S. 78 -Where mens rea stands accepted in relation to the demand of duty, it has to be accepted by the assessee vis-a-vis the proposal for imposition of penalty under section 11AC

Alloytech vs CCE

 

Whether penalty u/s 11AC of the Central Excise Act imposed on the assessee is sustainable or not ?

 

Held, The assessee has tacitly admitted their liability to have reversed the CENVAT credit at the time of removal of the capital goods. They also voluntarily paid interest under section 11AB. These payments cannot be accepted as payments under sub-section 2B of section 11A of the Act inasmuch as these were made under compulsion. Hence, the question of invoking Explanation 3 ibid does not arise. It is not in dispute that the show-cause notice invoked the extended period of limitation on the ground of suppression of facts with intent to avail undue CENVAT credit. The assessee did not choose to contest the demand on the ground of limitation, thereby virtually accepting the allegation of suppression. Their only grievance is against the penalty. The grounds for invoking the extended period of limitation are Indisputably identical to the grounds for invoking the section 11 AC. If that be so, where the demand has not been contested on the ground of limitation, it is not open to the assessee to oppose the section 11 AC penalty. In other words, where mens rea stands accepted in relation to the demand of duty, it has to be accepted by the assessee vis-a-vis the proposal for imposition of penalty under section 11AC. In the result, the penalty is unquestionable in this case.

Breaking News: HC - S. 54/54F: Several independent units can constitute “a residential house”

The assessee entered into a development agreement pursuant to which the developer demolished the property and constructed a new building comprising of three floors. In consideration of granting the development rights, the assessee received Rs. 4 crores and two floors of the new building. The AO held that in computing capital gains, the cost of construction of Rs. 3.43 crores incurred by the developer on the development of the property had to be added to the sum of Rs. 4 crores received by the assessee. The assessee claimed that as the said capital gains was invested in the said two floors, she was eligible for exemption u/s 54. The AO rejected the claim on the basis that the units on the said floors were independent & self-contained and not “a residential house” and granted exemption for only one unit. The CIT(A) and Tribunal upheld the assessee’s claim by relying on B. Ananda Basappa 309 ITR 329 (Kar) and K.G. Rukminiamma 331 ITR 211 (Kar). On appeal by the department to the High Court HELD dismissing the appeal:

 

     As held in B. Ananda Bassappa (SLP dismissed) & K G Rukminiamma, the Revenue’s contention that the phrase “a” residential house would mean “one” residential house is not correct. The expression “a” residential house should be understood in a sense that building should be of residential in nature and “a” should not be understood to indicate a singular number. Also, s. 54/54F uses the expression “a residential house” and not “a residential unit”. S. 54/54F requires the assessee to acquire a “residential house” and so long as the assessee acquires a building, which may be constructed, for the sake of convenience, in such a manner as to consist of several units which can, if the need arises, be conveniently and independently used as an independent residence, the requirement of the Section should be taken to have been satisfied. There is nothing in these sections which require the residential house to be constructed in a particular manner. The only requirement is that it should be for the residential use and not for commercial use. If there is nothing in the section which requires that the residential house should be built in a particular manner, it seems to us that the income tax authorities cannot insist upon that requirement. A person may construct a house according to his plans, requirements and compulsions. A person may construct a residential house in such a manner that he may use the ground floor for his own residence and let out the first floor having an independent entry so that his income is augmented. It is quite common to find such arrangements, particularly post-retirement. One may build a house consisting of four bedrooms (all in the same or different floors) in such a manner that an independent residential unit consisting of two or three bedrooms may be carved out with an independent entrance so that it can be let out. He may even arrange for his children and family to stay there, so that they are nearby, an arrangement which can be mutually supportive. He may construct his residence in such a manner that in case of a future need he may be able to dispose of a part thereof as an independent house. There may be several such considerations for a person while constructing a residential house. The physical structuring of the new residential house, whether it is lateral or vertical, cannot come in the way of considering the building as a residential house. The fact that the residential house consists of several independent units cannot be permitted to act as an impediment to the allowance of the deduction u/s 54/54F. It is neither expressly nor by necessary implication prohibited.

 

Contrast with ITO vs. Sushila Jhaveri 292 ITR (AT) 1 (Mum)(SB). On the question whether a non-jurisdictional High Court will prevail over the Special Bench see the line of cases where Virgin Creations (Cal HC) was followed in preference to Bharati Shipyard 132 ITD 53 (Mum)(SB).

S. 40(a)(ia) - Deduction of tax cannot be postponed till the last date of the accounting period by debiting the running account of the payee.

Hon`ble high court judgment reported in (2012) 6 TaxCorp (DT) 50407 (CALCUTTA) does not apply to a case where the assessee has failed to deduct the tax itself at source out of payments made to payee in accordance with the provisions of Chapter-XVII-B.

 

ITO vs Bhoomi Construction

Dated: 8^th Feb 2013

The assessee is a partnership firm engaged in the business of civil construction. It filed its return of income for the assessment year under appeal on 22-12-2006 returning total income at Rs.1,37,383/- as against which the total income of the assessee was assessed by the Assessing Officer at Rs. 59,10,645/- after disallowing a sum of Rs. 57,48,265/- u/s. 40(a)(ia) of the Income-tax Act.

The assessee claimed before the AO that tax amounting to Rs. 75,410/- was deducted by the assessee on 31.3.2006 by debiting the running account of M/s J.B. Construction and the same was deposited with the Government before the due date specified in sub-section (1) of section 139 and therefore the impugned payments were not hit by section 40(a)(ia). The AO did not accept the submissions and disallowed disallowing a sum of Rs. 57,48,265/- u/s. 40(a)(ia).

On appeal, before CIT(A) allowed the claim of the assessee following the judgment reported in (2012) 6 TaxCorp (DT) 50407 (CALCUTTA).

Whether Ld. CIT(A) has erred in deleting the addition under section 40(a)(ia) made by the Assessing Officer on account of tax not been deposited or paid during the previous year.

 

Revenue on appeal before ITAT, submitted that assessee have paid sum  of Rs.9,54,887/-; Rs.21,52,185/- + Rs.17,52,906/-; and Rs.8,88,287/- on 12-05-2005, 20-06-2005, and on 08-11-2005 respectively. The ld. D.R. submitted that a sum of Rs.75, 410/- has been shown in the chart as deducted on 31-03-2006 towards tax by debiting the account of M/s J.B. Construction. He contended that section 194C required the assessee to deduct tax at source out of amounts paid/credited in favour of M/s. J.B. Construction Co,  and not to deduct the tax by debiting the running account of the payee in its books. He further submitted that the amount deducted on 31-03-2006 was not deducted at source in as much as it was not deducted out of the amount paid by the assessee on 12-05-2005, 20-06-2005 and 08-11-2005 and hence the aforesaid sum shown as deduction on 31-03-2006 did not constitute deduction of tax at source out of amounts paid/credited to M/s. J.B. Construction Co. in terms of section 194C of the Income-tax Act. According to him, there was thus failure on the part of the assessee in complying with the provisions of section 194C and therefore its case was not covered by the judgment reported in (2012) 6 TaxCorp (DT) 50407 (CALCUTTA).

