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.

 

Whether input tax credit can be claimed on purchase of inputs such as pesticides, fertilizers, manure etc., for raising coffee, pepper, arecanut, cardamom, etc., and selling the same ?

M/s. Anaparai Estates Limited In re

Dated: 28^th November 2012

 

Whether input tax credit can be claimed on purchase of inputs such as pesticides, fertilizers, manure etc., for raising coffee, pepper, arecanut, cardamom, etc., and selling the same ?

 

Held, the Applicant is not entitled for the claim of input tax credit on the purchases of pesticides, manure, chemicals, fertilizers, etc., which are used in the cultivation and growing of coffee, pepper, arecanut, cardamom plantation as the said activity is only an agricultural operation and it cannot be termed as "business" activity,

Advance Ruling authority found assessee contention was untenable and unsustainable for the following reasons:

(a) It is an undisputed fact that the Applicant is not only involved in the cultivation of coffee, pepper, arecanut, cardamom, etc., plantation grown on their land but also engaged in the manufacture and sale of some of the produces obtained out of such plantation owried by the Applicant. For the purposes of enriching the soil and plant-growth promoted by the-Applicant in the growing of plantation, the Applicant has purchased fertilizers, chemicals, manure, pesticides, etc.', from local registered .dealers by paying VAT on such purchases and used the same in the course of growth of coffee, pepper, arecanut and cardamom plantation. After obtaining coffee, pepper, arecanut, cardamom from  the' plantation,  the  Applicant has  undertaken  processing /manufacture of coffee, pepper, arecanut, cardamom which are commercial  commodities for the purposes of sale in the course of its business activity. At this stage we deem it appropriate to reproduce the definition of  "Agricultural produce or horticultural.produce" as defined under Section 2(3) of the KVAT Act, 2003, which reads thus:     

"(3) Agricultural produce or horticultural produce  shall not be deemed to include tea, beedi leaves, raw cashew, timber, wood, tamarind and such produce, except coffee as has been subject to any physical chemical, or other process for being made fit for consumption, save mere cleaning, grading, sorting or  drying."

From the reading of the above definition it is obvious that the deeming provision does not include pepper, arecanut, cardamom with the exception of coffee as has been subject to any physical chemical or other process for being bade fit for consumption, save mere cleaning, grading, sorting or drying. In other words, these goods are regarded as agricultural produce for the purposes of KVAT Act, 2003 with the exception of further processing done to raw coffee obtained as enumerated above. No doubt, coffee, pepper, arecanut and cardamom cultivated and grown by the agriculturist or by any person in his plantation is a 'agricultural produce', but-coffee is kept out of the above said definition by deeming prevision for the reason that trfe raw coffee cannot be sold by the agriculturists/or person as the same is required to undergo manufacturing / processing activity in order to make it suitable and fit for human consumption and marketing, purpose. . For better clarity, the Legislature has inserted Explanation 4(a) and 4(b) to Section 2(2) of the KVAT Act, 2003 as per' which when an agriculturist who sells exclusively agricultural produce grown on land cultivated'by him personally has been kept out of the purview of the definition of 'dealer' and where the agriculturist is a company and is selling coffee, pepper, arecanut and cardamom is deemed to be a dealer in respect of turnovers relating to sales of such produce. The provisions of Explanation ,4(b) referred to. above defines "dealer" in relation to turnovers of sales of such produce. In: order to understand the implication of the above definition to the facts; of the case of the Applicant before us, it would be appropriate to reproduce the Explanation 4(a) and 4(b) annexed to Section 2(12) of the KVAT Act, 2003, which reads thus:

"Explanation (4)(a) - An agriculturist who sells exclusively agricultural produce gown on land, cultivated by him personally or a person who is exclusively engaged in poultry farming and sells the products of such poultry farm shall not be deemed to be a dealer within the meaning of this clause;

(b) Where the agriculturist is a company and is selling pepper, arecanut, cardamom, rubber, timber, wood, raw cashew or coffee grown«on land cultivated' by it personally, directly or otherwise, such company shall be deemed to be a dealer in respect of turnovers relating to sales of such produce."

