TaxTMI Updates e-Newsletter
Jan 24,2013

Deduction of tax at source on interest payable on foreign currency convertible bonds (FCCBs) - taxability of interest in the hands of non-residents - income accruing or arising in India - deemed to accrue or arise in India under deeming provisions - exception to deeming of interest payable by a resident where moneys borrowed and used for business or investment outside India - relationship between charging provision and deeming provision - dovetailing of section 9 into section 5(2) - machinery/code character of provisions governing tax on foreign currency bonds

Deduction of tax at source on interest payable on foreign currency convertible bonds (FCCBs) - taxability of interest in the hands of non-residents - income accruing or arising in India - deemed to accrue or arise in India under deeming provisions - exception to deeming of interest payable by a resident where moneys borrowed and used for business or investment outside India - machinery/code character of provisions governing tax on foreign currency bonds - Assessee was not liable to deduct tax at source on interest paid on FCCBs in July 2008 and January 2009. - HELD THAT: - The Tribunal held that the question whether interest is taxable in the hands of non-resident bondholders must be tested under section 5(2) read with the deeming provisions of section 9(1)(v). Deeming provisions operate where accrual or receipt is not unambiguously in India; they dovetail into the charging provisions. The facts showed the funds were raised and deployed outside India (investment in overseas subsidiaries and deposits abroad) and the place of lending was outside India; therefore the interest payments fell within the exception in clause (b) to the deeming provision in section 9(1)(v) (interest payable by a resident where the debt was incurred and moneys borrowed and used for business or earning income outside India). Once the interest is covered by that specific exception to the deeming provision, it cannot be treated as income accruing or arising in India for the purposes of section 5(2). Further, the Tribunal accepted that the provisions relating to tax on foreign currency bonds (a machinery/code embodied in section 115AC and its TDS counterpart) apply only if the income is chargeable to tax; where the interest is not taxable in India, no withholding under the special machinery is required. On these bases the Tribunal affirmed the CIT(A)'s conclusion that no TDS was deductible and there was no default under section 201. [Paras 11, 13, 16, 17, 18]

Revenue's appeal dismissed; no liability on the assessee to deduct TDS on the interest payments in question and no assessee-in-default under section 201(1).

Deduction of tax at source on interest payable on foreign currency convertible bonds (FCCBs) - machinery/code character of provisions governing tax on foreign currency bonds - grossing up under section 195A - Assessee's cross-objection seeking a finding on applicability of section 195A (grossing up) was rendered infructuous and dismissed. - HELD THAT: - Because the Tribunal held that no TDS was deductible on the FCCB interest, the question of grossing up under section 195A did not arise. The Court therefore declined to grant the relief sought in the cross-objection. [Paras 21]

Cross-objection dismissed as infructuous.

Final Conclusion: The Tribunal dismissed the Revenue's appeal and the assessee's cross-objection. It held that the interest paid on the FCCBs was neither accruing nor deemed to accrue or arise in India because the debt was incurred and the proceeds were used outside India, and therefore no TDS was deductible and no default under section 201 arose; consequential contention on grossing up was accordingly infructuous.

Reopening of assessment under Section 147/148 - reason to believe - tangible material - change of opinion not sufficient - power to reassess distinct from power to review - escapement of income

Reopening of assessment under Section 147/148 - reason to believe - change of opinion not sufficient - power to reassess distinct from power to review - Validity of the notice dated 24 March 2011 reopening assessment for A.Y. 2006-07 within four years - HELD THAT: - The Court applied the post-1989 jurisprudence and held that where an assessment is reopened within four years the statutory test is whether the Assessing Officer had a "reason to believe" that income had escaped assessment; mere change of opinion is not a permissible basis. The Court emphasised the conceptual distinction between the power to reassess and the power to review and reiterated that at the stage of issuance of the notice it is not necessary that escapement be finally established; what is required is tangible material forming a live link with the belief that income has escaped. The Court relied on the tests articulated in Kelvinator and Rajesh Jhaveri and held that the proviso demanding concealment or failure to disclose applies only to reopenings after four years, and not to reopenings within that period. [Paras 7, 8, 9]

The reopening within four years was subject to the "reason to believe"/"tangible material" test and could not be struck down merely as a change of opinion; the statutory test as applied by the Assessing Officer was legally permissible.

Tangible material - escapement of income - Whether the Assessing Officer had tangible material to form a reason to believe that income had escaped assessment on the specific grounds relied upon - HELD THAT: - The Court examined the assessment record and observed that the assessment order under Section 143(3) was silent on each of the five points relied upon for reopening and that no queries had been raised during the original assessment. The Court noted that the Assessing Officer had relied on disclosures in Schedule 17 (notably the change in accounting policy reflected in paragraph 6.1) and on other matters such as post-balance-sheet approval of pay-scale revision, which had not been considered earlier. The Court held that an Assessing Officer who has plainly ignored relevant material has not applied his mind, and where such tangible material exists a reason to believe is properly formed at the reopening stage. The Court declined to preempt the merits of any addition and confined itself to the jurisdictional question. [Paras 8, 10]

The Assessing Officer had tangible material and acted within jurisdiction in reopening the assessment; the Court would not preempt the merits of any additions.

Reopening of assessment under Section 147/148 - Disposition of merits of the substantive additions proposed in the reopening notice - HELD THAT: - The Court expressly refrained from deciding the substantive merits of the grounds relied upon for reassessment. It recorded that issues such as applicability of Section 44/Rule 5(a), prior acceptance of practices by the Revenue, characterization of ISO certification expenditure, and quantification of recoveries are matters to be examined afresh by the Assessing Officer once the assessment is reopened. The parties' rights and contentions on merits were kept open for adjudication by the Assessing Officer in the reassessment proceedings. [Paras 10]

Merits are not decided by the Court and are left open for fresh consideration by the Assessing Officer in the reopened assessment.

Final Conclusion: The petition challenging the notice to reopen the assessment for A.Y. 2006-07 is dismissed: the Assessing Officer acted within jurisdiction in issuing the notice within four years as there was tangible material to form a reason to believe that income had escaped assessment; substantive issues raised are left open for fresh consideration in the reassessment proceedings.

Extension of interim stay beyond 365 days under third proviso to section 254(2A) - Power of Tribunal to continue interim relief where delay in disposal is not attributable to the assessee - Grant of stay subject to deposit condition

Extension of interim stay beyond 365 days under third proviso to section 254(2A) - Power of Tribunal to continue interim relief where delay in disposal is not attributable to the assessee - Whether the Tribunal could extend the interim stay of recovery beyond 365 days in the facts of this case and whether such extension should be granted where delay in disposal of the appeal is not attributable to the assessee. - HELD THAT: - The Tribunal examined the appellant's submissions that the appeals raise issues identical to matters pending before the Hon'ble Supreme Court (Idea Cellular and Bharti Cellular) and that the delay in hearing was on account of the pendency before higher courts rather than attributable to the assessee. Having considered the rival contentions and relevant precedents relied upon by the parties, the Tribunal accepted that its power to extend interim relief under the third proviso to section 254(2A) is not ousted where the delay in disposal is not due to the assessee and where good cause is shown. In the present case the Tribunal found sufficient nexus with matters pending before the Supreme Court and noted substantial compliance by the assessee in payment of the demand for one year; on that basis it exercised its discretion to extend the stay for a further limited period. The exercise of discretion was thereby conditioned to protect public interest by imposing terms for further continuance of stay. [Paras 2]

Tribunal extended the interim stay for a further period of 180 days or until disposal of the appeal, holding that a stay beyond 365 days could be granted in the circumstances where delay was not attributable to the assessee and good cause was shown.

Grant of stay subject to deposit condition - The terms on which the extended stay would be granted in respect of the demands for A.Y. 08-09 and A.Y. 09-10. - HELD THAT: - On the facts, the Tribunal recorded that the assessee had already paid 90% of the demand for A.Y. 08-09 and had paid 75% for A.Y. 09-10. As a condition for granting further interim relief the Tribunal required the assessee to make an additional payment so that parity is maintained between the years. The Tribunal also directed that if the Supreme Court decides the matter within the stay period the assessee may seek early hearing. These conditions were imposed to balance the assessee's entitlement to interim relief with protection of revenue interests. [Paras 2]

Stay granted subject to (i) payment by the assessee of 90% of the demand for A.Y. 09-10 by 31.01.2013, and (ii) the right to seek early hearing if the Supreme Court decides the case within the stay period.

Final Conclusion: The Tribunal allowed the stay applications for A.Y. 08-09 and A.Y. 09-10 by extending interim relief for 180 days or till disposal of the appeal, holding that it could grant stay beyond 365 days where delay was not attributable to the assessee and subjecting the continuance of stay to specified deposit and procedural conditions.