 

ITAT observed that payments were made by the assessee on the aforesaid dates to M/s J.B. Construction without deduction of tax at source. The case of the assessee however is that it has running account with M/s J.B. Construction and therefore it debited the said account by a sum of Rs.75,410/- on 31.3.2006 as representing deduction of tax and deposited the same with the Government before the due date specified in section 139(1) and therefore the AO was not justified in making the impugned disallowance under section 40(a)(ia).

The crucial question that arises for consideration is as to what constitutes deduction of tax at source u/s 194C read with section 40(a)(ia). Is it required to be deducted at source out of the amounts paid to a contractor/sub-contractor? Or, it is sufficient compliance with law if the running account of payee is debited by the deductor on the last date of the previous year without deducting the same from actual payments made by the assessee during the course of its accounting year.

Further ITAT observed that Section 40(a)(ia) applies only when “… tax is deductible at source under Chapter XVII-B and such tax has not been deducted ….”. The relevant question therefore is as to what is the import firstly of the phrase “deduction” of tax and secondly of such deduction being “at source”. “Deduct” means to take away or to subtract from the whole. “At source” means occurrence of an event that initiates a process. Therefore payment of any amount, on which tax is deductible at source, itself is the “source” at which tax should be deducted and it is after such deduction that the remaining amount should be paid to the payee. This position becomes quite clear on perusal of Chapter XVII-B of the Income-tax Act dealing with “Collection and Recovery of Tax – Deduction at Source”. “Deduction at source” means subtraction of the amount of tax from the whole amount payable by the assessee to the payee out of which tax is deductible. If tax is not so deducted out of the amount payable, it cannot be said to have been “deducted at source”. In other words, if tax is deducted at any other point of time than at the time when the amount exigible to deduction of tax at source is paid or is deducted out of any other sum than the sum out of which it is mandated to be deducted, such deduction of tax per se cannot be said to be at source. Source of deduction of tax statutorily emanates from payment. Deduction of tax at source, i.e., out of the amount payable in terms of section 194C read with section 40(a)(ia), is one thing and debiting the running account of the payee on the last date of the accounting period is altogether a different thing. Deduction of tax at source and its payment to the Government is a continuous source of revenue mobilisation throughout the year. The law mandates deduction of tax to be made at source, i.e., as and when amount is payable, and therefore deduction of tax cannot be postponed till the last date of the accounting period by debiting the running account of the payee. By no stretch of imagination, debiting the running account of a payee can be said to be deduction of tax at source as contemplated by section 194C read with section 40(a)(ia).

Service Tax - The gross amount has to be adopted to quantify the tax liability treating it as value of taxable serv

Whether the amount which has been paid by the service recipient to the appellant is inclusive or exclusive of service tax liability?

 

As per this system of taxation, tax borne by the consumer of goods/services is collected by the assessee (manufacturer/service provider) and remitted to the Government. When the amount is collected for the provision of services, the total compensation received should be treated as inclusive of service tax due to be paid by the ultimate customer of the services unless service tax is also paid by the customer separately. So considered, when no tax is collected separately, the gross amount has to be adopted to quantify the tax liability treating it as value of taxable service plus service tax payable.

TDS not deducible on Chit Dividend/Discount: SLP dismissed by SC

On 18^th Feb 2013 Supreme Court dismissed the SLP filed by revenue again Hon`ble Delhi high court judgment reported in (2009) 3 TaxCorp (DT) 43917 (DELHI). Hon`ble Delhi high court held that dividend/discount disbursed to the members from their contribution cannot be mistaken for interest income in the hands of the subscribers. TDS U/S 194A NOT DEDUCIBLE

 

S U P R E M E   C O U R T   O F   I N D I A

RECORD OF PROCEEDINGS

 

Petition(s) for Special Leave to Appeal (Civil) CC 7714/2010

 

(From the judgement and order  dated 24/07/2009 in ITA No.44/2008, of

The HIGH COURT OF DELHI AT N. DELHI)

 

C.I.T,DELHI                                       Petitioner(s)

 

VERSUS

 

SAHIB CHITS(DELHI) P.LTD.                         Respondent(s)

 

(With appln(s) for c/delay in filing SLP)

 

Date: 18/02/2013 

 

This Petition was called on for hearing today.

 

CORAM :

        HON'BLE MR. JUSTICE R.M. LODHA

        HON'BLE MR. JUSTICE J. CHELAMESWAR

        HON'BLE MR. JUSTICE MADAN B. LOKUR

 

For Petitioner(s)      

Mr. Arijit Prasad, Adv.

Ms. Anil Katiyar, Adv.

Mr. B.V. Balaram Das, Adv.

 

For Respondent(s)       Mr. K. Parasaran, Sr. Adv. Mr. A. Raghunath,Adv.

 

UPON hearing counsel the Court made the following

                              

O R D E R

 

Delay condoned.

 

The special leave petition is dismissed.

The appellant had not furnished the return within time allotted to him under sub sections (1) and (2) and therefore, his case clearly falls within the provision of section 139(4). Section 139(5) merely stipulates that it is applicable to any person who has furnished the return under sub sections (1) or (2).

Menezes Fernandes Enterprises Vs ITO (HC OF BOMBAY AT GOA)

Dated: 21^st Jan 2013

 

In favor of Revenue

 

The assessee is a registered partnership firm constituted by the partnership deed. The due date for filing of the return was 31/8/1993. The assessee filed its return of income on 30/9/1993 and the said return declared an unabsorbed depreciation to the tune of Rs.2,42,996 for the AY 1993-94. Intimation u/s 143(1)(a) was issued on 21.9.1994 and served on the assessee on 24.11.1994. The assessee claimed to have filed a revised return for the purpose of correcting the mistake in its claim by declaring the amount of unabsorbed depreciation as Rs.4,14,345. The assessee challenged this intimation before the DCIT(A), who directed the assessing authority to consider the revised return in the light of the judgment of Madhya Pradesh High Court and Calcutta High Court. The Revenue challenged this order and filed a Second Appeal before the Tribunal. Initially the Tribunal passed the order dated 12.12.2002 and set aside the order of the DCIT(A) and remanded the matter back to the CIT(A). A review application was filed by the assessee u/s 254 seeking rectification of the order, which was dismissed by the Tribunal.