The provisions, of Section 2(12) of the KVAT Act, 2003 defines the word "dealer". However, on a con-joint reading of the definition of agricultural produce or horticultural produce as defined under Section 2(3) of the KVAT Act, 2003 along with Explanation 4(a) and 4(b) annexed to the provisions of Section 2(12) of the KVAT Act, 2003, a conclusion is obvious that a Company incorporated  under the Companies Act, 1956 and carrying on agricultural operations to grow crops like pepper, cardamom, rubber, timber, wood, raw cashew or coffee for sale or such produce, is a dealer for the purposes of KVAT Act, 2003.

(b) In the case of the Applicant before us, there is no dispute that the Applicant is not only engaged in the growing of various plantation which are consisting of minor and major crops but also engaged in the processing of raw coffee  obtained  from  such  plantation which  is used  put  to  any physical chemical or other process for being made fit for consumption,  save mere cleaning, grading,  sorting or drying along with other ingredients to obtain finished coffee which its sold as a commercial commodity.   The main business activity of the Applicant is to sell these goods which  are  obtained out of cultivation and growth of minor and major crops.  Thus there are two activities involved in the case of the Applicant,   Firstly, the Applicant is engaged in the activity of growing of coffee, pepper, arecanut, cardamom plantation which constitutes agricultural activity and the second is processing and sale of these goods from the plantation grown by the Applicant.  Both these activities are independent and distinct in nature. For the purposes of-carrying on the agricultural activity of growing of coffee, pepper, arecanut, cardamom plantation,  the Applicant has purchased inputs viz.,  pesticides,  fertilizers, manure,   chemicals,   etc.,   from   local   registered   dealers   and   used   for   the enrichment of the soil and growth of the coffee, pepper, arecanut, cardamom plantation.

(c)   The word "agriculture" is also defined under Section 2(1) of the KVAT Act, 2003. The word agriculture is understood to mean the cultivation of the field which involves tilling of the land, sowing of the seeds, planting and similar operations on the land. These are the-basic operations and would require the expenditure of human skill and labour upon the land itself. However, there are other operations which have got to be resorted to and which are absolutely necessary for the purpose of effectively raising, the produce from the land. They are operations to be performed after The produce, sprouts from the land, namely, weeding, digging the soil around the growth, removal of undesirable undergrowth, and all operations which foster the, growth and preserve the same not only from insects and pests but also from depredation from outside, tending, pruning, cutting, harvesting and rendering the produce fit for the market. One cannot dissociate the basic operations from the subsequent operations and say that the subsequent operations, even though they are divorced from the basic operations can constitute agricultural operations by themselves. With this background in view, we have to move on to the definition of agricultural produce as reproduced elsewhere in this order. The definition itself gives recognition to the fact that any produce, in order, to be marketable and fit for human consumption, must undergo some primary processing. The Hon'ble Supreme Court in the case of Commissioner of Sales Tax, Lucknow V/s. D.S. Bist and others in their-decision reported in AIR 1979 SO 169 has" observed that "almost every kind of agricultural produce has to undergo some kind of processing or treatment by the agriculturist himself in his farm or elsewhere in order to bring them to a condition, of non-perishability and to make them transportable and marketable" and that the mere fact that in the case of a particular produce the process is a bit longer or even a bit complicated will not rob the produce of its character of being an agricultural produce.

(d) The word "business" is defined under Section 2(6) of the KVAT Act, 2003, to mean;

"(a)Any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, whether or not such trader-commerce, manufacture, adventure or concern is carried on in furtherance of gain or profit and whether or not any gain or profit accrues there from; and

(b) Any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern."

From the above definition it is clear that the activity of producing agricultural produce is not regarded as business activity. When there is no business activity insofar as the agricultural produce is concerned, the purchases made for plantation growth by the Applicant does not fall within the meaning of "business" as defined under Section 2(6) of the KVAT Act, 2003. Further, the activity of growing of coffee, pepper, arecarrat and cardamom plantation and obtaining goods out of such plants would not amount to manufacture or processing so as to say that it is incidental or ancillary to the business activity of the appellant of manufacturing and selling of coffee, pepper, arecanut, cardamom, etc.,. The growing of coffee, pepper, arecanut, cardamom, etc., plantation is only am activity of cultivation of agricultural produce and the final products produced out of such plantation is an agricultural 'produce which does not answer to the description' of "manufacture" or "processing" of finished commodities. In this connection it would be of relevance to refer to the judgment of the Hon'ble-Supreme Court in the case of IVl/s. Travancore Tea  Estates- Co. Ltd., V/s. State of Kerala reported in 1976 AIR 2469, wherein the Apex Court at the fag end.of the judgment has rule.d as under:

".....Cultivation and  growth of tea plants no "doubt results in the production of raw. material in the form of green tea leaves which are ultimately processed into tea meant for Sale, but cultivation and growth are in the very nature of things prior to the manufacturing process and do not answer to the description of manufacture and processing of tea meanttbr sale. 'There is a vital difference between an agricultural operation and a manufacturing process, and the same should not be lost sight of. What is needed for being used purely in an agricultural operation cannot be held, to be goods required for use in a manufacturing process....,...,..."