Absence of statutory notice under Section 143(2) - proviso to Section 144(1) notice requirement - scrutiny assessment under Section 144 - reliance on Section 184(5) where a firm is assessed as an Association of Persons - raising of new grounds before the High Court which were not urged before statutory authorities

Raising of new grounds before the High Court which were not urged before statutory authorities - Permissibility of raising for the first time before the High Court the contention that requisite statutory notices under Sections 143(2) and the proviso to Section 144(1) were not issued. - HELD THAT: - The Court held that the petitioner did not urge the contention regarding the absence of the statutory notices before the Revisional Authority and therefore the Revisional Authority had no occasion to deal with that point. A contention not raised before the statutory authorities cannot be permitted to be raised for the first time in writ proceedings before this Court. The Court declined to take cognizance of these arguments urged for the first time at this stage and refused to invalidate the impugned proceedings on that ground. [Paras 7]

Contention not entertained as it was not raised before the revisional authority; writ petition cannot succeed on that ground.

Absence of statutory notice under Section 143(2) - proviso to Section 144(1) notice requirement - scrutiny assessment under Section 144 - Whether Ext.P4 and Ext.P7 constitute the statutory notices under Section 143(2) and the proviso to Section 144(1) respectively, thereby validating the scrutiny assessment completed by Ext.P8. - HELD THAT: - On the facts the Court examined the notices: Ext.P4 informed the petitioner of specific points to be clarified and required attendance with documents and was held to be a notice under Section 143(2). Ext.P7 notified the petitioner that the assessment was posted for hearing on a specified date and was held to satisfy the requirement of the proviso to Section 144(1). Having found these notices present on the record, the Court concluded that the statutory notice requirements relied upon by the petitioner were erroneously asserted to be absent. [Paras 8]

Ext.P4 and Ext.P7 were held to be valid notices under Section 143(2) and the proviso to Section 144(1) respectively; absence of statutory notice contention rejected on the facts.

Reliance on Section 184(5) where a firm is assessed as an Association of Persons - Challenge to the revisional authority's sustaining of disallowance of interest on capital and partners' remuneration by reference to the revisional authority's reliance on Section 184(5). - HELD THAT: - The Revisional Authority sustained the disallowance on the basis that the firm had been assessed as an Association of Persons and therefore interest on capital and remuneration to partners could not be allowed. The High Court noted this reliance in Ext.P12 and, in the absence of successful procedural objections or distinct substantive findings persuading interference, did not disturb the revisional order in the writ petition. The Court's dismissal of the writ petition affirmed the revisional authority's order without separately re-adjudicating the substantive correctness of that application of law. [Paras 5, 9]

Revisional authority's order sustaining the disallowance was not upset; writ petition dismissed.

Final Conclusion: Writ petition dismissed. The High Court refused to entertain procedural objections raised for the first time before it, held that Ext.P4 and Ext.P7 satisfied the statutory notice requirements, and declined to disturb the revisional authority's orders sustaining the disallowances.

Time-bar for completion of assessment under the Agricultural Income Tax (1950) Act - application of repealed Act's provisions to proceedings for periods prior to 1991 - liability of transferee for recovery of tax due from transferor - invalidation of revenue recovery where amended assessment is beyond statutory limitation

Time-bar for completion of assessment under the Agricultural Income Tax (1950) Act - application of repealed Act's provisions to proceedings for periods prior to 1991 - liability of transferee for recovery of tax due from transferor - Validity of revenue recovery proceedings against the petitioner as transferee where the amended assessment in respect of the transferor was completed beyond the statutory five year period prescribed under the 1950 Act - HELD THAT: - The Court applied the transitional provision that for proceedings relating to periods prior to 1991 the provisions of the Agricultural Income Tax (1950) Act govern initiation and completion of assessment. Under the 1950 Act, assessments were required to be completed within five years from the end of the year in which the agricultural income was first assessable. In the present matter the agricultural income in question was first assessable in 1988- 1989 but the amended assessment in respect of the transferor was passed only on 06.09.1997, which is outside the five year limitation. Because the amended assessment giving rise to the recovery action was time barred under the applicable (1950) Act provisions, the consequent Revenue Recovery proceedings against the petitioner, though a transferee, could not be sustained.

Exts.P3 and P4 (Revenue Recovery proceedings) are quashed and the writ petition is allowed.

Final Conclusion: The amended assessment relied upon to initiate recovery was passed beyond the five year period prescribed by the Agricultural Income Tax (1950) Act for the year 1988- 1989; accordingly the Revenue Recovery proceedings against the petitioner are untenable and are quashed.

Revision under Section 264(4) of the Income Tax Act - Appeal dismissed as time-barred is an order in appeal - Waiver of right of appeal

Revision under Section 264(4) of the Income Tax Act - Appeal dismissed as time-barred is an order in appeal - Waiver of right of appeal - Whether the revision filed by the assessee under Section 264 was maintainable where the appeal to the Commissioner (Appeals) had been dismissed for want of condonation of delay. - HELD THAT: - The Court examined Section 264(4) and held that the revisional power is circumscribed by the conditions in the provision. Clause (c) bars revision where the order has been made the subject of an appeal. The petitioner had filed an appeal to the Commissioner (Appeals) with an application for condonation of delay which was rejected and the appeal dismissed on 28.03.2007. Relying on the binding decision in Mela Ram and Sons v. Commissioner of Income Tax, Punjab, the Court accepted the principle that an appeal presented out of time remains an appeal and an order dismissing it as time barred is an order in the appeal. Applying that precedent, the Court concluded that the Commissioner (Appeals) had passed an order in the appeal and that the petitioner had not waived the right of appeal; consequently clause (c) of Section 264(4) applied to bar revision. Having upheld non maintainability on this ground, the Court found it unnecessary to consider the revisional authority's other findings. [Paras 5, 6, 8, 9, 10]

Revision under Section 264 is not maintainable because the appellate order dismissing the appeal as time barred is an order in appeal; writ petition dismissed.

Final Conclusion: The revisional order was correctly held to be not maintainable under Section 264(4) since the appeal had been dismissed as time barred; the writ petition is dismissed.

Deduction under Section 80HHE - Customized electronic data - Data entry as computer software service - CBDT notification dated 26.09.2000 - Findings of fact not perverse

Deduction under Section 80HHE - Customized electronic data - Findings of fact not perverse - Respondent-assessee entitled to deduction under Section 80HHE for AY 2003-04 on finding that it sold/transmitted customized electronic data to clients abroad. - HELD THAT: - The CIT(A) and the Tribunal concurrently found as a fact that the assessee collected data from various sources and customized it to meet specific client requirements and thereafter transmitted the customized data abroad. The High Court recorded that both authorities under the Act negatived the Revenue's contention that the activity was that of a news agency. The court found these concurrent factual findings to be neither perverse nor arbitrary and therefore sufficient to support allowance of the Section 80HHE deduction for the assessment year in question. [Paras 4, 7]

Allowance of deduction under Section 80HHE upheld on the factual finding that the activity constituted transmission of customized electronic data.

Data entry as computer software service - CBDT notification dated 26.09.2000 - Data-entry activity of the assessee falls within computer software service notified by CBDT and hence qualifies for deduction under Section 80HHE. - HELD THAT: - The Tribunal held and the High Court accepted that the activity of data entry is covered by the CBDT notification dated 26.09.2000 which specifically notifies data entry as computer software service under the explanation to Section 80HHE. On that basis the court held that the assessee's data-entry operations attract the benefit of Section 80HHE. [Paras 4, 7]

Data-entry operations held to be covered by the CBDT notification and to qualify for deduction under Section 80HHE.

Final Conclusion: The appeal is dismissed; the Tribunal's allowance of deduction under Section 80HHE for AY 2003-04 is upheld, the concurrent factual findings being sustainable, and the CBDT notification of 26.09.2000 brings data-entry within the scope of qualifying computer software services.

Characterisation of daily allowance as hotel expenses - disallowance under Section 37(3A) to (3D) - treatment of allowances under Rule 6-D(2) - allowances paid to employees

Characterisation of daily allowance as hotel expenses - disallowance under Section 37(3A) to (3D) - treatment of allowances under Rule 6-D(2) - Daily allowances paid to employees partake the character of hotel expenses for the purpose of disallowance under Section 37(3A) to (3D) of the Income tax Act, 1961. - HELD THAT: - The Finance Act, 1983 introduced sub sections (3A) to (3D) to Section 37 with a scheme that subjects aggregate expenditure on specified items, including "payments made to hotels", to a 20% disallowance of the excess over Rs.1,00,000. Rule 6 D(2) of the Income tax Rules, 1962 expressly groups "hotel expenses or allowances paid" together when prescribing limits for travel related expenditure within India. Having regard to the statutory text and the rule which treats hotel expenses and allowances in the same category, the court held that daily allowances paid to employees are of the same character as hotel expenses for the purposes of making disallowance under Section 37(3A) to (3D). The tribunal and the CIT(A) were therefore correct in their treatment.