 

“Whether the Tribunal was justified in holding that the revised return was invalid in law when the said return was filed before the due date for filing the return u/s. 139(4) of the Act and it could be deemed as a rectified return u/s. 139(4) of the Act and not a revised return u/s 139(5) of the Act?

 

Learned counsel appearing on behalf of the appellant submitted that the Tribunal had erred in coming to the conclusion that the return filed was a revised return. He submitted that it ought to have held that the said return was a valid return since it was a rectified return and it was sought before the intimation u/s 143(1)(a) was served on the assessee. It was then contended that the Tribunal had erred in relying on the judgment of the Apex Court in the case reportd in AIR 1996 S.C 1895. He submitted that the Supreme Court had not decided the issue as to the distinction between a revised return and a rectified return. He, therefore, submitted that the ratio of the said judgment could not have been made applicable to the appellant of the present case.

 

Further ld. counsel invited our attention to the Circular No.549 which was issued on 31/10/1989 and which raises a presumption in favour of the revenue. He submitted that even if the said circular was taken into consideration, the benefits of the said circular ought to have been given to the appellant, since admittedly, the order passed under section 143 (1) (a) was not served on the assessee when he filed the rectified return. It was submitted that there was a bonafide mistake on the part of the accountant and the said mistake was sought to be rectified by filing a rectified return.

 

On the other hand, the Departmental Representative submitted that after the period of filing the return was over and, as such, in view of the provision of Section 139 sub clause (5), the assessee was not entitled to file the revised return. It was submitted that in case of delay in filing the return, the provision of sub clause (5) was not applicable to such cases, which were covered u/s 139(4), in view of the fact that section 139(5) merely was restricted to the return which was filed under section 139(1) and (2).

 

Hon`ble high court observed that the benefits of sub clause 5 of Section 139 would not apply to the applications which are filed under section 139(4) of the said Act. Learned counsel appearing on behalf of the appellant had laid much emphasis on the provisions of sub clause 5 and, more particularly, on the last portion which reads as under: “ he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before completion of the assessment, whichever is earlier”. It was contended that in the present case admittedly, the order of assessment was not served on the appellant and, therefore, the provisions of sub clause 5 were clearly attracted in favour of the appellant. We are unable to accept the said submission when sub clause 5 has to be read in context with the other provisions of the said section. In the present case, it is an admitted position where the appellant had not furnished the return within time allotted to him under sub sections (1) and (2) and therefore, his case clearly falls within the provision of section 139(4). Section 139(5) merely stipulates that it is applicable to any person who has furnished the return under sub sections (1) or (2). In the present case, therefore, if the appellant had filed the return in time, and thereafter had filed a rectified return, he could be permitted to do so under the said provision. Therefore, from the aforesaid provisions it can be seen that the Legislature in its wisdom had intended to give the benefits of filing a revised return only to those persons who fall within the four corners of section 139 sub sections (1) and (2) of the said Act. If the legislature had intended to also give the same benefits to an assessee who had not furnished the return within time, it would have said so in sub clause (5). The very fact that sub clause 4 is not referred to in sub clause (5) clearly indicates the intention of the legislature.

 

Held, No revised return can be filed under sub-section (5) of Section 139 in a case where the return is filed under Section 139(4). Once this is so the revised returns filed by the assessee for both the said assessment years were not valid in law and could not have been treated and acted upon as revised returns contemplated by sub-section (5) of Section 139 - which means that Section 153(1)(c) was not attracted in this case.

 

Further Hon`ble high court also didn`t accept the appellant argument that the Apex Court in the case reported in AIR 1996 S.C 1895 had not given any decision on the point of distinction between a revised return and a rectified return. The Apex Court after taking into consideration the view taken by the High Court thereafter had observed that the High Court had drawn a distinction between a revised return and a rectified return and in that context had observed that there may be distinction. The Apex Court, however, clearly has maintained in its conclusion that the rectified return was in fact a new return. It is not possible for us to interpret the judgment of the Supreme Court and come to a conclusion that this point has not been decided by the Apex Court. It is not open for the High Court to interpret the judgment of the Supreme Court. The Apex Court in several cases has deprecated this practice of the High Court in dissecting the judgment of the Apex Court in this manner.

The appellant had not furnished the return within time allotted to him under sub sections (1) and (2) and therefore, his case clearly falls within the provision of section 139(4). Section 139(5) merely stipulates that it is applicable to any person who has furnished the return under sub sections (1) or (2).

Menezes Fernandes Enterprises Vs ITO (HC OF BOMBAY AT GOA)

Dated: 21^st Jan 2013

 

In favor of Revenue

 

The assessee is a registered partnership firm constituted by the partnership deed. The due date for filing of the return was 31/8/1993. The assessee filed its return of income on 30/9/1993 and the said return declared an unabsorbed depreciation to the tune of Rs.2,42,996 for the AY 1993-94. Intimation u/s 143(1)(a) was issued on 21.9.1994 and served on the assessee on 24.11.1994. The assessee claimed to have filed a revised return for the purpose of correcting the mistake in its claim by declaring the amount of unabsorbed depreciation as Rs.4,14,345. The assessee challenged this intimation before the DCIT(A), who directed the assessing authority to consider the revised return in the light of the judgment of Madhya Pradesh High Court and Calcutta High Court. The Revenue challenged this order and filed a Second Appeal before the Tribunal. Initially the Tribunal passed the order dated 12.12.2002 and set aside the order of the DCIT(A) and remanded the matter back to the CIT(A). A review application was filed by the assessee u/s 254 seeking rectification of the order, which was dismissed by the Tribunal.

 

“Whether the Tribunal was justified in holding that the revised return was invalid in law when the said return was filed before the due date for filing the return u/s. 139(4) of the Act and it could be deemed as a rectified return u/s. 139(4) of the Act and not a revised return u/s 139(5) of the Act?

 

Learned counsel appearing on behalf of the appellant submitted that the Tribunal had erred in coming to the conclusion that the return filed was a revised return. He submitted that it ought to have held that the said return was a valid return since it was a rectified return and it was sought before the intimation u/s 143(1)(a) was served on the assessee. It was then contended that the Tribunal had erred in relying on the judgment of the Apex Court in the case reportd in AIR 1996 S.C 1895. He submitted that the Supreme Court had not decided the issue as to the distinction between a revised return and a rectified return. He, therefore, submitted that the ratio of the said judgment could not have been made applicable to the appellant of the present case.

 

Further ld. counsel invited our attention to the Circular No.549 which was issued on 31/10/1989 and which raises a presumption in favour of the revenue. He submitted that even if the said circular was taken into consideration, the benefits of the said circular ought to have been given to the appellant, since admittedly, the order passed under section 143 (1) (a) was not served on the assessee when he filed the rectified return. It was submitted that there was a bonafide mistake on the part of the accountant and the said mistake was sought to be rectified by filing a rectified return.

