provide designing service but also make garments or intended articles as per the requirement and charge fees in a composite manner for designing as well as making of garments. The service tax levy covers only the fashion designing service. Making of garments is outside the purview of the levy. Therefore, service tax will be leviable only on designing charges, provided the fashion designer shows the designing charges and making charges separately in the bill. However, if consolidated charges are shown, then service tax will be on the entire amount.

Taxation Of Mutual Funds - Investment Or Stock In Trade

Normally it should be taken that the units are held as investments. You can claim the income distributed by the mutual fund as exempt under Section 10(36).

If you hold the units for 12 months or less the loss arising out of the sale will be short-term capital loss which can be set off against either a short-term capital gain or a long-term capital gain of the same year. The balance, if any, can be carried forward and set off against either a short-term capital gain or a long-term capital gain within eight assessment years immediately succeeding the assessment year in which the loss was first computed.

If you hold the units for more than 12 months, the loss arising out of the sale will be a long-term capital loss which can be set off only against a long-term capital gain of the same year. The balance, if any, can be carried forward and set off against a long-term capital gain eight assessment years immediately succeeding the assessment year in which the loss was first computed.

If investment in mutual fund is taken as investment it will be shown in your books, and, for tax purposes, at the amount invested and not at the lower of cost or market price.

The provisions of Section 94(7) will not affect the set off or carry forward and set off of losses. Under Section 94(7), if:

*any person buys or acquires any securities or unit within three months prior to the record date;

*such person sells or transfer such securities or unit within three months after such date;

*the dividend/income on such securities or unit received or receivable by such person is exempt.

Then, the loss, if any, incurred by him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purpose of computing his income chargeable to tax.

This provision, in effect, will mean that if a share or unit is purchased within three months prior to the record date and if it is sold within three months from such record date, the loss arising there from will be ignored to the extent of dividend/income from such securities or unit which enjoyed the exemption.

The excess loss over such dividend/income can, however, be set off or carried forward and set off in the manner stated above.

Basics Of Calculating HRA Exemption

House Rent Allowance(HRA) is part of salary package

calculation of HRA exemption.

Least of following three will be exempted
*Hra received
*50% of salary in case of residential accommodation taken on rent is situated in Bombay ,Calcutta ,Delhi, or Madras (Chennai) and 40 % of salary in in any other case.
*rent paid in excess of 10 % of salary

other points to be noted

Salary for this purpose mean
-Basic salary
-Dearness Allowance if terms of employment so provides.
-commission based on a fixed percentage of trunover.
-all other allowances and perquisites is to be excluded.
-Salary related to period of rent should only be considered on due basic .
-Salary received in period as advance or arrear not related to calculation period should not be included.

For calculating 40/50 % as per point 2 above place of residential accommodation is important ,not where the person is working.suppose Rajiv taken a house in Delhi on rent but has working in Rohtak than he is eligible as per point 2 upto 50 % as house is situated in Delhi.

The calculation should be done on separately(monthly) if salary or HRA has varies during the year.
No,Hra exemtion if Hra paid is less than 10 % of salary.

Again exemption is denied where an employee lives in his own house, or in a house for which he does not pay rent.