Answered in the affirmative; daily allowances are to be treated as having the same character as hotel expenses for disallowance under Section 37(3A) to (3D).

Final Conclusion: The reference is answered in the affirmative: daily allowances paid to employees are to be treated as hotel expenses for the purpose of disallowance under Section 37(3A) to (3D) for Assessment Year 1985-86. The Court declined to express any opinion on the separate contention that such allowance may otherwise be allowable as a business expenditure under Section 37(1).

Deemed income - survey surrender - classification under heads of income - set-off of brought forward losses - unabsorbed depreciation - section 32(2) deeming provision - temporal restriction on set-off of depreciation

Deemed income - survey surrender - set-off of brought forward losses - classification under heads of income - Assessment of surrendered survey income as deemed income and disallowance of set-off of brought forward losses against such surrendered income. - HELD THAT: - The Tribunal held that surrendered receipts during survey were to be assessed separately as deemed income under the provisions dealing with undisclosed income, and therefore could not be set off against brought forward losses. The Tribunal examined competing authorities and distinguished D.P. Sandu Bros. on its facts, and held itself bound by the decision of the Hon'ble Punjab & Haryana High Court in M/s Kim Pharma (P.) Ltd., which sustained treatment of surrendered survey income as deemed income and refused set-off of losses under sections 70/71. Consequently the surrender of Rs.70 lakhs (cash, stock and expenditure items) was to be treated as deemed income and not eligible for set-off of carried forward losses. [Paras 11]

Surrendered income assessed as deemed income; claim for set-off of brought forward losses disallowed.

Unabsorbed depreciation - section 32(2) deeming provision - temporal restriction on set-off of depreciation - Whether unabsorbed depreciation (carry forward) could be set off against the surrendered deemed income and the temporal limitation applicable to such set-off. - HELD THAT: - The Tribunal analysed section 32(2) and the evolution of the provision by amendments w.e.f. 1-4-1997 and 1-4-2002, and relied on the Special Bench decision in Dy. CIT v. Times Guaranty Ltd. The Tribunal observed that unabsorbed depreciation which becomes current depreciation under section 32(2) is ordinarily available for set-off, but amendments introduced temporal and head-wise restrictions for depreciation arising in the block 1997-98 to 2001-02. Applying that legal position, the Tribunal held that unabsorbed depreciation falling within the block of assessment years 1997-98 to 2001-02 which could not be set off earlier cannot now be allowed; however unabsorbed depreciation outside that block may be treated as current depreciation under section 32(2) and is available for set-off. Accordingly the matter was remitted to the Assessing Officer with a direction to allow set-off only of unabsorbed depreciation outside the block 1997-98 to 2001-02. [Paras 12, 14]

Remitted to Assessing Officer to allow set-off of unabsorbed depreciation only to the extent it falls outside the block 1997-98 to 2001-02; depreciation within that block disallowed for set-off.

Final Conclusion: Appeal partly allowed: surrendered survey income upheld as deemed income and not eligible for set-off of brought forward losses; claim for set-off of unabsorbed depreciation remitted to Assessing Officer to permit only such set-off as is outside the block 1997-98 to 2001-02.

Penalty under section 271(1)(c) - Explanation 1 - Accrual of income to a Permanent Establishment and assessability of gross receipts - Tax deducted abroad and assessability of gross v. net amount - Bona fide belief and applicability of Explanation 1(1)(b) to exclusion of income - Interplay of DTAA/section 9(1)(i) with foreign tax deductions

Penalty under section 271(1)(c) - Explanation 1 - Disallowance under section 40(a)(i) and attribution of income to Head Office/Foreign Branches - Whether penalty under section 271(1)(c) survived in respect of additions that were subsequently deleted in the quantum appeals. - HELD THAT: - The two additions in respect of disallowance under section 40(a)(i) and the treatment of the same amount as income of the head office/foreign branches were deleted in the quantum appeals (Special Bench/ITAT in assessee's own case). The Revenue fairly admitted that once the additions stood deleted, the corresponding penalty levied on those additions could not survive. The Tribunal recorded that the CIT(DR) conceded the non-survival of penalty on these two issues following deletion of the additions. [Paras 3]

Penalty in respect of the additions under section 40(a)(i) and the attribution to the head office/foreign branches does not survive and is not maintainable.

Penalty under section 271(1)(c) - Explanation 1 - Tax deducted abroad and assessability of gross v. net amount - Accrual of income to a Permanent Establishment and assessability under section 9(1)(i) - Bona fide belief and applicability of Explanation 1(1)(b) to exclusion of income - Whether deletion of penalty by the CIT(A) was warranted in respect of income received from S.K. Telecom, Korea (gross amount credited in books but net amount offered in return after foreign tax deduction). - HELD THAT: - The Tribunal examined whether the assessee's exclusion of the portion allegedly taxed in Korea was a bona fide claim within Explanation 1 to section 271(1)(c). The assessee had credited the entire amount in its Profit & Loss account but offered only the net amount in the Indian return, noting that tax was deducted in Korea. The AO and the ITAT (in the connected assessment) held that the entire receipt accrued to the non-resident assessee's principal (through its PE in India) and was therefore taxable in India under the principles applicable to a Permanent Establishment and section 9(1)(i). The Tribunal distinguished authorities relied upon by the assessee (which dealt with residents and particular statutory schemes relating to grossing up or credit) and held that those decisions did not avail a non-resident with a PE governed by the Indo-Japan DTAA. The Tribunal found that the assessee had not claimed credit of the Korean tax in India, had accounted for the full amount as income, and therefore the exclusion was not a bona fide claim under Explanation 1; consequently the second limb of Explanation 1 (requiring non-disclosure of material facts or lack of bona fides) was attracted. The Tribunal concluded that the CIT(A) erred in deleting the penalty solely on the basis that particulars were furnished; having regard to the material and judicial precedents favourable to Revenue, the exclusion lacked bona fides and penalty was justified. [Paras 6, 9, 14, 16]

CIT(A)'s deletion of penalty is reversed in respect of the amount arising from S.K. Telecom, Korea; penalty under section 271(1)(c) is warranted and AO is directed to compute penalty at 100% of the tax sought to be evaded.

Final Conclusion: Revenue appeal is partly allowed: penalties relating to the two additions deleted in quantum do not survive, but the CIT(A)'s deletion of penalty in respect of the income received from S.K. Telecom, Korea is reversed and the AO is directed to compute penalty at 100% of the tax sought to be evaded.

Taxability of salaries of non-resident employees - characterisation under the head 'salaries' - application of Double Taxation Avoidance Agreement between India and Denmark - 183 days rule - remuneration borne by a permanent establishment or fixed base - residence of the employer vis-a -vis non-resident employer requirement

Taxability of salaries of non-resident employees - application of Double Taxation Avoidance Agreement between India and Denmark - 183 days rule - Remuneration paid to the 13 Danish nationals for services rendered in India is not taxable in India in view of the DTAA conditions being satisfied. - HELD THAT: - The Tribunal found as a fact (accepted by the Revenue) that each of the 13 Danish nationals rendered services in India for periods not exceeding 183 days in the fiscal year, that the remuneration was paid by or on behalf of an employer who was not a resident of India, and that the remuneration was not borne by any permanent establishment or fixed base in India. In light of the DTAA between India and Denmark, where these three conditions are satisfied remuneration in respect of employment exercised in the other country is taxable only in the country of residence of the employee. Those factual findings thus took the remuneration outside the charge to tax in India despite being earnings for services rendered in India under the head 'salaries'. [Paras 3]

Tribunal's conclusion that the salaries are taxable in Denmark and not in India is upheld.

Remuneration borne by a permanent establishment or fixed base - residence of the employer vis-a -vis non-resident employer requirement - The employer's residence being in Denmark (as opposed to the UK) is immaterial so long as the employer is a non-resident of India; and even if the assessee has a permanent establishment in India, taxation would arise only if the remuneration is borne by that permanent establishment or fixed base. - HELD THAT: - The Court noted that the treaty condition requires the remuneration to be paid by or on behalf of an employer who is not a resident of the other country (India), but does not require the employer to be a resident specifically of Denmark; thus any contention about the employer's residence being elsewhere is of no consequence where the employer is non-resident of India. Further, the existence of a permanent establishment or fixed base in India of the employer does not, by itself, render the remuneration taxable in India unless it is shown that the remuneration was borne by that permanent establishment or fixed base. The Tribunal recorded as a fact that the remuneration was not borne by any permanent establishment or fixed base in India. [Paras 3]

Contentions regarding employer's residence and existence of permanent establishment do not alter the Tribunal's finding; taxation in India would follow only if the remuneration were borne by an Indian permanent establishment, which was not found.

Final Conclusion: On the accepted facts - services rendered in India for less than 183 days, remuneration paid by or on behalf of a non-resident employer, and remuneration not borne by any Indian permanent establishment - the Tribunal correctly applied the DTAA and the appeals are dismissed.