 

On the other hand, the Departmental Representative submitted that after the period of filing the return was over and, as such, in view of the provision of Section 139 sub clause (5), the assessee was not entitled to file the revised return. It was submitted that in case of delay in filing the return, the provision of sub clause (5) was not applicable to such cases, which were covered u/s 139(4), in view of the fact that section 139(5) merely was restricted to the return which was filed under section 139(1) and (2).

 

Hon`ble high court observed that the benefits of sub clause 5 of Section 139 would not apply to the applications which are filed under section 139(4) of the said Act. Learned counsel appearing on behalf of the appellant had laid much emphasis on the provisions of sub clause 5 and, more particularly, on the last portion which reads as under: “ he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before completion of the assessment, whichever is earlier”. It was contended that in the present case admittedly, the order of assessment was not served on the appellant and, therefore, the provisions of sub clause 5 were clearly attracted in favour of the appellant. We are unable to accept the said submission when sub clause 5 has to be read in context with the other provisions of the said section. In the present case, it is an admitted position where the appellant had not furnished the return within time allotted to him under sub sections (1) and (2) and therefore, his case clearly falls within the provision of section 139(4). Section 139(5) merely stipulates that it is applicable to any person who has furnished the return under sub sections (1) or (2). In the present case, therefore, if the appellant had filed the return in time, and thereafter had filed a rectified return, he could be permitted to do so under the said provision. Therefore, from the aforesaid provisions it can be seen that the Legislature in its wisdom had intended to give the benefits of filing a revised return only to those persons who fall within the four corners of section 139 sub sections (1) and (2) of the said Act. If the legislature had intended to also give the same benefits to an assessee who had not furnished the return within time, it would have said so in sub clause (5). The very fact that sub clause 4 is not referred to in sub clause (5) clearly indicates the intention of the legislature.

 

Held, No revised return can be filed under sub-section (5) of Section 139 in a case where the return is filed under Section 139(4). Once this is so the revised returns filed by the assessee for both the said assessment years were not valid in law and could not have been treated and acted upon as revised returns contemplated by sub-section (5) of Section 139 - which means that Section 153(1)(c) was not attracted in this case.

 

Further Hon`ble high court also didn`t accept the appellant argument that the Apex Court in the case reported in AIR 1996 S.C 1895 had not given any decision on the point of distinction between a revised return and a rectified return. The Apex Court after taking into consideration the view taken by the High Court thereafter had observed that the High Court had drawn a distinction between a revised return and a rectified return and in that context had observed that there may be distinction. The Apex Court, however, clearly has maintained in its conclusion that the rectified return was in fact a new return. It is not possible for us to interpret the judgment of the Supreme Court and come to a conclusion that this point has not been decided by the Apex Court. It is not open for the High Court to interpret the judgment of the Supreme Court. The Apex Court in several cases has deprecated this practice of the High Court in dissecting the judgment of the Apex Court in this manner.

 

Expl. 2 to section 9(1)(vii) - Merely because certificates have been provided by the humans after a test is carried out in a Laboratory automatically by the machines, it cannot be held that services have been provided through the human skills and the payment do not fall in the nature and category of FTS

Siemens Ltd vs CIT

Dated: 12^th Feb 2013

 

The assessee was required to make payment to "Pehla Testing Laboratory" (PTL) located at Germany for carrying out type tests of the circuit breakers manufactured by assessee in order to establish that the design and the product meets the requirement of the International Standards. Pehala Lab is accredited by National Accreditation Board for Testing & Calibration Laboratories (NABL) Germany, which carries out various kinds of tests for circuit breakers and other electronic devices to prove that the designs of the equipment meets the requirements of the international standards. This is a standard service provided by the Laboratory, which is done automatically by machines. For the purpose of the payment for making remittance to PTL, assessee moved an application under section 195(2) before the ADIT. Along with the said application assessee has given a detailed submission and reasons justifying as to why the remittance made to the PTL is not liable to tax in India under the provisions of the Income Tax Act.

 

Assessee submitted that the payment is in the nature of business income of Pehla Laboratory and since it does not have any Permanent Establishment in India, the same is not taxable in India as per the DTAA and as per the provisions of Expl. 2 to section 9(1)(vii), the payment do not fall in the nature and category of fees for technical services (FTS). The main contention in this regard was that it is not a FTS but the payment was purely for standard facility provided by the Laboratory which is done automatically by the machines without any human intervention. In support of this contention, flyer received from PTL, describing the nature and procedure of the testing was filed before the AO.

 

AO, however, rejected the assessee's contentions of assessee on the ground that firstly, type of the services provided by the Pehla Lab is of highly technical in nature and the payment is definitely covered by section 9(1)(vii) and secondly, the Explanation 2 to section 9 which was inserted by the Finance Act, 2007 with retrospective effect 1.6.1976 provides that, where the income is deemed or accrued or arise in India, such income shall be included in the total income of the non resident, whether or not the non resident has a residence or place of business or business connection in India.

 

Before the CIT (A), assessee submitted that this kind of testing certificate is required by assessee for completing the tender formalities in India and for this purpose it had to send circuit breakers, one of the product manufactured by assessee to Pehla in Germany for quality tests. The circuit breakers undergo a destructive test in the Labs and the same are not received back in India. They are sent on sample basis for the purpose of testing only and once it has cleared the test in the Lab, a certificate is issued by the PTL. This test is carried out through the use of sophisticated machines and equipment which impose both high voltage and high current on the circuit breakers to test the resistance. All this is done without human intervention and report is prepared for the test conducted. In this manner, the Pehla Lab does not offer any kind of consultancy services or technical services. This certificate is one of the formalities for completing the tender project in India by the assessee, as the ultimate sale of the product, depend on fulfillment of other tender requirements. It was further submitted that the word "technical services" as appearing in Explanation 2 to section 9(1)(vii) has to be read with the word "managerial and consultancy" which requires and involvement of human element.

 

Ld. CIT observed that Pehla carried out only type testing by using their sophisticated test equipments to impose both high voltage and high currents on the circuit breakers without human intervention and issued reports of the tests conducted" and the 'type testing' services provided by Pehla can by no stretch of imagination be considered as non technical. Moreover, Pehla carried out the said type testing by using their sophisticated test equipments to impose both high voltage and high currents on the circuit breakers and issues reports of the tests conducted which are sent to the appellant in India".