Even in the case of the Applicant, the cultivation and growth of coffee, pepper, arecanut, cardamom plants no doubt results in the production of raw form of these goods which are ultimately processed into finished form of coffee, pepper, arecanut, cardamom meant for sale subsequently. This; cultivation and growth are in the very nature of agricultural operations prior to the manufacturing process  and  therefore   the  pesticides, chemicals, manure, fertilizers, etc., purchased by the Applicant is used prior to the manufacturing process and with the use of these inputs what is obtained is agricultural produce whichjis not' a commercial commodity so as to be eligible to claim, input tax credit on such purchases. Therefore, the purchases of chemical?, fertilizers, manure, etc., are not in the course of its business activity but for the purposes' of' . agriculture activity which does not fall within the meaning of "business". In addition to this "factor,; the Applicant'is not.paying any output tax on the "raw coffee, pepper, ^arecanut,, cardamom" obtained out of cultivated and grown plantation so as to hold that the Applicant is eligible for input tax credit on the purchases-of fertilizers, manure, chemicals, etc., used for growing of coffee, pepper, arecanut, cardamom, etc., plantation.

(e) The issue at dispute has already been dealt with by the Hon'ble High Court of Karnataka in their recent judgment dated 16.8.2012 rendered in the case of M/s.Balanoor Plantations and Industries Ltd., v/s. State of Karnataka and others in W.P.No.5739/2011 & W.P.Nos. 18322-332/2012 and others.   At para 36 and 37 of the said judgment,' it has been succinctly ruled as under:

"36. But, in the instant case, petitioners seek to claim deduction of input !tax for having purchased agricultural machineries, motor car, fertilizers and chemicals on the ground that they are purchased by them for use in their business which includes growing of and maintaining tea plantation apart from processing and manufacturing tea. This contention cannot be accepted. Fertilizers and Chemicals or for that matter agricultural machineries, such as tractors, trailers, transformers^ motor car, pump sets and electrical goods, which are used for tea cultivation cannot be regarded as goods falling within the definition of the term 'input' for the purpose of the business of the petitioners, which in the instant case is manufacturing and processing of tea for the sale of which output tax is claimed. The 'output tax', in the instant case, is not claimed on the sale of tea leaves, on the other hand, the output tax is paid on the sale of manufactured tea. Therefore, the business of the dealer for the purpose has to be understood confining it to the manufacturing process resulting in production of tea and any transaction in connection therewith or incidental or ancillary to it. Viewed in this background, even though the petitioners are engaged in cultivating tea plantation and in growing tea leaves, this cannot be regarded'as business and has no relevance for the purpose of granting input tax credit to the inputs used by way of purchase of fertilizers, chemicals etc., in the course of cultivation of tea.

37. The expression 'business' used in Section 2(6), in this background, cannot be stretched to include the tea plantation and cultivation by the dealer for the purpose of claiming a input tax credit. Therefore, fertilizers, chemicals, pesticides and other agricultural machineries, which are used for 'the purpose of growing tea leaves cannot be termed as goods purchased by the petitioners in the course of their business in manufacturing processing or packing of tea produced by them or storing of other goods or any other use in that business........

This judgment applies in all force to the facts of the case of the Applicant before us.   In addition to this, the Commissioner of Commercial Taxes, Karnataka, Bangalore, in his Proceedings bearing No.CLR.CR.83/09-10 dated 22.11.2010 has clarified as under: 

"12. In the circumstances, the. petitioner's activity relating to raising or growing of tea plants is an agricultural activity and any transaction relating to it does not attract any of the provisions of the KVAT Act.

13. In view of the above position of law, it is clarified that the tax paid on fertilizers, chemicals, manures, pesticides etc, 'for use in cultivation of tea crop, is not eligible for deduction from the output tax* payable by the applicant under the Karnataka Value Added Tax Act, 2003."