Reasonable cause - penalty under section 271C - failure to deduct tax at source - bonafide belief - reimbursement not exigible to tax

Reasonable cause - penalty under section 271C - failure to deduct tax at source - bonafide belief - reimbursement not exigible to tax - Deletion of penalty imposed under section 271C for non-deduction of tax at source on equipment hire charges for assessment years 2007-08 and 2008-09. - HELD THAT: - The Tribunal examined the assessee's consistent plea that equipment hire charges paid to specialist doctors were reimbursements collected from patients and paid out, and that the assessee was under a bona fide belief (until becoming aware in 2007) that no TDS obligation arose. The Assessing Officer did not accept this explanation and imposed penalty equal to the TDS shortfall. The CIT(A) deleted the penalty after applying settled principles that penal liability under section 271C is attracted only where there is no good and sufficient reason for non-deduction and that bona fide belief or reasonable cause negates imposition of penalty. The Tribunal, having found no contrary material to displace the assessee's explanation and observing that the reimbursement element negates an income character, followed the ratios of Eli Lilly, Schell International and Hindustan Steel that penalty will not ordinarily be imposed where non-compliance flows from a bona fide belief or where the breach is venial; therefore the assessee had shown reasonable cause and the penalty was rightly deleted. The Tribunal also distinguished the authority relied on by Revenue as inapplicable on the facts. [Paras 11, 16]

Penalty under section 271C deleted for AYs 2007-08 and 2008-09 as assessee established reasonable cause and bona fide belief that TDS was not deductible on equipment hire reimbursements.

Final Conclusion: Revenue's appeals are dismissed and the orders deleting penalty for assessment years 2007-08 and 2008-09 are upheld.

Importation from the country of manufacture - transhipment and compliance with import policy - lex non cogit ad impossibilia - confiscation under section 111(d) of the Customs Act - redemption fine and penalty under section 112 of the Customs Act

Importation from the country of manufacture - transhipment and compliance with import policy - confiscation under section 111(d) of the Customs Act - Whether vehicles routed through intermediate countries after shipment from the country of manufacture amounted to importation not 'from the country of manufacture' so as to warrant confiscation - HELD THAT: - Member (Technical) held that the policy condition that the vehicle 'be imported from the country of manufacture' could not be treated as complied with merely by proving the path of the goods through intermediate countries; acceptance of the appellants' documentary chain would render the condition redundant and it was not open to the Tribunal to rewrite policy. The Member accepted the Revenue's contention that the vehicles were imported in contravention of condition 2(II)(a)(iv) and therefore confiscation under section 111(d) was justified, though in view of related decisions and circumstances the redemption fine and penalty were reduced. (See reasoning at paras 11, 15 and 19.) [Paras 11, 15, 19]

Finds contravention of the requirement to import from the country of manufacture; confiscation upheld with reduction of redemption fine to Rs.2,00,000 and penalty to Rs.1,00,000 in each case.

Importation from the country of manufacture - transhipment and compliance with import policy - evidentiary link by bills of lading and customs documents - Whether shipment originating in the country of manufacture and reaching India via transhipment through other countries satisfied the policy requirement that vehicles be imported 'from the country of manufacture' - HELD THAT: - Member (Judicial) concluded that the policy language does not include the word 'directly' and therefore does not preclude importation via transhipment. Having reviewed the bills of lading, re export/import certificates from Dubai, Thai customs documents and car history reports, the Member found sufficient documentary proof that the vehicles originated from the country of manufacture (USA) and merely transhipped via UAE and Thailand. Applying principles of statutory interpretation (no addition or deletion of words; where two interpretations are possible, adopt the one beneficial to the importer) and noting absence of evidence that vehicles were used in intermediate countries, the Member held there was no violation of condition 2(II)(a)(iv). Consequently, confiscation and penalties were unjustified and were set aside. The Member also noted absence of mala fide and treated the issue as a bona fide interpretation of policy (paras 23-28). [Paras 23, 25, 26, 27, 28]

Sets aside confiscation and penalties on the ground that importation via transhipment from the country of manufacture met the policy requirement; appeals allowed.

Final Conclusion: The two members of the bench expressed a clear difference of opinion. Member (Technical) affirmed contravention of the 'country of manufacture' condition and upheld confiscation but reduced the redemption fine and penalty; Member (Judicial) held that importation originating in the country of manufacture and reaching India by transhipment satisfied the policy, set aside confiscation and penalties and allowed the appeals. The order records this difference of opinion without a conciliatory majority disposition in the text supplied.

Injunction against encashment of an unconditional bank guarantee - fraud vitiating a bank guarantee (egregious/absolute fraud) - irretrievable injustice / special equities as exception to enforcement of guarantees - independence of an unconditional and irrevocable guarantee from the underlying contract - joint and several liability of consortium members

Fraud vitiating a bank guarantee (egregious/absolute fraud) - Whether the pleadings establish a prima facie case of fraud of such an egregious and absolute nature as to vitiate the Counter Guarantee and justify injuncting its encashment. - HELD THAT: - The Court applied the settled principle that encashment of an unconditional bank guarantee may be restrained where there is established fraud that vitiates the very foundation of the guarantee. On examination of paragraphs 8 to 10 of the plaint the Court found most averments to be bald or relating to underlying contractual disputes; the specific allegations relied upon did not, on the face of the pleadings, establish absolute and egregious fraud by the beneficiaries to vitiate the Counter Guarantee. The single Judge's conclusion that the appellant had not made out such a case and had not rescinded the JBA was upheld as consistent with law and the material before the Court. The Court therefore held that the fraud exception was not made out on a prima facie basis. [Paras 27, 28]

Fraud of the requisite egregious character to vitiate the Counter Guarantee was not established; injunction on that ground refused.

Irretrievable injustice / special equities as exception to enforcement of guarantees - joint and several liability of consortium members - Whether the appellant has shown that allowing encashment would cause irretrievable injury or special equities that outweigh the rule of enforcing an unconditional guarantee. - HELD THAT: - The Court applied the Dwarikesh test requiring decisive proof that recovery from the beneficiary would be impossible and that payment would cause exceptional, irretrievable harm. The JBA expressly provided joint and several liability among consortium members; the plaint itself pleaded that the beneficiary is a large container operator owned by the Government of Singapore. The single Judge's finding-that the appellant failed to prove impossibility of recovery or the exceptional injustice necessary to restrain encashment-was sustained. The contention that the counterparty (respondent no.2) being a shell company established irretrievable injury was rejected as immaterial given the nature of the beneficiary and the contractual allocation of liability. [Paras 29, 30]

Irretrievable injury/special equities exception not made out; injunction on that ground refused.

Injunction against encashment of an unconditional bank guarantee - independence of an unconditional and irrevocable guarantee from the underlying contract - Whether the Counter Guarantee is conditional (requiring proof that appellant personally incurred liability) or is an unconditional irrevocable guarantee enforceable on presentation of the stipulated documents, thereby precluding interim injunction. - HELD THAT: - The Court construed the Counter Guarantee clauses and observed that its language described a promise to pay the appellant's share 'as payment obligation to the Beneficiary pursuant to the Bid Bond' and provided for payment without demur upon presentation of specified documents. The Court held that the Counter Guarantee is an unconditional and irrevocable guarantee, independent of the underlying contract, and that its encashment could be effected on compliance with its documentary preconditions without reference to deeper disputes on the substantive contract. Consequently, the appellant's argument that payment was conditional upon establishing its own liability to the beneficiary was rejected. [Paras 30, 31]

The Counter Guarantee is an unconditional, irrevocable guarantee enforceable on compliance with its terms; it is not a conditional indemnity requiring prior proof of appellant's liability.

Final Conclusion: The Court found that the appellant had not made out a prima facie case of egregious fraud, irretrievable injustice or special equities sufficient to restrain encashment of the unconditional Counter Guarantee. The single Judge's refusal of interim injunctive relief was upheld and the appeal was dismissed with costs.