 

 Ld. CIT(A) further analyzed the provisions of section 9(1)(vii) r.w. Explanation 2 and held that firstly, fee payable to Pehla is within the meaning of FTS and secondly, the services received by assessee was utilized in India in the business of assessee and also for earning income from source within India, therefore, it has to be considered that services are rendered in India, hence taxable in India. He further made reference to the Article-12(4) of the Indo German DTAA and held that the definition of FTS given therein is similar to Explanation 2 to section 9(1)(vii) of the Income Tax Act. Regarding other contentions of assessee that testing was carried out, outside India and the payment made to Pehla cannot be charged to tax in India in view of the principles laid down by the Hon'ble Supreme Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408 (SC), he held that the said decision is not applicable after the insertion of Explanation 2 to section 9(1)(vii) with retrospective effect w.e.f. 1.6.1976. He thus upheld the reliance placed by the AO on the CBDT circular No.03 of 2008. Assessee's plea that the payment made to Pehla cannot be taxed in view of Article 7 of the DTAA as Pehla does not have a PE in India was also rejected by the CIT (A) as per the discussion given from Para 5.1 to 5.6. Accordingly assessee's entire contentions were rejected.

 

Whether the payment made to Pehla Testing Laboratories in Germany, for carrying out certain tests on circuit breakers manufactured by assessee for the purpose of certification, so as to meet the international standard, falls within the meaning of fees for technical services and is taxable within the meaning of section 9(1)(vii).

 

ITAT observed that the expression "fees for technical services" has been given as consideration for rendering managerial, technical or consultancy services. No other definition as such of the term technical services in the Act has been given. The word "technical" as appearing in Explanation 2 is preceded by the word "managerial" and succeeded by the word "consultancy". It cannot be read in isolation as it takes colour from the word "managerial and consultancy" between which it is sandwiched. The Courts have held that in such a case principle of noscitur a sociis gets attracted, which means that the meaning of the word or expression is to be gathered from the surrounding word i.e. from the context. Coupling of the words together shows that they are to be understood in the same sense. The word "managerial and consultancy" is a definite indicative of the involvement of a human element. Managerial services and consultancy services has to be given by human only and not by any means or equipment. Therefore, the word "technical" has to be construed in the same sense involving direct human involvement without that, technical services cannot be held to be made available. Where simply an equipment or sophisticated machine or standard facility is provided albeit developed or manufactured with the usage of technology, such a user cannot be characterized as providing technical services.

 

Held, if a standard facility is provided through a usage of machine or technology, it cannot be termed as rendering of technical services. Once in this case it has not been disputed that there is not much of the human involvement for carrying out the tests of circuit breakers in the Laboratory and it is mostly done by machines and is a standard facility, it cannot be held that Pehla Testing Laboratory is rendering any kind of technical services to assessee. In our conclusion, we thus hold that payment made by assessee to the PTL in Germany is not in consideration for rendering of any kind of "technical services" either in the nature of managerial or technical or consultancy services. Therefore, it does not fall within the ambit of section 9(1)(vii).

Kerala Right to Service Act - Notified

On 15^th Jan 2013,  Commissionerate of Commercial Taxes notified the powers conferred under Sec.3 of the Kerala Right to Service Act.

 

Al-28359/2012/CT  dated 20^th December 2012

 

Hereby notify the services that will be rendered by the Commercial Taxes Department of the Government of Kerala, the designated officers, the First Appellate Authorities, the Second Appellate Authorities and the stipulated time limits for the purpose of the said section. The time limit prescribed will commence after all the necessary documents/details, if any, required for providing a service are submitted.

 

Click here to download Notification no. Al-28359/2012/CT

 

Note: Section 3 of the Kerala State Right to Service Act, 2012 [18 of 2012] empowers every Head of Department to notify the designated officers, services that will be rendered by the designated officers, stipulation of time limit for rendering the services, the First Appellate Authorities, the Second Appellate Authorities.

Section 54F is intended to encourage construction of or acquisition of residential house and u/s 54B the assessee must establish that the land was being used for agricultural purpose for a period of two years prior to the date of the transfer

Smt. Asha George vs ITO

Appellant had 1/4th share in 1.10 acres of land in Ayyanthole Village. The same was sold for Rs. 44 lakhs on 14.11.2004. The assessee received Rs.11 lakhs as her share. In her return, she computed her capital gain at nil after claiming indexation on cost of acquisition and cost of improvement and further claiming exemption under Section 54F on the basis of a property purchased at Koothattukulam, a farm house with 1.92 acres of land for Rs.11 lakhs on 28.3.2005. During the course of the assessment proceedings, the appellant took up the contention that she is entitled to exemption under Section 54B of the Act. The tribunal has arffirmed the findings of the authorities that the appellant is not entitled to the benefit of Section 54B for the reason that the property at Ayyanthole Village which she sold was not used for agricultural purposes for a period of two years prior to the date of the sale as required under Section 54B of the Act. It is the further finding of the tribunal that the appellant is entitled only to take Rs.2 lakhs as the cost of acquisition over and above Rs.1 lakh allowed as value of super-structure under Section 54F of the Act.

Aggrieved by the order of ITAT, appeal before Hon`ble High court.

Whether the sale proceeds of the land at Ayyanthole were within the scope of Section 54B of the Income Tax Act  and subsequent purchase of land (at Koothattukulam) in which a farm house is situated satisfied the requirements of Section 54F and/or Section 54B and thus there was no liability to pay any long term capital gains tax on the sale of land at Ayyanthole, in the Assessment Year 2005-06 ?”.

Before high court assessee submit that the approach of the tribunal in denying the benefit of the exemption under Section 54B is unsupportable. There were materials before the authorities indicating that the land at Ayyanthole was indeed being put to agricultural use for a period of two years. In this regard, he drew our attention to certain photographs showing coconut trees. He also relied on the receipt for the water cess. Further more, he drew support from the certificate of the village officer. It is further pointed out that a receipt was produced from the Electricity Board and it was contended that the connection was an agricultural one. He would point out further that the tribunal and the authorities have taken into consideration irrelevant facts. In this regard, he would point out that the fact that the purchaser of the property at Ayyanthole had converted the land and an apartment complex was set up, should not have weighed with the authority in denying the benefit under Section 54B of the Act. The assessing officer also finds that it cannot stand to reason that an agricultural property lying right under the nose of the District Administration could be converted into a commercial complex without any issues. According to the appellant, what is relevant is the use to which the land was put as provided. Still further more, he would submit that the fact that the appellant had not originally set up the claim under Section 54B could not disentitle her from claiming the benefit under Section 54B, if it is otherwise available. It is further contended that the authorities have been influenced by the fact that no agricultural income from the property at Ayyanthole was returned. The finding of the authorities is that neither the appellant, nor her family members have shown any agricultural income in their returns. It is stated that her father was stated to be a business man dealing in supply of meat to the zoo and the mother, a Nurse by profession who earns income from salary and, therefore, they ought to have disclosed agricultural income, if there was any, in their returns.