(f) Now, we analyze the- judgments relied upon: by the Applicant in support of their contention and we. express our opinion about the applicability or otherwise of the said judgments to the facts of the case of, the Applicant before us.

(i)    The judgment of Hon'ble High Court of Karnataka in the case of  M/s. Diwan Bahadur S.L. Mathias & Sons V/s. State of Karnataka & Others reported in 2010-11 (15) KCTJ 39 in no way helps the Applicant's case as the Hon'ble High Court did not express its opinion on the issue before it instead the matter was repored to the Commissioner of Commercial Taxes for passing speeding order. Hence pursuant to remand by the High Court, the Commissioner has drawn the proceedings dated 22.11.2010 referred to above holding that no input tax credit is applicable in respect of purchases of fertilizers, manure, chemicals, pesticides, etc., used for cultivation of tea. Hence;- this judgment is of no help to the appellant.

(ii) In the case of Commissioner of Sales Tax V/s. Jaswant Singh Charan reported in 19 STC 469, the Apex Court has referred to the judgment rendered in the case of K.V. Varkey v. Agricultural Income Tax; and Rural Sales Tax officer, Peelmedu and others wherein it is held that tea leaf and tea powder is one and the same commodity. This decision was rendered on the basis of definition of turnover in Section 3 of the Travancore General Sales Tax Act which while including sales of agricultural or horticultural produce included tea, coffee, rubber etc., in the turnover. This judgment in no way supports the stand of the Applicant as it  was decided  on the basis of the words and phrases prevailed under the relevant statute and on the basis of non-occurrence of word "tea" in the statute. But under the KVAT Act, 2003, the definition of agricultural produce or-horticultural produce is very well defined to include tea. Hence this judgment is also, of no relevance to the facts of the case of the Applicant.

(iiiJ In the case of  M/s. Girdharlal Jaiwanlal Vs. The Assistant Commissioner of Sales Tax (Appeals), Nagpur and another reported in 8 STC 732, the Bombay High Court held that an agriculturist may sell the produce from his lands but, his activity cannot be regarded as a business of sale or supply of agricultural produce. 'Even under the KVAT Act, 2003, the agriculturist producing the agricultural produce is not regarded as sale by virtue of the provisions of Section 2(6) of the KVAT Act, 2003 as such activity does not fit into the word "business". Therefore, this judgment - also does not support the stand taken by the Applicant.

(iv) The Andhra Pradesh High Court in the case of T.V. Chetty and Sons Vs. CTO reported in 33 STC 497 the deeming provision of AP General Sales Tax Act contained a deeming provision which says that an agricultural grower of sugarcane who converts the same to jaggery and sells it should be regarded as a "dealer for all purposes of the Act. Under the KVAT Act, 2003 also there is a deeming provision in the form of Explanation 4(a) and (b) in Section 2(12), which prescribes that an agriculturist selling the agricultural produce is not a dealer, but- where a Company sells such agricultural produce then, such company is deemed to be a dealer under the KVAT Act,. 2003. Since sugarcane is an agricultural produce  and jaggery is  a  commercial  commodity,   the  Andhra Pradesh High Court has rightlyTierld that the agriculturist growing sugarcane when converts the same to jaggery and sells he should be regarded as "dealer". This judgment in no way helps the Applicant, as the Applicant has undertaken growing and cultivation of minor and major, crop plantations and out of such cultivation the raw form of coffee, pepper, arecanut, cardamom, etc.,' is obtained which is an agricultural produce and thereafter the Applicant has processed and obtained finished form of coffee, pepper, arecanut, cardamom which are different commercial commodities. (v) The Hon'ble Karnata'ka Appellate Tribunal in the case, of M/s.Deluxe Coffee Company V/s. State of Karnatakarreported in 2011 (70) KLJ 500 (Tri.) was dealing with the issue wherein the dealer had claimed exemption fronvpayment of CST on inter-State ' sales of coffee, seeds by virtue of Notificatioji No.FD 112 CSL 2002(5) dated: 31.5.-2002. The Tribunal while interpreting this ' notification had come to the conclusion that VAT is a multi-point system of taxation and the dealer is entitled toi the benefit of input tax credit on the output tax payable either under the State Act or under the CST. But the Tribunal had further held that the claim •of deduction of CST by the appellant on the VAT paid coffee seeds would defeat, the purpose of the enactment of \(AT for the reason that under the KST Act the benefit "olHnput tax was not available. This judgment is altogether on a different footing and this will not help the facts prevalent in the case oTthe Applicant.