Levy of service tax on lease/license rentals for premises in airport - administrative clarification and its binding effect - availability of relief for periods prior to change in law/application date - participation of affected parties in departmental appeal - resolution of inter se liability by arbitration - security/undertaking and refund mechanism pending final adjudication

Levy of service tax on lease/license rentals for premises in airport - administrative clarification and its binding effect - availability of relief for periods prior to change in law/application date - Quashment of demand for service tax on license/lease rentals for the period prior to 1st June, 2007 - HELD THAT: - The Court examined earlier orders in which, relying upon Central Board of Excise and Customs Circular No. 80/10/2004-S.T. dated 17-9-2004, it was held that letting out of parts of airport premises did not attract service tax under the relevant entry. Those decisions dealt with periods prior to 1st June, 2007 and the Court held that the petitioner is entitled to the same benefit for the period before 1st June, 2007. Consequently the demand for service tax for that earlier period is quashed as per the reasoning in the earlier orders applying the said circular. [Paras 6, 8]

Demand for service tax quashed for the period prior to 1st June, 2007

Participation of affected parties in departmental appeal - resolution of inter se liability by arbitration - security/undertaking and refund mechanism pending final adjudication - Procedure for adjudication of claims for the period from 1st June, 2007 onwards including participation in appeal, arbitration for inter se liability, and interim financial arrangements - HELD THAT: - For the period from 1st June, 2007 onwards the Court followed the course adopted in earlier connected matters by permitting the petitioner to join and participate in the departmental appeal against the assessment order. The Court directed that if service tax is ultimately held payable for that period, the dispute between the petitioner and AAI as to who is liable shall be resolved by reference to the arbitration clause in their agreement. Pending final determination, amounts already collected may be retained by AAI, with directions that where service tax is held not leviable any amounts collected shall be refunded; where adequate security is not held, the petitioner is directed to file an affidavit of undertaking to pay any liability ultimately found due. [Paras 9, 10]

Petitioner permitted to participate in the appeal; inter se liability to be determined by arbitration if service tax is held payable for the period from 1st June, 2007 onwards; interim arrangements regarding retention of amounts and filing of undertaking directed

Final Conclusion: The petition is disposed of: the demand for service tax on lease/license rentals is quashed for the period prior to 1st June, 2007; for the period from 1st June, 2007 onwards the petitioner may participate in the departmental appeal, any inter se liability between the petitioner and AAI shall be determined by arbitration if service tax is ultimately held payable, and interim arrangements including retention of amounts by AAI and filing of an undertaking by the petitioner are directed.

Service tax on toll collections - Business Auxiliary Service - Special Purpose Vehicle (SPV) - Build-Own/Operate-Transfer (BOT) arrangement - tolls as State List subject - agency/agent relationship - renting, leasing or licensing of vacant land - exclusion of road construction from service tax

Service tax on toll collections - Business Auxiliary Service - Special Purpose Vehicle (SPV) - Build-Own/Operate-Transfer (BOT) arrangement - tolls as State List subject - agency/agent relationship - Whether service tax is leviable on tolls collected by the appellant (an SPV/concessionaire) under a BOT/PPP arrangement and whether the activity is taxable as Business Auxiliary Service. - HELD THAT: - The Tribunal accepted the Board's Circular dated 22/02/2012 which clarifies that tolls paid by users for use of roads constructed under an agreement between NHAI or a State Authority and a concessionaire (PPP/BOOT/BOT) are not liable to service tax when collected by the SPV on its own account. The Circular notes that 'tolls' are enumerated in List-II (State List) and are not covered by taxable services at present, and that an SPV formed under such agreement is not an agent of NHAI or the State Authority. The Tribunal further observed that road construction has been excluded from service tax coverage under construction/works contract categories and that the legislative intent favours keeping road construction-related tolling outside service tax. Applying these determinations, the Tribunal held that treating the appellant's collection of tolls as a taxable Business Auxiliary Service is unsustainable. The Tribunal also noted the limited exception in the Circular where service tax may arise if an independent entity collects tolls on behalf of the SPV and retains commission, but that factual scenario was not the basis of the adjudication against the appellant. [Paras 5]

The demand and penalties imposed in the impugned order are set aside; tolls collected by the appellant under the BOT/PPP arrangement are not subject to service tax as Business Auxiliary Service.

Final Conclusion: Appeal allowed; impugned order quashing the demand confirmed in the appellate proceedings and the stay application disposed of, on the basis that tolls collected by the SPV under the BOT/PPP arrangement do not attract service tax under the Business Auxiliary Service.

Nexus between input services and output services - refund of unutilized CENVAT credit - Board's Circular No. 120/1/2010 - procedural guidelines for declaration and nexus - requirement (or non-requirement) of Chartered Accountant's certificate - remand for fresh consideration to original authority

Refund of unutilized CENVAT credit - nexus between input services and output services - Board's Circular No. 120/1/2010 - procedural guidelines for declaration and nexus - Entitlement to refund of unutilized CENVAT credit on input services claimed to have been used for export of maintenance or repair service for April to June 2008. - HELD THAT: - The Tribunal found that the Commissioner (Appeals) had applied the Board's Circular and that there was no reason to interfere with the appellate authority's conclusion insofar as the refund related to maintenance or repair services for April-June 2008. The Circular was in force when the appellate order was passed and the original adjudicating authority had not had occasion to consider those guidelines; nevertheless the Tribunal expressly confirmed the respondent's entitlement to refund of unutilized CENVAT credit on input services used for export of maintenance or repair service during the stated period. [Paras 4]

Respondent is entitled to refund of unutilized CENVAT credit on input services used for export of maintenance or repair service for April to June 2008.

Nexus between input services and output services - refund of unutilized CENVAT credit - Board's Circular No. 120/1/2010 - procedural guidelines for declaration and nexus - remand for fresh consideration to original authority - Validity of the Commissioner (Appeals) order granting refund of unutilized CENVAT credit claimed to have been used for export of consulting engineer's service for April to June 2008. - HELD THAT: - The Tribunal held that the Commissioner (Appeals) did not record a clear and intelligible finding on nexus between each input service and the exported consulting engineer's service and appeared to treat the Board's Circular as a conclusive answer without applying its guidelines to the facts. Consequently the appellate order insofar as it allowed refund for consulting engineer's service for April-June 2008 was set aside and the matter remanded to the original adjudicating authority to reexamine whether the claimant has established nexus between the exported consulting engineer's service and each input service, following the Board's Circular. [Paras 3, 4]

Refund granted by the Commissioner (Appeals) for consulting engineer's service (April-June 2008) is set aside and remanded to the original authority for fresh examination of nexus as per Board's Circular.

Nexus between input services and output services - Board's Circular No. 120/1/2010 - procedural guidelines for declaration and nexus - requirement (or non-requirement) of Chartered Accountant's certificate - remand for fresh consideration to original authority - Validity of the Commissioner (Appeals) order on the refund claim for July to September 2008 and the procedure to be followed for establishing nexus for that period. - HELD THAT: - The Tribunal concluded that the Commissioner (Appeals) had not applied the Board's Circular by scrutinising any declaration filed by the claimant and had merely observed that the original authority's findings were unconvincing. The Circular requires a declaration disclosing facts to establish nexus; for the claim in question a Chartered Accountant's certificate was not mandatory. The Tribunal therefore set aside the appellate findings and remanded the matter to the original authority (which had not considered the Circular) to permit the party to file a declaration in terms of the Circular, to give a reasonable opportunity of being heard, and to determine meticulously whether nexus between each output service and each input service is established. [Paras 5, 7]

Impugned findings of the Commissioner (Appeals) for July-September 2008 are set aside and the matter remanded to the original authority to examine nexus in accordance with the Board's Circular; no Chartered Accountant's certificate is required in this case.

Final Conclusion: The departmental appeals are allowed in part: the respondent's entitlement to refund of unutilized CENVAT credit for maintenance or repair services for April-June 2008 is confirmed; refunds allowed by the Commissioner (Appeals) for consulting engineer's services (April-June 2008) are set aside and remanded to the original authority for determination of nexus under Board's Circular No. 120/1/2010; and the appellate findings on the July-September 2008 claim are set aside and remanded to the original authority to follow the Circular (claimant to be given opportunity to file the requisite declaration; a CA certificate was not held to be mandatory).

Remand for fresh adjudication - pre-deposit waiver - Goods Transport Agency services-service tax liability - principles of natural justice - appreciation of departmental verification obtained under RTI

Goods Transport Agency services-service tax liability - appreciation of departmental verification obtained under RTI - remand for fresh adjudication - principles of natural justice - Impugned finding of non-discharge of service tax on Goods Transport Agency services remanded for fresh consideration. - HELD THAT: - The Tribunal found that the departmental allegation concerned non-discharge of service tax on Goods Transport Agency services received by the appellant at Gandhidham and Hospet for the period in question. The record includes a letter dated 16.01.2012 from the Range Superintendent, Gandhidham-II, indicating that the appellant's claim had been verified with returns and details and that service tax liability had been discharged. The Tribunal observed that the adjudicating authority did not appreciate that letter and the certificates/details submitted by the appellant in their correct perspective and that not all documents may have been produced or considered. Without expressing any opinion on the merits, the Tribunal set aside the impugned order, kept all issues open, and remanded the matter to the adjudicating authority to reconsider the issue afresh after affording the parties the opportunity required by the principles of natural justice and properly evaluating the verification evidence obtained (including the RTI-obtained letter).

Impugned order set aside and matter remanded to the adjudicating authority for fresh consideration after following principles of natural justice and properly appreciating the verification letter and related documents.