Further it was also as far as the land at Koothattukulam along with the farm house admeasuring 1 acre 92 cents is concerned, the finding of the tribunal estimating and limiting the value of the plot on which the farm house is located and the value of the land appurtenant thereto and thus the estimating the value of the plot and the land at Rs.2 lakhs and allowing the same in addition to the value of the super structure, may not be the correct view. He would submit that the farm is connected with the enjoyment of the house being an integral part and, therefore, the value of the entire land should have been considered.

On behalf of revenue it was contend that the findings of the tribunal are unexceptionable. No substantial question of law has been made out. He would point out that a perusal of the substantial questions of law would show that there is no substantial question of law raised that the findings rendered are perverse so as to warrant interference under Section 260A of the Act. He would further contend that no reliance can be placed on the photographs. The photographs were not even produced before the assessing officer. The order of the assessing officer is dated 10.12.2009 and it is only before the appellate authority that some photographs were produced. There is no material to indicate as to whether the photographs related to the property in question. He would also reiterate that the conduct of the appellant in not raising the claim under Section 54B of the Act may be borne in mind and the claim under Section 54B of the Act is only raised as an after-thought.

 

Hon`ble high court observed that the order of assessment that the appellant’s late father had applied for sanction for construction of a compound wall before the Thrissur Urban Development Authority. The appellant had claimed in the return, exemption on the basis of Section 54F of the Act. But, during the assessment proceedings, the appellant relied on Section 54B of the Act. In other words, initially the appellant even did not have a case that the land at Ayyanthole was used for agricultural purposes. A perusal of the order of assessment would show that the appellant had produced tax receipt of property and a receipt from the KSEB. The opening and closing meter reading, as per the receipt, is the same. It is also found that tax receipt does not throw light on the nature of the property. It does not say that the tax is levied in respect of agricultural property. The agricultural income been declared in the return, it would have been a circumstance to assist the authorities to conclude that the appellant is entitled to the benefit of Section 54B of the Act. It is true that for the applicability of Section 54B, what the purchaser of the land does with it, may not be relevant. If he puts a land falling under Section 54B of the Act for a non-agricultural use, that cannot be a circumstance to deprive the previous owner of his right to claim under Section 54B of the Act. Equally, the emphasis under Section 54B is the use to which the land is put (In fact, the tribunal has correctly held that it is the user of the land and not the nature of the land that is relevant). In other words, it is not necessary that the land which is transferred, must be an agricultural land as such. The fact that the land is located in an urban area, cannot by itself be relevant to deny the benefit under Section 54B. What is essential is that it must be used for agricultural purposes for a period of two years prior to the date of the transfer.

 

Further the property in the hands of the purchaser was used for putting up an apartment complex. Therefore, we cannot certainly blame the officer for not conducting any inspection. At least, the appellant has not posted us with sufficient materials with reference to which we could have formed an opinion that the nature of the property continued to be such that the officer could have conducted an inspection. The photographs were, no doubt, produced before the appellate authority. But, as rightly pointed out by the learned counsel for the Revenue, the photographs, we must remind ourselves, could be relied on only if it is established that it related to the property. Therefore, it may not be safe for us to overturn a finding of fact in a proceeding under Section 260A of the Act which is premised on a substantial question of law being made out. The other material produced by the appellant before the assessing officer appear to be a self-defeating act, as the receipt of the electric connection, though shown to be for agricultural one, related to the meter which reveals that the opening and closing reading is the same. We must remind ourselves that the requirement of Section 54B of the Act is that the assessee must establish that the land was being used for agricultural purpose for a period of two years prior to the date of the transfer. Certainly, this material does not in any way establish the said facts.

 

As far as the certificate issued by the Agricultural Officer, a copy of which was handed over to us is concerned, we notice that it is seen issued in the year 2012. We do not know on what basis the officer could have given such a certificate. Admittedly, the land was already converted for the construction of an apartment complex. We must also remind ourselves that unlike the decision reported in CIT v. Smt. Savita Rani, where one of the materials was the inclusion of agricultural income in the return, there is no such return filed. At any rate, we cannot on a re- appreciation of all these materials, overturn the findings of facts entered by the tribunal. Unless the finding of fact is perverse or contrary to the weight of the evidence, the law does not permit us to re-appreciate the evidence and interfere. It is no doubt true that no substantial question of law about the finding be perverse is raised. We do not doubt our power to frame an additional substantial question of law, provided one such question arose. But, we are not inclined to think that the finding of fact rendered under Section 54B is perverse. We therefore repel the case under Section 54B of the Act.

 

Further as contended that the officer should have granted, at any rate, the benefit of exemption under Section 54F of the Act in regard to the value of the property, namely the officer should have deducted the entire Rs.11 lakhs paid for purchasing 1 acre 92 cents with the farm house.

 

Hon`ble High court observed that Section 54F is intended to encourage construction of or acquisition of residential house with the aid of the proceeds from the transfer of any long term capital asset, which is not a residencial house. The provision contemplates computing the cost of the residential building, but the value of the plot on which the farm house stands and the land appurtenant could also be considered. The tribunal has categorically found that the appellant has not produced material to show that the entire area of 1.92 acres should be considered as land appurtenant to it. It is in such circumstances, the tribunal made an estimation and directed that the value of the plot on which the farm house is located and the land appurtenant be fixed as Rs.2 lakhs. We are unable to accept the contention of the appellant that the value of the entire land must be considered in arriving at the value of the residential building. We find no illegality committed by the tribunal. It is not open to the appellant to invoke Section 54B of the Act in regard to the rest of the land at Koothattukulam. This is for the reason that the appellant has not been able to satisfy the requirements of Section 54B as already noted by us in regard to the land at Ayyanthole. Therefore, at any rate, there can be no basis for invoking Section 54B of the Act for deducting the value of the land purchased at Koothattukulam. Therefore, we reject the contention of the appellant.

Expl. 3 to Section 147 added w.e.f. 01.04.2009 with retrospective effect from 01.04.1989 was meant to be merely clarificatory in nature and was introduced with the purpose of putting at rest the legal controversy regarding the true interpretation of Section 147 of the Act which had arisen on account of certain judicial pronouncements

CIT vs Mohmed Juned Dadani

Dated: 29^th Jan 2013

 

"Whether the Income-tax Appellate Tribunal was right in law in coming to the conclusion that when on the ground on which the reopening of assessment is based, no additions are made by the AO in the order of assessment, he cannot make additions on some other grounds which did not form part of the reasons recorded by him."

