TaxTMI Updates e-Newsletter
Jan 19,2012

Capital receipt versus revenue receipt - capitalisation of pre operative interest - receipts and payments inextricably linked with project setting up - set off of interest received against interest paid - application of Bokaro Steel ratio

Capital receipt versus revenue receipt - receipts and payments inextricably linked with project setting up - Interest received from PFC on unutilized Commitment Advance is capital in nature and not assessable as income under Section 57. - HELD THAT: - The tribunal and the Commissioner (Appeals) found on the recorded facts that the Commitment Advances were received for the express purpose of land acquisition and other pre project activities, and that PFC had incurred the development expenditure until such advances were available. The interest on the unutilized portion was earned only because the funds were temporarily placed pending utilisation for the project; such receipts were held to be inextricably linked with the setting up of the plant and, therefore, of a capital nature. The High Court accepted the factual findings and the application of the principle that receipts which reduce the cost of the asset being created are capital receipts, following the ratio applied by the authorities below (including the ratio in Bokaro Steel Ltd. and the Indian Oil Panipat Power Consortium ). The assessee's inadvertent classification of the interest as income from other sources did not alter its character where the factual matrix established a direct nexus with project creation. [Paras 14]

Interest received on unutilized Commitment Advances is capital and not taxable as income under Section 57 for AY 2007-08.

Capitalisation of pre operative interest - set off of interest received against interest paid - application of Bokaro Steel ratio - Interest paid on Commitment Advances is capitalised and, being of the same character as the interest received, cannot be treated differently for tax purposes. - HELD THAT: - On the facts the Assessing Officer himself had recorded that both the interest earned and the interest payable related to capital work in progress. The tribunal held that interest paid on the Commitment Advances formed part of the cost of setting up the plant and was capital in nature; consequently, interest received and interest paid have a commonality and must be treated consistently. The High Court endorsed this conclusion, observing that treating the receipt as revenue while treating the payment as capital would be contradictory given the factual matrix where both relate to the bidding/project formation process and reduce the cost of the asset being created. [Paras 14]

Interest paid on Commitment Advances is capitalised; it cannot be disallowed as a revenue expenditure while treating interest received as revenue.

Final Conclusion: The appeal is dismissed; the tribunal's finding that the interest receipts and payments relating to Commitment Advances are capital in nature is upheld and no substantial question of law arises. No order as to costs.

Penalty under Section 271(1)(c) - Furnishing of inaccurate particulars - Bonafide claim versus mala fide claim - Allowability of bad debts as revenue deduction - Section 36(2)(i) - condition of having taken the loan/interest into account - Failure to disclose material facts in penalty proceedings - Explanation 1 to Section 271(1)(c) - consequence of non bonafide claims

Penalty under Section 271(1)(c) - Furnishing of inaccurate particulars - Bonafide claim versus mala fide claim - Explanation 1 to Section 271(1)(c) - consequence of non bonafide claims - Validity of imposition of penalty under Section 271(1)(c) for claiming the Rs.50 lakhs as a bad debt - HELD THAT: - The Court reviewed the settled proposition that an incorrect claim, by itself, does not attract penalty under Section 271(1)(c) where the assessee has made full disclosure of relevant facts and acted bona fide. Reliance was placed on authoritative decisions which distinguish between mere legal incorrectness and furnishing of inaccurate particulars. However, the Court held that this principle is conditioned by the facts: if the assessee omitted material facts or the factual particulars supplied are inaccurate or not fully disclosed, the protection for bona fide legal positions does not apply. Applying these principles, the Court found that the assessee failed to disclose a crucial fact - that no interest in respect of the Rs.50 lakhs was taken into account or offered to tax in earlier years despite the letter asserting conversion of share application money into a loan bearing interest from a prior date - and thus the particulars were incomplete and inaccurate. The omission raised a grave doubt about the genuineness of the asserted conversion and the assessee's bonafides, bringing the case within the mischief of furnishing inaccurate particulars and attracting penalty. The Court therefore upheld the Tribunal's restoration of the penalty. [Paras 20, 21, 22, 25, 26]

Penalty under Section 271(1)(c) was rightly restored because the assessee furnished incomplete and therefore inaccurate particulars, and the claim was not shown to be bona fide.

Allowability of bad debts as revenue deduction - Section 36(2)(i) - condition of having taken the loan/interest into account - Failure to disclose material facts in penalty proceedings - Whether the claim of Rs.50 lakhs as a bad debt was supported by the necessary factual preconditions (including having taken interest into account) and whether non disclosure of this fact rendered particulars inaccurate - HELD THAT: - The Court examined the material on record and the Tribunal's findings that the Rs.50 lakhs paid as share application money was in substance an investment in a capital asset and, even assuming conversion to a loan, amounted at best to an inter corporate deposit - not a loan in the ordinary course of money lending business. Crucially, one of the statutory preconditions for allowability under Section 36(2)(i) is that the loan/interest must have been taken into account in computing income of earlier years; the Tribunal found that this had not been done. The assessee had a duty to disclose that no interest had been charged or brought to tax in earlier years despite the letter purporting to convert the amount into a loan with interest from an earlier date. The failure to place this crucial fact before the assessing officer and in penalty proceedings rendered the particulars incomplete and created serious doubt about the genuineness of the conversion, undermining the claim's credibility. [Paras 11, 21, 22, 23, 24]

The preconditions for treating the sum as a revenue bad debt were not satisfied and the omission to disclose that interest had not been taken into account made the particulars inaccurate.