Pre-deposit waiver - remand for fresh adjudication - Condition of pre-deposit waived to permit disposal of the appeal by taking it up on merits and remanding the matter. - HELD THAT: - The Tribunal waived the requirement of pre-deposit of the confirmed amounts in order to take up and dispose of the appeal at the hearing of the stay petition. Having taken the appeal on merits, and after identifying the need for fresh adjudication, the Tribunal allowed the appeal by way of remand while expressly keeping all substantive issues open.

Requirement of pre-deposit waived for the purposes of hearing; appeal allowed by remand to the adjudicating authority.

Final Conclusion: The Tribunal set aside the impugned order, waived the pre-deposit requirement to hear the appeal, and remanded the matter to the adjudicating authority for fresh consideration of whether service tax on Goods Transport Agency services for the period from 2005 to 2009 was discharged, directing that principles of natural justice be followed and that the departmental verification (including the letter dated 16.01.2012) and the appellant's supporting documents be duly considered.

Credit of service tax on input services - in relation to rendering of output service - invoice/bill/challan dated on or after 14.05.03 - utilisation of cenvat credit for payment of service tax on output services - direct versus indirect use in relation to output service

Invoice/bill/challan dated on or after 14.05.03 - credit of service tax on input services - Whether the temporal requirement for availing credit was satisfied for the period in question - HELD THAT: - The Tribunal examined Rule 3 of the Service Tax Rules as amplified by Notification No.5/2003-ST (14.05.03) and identified two legal preconditions for availing credit during the relevant period: (i) the invoice/bill/challan must be issued on or after 14.05.03; and (ii) the input service must be received and consumed in relation to rendering of an output service. The decision records that the statutory scheme required both conditions to be satisfied. Applying the statutory test to the materials before it, the Tribunal treated the invoice-date requirement as a discrete and necessary precondition which must be met alongside the consumption nexus. [Paras 5, 6]

The Tribunal upheld the invoice-date requirement as a condition but found that the facts satisfied the statutory temporal requirement.

In relation to rendering of output service - utilisation of cenvat credit for payment of service tax on output services - direct versus indirect use in relation to output service - Whether the specified input services (travel agent, custom house agent, tour operation, telephone, insurance, courier, testing services, etc.) were received and consumed in relation to rendering the appellant's output services, permitting utilisation of credit - HELD THAT: - The Tribunal construed the statutory phrase 'in relation to rendering of output service' broadly, rejecting the lower authority's apparent requirement of direct use. Having regard to the appellant's business of manufacturing water treatment plants and providing related taxable services (maintenance/repair, erection, commissioning, installation), the Tribunal found that services such as custom house agent (for import of parts/equipment), telephone, testing and similar services were used either directly or indirectly in relation to rendering the output services. The Tribunal emphasised that without imported parts and related services, manufacture and erection could not be effected, and therefore the necessary nexus existed between the input services and the output services. On that basis the Tribunal concluded that the cenvat credit had been correctly availed and utilised. [Paras 6, 7]

The Tribunal held that the input services were used in relation to rendering the output services (directly or indirectly) and that the cenvat credit was correctly availed and utilised.

Final Conclusion: The appeal is allowed: the Tribunal held that (i) the statutory invoice-date condition is a precondition which was to be met, and (ii) on the facts the impugned input services were used in relation to rendering the appellant's output services (directly or indirectly), entitling the appellant to retain the cenvat credit; consequential relief granted.

Bagasse as residue/waste and not a manufactured final product - applicability of Rule 6 of the Cenvat Credit Rules, 2004 - effect of explanation to Section 2(d) of the Central Excise Act, 1944 (marketability) - quashing of departmental circulars and demand notices - Cenvat credit reversal versus payment under Rule 6(3)

Bagasse as residue/waste and not a manufactured final product - effect of explanation to Section 2(d) of the Central Excise Act, 1944 (marketability) - applicability of Rule 6 of the Cenvat Credit Rules, 2004 - Whether bagasse can be treated as a manufactured/excisable final product for the purposes of imposing duty or for invocation of Rule 6 of the Cenvat Credit Rules, 2004. - HELD THAT: - The Court held that bagasse, produced in the course of crushing sugarcane, is a residue/waste and is not a manufactured final product. Judicial precedents, including the decision in the Department's appeal in Civil Appeal No.2791 of 2005, establish that bagasse does not become a final product merely because it is entered in the Tariff or is marketable. Rule 6(1)-(3) of the Cenvat Credit Rules apply where a manufacturer actually manufactures both dutiable and exempted final products and has availed Cenvat credit on inputs; the provision contemplates separate accounts or reversal/payment where exempted goods are manufactured. Since bagasse is not manufactured but emerges as a waste in the process of making sugar, the conditions precedent for Rule 6 are absent and Rules 6(2) and 6(3) are not attracted. The later addition of an Explanation to Section 2(d) treating marketable articles as marketable does not convert waste into a manufactured final product for the purpose of Rule 6 and does not alter the settled position that mere marketability is insufficient to render bagasse a manufactured excisable good.

Bagasse is a waste and not a manufactured final product; Rule 6 of the Cenvat Credit Rules does not apply to bagasse despite the Explanation to Section 2(d).

Quashing of departmental circulars and demand notices - Cenvat credit reversal versus payment under Rule 6(3) - Whether the Circulars issued by the Central Board of Excise & Customs and the Chief Commissioner and the demand notices issued pursuant thereto are legally sustainable, and whether amounts deposited under protest are recoverable. - HELD THAT: - In light of the finding that bagasse is not a manufactured final product and Rule 6 is inapplicable, the Court concluded that the Board's Circular and the Chief Commissioner's Circular purporting to make Rule 6 applicable to bagasse were unsustainable. The demand notices issued invoking Rule 6 for reversal or payment in respect of bagasse therefore lacked foundation. Petitioner payments made under protest (duty and interest) cannot be appropriated in view of this conclusion and must be returned. The Court observed that penal consequences and interest could not be sustained where no liability arose.

The Circulars dated 28.10.2009 and 3.10.2009 and the demand notices dated 24/27.9.2010 are quashed; amounts deposited under protest shall be returned to the petitioners.

Final Conclusion: The writ petitions are allowed: bagasse being a residue/waste and not a manufactured final product is not liable to duty under the Central Excise regime for purposes of Rule 6, the impugned circulars and demand notices are quashed, and amounts paid under protest are to be refunded within the period directed by the Court.

Entitlement to CENVAT credit of Countervailing Duty paid by an importer - disallowance of credit under Rule 9(1)(b) of the CENVAT Credit Rules, 2004 - penalty under Section 114A of the Customs Act, 1962 and its relevance to credit denial - pre-deposit waiver and stay of recovery pending appeal

Entitlement to CENVAT credit of Countervailing Duty paid by an importer - disallowance of credit under Rule 9(1)(b) of the CENVAT Credit Rules, 2004 - penalty under Section 114A of the Customs Act, 1962 and its relevance to credit denial - Whether, in view of the absence of a finding of additional duty under Section 114A (fraud, collusion, willful mis statement or suppression of facts) against the applicants, they are prima facie entitled to take CENVAT credit of the CVD component paid by the importer. - HELD THAT: - The Tribunal noted that Rule 9(1)(b) of the CENVAT Credit Rules, 2004 bars credit where additional duty is payable on account of fraud, collusion, willful mis statement or suppression of facts - the circumstances which attract penalty under Section 114A of the Customs Act, 1962. In the present case the penalty initially proposed in the show cause at import was under Section 112(a) and no additional duty under Section 114A has been confirmed against the applicants. On the material before the Tribunal there is no adjudication establishing that the additional duty falls within the mis statement/fraud/suppression category which would trigger Rule 9(1)(b). Accordingly, on a prima facie consideration the applicants have made out entitlement to take the CENVAT credit of the CVD component. [Paras 4]

On prima facie view applicants are entitled to take CENVAT credit as no additional duty under Section 114A has been confirmed.

Pre-deposit waiver and stay of recovery pending appeal - entitlement to CENVAT credit of Countervailing Duty paid by an importer - Whether the applicants are entitled to waiver of pre-deposit of the demanded duty, interest and penalty and stay of recovery during the pendency of the appeal. - HELD THAT: - Relying on its prima facie conclusion that the applicants are entitled to CENVAT credit because no additional duty under Section 114A has been confirmed, the Tribunal found that the applicants have established a case for complete waiver of the pre deposit. In consequence, and to preserve the applicants' position during the appeal, the Tribunal ordered 100% waiver of the pre deposit of the entire amount of duty, interest and penalty and directed stay of recovery pending disposal of the appeal. [Paras 4]

Grant of 100% waiver of pre deposit of duty, interest and penalty and stay of recovery during pendency of the appeal.

Final Conclusion: The Tribunal held on a prima facie basis that, in absence of a finding of additional duty under Section 114A, the applicants are entitled to take CENVAT credit of the CVD component; accordingly it granted full waiver of the pre deposit and stayed recovery of the demanded amounts pending the appeal.