 

On appeal before Hon`ble HC the Ld. DR on behalf of revenue contended that Tribunal committed a grave error in interpreting the provisions contained in Section 147 of the Act. He submitted that Section 147 of the Act, as amended w.e.f. 01.04.1989, gives ample authority to an AO  to assess or reassess any income chargeable to tax which has escaped assessment, of course, as long as the requirements of a valid reopening of the assessment are satisfied. In other words, according to the learned counsel, once an assessment is reopened, by virtue of valid exercise of powers under Section 147 of the Act, thereafter, there would be no further limitation on the AO  framing assessment on all or any of the grounds mentioned in the reasons recorded or even on the grounds not so mentioned.

 

Further Ld. DR also submitted that this position was clear even before Explanation 3 to Section 147 of the Act was added w.e.f. 01.04.2009 with retrospective effect from 01.04.1989. In any case, by virtue of such explanation being introduced in Section 147, the issue has been put beyond any pale of controversy. Ld. DR relied on a decision in case of Majinder Singh Kang.

 

On the other hand, ld. counsel for assessee drew our attention to the statutory provisions contained in Section 147 of the Act, as amended w.e.f. 01.04.1989, and the explanatory memorandum clarifying the background in which Explanation 3 to Section 147 of the Act was enacted. He submitted that Section 147 of the Act, prior to introduction of Explanation 3, permitted the AO  to assess or reassess any income chargeable to tax which had escaped assessment and also any other income which had escaped assessment and which came to the notice of the AO  subsequently in the course of the proceedings for reassessment. He submitted that the words "and also any other income" must be understood as to be referring to such income which has escaped assessment but the ground which has not been mentioned in the reasons recorded, in addition to income which has escaped assessment and for which mention has been made in the reasons recorded. He submitted that Explanation 3 to Section 147 of the Act did not change this basic proposition, nor it was meant to do so as would be clear from the explanatory memorandum explaining the reasons for introduction of the said explanation.

 

Further it was also submitted that power to reopen the assessment which has been previously closed is peculiar in nature and is available to the AO  which is not normally available to an officer exercising judicial or quasi judicial powers. Such powers, therefore, must be strictly construed, authorizing an AO to assess income under any head even if the same was not part of the reasons recorded for reopening of the assessment, would give wide powers which are possible of arbitrary exercise.

Counsel lastly submitted that for an AO  to assess income on any ground not mentioned in the reasons recorded, it is essential that there is a valid reopening of assessment. If the grounds, on which the reopening of the assessment fails, there would thereafter be no longer a valid reopening of an assessment in which the AO  can make any additions on some other grounds. Reliance was placed on Commissioner of Income Tax v. Jet Airways (I) Ltd

Whether introduction of Explanation (3) to Section 147 would change this position and for that purpose we need to ascertain what is true purport of Explanation 3 and the purpose for which the same was introduced.

Hon`ble high court observed that  “Explanation which provides that for the purpose of assessment or reassessment under the said section, the AO  may assess or reassess the income in respect of any issue which escaped assessment and which comes to his notice subsequently in the course of reassessment proceedings. The explanation further provides that this would be so notwithstanding that the reasons for such issue have not been included in the reasons recorded under Section 148(2)”

If the contention of the assessee that even after introduction of Explanation 3 to Section 147 of the Act, the situation has not undergone any material change is accepted, the question that immediately would come to one's mind is, what then was the purpose of introducing such an explanation. An argument may arise that if before and after introduction of Explanation 3, the nature of jurisdiction exercised by the AO  was not to undergo any change, would Explanation 3 not be rendered redundant. Would such a situation not run counter to a well known legal principle that the Legislature cannot be seen to have enacted a redundant legislation and that every effort should be made to give such interpretation which ensures that a provision in a statute is not rendering otiose. Such question may have led to some interesting discussion. However, the entire issue has been put beyond any pale of controversy by virtue of the explanatory memorandum for introducing such explanation.

 

“The explanation was meant to be clarificatory in nature and to put the issue beyond any legal controversy. When the Legislature found that in face of the provisions contained in Section 147 of the Act post 01.04.1989 some of the courts had taken a view that the AO  is restricted to the reassessment proceedings only on issues in respect of which the reasons were recorded for reopening the assessment, such explanation was introduced in the statute. Thus, the explanation was meant to be merely clarificatory in nature and was introduced with the purpose of putting at rest the legal controversy regarding the true interpretation of Section 147 of the Act which had arisen on account of certain judicial pronouncements. We have noticed that prior to enactment of Explanation 3 to Section 147, in case of Commissioner of Income Tax v. Atlas Cycle Industries had taken a restricted view of the power of the AO  to make any addition on the grounds not mentioned in the reasons recorded for reopening the assessment. We may also notice that in case of Travencore Cements Ltd. v. Assistant Commissioner of Income-Tax and anr had taken somewhat similar stand.

 

Explanation 3 to Section 147 of the Act thus does not in any manner, even purport to expand the powers of the AO under Section 147 of the Act. In any case, an explanation cannot expand the scope and sweep of the main body of the statutory provision. In case reported in AIR 1985 SC 582 the Supreme Court observed that, an explanation added to a statutory provision is not a substantive provision but as the plain meaning of the word itself shows it is merely meant to explain or clarify certain ambiguities which may have crept in the statutory provision.

 

Held, except in the case of Majinder Singh Kang vs CIT, all courts have uniformly taken a view that Explanation 3 to Section 147 of the Act does not change the situation insofar as the present controversy is concerned. Leading decision of in case of CIT. v. Jet Airways (I) Ltd. has been followed by different High Courts. In case of CIT. v. Jet Airways (I) Ltd., the High Court, in its elaborate decision considering the statutory provisions, different judicial pronouncements and the explanatory memorandum for introduction of Explanation 3 to Section 147 of the Act ruled in favour of the assessee.

In case of Majinder Singh Kang v. Commissioner of Income-Tax and anr of course has sounded a different note. We may, however, notice that the explanatory memorandum to Explanation 3 to Section 147 of the Act was not brought to the notice of the High Court in the said decision. The High Court gave considerable importance on such Explanation 3 to Section 147 of the Act and the language used therein.

Though back-up services and IT support services for solving IT related problems to its Indian subsidiary are in the nature of technical services, but is not covered in para (3)(g) to Article 12 of the India Australia Treaty

Sandvik Australia Pty. Ltd vs DDIT

 

The assessee is a non-resident company incorporated in Australia. During scrutiny AO observed that assessee received the payment from Sandwich Asia Ltd., from Walter Tools India Pvt. Ltd. The A.O. has noted that the assessee gives the IT support in Asia pacific region which was introduced in order to achieve the consolidated and standardised IT environment in Sandvik Group. The services provided by the assessee are in the nature of Help Desk, administrative and maintenance IT support and therefore, concluded that as per the agreement the assessee is not only providing the basic IT services such as help desk support, by supporting Sandvik IT personnel but much more than that which is IT infrastructure to those facilities. The A.O. has also observed that the assessee is also charging payments from its affiliates for providing the infrastructure which is evident from the copy of the invoices submitted by the assessee. AO also referred to section 5(2) r.w.s. 9(1)(vi) and section  9(1)(vii) and concluded that the services rendered by the assessee company to its group companies in India i.e. Notes Domino Administration, SBS, Windows operations, network infrastructure, global server, and AS400 data processing are services in the nature of technical services and payments made for those services get covered under the fees for the technical services.