5. Before concluding our discussion on the subject-matter we would like to give our opinion in this case that since the Applicant is a Company carrying on the agricultural / horticultural produce operations to grow crops of coffee, pepper, arecanut, cardamom, etc., will be liable for registration as well as liable to pay tax under the KVAT Act, 2003. There are no special provisions with regard to allowance of deduction of input tax paid on purchases effected to carry on the agricultural / horticultural operations, especially where such companies carry on inter-plantation of crops. No doubt, no provisions like the provisions of Section 11. of the KVAT Act, 2003 restricting the input tax credit are enunciated under the Act for restricting the input tax credit in the case like the Applicant's case, such benefits are not automatically extendable for the reason that the input so utilized are for the purpose of agricultural operations and not for business activity as, elaborately discussed above.     Thus,  not restricting the inputs, like this under Section 11 for the activity of agricultural as well as business, the Applicant would not be eligible for entitlement of such benefit?.           

6. For the foregoing reasons, we do not find any legality in the claim of the Applicant in the application filled under Section 60 of the KVAT Act, 2003, seeking input tax credit on the purchases of pesticides, manure, chemicals, fertilizers etc, used in the cultivation and growing of coffee, pepper, arecanut, cardamom plantation. Hence the Applicant is not entitled for the benefit of input tax credit claimed oh such purchases.'

The agreement was not only for the purchase of machine but it was also for the purchase of the technology, and the technology was made available to the taxpayer exclusively.

Bajaj Holdings & Investments Ltd vs ADIT

Dated: 16^th Jan 2013

 

Assessee filed an application u/s.195 requesting AO to issue a no objection certificate for making payment of 25,000 British Sterling Pound to Xennia, a company based in United Kingdom, without any deduction of tax.

 

AO observed that agreement between Assessee and Xennia for developing inkjet printers and four specific inks for the purpose of printing directly on two opposite sides of painted metallic petrol tank. The printer as per the specification of Bajaj were to be developed at Xennia and thereafter were to be shipped to India for  commissioning at Bajaj plant in India and Bajaj was required to make payment of 25,000 British Sterling Pound being start up fees to procuring inkjet printing solution.

 

AO held that technical design and drawing and Plans were also being made available by Xennia, that payment was in the nature of fees for technical services, that same was to be taxed at 15% of the gross amount in terms of clause 2 Article 13 of the DTAA between India and UK. Assessee on appeal before CIT(A) held that

 

The assessee had utilised the technical services of the Xennia for the development of a technical plan / design in a sophisticated printer. It had also utilised the technical services of Xennia to develop four different inks and the assessee  was specifically charged by Xennia for the technical services rendered with regard to designing the printer. The manufacturing cost of the printer was separately paid and 25,000 British Sterling Pound were paid only for the technical services.The IP developed from the technical services was owned by the assessee  and the contract was not only for purchase of machinery, it was also for acquiring the technology from Xennia. The agreement was for services of a technical nature consisting of the development and transfer of a technical design and therefore, the payment would fall within the purview of Royalty or FTS under Section 9(1)(vi) or 9(1)(vii) respectively of the Act as well as Article 13(4)(c)3 of the tax treaty.

 

Assessee on appeal before ITAT

 

ITAT observed that, the basic question to be answered by us is whether the agreement entered into by the assessee and Xennia was about purchase for machinery only or it dealt with something more than that? After going through the agreement, we are of the opinion that it was not about purchase of printer alone. Assessee-company had purchased a particular technology form the Xennia.

 

The agreement clearly proves that Xennia had supplied the technology to the assessee. Not only the assessee was using it, it had the right over the Intellectual Property also. Agreement entered in to by the assessee-company allowed it ‘to file patent application, design application or any such application for intellectual property rights arising out of foreground IP’. In these circumstances, we agree with the CIT(A) that the transaction was not for sale of printer only-it included the technology also. When a particular technology was made available to the assessee by Xennia exclusively, it cannot be said that the agreement was only for sale of printer. Therefore, upholding the order of the CIT(A).