CENVAT credit - input service - nexus between service and manufacturing activity - statutory obligation under Section 46 of the Factories Act, 1948 - evidentiary burden to establish business use of service

CENVAT credit - input service - nexus between service and manufacturing activity - statutory obligation under Section 46 of the Factories Act, 1948 - Outdoor catering service used for supply of food in the factory canteen is not an input service for CENVAT credit for the period in dispute. - HELD THAT: - The Tribunal examined whether outdoor catering service qualifies as an input service by reference to the requisite nexus with manufacturing activity. The Larger Bench in GTC Industries found such nexus where (i) the cost of subsidised food was included in the cost of production and (ii) the manufacturer was under a statutory obligation to provide a canteen when employing more than 250 workers under Section 46 of the Factories Act, 1948. Those factors together established the necessary nexus in the earlier precedents. In the present case the appellant admitted (and documents showed) that fewer than 250 workers were employed during January to August 2009, so there was no statutory obligation to maintain a canteen under Section 46 and no showing that the canteen expense was mandatorily factored into cost of production. The show-cause notice and adjudication proceeded on the basis that the services did not qualify as input services; the number-of-workers point is a defensive fact that the appellant could have pleaded in response to the notice. Reliance on the appellant's earlier favourable order was rejected because that order had overlooked the employer's workforce strength which is material to establishing nexus. On these findings the Tribunal upheld denial of CENVAT credit on outdoor catering service. [Paras 6, 7, 8]

Denial of CENVAT credit on outdoor catering service sustained.

CENVAT credit - input service - evidentiary burden to establish business use of service - nexus between service and manufacturing activity - Repair and maintenance of the guest house is not an input service for CENVAT credit for the period in dispute. - HELD THAT: - The appellant claimed that the guest house was used to accommodate business guests and to hold business meetings, thereby establishing nexus with manufacturing activity. The Tribunal held that such a claim required positive evidentiary support; ordinarily guest houses house guests and business meetings are held in company conference facilities. No documentary or other evidence was produced to substantiate the asserted business use of the guest house. In the absence of such evidence and having regard to precedent treating guest house maintenance as not connected with manufacture absent proof of business use, the Tribunal found no nexus between guest-house maintenance and the manufacture of excisable goods and therefore rejected the claim to CENVAT credit. [Paras 9]

Denial of CENVAT credit on guest house repair/maintenance sustained.

Final Conclusion: The appeal is dismissed; CENVAT credit on outdoor catering service and on repair/maintenance of the guest house for January to August 2009 is not allowable and the impugned order is sustained.

Confiscation and Penalty under Rule 25 - liability limited to producer, manufacturer, registered person of a warehouse or registered dealer - construction of Rule 25(1)(c) - inapplicability of penal provision to persons outside the categories expressly mentioned

Confiscation and Penalty under Rule 25 - liability limited to producer, manufacturer, registered person of a warehouse or registered dealer - inapplicability of penal provision to persons outside the categories expressly mentioned - Whether the penalties under Rule 25 could be imposed on the respondents who were alleged to be storing and selling zarda but were not shown to be producers, manufacturers, registered persons of a warehouse or registered dealers. - HELD THAT: - The Tribunal held, and this Court concurs, that Rule 25(1) specifies four discrete categories of persons on whom confiscation and penalty may be imposed: a producer, a manufacturer, a registered person of a warehouse, or a registered dealer. The penal liability spelled out at the end of Rule 25(1) is expressly confined to those categories. The respondents were neither shown to be producers or manufacturers of the goods nor the registered person of the warehouse where the goods were stored, nor registered dealers. In the absence of any case by the prosecution establishing that the respondents fell within any of the four statutory categories, Rule 25 cannot be invoked against them. The Tribunal correctly allowed the appeals on this basis. [Paras 5]

Penalties under Rule 25 could not be imposed on the respondents as they did not fall within the four categories of persons to whom Rule 25 applies; the Tribunal's allowance of the appeals was correct.

Construction of Rule 25(1)(c) - liability limited to producer, manufacturer, registered person of a warehouse or registered dealer - Whether Rule 25(1)(c), concerning storage/manufacture without registration, applies to the respondents. - HELD THAT: - The Court rejected the revenue's contention that sub-clause (c) applied. Sub-clause (c) is to be read in the context of the opening words of Rule 25(1) and therefore pertains to the same four categories of persons identified therein. Because the respondents do not satisfy those antecedent descriptions, sub-clause (c) cannot be invoked against them. Consequently, the contention that (c) renders the respondents liable was not accepted. [Paras 6]

Rule 25(1)(c) does not apply to the respondents as it applies only to persons falling within the categories specified in the opening part of Rule 25(1).

Final Conclusion: The appeal is dismissed; the Tribunal was correct in holding that Rule 25 does not authorize imposition of the penalties on the respondents who were not shown to be producers, manufacturers, registered persons of a warehouse or registered dealers, and Rule 25(1)(c) is inapplicable to them.

Stay of recovery pending appeal - waiver of pre-deposit - interim restraint on coercive recovery - expeditious disposal of stay/waiver applications by the Tribunal

Stay of recovery pending appeal - interim restraint on coercive recovery - waiver of pre-deposit - expeditious disposal of stay/waiver applications by the Tribunal - Whether coercive recovery under the impugned order should be restrained until the Tribunal disposes of the petitioner's stay/waiver applications and whether the Tribunal should be directed to decide those applications expeditiously. - HELD THAT: - The petitioner challenged an order of the superintendent demanding payment of duty and penalty in terms of earlier orders-in-original, contending that stay/waiver applications filed before the Customs, Excise and Service Tax Appellate Tribunal were pending because the Tribunal had not been holding regular sittings. The court noted the prejudice claimed by the petitioner and that two Members have now been appointed to the Tribunal and that the Tribunal is hearing appeals and applications for waiver/stay. In the exercise of its supervisory jurisdiction, the court declined to quash the impugned recovery order outright but granted an interim protection by restraining respondents from taking coercive steps until the Tribunal disposes of the petitioner's waiver/stay applications. The Tribunal was requested/directed to decide the petitioner's waiver/stay applications as early as possible and preferably on or before 1.2.2013. The court thus balanced the administrative difficulty of earlier non-sittings against the availability of an effective forum and afforded a time-bound opportunity for adjudication by the Tribunal. [Paras 7, 8, 9]

Respondents restrained from taking coercive recovery steps until the Tribunal disposes of the petitioner's waiver/stay applications; the Tribunal directed to dispose of those applications preferably on or before 1.2.2013; writ petition disposed accordingly.

Final Conclusion: Writ petition allowed in part: coercive action stayed pending disposal of the petitioner's waiver/stay applications by the Tribunal, which is directed to decide the applications expeditiously (preferably by 1.2.2013); no costs.

Treatment of supplies to SEZ Developers as export - exempted goods - application of Rule 6(3)(b) of the Cenvat Credit Rules, 2004 - scope and application of Rule 6(6) of the Cenvat Credit Rules, 2004 - overriding effect of the SEZ Act (Section 51) over other laws - distinction between deemed exports and exports for central excise purposes

Treatment of supplies to SEZ Developers as export - exempted goods - application of Rule 6(6) of the Cenvat Credit Rules, 2004 - application of Rule 6(3)(b) of the Cenvat Credit Rules, 2004 - overriding effect of the SEZ Act (Section 51) over other laws - Supplies made from DTA to SEZ Developers without payment of duty are to be treated as exports and not as "exempted goods", and therefore sub rules (1), (2) and (3) of Rule 6 of the Cenvat Credit Rules, 2004 do not apply to such supplies under the facts of the case. - HELD THAT: - The appellant used common Cenvat credit inputs in manufacture of goods cleared on payment of duty to DTA buyers and cleared without payment of duty to SEZ Developers. The SEZ Act treats supplies to SEZ and SEZ Developers as exports (definition in Section 2(m)) and Section 51 gives the SEZ Act overriding effect over inconsistent provisions of other laws. Consequently, supplies to SEZ Developers made without payment of duty are to be regarded as exports for the purpose of the Cenvat Credit Rules, 2004, and cannot be classified as "exempted goods" within Rule 2(d) (which contemplates goods exempted from duty by notification or goods chargeable to nil rate). Since such supplies are exports, they fall within the protective scope of sub rule (6) of Rule 6 (as interpreted by the Tribunal in Sujana Metal Products Ltd. v. CCE, Hyderabad) and the operation of sub rules (1), (2) and (3) of Rule 6 is excluded in respect of those supplies. The departmental contention that supplies to SEZ Developers are only "deemed exports" for central excise purposes and therefore remain "exempted goods" is rejected in view of the SEZ Act's overriding provision and the statutory treatment of such clearances as exports. On this basis the imposition of liability under Rule 6(3)(b) for the supplies to SEZ Developers is unsustainable. [Paras 6, 7]

Impugned order holding supplies to SEZ Developers as "exempted goods" and levying liability under Rule 6(3)(b) is set aside; such supplies are treated as exports and sub rules (1)-(3) of Rule 6 do not apply.