Final Conclusion: The appeal is dismissed; the Tribunal's order restoring the penalty under Section 271(1)(c) is upheld because the assessee failed to disclose material facts (notably non inclusion of interest) rendering the particulars inaccurate and negating a bona fide claim.

Service tax levy on recipient under Section 66A - Extraterritorial application of service tax - Temporal effect of amendment introducing liability from 18.4.2006 - Non-exigibility of service tax for services received from non-residents prior to enactment

Service tax levy on recipient under Section 66A - Temporal effect of amendment introducing liability from 18.4.2006 - Whether services received from non-resident service providers prior to 18.4.2006 were exigible to service tax from the recipient in India. - HELD THAT: - The Court accepted the view expressed by the Division Bench of the Bombay High Court and followed by other High Courts that the Finance Act, 1994 was first amended on 18.4.2006 to introduce legal authority to levy service tax on the recipient for services received from persons outside India. Prior to insertion of Section 66A, the statutory scheme did not vest the revenue with power to tax services received in India from non-resident providers; liability was confined to the service provider. The Tribunal's reliance on the Bombay High Court judgment and the dismissal of Special Leave to Appeal were held to be decisive. Applying these precedents, services provided to the assessee by non-resident service providers during the period before 18.4.2006 were not exigible to service tax and the demand could not be sustained. [Paras 4]

Demand for service tax in respect of services received from non-resident providers during 9.7.2004 to 18.1.2006 is not sustainable; appeal dismissed.

Final Conclusion: The Revenue's appeal was dismissed: services received from non-resident service providers prior to the insertion of Section 66A on 18.4.2006 were not exigible to service tax, and the demand and penalties challenged could not be upheld for the period 9.7.2004 to 18.1.2006.

Definition of "manufacture" in Section 2(f) of the Central Excise Act - deeming provision in Section 2(f)(ii) requiring specification in Section or Chapter notes of the First Schedule - transformation test: new and different article having distinctive name, character or use - improvement in quality does not amount to manufacture - marketability as a cumulative requirement for levy of excise

Definition of "manufacture" in Section 2(f) of the Central Excise Act - transformation test: new and different article having distinctive name, character or use - improvement in quality does not amount to manufacture - Whether the process of adding and mechanically mixing polymer and additives with heated bitumen amounts to manufacture and is exigible to Central Excise duty - HELD THAT: - The Court held that the mixing of polymer and additives with duty-paid bitumen did not amount to manufacture. The amended definition in Section 2(f) gives an extended meaning only where a process is specifically recognised as manufacture in the Section or Chapter notes of the First Schedule; no such specification exists for treatment of petroleum bitumen to produce PMB/CRMB. Applying the established transformation test, the Court observed that manufacture requires a change by which the original commodity is commercially no longer regarded as the same but as a new and distinct article with different identity, characteristic or use. The Tribunal's factual finding that the process only improved the grade/quality of bitumen, without change in its identity or end-use (still used as a road-construction binder), and that the polymer-bitumen mixture reverts/separates if not maintained in molten/agitated condition, supports that no chemical transformation producing a new commodity occurred. Reliance on precedents underscoring that mere improvement in quality or difference in tariff entries does not automatically establish manufacture was affirmed. [Paras 15, 18, 19, 23]

The process of mixing polymers and additives with bitumen does not amount to manufacture; the levy of excise on that basis cannot be sustained.

Deeming provision in Section 2(f)(ii) requiring specification in Section or Chapter notes of the First Schedule - marketability as a cumulative requirement for levy of excise - Whether the finished goods PMB/CRMB are covered by the tariff entry for bituminous mixtures and liable to be classified under CSH 27150090 instead of petroleum bitumen CSH 27132000 - HELD THAT: - The Court found no Section or Chapter note treating the treatment of petroleum bitumen with polymers/additives as an operation amounting to manufacture for tariff purposes; therefore the deeming provision could not be invoked to treat PMB/CRMB as bituminous mixtures under CSH 27150090. On the facts, since no manufacture was found, classification into a distinct finished-goods heading was not warranted. The Court also noted the requirement of marketability as part of the excise levy analysis, but having held absence of manufacture, it was unnecessary to decide marketability in detail. [Paras 24, 25]

PMB and CRMB shall continue to be classified under CSH 27132000 as petroleum bitumen and not under CSH 27150090.

Final Conclusion: The appeals by the revenue are dismissed; the Tribunal's finding that addition and mixing of polymer and additives with heated bitumen does not constitute manufacture is upheld and PMB/CRMB remain classifiable under the tariff for petroleum bitumen.

Excisability of returnable containers - sale of product versus sale of packaging - pure finding of fact - scope of appellate jurisdiction under Section 35G

Excisability of returnable containers - sale of product versus sale of packaging - Whether glass bottles and crates, which are reusable and used for selling beverages, are exigible to excise duty - HELD THAT: - The court accepted the factual finding recorded by the authorities below that what is sold to the consumer through dealers is the beverage alone and not the bottles or crates. On that factual foundation the court held that bottles and crates cannot be treated as goods sold for levy of excise duty. Because the conclusion rests on a pure finding of fact that the sale was of beverages only and there was no sale of the containers, no substantial question of law under Section 35G arises that would warrant admission of the appeal. The tribunal's and lower authorities' concurrent factual conclusion was therefore left undisturbed. [Paras 2, 3]

Appeals dismissed; bottles and crates not exigible to excise duty where the sale is of beverages alone and the finding is purely factual, and no substantial question of law under Section 35G arises.

Final Conclusion: The appeals were dismissed as the courts below correctly found as a fact that only beverages (and not bottles/crates) were sold; accordingly the containers are not chargeable to excise and no substantial question of law under Section 35G warranted admission.