 

Further also held that, as per Section 115A(1)(b)(BB) of the Act, tax on dividends, royalty and technical service fees in case of foreign companies has to be computed in a particular manner, if it is entered in to after a particular date. Neither the AO nor the CIT(A) had dealt with the issue. Therefore, the matter was restored to the file of the AO for deciding the question of applicability of lower rate of tax for the transaction.

S. 14A & Rule 8D: Expense specifically relatable to taxable income cannot be disallowed

JCIT vs. Pilani Investment & Industries Corpn. Ltd (ITAT Kolkata)

For AY 2008-09, the AO computed the s. 14A disallowance under Rule 8D by excluding from the total general expenditure of Rs.1,16,94,912, an amount of Rs.19,96,228 being expenses related to house property income, interest expenditure and demat charges. The balance expenses were allocated as relating to tax exempt income in the ratio of tax exempt receipts to total receipts. On this basis, 46.68% of the balance expenditure was disallowed u/s 14A read with Rule 8D. In appeal before the CIT (A), the assessee claimed that an amount of Rs. 57,14,450 was incurred exclusively on building maintenance and service expenses and as no part of these expenses could be attributed to tax exempt income, it had to be taken out of computation of 14A disallowance. This was upheld by the CIT (A). On appeal by the department to the Tribunal, HELD dismissing the appeal:

Once it is found that an expense is specifically relatable to a taxable income, no portion of such an expense can be disallowed u/s 14A. The allocation of general expenses vis-à-vis tax exempt income and taxable income can only be made in respect of expenditure which cannot either be wholly allocated to taxable income, then or which can not be wholly allocated to tax exempt income; the allocation can be made, even on the basis of formula set out in Rule 6D (iii) (should be Rule 8D (2)(iii)), in respect of such expenses which do not fall within any of these categories. 

Also Read:  (2012) 6 TaxCorp (A.T.) 28759 (KOLKATA) , where it was held that interest incurred on taxable income has also to be excluded under Rule 8D(2)(ii) by modifying the prescribed formula.

AP VAT Notification

1. AP VAT – Amendment in Schedule IV – entry of serial number 130

 

GOVERNMENT OF ANDHRA PRADESH

ABSTRACT

The Andhra Pradesh Value Added Tax Act, 2005 (Andhra Pradesh Act No.5 of

2005) – Amendment to Schedule-IV – Notification – Issued.

--------------------------------------------------------------------------------------

REVENUE (COMMERCIAL TAXES-II) DEPARTMENT

 

G.O.Ms.No. 118

 

Dated: 26-02-2013.

 

ORDER:

The appended Notification will be published in an Extraordinary Issue of the Andhra Pradesh Gazette, Dated:28-02-2013.

 

NOTIFICATION

In exercise of the powers conferred by sub-section (1) of section 79 of the Andhra Pradesh Value Added Tax Act, 2005 (Andhra Pradesh Act No.5 of 2005), the Government of Andhra Pradesh hereby make the following amendment to the Schedule-IV of the said Act:

 

AMENDMENT

 

I. In Schedule-IV, after entry at serial number 129, the following shall be added, namely;

 

“130. Plastic Moulded Furniture, purely made of Plastic and not containing any other material like Steel, Aluminium, Wood and Glass, etc.”

 

ASUTOSH MISHRA,

PRINCIPAL SECRETARY TO GOVERNMENT

(Commercial Taxes & Excise)

 

2. AP VAT - AMENDMENTS in Schedule-VI

 

 

 

2. GOVERNMENT OF ANDHRA PRADESH

ABSTRACT

The Andhra Pradesh Value Added Tax Act, 2005 – Amendments to

Schedule-VI –Notification – Issued.

-----------------------------------------------------------------------------------

REVENUE (COMMERCIAL TAXES-II) DEPARTMENT

 

G.O.Ms.No. 117

 

Dated: 25.02.2013.

 

O R D E R:

 

The appended Notification will be published in the Extraordinary Issue of the Andhra Pradesh Gazette Dated:27-02-2013.

 

NOTIFICATION

 

In exercise of the powers conferred under sub-section (1) of section 79 of the Andhra Pradesh Value Added Tax Act, 2005 (Andhra Pradesh Act No.5 of 2005), the Governor of Andhra Pradesh hereby makes the following amendments to Schedule-VI of the said Act.