 

Assessee claimed that said payment is not received to make available technical knowledge, skill, knowhow or process and the same do not fall within the ambit of royalty under Article 12 of the Treaty (DTAA) between India and Australia. Assessee also contended that as assessee is not having any Permanent Establishment (PE) in India, the said income is not taxable. Assessee also contended that the services rendered by it are in the nature of IT support services. The assessee opposed the conclusion of the A.O. that the services rendered to Indian affiliates are in the nature of technical services by taking the stand that the payment for the services rendered by the assessee is not in the form of the royalty income and nor it is FTS. Assessee further contended that assessee has not made available any technical knowledge, experience, skill and know-how. The assessee also relied on the decision in the case reportd in (2006) TaxCorp (INTL) 2220 (ITAT-MUMBAI) and  (2001) TaxCorp (INTL) 2002 (HC-MADRAS).

 

The A.O. did not accept the contention of the assessee that the services rendered by the assessee are not the technical services and hence the payment received by it from its Indian affiliates cannot be treated as FTS. The A.O. also held that so far as the taxability of the payment received by the assessee from its Indian affiliates is concerned, the same is taxable u/s.9(1)(vii) of the Act as assessee cannot get the benefit even under the Treaty.

 

The Dispute Resolution Panel (DRP) confirmed by the AO that the amount received by the assessee from its Indian affiliates are taxable in the normal provisions of the Act u/s.5(2) r.w.s. 9(1)(vi) and 9(1)(vii) of the Income Tax Act, 1961 as well as same is taxable in view of the Article 12 of the DTAA between India and Australia.

 

Whether payments for IT support services are taxable as FTS in India under Article 12 of the tax treaty?

 

On appeal before ITAT, submitted that the assessee acts as a global information technology support centre for the Asia-pacific region and is responsible for providing necessary IT support services for Sandvik Asia Ltd. in Asia-pacific region. He submits that assessee company has installed servers in various locations in Asia-pacific region i.e., Singapore, Malaysia, China, Japan, Korea, India, etc., and the regional servers installed at various locations are part of global infrastructure maintained by the assessee. He submits that there are two servers located in India, one is at Mehsana(Gujarat) and another is in Gurgaon. He submits that the services rendered by the assessee company do not make available any technical knowledge, skill, know-how or process to the recipients and they do not fall within the ambit of the royalties under Article 12 of the Treaty. He submits that even it is not the case of the A.O. also that the payments received by the assessee company is in the nature of the royalty though he has mentioned royalty/FTS in the draft order as well as in the final order. He submits that so far as taxability of the payments received by the assessee from the Indian affiliates, the same is taxable under the normal provisions of the Act more particularly under sec.9(1)(vi)/9(1)(vii) but in view of the DTAA between India and Australia, unless and until the technical knowhow is made available the same cannot be taxed in India. He submits that the nature of the services has been elaborated in the agreement between these two parties, the assessee and Sandvik Asia Ltd.

 

Futhe, thrust of the argument is that assessee is only rendering IT support services but is not imparting any technical knowhow or knowledge to its Indian affiliates and unless and until the technical know-how is imparted, the same cannot be taxable in India in view of the DTAA more particularly Article 12. Ld. Counsel took us to Article 12 of the India Australia Treaty more particularly sub-para 3(g) and submits that it is clear from the language used in the Treaty that unless the services are made available to the person acquiring the services, the same cannot be taxed in the contracting State. He placed his reliance on the decision of the Hon'ble High Court of Karnataka in the case reported in (2012) TaxCorp (INTL) 0214 (KARNATAKA). Finally he concluded that there is a difference between rendering the services and to make available the services.

 

Where as on behalf of revenue it was contended that  taxpayer was not only rendering the back-up IT support services but also transferring knowledge of the said services to the recipient party. Referring to Article 12 of the tax treaty it was contended that consideration received by the taxpayer from the Sandvik Asia Ltd was nothing but royalty.

 

ITAT observed that Clause (g) in Article 12(3) goes to the roots of the issue. Main thrust of the argument of the Ld. Counsel is that it is not only sufficient to render the services but the same should be made available to the recipient and this particular important aspect is missed by the DRP/TPO. We find that the expression “making available” is very much important to decide in which contracting state the amount received for rendering the services relating to the technical know-how is to be taxed. The expression “make available” is used in the context of supplying or transferring technical knowledge or technology to another. It is different than the mere obligation of the person rendering the services of that persons own technical knowledge or technology in performance of the services. The technology will be considered as made available when the person receiving the services is able to apply the technology by himself.

 

The technology will be considered ‘made available’ when the person who received service is enabled to apply the technology. The service provider in order to render technical services uses technical knowledge,  experience, skill, know how or processes. To attract the tax liability, that technical knowledge, experience, skill, know how or process which is used by service provider to render technical service should also be made available to the recipient of the services, so that the recipient also acquires technical knowledge, experience, skill, know how or processes so as to render such technical Services. Once all such technology is made available it is open to the recipient of the service to make use of the said technology. The tax is not dependent on the use of the technology by the recipient. The recipient after receiving of technology may use or may not use the technology. It has no bearing on the taxability aspect is concerned. When the technical service is provided, that technical service is to be made use of by the recipient of the service in further conduct of his business. Merely because his business is dependent on the technical service which he receives from the service provider, it does not follow that he is making use of the technology which the service provider utilizes for rendering technical services. The crux of the matter is after rendering of such technical services by the service provider, whether the recipient is enabled to use the technology which the service provider had used. Therefore, unless the service provider makes available his technical knowledge, experience, skill, know how or process to the recipient of the technical service, in view of the Clauses in the DTAA, the liability to tax is not attracted.”

 

Held, the assessee has only provided the back-up services and IT support services for solving IT related problems to its Indian subsidiary. Hence, unless and until the services are not made available, same cannot be taxable in India. We therefore hold that the services rendered by assessee company to its Indian group companies, though are in the nature of technical services, but is not covered in para (3)(g) to Article 12 of the India Australia Treaty and hence, the same is not taxable in India. We also hold that the amount received by the assessee cannot be treated as a Royalty even under the normal provisions of I.T. Act. But under the normal provision of the I.T. Act the same constitute consideration for rendering the technical services covered u/s.9(1)(vii) of the I.T.Act.