Final Conclusion: The appeal is allowed; the order demanding liability under Rule 6(3)(b) in respect of clearances to SEZ Developers for the period June 2007 to November 2007 is set aside as those clearances are exports and not "exempted goods" under the Cenvat Credit Rules, 2004.

Clubbing of clearances of factories of same manufacturer - application of SSI exemption notification where manufacturer has multiple factories - aggregate-value slabs for nil and concessional rates under SSI exemption - penalty under Section 11AC and penalty under Rule 173Q

Clubbing of clearances of factories of same manufacturer - application of SSI exemption notification where manufacturer has multiple factories - aggregate-value slabs for nil and concessional rates under SSI exemption - Whether clearances of two units owned by the same manufacturer must be aggregated for determining eligibility and slabs under Notification No. 8/2000-C.E. - HELD THAT: - Clause 2(V) of Notification No. 8/2000-C.E. provides that where a manufacturer clears the specified goods from one or more factories, the exemptions shall apply to the aggregate value of clearances mentioned against each serial number in the table and not separately for each factory. Therefore, the first clearances eligible for nil rate (up to the prescribed aggregate value from 1st April in a financial year) and the subsequent concessional slab are to be determined by aggregating clearances of all units of the same manufacturer. The Tribunal decisions relied upon by the Commissioner (Appeals), which permit one unit to pay duty and another to avail exemption independently, concern a different issue and are not applicable where the plain language of the notification mandates aggregation across factories of the same manufacturer. Applying Clause 2(V) to the facts, the clearances of the respondent unit and M/s. H.B. Exports must be clubbed for the purpose of computing eligibility under the notification for the financial year 2000-2001.

Clearances of both units owned by the same manufacturer are to be aggregated for application of Notification No. 8/2000-C.E.; clubbing is required for 2000-2001.

Penalty under Section 11AC and penalty under Rule 173Q - Whether the separate penalty imposed under Rule 173Q should stand in addition to penalty under Section 11AC equal to the duty demand. - HELD THAT: - The original adjudicating order confirmed the duty demand and imposed a penalty equal to the duty under Section 11AC and, separately, a further penalty under Rule 173Q. The Appellate Tribunal concluded that imposition of a separate penalty under Rule 173Q is not justified when a penalty equal to the duty demand has already been imposed under Section 11AC. Consequently, while the duty demand and the penalty equal to the duty under Section 11AC are restored, the additional separate penalty under Rule 173Q is set aside as unjustified.

Order-in-original restored as regards demand and penalty under Section 11AC; separate penalty under Rule 173Q set aside.

Final Conclusion: The appeal is allowed in part: the Tribunal's appellate order is set aside insofar as it refused to club clearances of the two units for financial year 2000-2001; the original demand is restored and the penalty equal to the duty under Section 11AC maintained, but the separate penalty under Rule 173Q is quashed.

Penalty under Section 11AC - no discretion to reduce penalty where elements for Section 11AC are present - prospective operation of penal provision - suppression of facts - extended period under proviso to Section 11A(1)

Penalty under Section 11AC - suppression of facts - extended period under proviso to Section 11A(1) - no discretion to reduce penalty where elements for Section 11AC are present - prospective operation of penal provision - Whether penalty under Section 11AC is attracted and, if so, whether it must be equal to the duty demand confirmed where price escalation amounts relating to clearances prior to 28-9-1996 were received in 1999 and duty was not paid or intimated to the department. - HELD THAT: - The Tribunal found that although the clearances occurred between June 1995 and 31-8-1998, the price-differential (price escalation) was received by the appellant in 1999 and the duty therefore became payable only when the differential was received. The appellant neither paid the duty nor informed the department, amounting to suppression of relevant facts, thereby attracting penal liability under Section 11AC. The Tribunal noted that the proviso to Section 11A(1) (invoked for extended period) and the conditions for imposing penalty under Section 11AC are identical, and that the Tribunal had earlier upheld the extended-period duty demand. Applying the Apex Court rulings in Union of India v. Rajasthan Spinning and Weaving Mills and related decisions, the Tribunal held there is no discretion for the adjudicating or appellate authority to impose a penalty lower than the confirmed duty where the statutory elements for penalty are present. The earlier precedents holding Section 11AC to be prospective were held inapplicable because, on the facts here, the duty crystallised in 1999 after Section 11AC came into force. [Paras 6]

Penalty under Section 11AC is attracted and must be equal to the quantum of duty demand confirmed; the Commissioner's imposition of penalty equal to the duty demand is upheld and the appellant's challenge on this point is dismissed.

Final Conclusion: The appeal on the question of quantum of penalty fails; penalty under Section 11AC equal to the confirmed duty demand is upheld as the price-differential was received in 1999, duty became payable then, and the statutory conditions for imposing penalty were satisfied.

Additional consideration - Central Excise Valuation Rules - transaction value - value deemed to include money value of any additional consideration flowing directly or indirectly from the buyer - business franchise service

Additional consideration - Central Excise Valuation Rules - transaction value - Whether the one time technical assistance fee and the monthly fee charged by the appellant from franchisees constitute additional consideration to be included in the assessable value of excisable goods. - HELD THAT: - The Tribunal applied Rule 6 of the Central Excise Valuation Rules, 2000 (and Rule 5 of the 1975 Rules for earlier period) which provides that where price is not the sole consideration the value shall include the transaction value plus the money value of any additional consideration flowing directly or indirectly from the buyer. The Explanation to Rule 6 requires some direct or indirect financial flow from buyer to manufacturer, such as supply of goods or services by the buyer to the manufacturer, discharge by buyer of an obligation on behalf of seller, or purchase by buyer of goods/services from seller at inflated prices. The appellant's agreements show that the one time technical assistance fee is for services such as architects, design, training and set-up, and the monthly charge (8.5% of gross sales) is for ongoing services and the right to use technical know-how and brand. The department did not allege that these sums have no relation to services provided or that they are grossly inflated; indeed the appellant has been discharging service-tax liability on the monthly charge. Given that the amounts represent consideration for services rendered by the appellant to franchisees and not a financial flow from buyer to seller that alters the transaction value of the excisable goods, they cannot be treated as additional consideration under the Valuation Rules. Consequently, Rule 6 could not be invoked to reject the transaction value on which duty had been paid. [Paras 7, 8, 9]

The one time technical assistance fee and the monthly fee are not additional consideration for sale and thus are not includible in the assessable value; Rule 6 is inapplicable and the demand based on adding these amounts to value is unsustainable.

Final Conclusion: The demands confirmed by the Commissioner insofar as they rest on treating the contractual technical assistance fee and monthly franchise fee as part of the assessable value are set aside; the appeal is allowed.

Production of books of accounts pursuant to appellate direction - enlargement of time by appellate tribunal - restoration of original assessment for non-production of records - power of assessing officer to pass consequential orders after compliance

Enlargement of time by appellate tribunal - production of books of accounts pursuant to appellate direction - Challenge to the Tribunal's refusal to enlarge time for producing books of accounts was not sustainable. - HELD THAT: - The Tribunal had directed the petitioner to produce books of accounts within a specified period and warned that failure would permit restoration of the original assessment. The Court accepted the Tribunal's allocation of responsibility to the petitioner for timely production of records and found the petitioner's justification for non-production unacceptable. Consequently the Tribunal's refusal to enlarge time was upheld on that ground. [Paras 3]

Tribunal's order refusing enlargement of time is justified and the challenge to Ext.P6 is not sustained.

Production of books of accounts pursuant to appellate direction - power of assessing officer to pass consequential orders after compliance - restoration of original assessment for non-production of records - Whether the petitioner may nevertheless be permitted to produce the books belatedly and the consequent course of action by the assessing officer. - HELD THAT: - Although the Tribunal's refusal to enlarge time was upheld, the Court noted that the assessing officer had not passed any consequential orders pursuant to the Tribunal's direction. In view of the absence of any action by the assessing officer, the Court exercised its discretion to permit the petitioner, belatedly, to produce the books of accounts by a fixed date. The assessing officer is directed to pass fresh orders as directed by the Tribunal if the records are produced; if the petitioner fails to produce the records by that date, the assessing officer remains free to pass consequential orders including restoration of the original assessment as authorised by the Tribunal. [Paras 4, 5]

Petitioner permitted to produce books of accounts before the assessing officer on or before 31/1/2013; if produced, assessing officer to pass orders as per Tribunal direction; failure to produce enables the assessing officer to pass consequential orders.

Final Conclusion: The Tribunal's refusal to enlarge time is upheld, but the petitioner is granted a final opportunity to produce the books of accounts by 31/1/2013; on production the assessing officer must pass fresh orders in accordance with the Tribunal's direction, and in default the assessing officer may proceed to pass consequential orders.