 

2. This notification shall be deemed to have come into force with effect on and from 10-01-2013.

 

AMENDMENTS

 

In the said Schedule-VI in the Table, after item No.1-D, the following shall be added, namely:

 

Item No. (1)	Description (2)	Point of levy (3)	Rate of Tax (4)
1-E	Liquor sold by Military Canteens holding   licences   in   Form   CS-1 and CS-2 under the provisions of The Andhra Pradesh     Excise (Grant  of  licence  of  selling  by in-house     and conditions of licence) Rules, 2005.	At the point of first sale in the state.	70%
1-F	Privilege    fee    on    all    liquors, bottled and packed as per the provisions of the Andhra Pradesh Excise     Act,     1968     (including imported  liquor) whether bottled/packed     in     India     or outside India but excluding toddy and arrack under the provisions of the following rules;-   (i) Rule 16(9) of the Andhra Pradesh Excise (Grant of licence of selling by shop and conditions of licence) Rules, 2012.   (ii) Rule 10-A of the Andhra Pradesh Excise (Grant of licence of selling by bar and conditions of licence) Rules, 2005.   (iii) Rule 12 of the Andhra Pradesh Excise (Grant of licence of selling by in-house and conditions of licence) Rules, 2005.	At the point of first sale in the State	70%

 

ASUTOSH MISHRA,

PRINCIPAL SECRETARY TO GOVERNMENT

(Commercial Taxes & Excise)

 

 

3. Way Bills- Certain instructions issued to the Officers -Regarding

 

Government of Andhra Pradesh

Commercial Taxes Department Office

of the Commissioner of Commercial Taxes

A.P. Hyderabad

 

CCT’s Ref. Enft/D2/172/2010

Dated :26 -2-2013

 

Sri Suresh Chanda, I.A.S.,

Commissioner of Commercial Taxes,

A.P. Hyderabad

 

Sub: Way Bills- Certain instructions issued to the Officers -Regarding

 

Ref: G.O. Ms. No. 33 Rev CT.II Department Dated: 21-01-2013

 

It is to inform that, the sub-rule(4) of Rule 55 is omitted from APVAT Rules,2005 as per the GO Ms.No. 33 Rev.C.T.II ,Dept Dated: 21-01-2013. Therefore the use of Waybill for all the consignments under VAT & CST Acts has become mandatory for all the dealers including Manufacturers for movement of goods which should be accompanied along with the goods vehicle. To facilitate the smooth movement of goods vehicles of the Manufacturers the following instructions are issued:

 

1. The Asst Commissioners (CT) LTU and Commercial Tax Officers, are instructed to issue Paper Based Waybills by fixing the limit based on the average monthly requirement of waybills for the last two months period to all the Manufacturers.

 

2. All the Manufacturers and Dealers registered under APVAT Act are informed that they can avail the facility of generating e-waybill online from CTD website www.apct.gov.in and they can issue tax invoice containing the unique e-waybill number so generated online and such invoice with e-Waybill number written or typed on it will be treated as e-waybill also and there will not be any necessity to print the e-waybill separately. This process will also save paper.

 

3. The Transporters/In-charge of the goods vehicles should carry one extra copy of such invoice which may be retained by the CTD inspection staff during vehicle check or at the Check Post.

 

4. The Check post Officials and Officers conducting CVT are informed that, if the invoice contains unique e-waybill number generated by the dealers online from the CTD system, such invoice should be treated as e-waybill also.

 

5. The correctness of e-Waybill unique number indicated on invoice and corresponding invoices covered by such e-Waybill can be checked Online at www.apct.gov.in

 

Sd/- Suresh Chanda

Commissioner of Commercial Taxes

Recent Ruling on Income Tax

1. K. Gopi vs DCIT (ITAT)

 

Mere furnishing of affidavit and confirmation letters from the parties cannot itself prove the genuineness of the transaction as required u/s 68 of the IT Act.

 

2.  DIT vs. Prudential Assurance Company Ltd. (HC)

 

AAR Ruling - Binding Precedent- Subsequent advance ruling in third-party case does not supersede advance ruling obtained by the assessee. Therefore, reopening of assessment was not justified because the Authority for Advance Ruling’s finding in the assessee matter continued to govern the assessee assessment.

 

3. Scott R. Bayman vs CIT (HC)

 

The renovation expenditures paid by the employer on employer-provided accommodations are not taxed separately as income to the employee when the employer had already included the value of the accommodations in India in the employee’s taxable income.