TaxTMI Updates e-Newsletter
Jan 31,2013

Capital expenditure versus revenue expenditure (product registration, trademark and patent fees) - weighted deduction under section 35(2AB) - scope of Explanation (clinical trials, regulatory approvals, patent filing) and requirement of in-house R&D - disallowance under section 14A and computation of book profit under section 115JB - section 69 unexplained investment - burden of proof and evidentiary requirement - allowability of depreciation - ownership and business use - application of section 80-IC (and applicability of section 80-IA(8) proviso) - computation of profits of eligible unit and inter unit transfers - mark-to-market loss on foreign exchange derivatives - revenue allowance - transfer pricing adjustment - remand for verification of international transaction computations

Capital expenditure versus revenue expenditure (product registration, trademark and patent fees) - Treatment of product registration expenses and reimbursement for product registration support services, and trademark and patent registration fees - whether capital or revenue in nature - HELD THAT: - The Tribunal followed its earlier decision in the assessee's own case for AY 2006-07 (paras 3-3.12 of that order) and held that the payments in question are inextricably linked with the working of the assessee's business and do not create any new right of permanent character. Licences/registrations require renewal and form part of day-to-day running expenditure. Reliance was placed on precedents to the effect that registration expenses (including trademark registration) do not necessarily create an enduring advantage amounting to capital expenditure. As no distinguishing facts were pointed out for the year under appeal, the Tribunal found no reason to take a different view and allowed the grounds. [Paras 2]

Both grounds No.1 and No.2 allowed; the questioned registration and reimbursement expenditures treated as revenue in nature and allowable.

Weighted deduction under section 35(2AB) - scope of Explanation (clinical trials, regulatory approvals, patent filing) and requirement of in-house R&D - Whether expenditure on clinical trials, obtaining regulatory approvals and filing patent applications (covered by the Explanation to section 35(2AB)(1)) must be incurred 'in-house' to qualify for weighted deduction - HELD THAT: - The Tribunal examined the Explanation to section 35(2AB)(1) which expressly includes clinical drug trials, regulatory approval costs and patent filing expenses within 'expenditure on scientific research' for drugs and pharmaceuticals. It concluded that the nature of these activities (particularly clinical trials and regulatory approvals) makes them incapable of being carried out entirely within an in house R&D facility. The Tribunal found that the contrary Tribunal decision relied on by Revenue did not examine whether these specific expenditures can be incurred in house and therefore is not a binding precedent. Following the assessee's own earlier-year Tribunal decision, and on the basis that such expenditures, when incurred in relation to in house research, are covered by the Explanation, the Tribunal allowed the claim for weighted deduction. [Paras 3]

Ground No.3 allowed; expenditure on clinical trials, regulatory approvals and patent filing covered by the Explanation to section 35(2AB)(1) and eligible for weighted deduction when incurred in relation to in house research.

Disallowance under section 14A and computation of book profit under section 115JB - Whether disallowance under section 14A should be computed/adjusted for purposes of book profit under section 115JB (issue in AY 2007-08 restored for fresh consideration) - HELD THAT: - The Tribunal noted that in the preceding year the matter had been restored to the Assessing Officer for fresh decision in the light of the Bombay High Court decision in Godrej & Boyce, and observed that Rule 8D is applicable from AY 2008-09. Following the course adopted in AY 2006-07, the Tribunal restored the issue to the file of the AO for a fresh decision, directing the AO to pass orders in accordance with law after affording opportunity of hearing and to prefer any higher court precedent (Gujarat High Court or Supreme Court) if applicable. [Paras 4]

Ground No.4 allowed for statistical purposes - issue remanded to the Assessing Officer for fresh decision.

Section 69 unexplained investment - burden of proof and evidentiary requirement - Addition under section 69 as unexplained investment in relation to purchase of imported Hummer H2 - whether justified - HELD THAT: - The AO made an addition by treating an alleged difference in price as unexplained investment. The assessee explained that certain amounts (conversion charges, shipping, alleged suppression) were unpaid or unsupported. The Tribunal held that once the assessee furnished an explanation that payments were not made or were accounted for, it was incumbent on the AO to produce evidence to establish actual payment by the company (for example confirmations from the payee). The AO did not bring such evidence; consequently the addition under section 69 was not sustained. [Paras 5]

Ground No.5 allowed - addition under section 69 deleted for lack of evidence of unrecorded investment.

Allowability of depreciation - ownership and business use - Allowability of depreciation on the imported Hummer H2 where vehicle was registered in Director's name - determination of business use and ownership - HELD THAT: - The Tribunal observed a contradictory stance by Revenue (making an addition under section 69 for alleged unaccounted payment, yet denying depreciation because the car was in director's name). The Tribunal noted that payment for the car was made from company funds and that the decisive question is whether the car was used for the company's business. Authorities below had not examined or recorded findings on actual business use. Therefore the matter required fresh consideration; the burden to establish business use lies on the assessee and the AO must decide after providing opportunity of hearing. [Paras 6]

Ground No.6 allowed for statistical purposes - issue remanded to the Assessing Officer to decide depreciation after examination of business use and evidence.

Application of section 80-IC (and applicability of section 80-IA(8) proviso) - computation of profits of eligible unit and inter unit transfers - Whether deduction under section 80 IC for the Baddi and Goa units was correctly restricted by the AO by applying a segmented/proportional basis invoking section 80 IA(8) - HELD THAT: - The Tribunal independently examined the statutory scheme. Section 80 IC applies to profits 'derived by an undertaking' and incorporates sub sections of section 80 IA, including the transfer pricing rule in section 80 IA(8) which operates where goods or services held for the eligible business are transferred to another business of the assessee and the recorded consideration does not correspond to market value. The Tribunal found that the AO did not establish (i) any transfer of goods/services by the eligible unit to another unit of the same assessee, (ii) any recorded transfer price that differed from market value, or (iii) exceptional difficulty warranting computation on a 'reasonable basis' under the proviso. The AO's method (treating only incremental profit above a prior margin as the eligible unit's profit) was held to be neither mandated by the statute nor a reasonable basis. On independent examination the Tribunal reached the same conclusion as in the assessee's earlier year and allowed the deductions. [Paras 7]

Grounds No.7 and No.8 allowed; AO's segmentation approach under section 80 IA(8)/80 IC rejected and deduction allowed as claimed.

Mark-to-market loss on foreign exchange derivatives - revenue allowance - Allowability of mark-to-market exchange loss on foreign exchange derivatives as revenue loss - HELD THAT: - The Tribunal followed the Special Bench decision in DCIT v. Bank of Bahrain & Kuwait (41 SOT 290 (Mum.)) and, as Revenue did not distinguish that precedent, decided the issue in favour of the assessee. The AO's disallowance was not sustained. [Paras 9]

Ground No.11 allowed; mark-to-market loss on forex derivatives allowed.

Transfer pricing adjustment - remand for verification of international transaction computations - Validity of upward adjustment on international transactions under transfer pricing provisions - whether computation requires fresh examination - HELD THAT: - The Tribunal observed that in the earlier year a similar transfer pricing issue was remitted to the AO to examine correctness of the assessee's computations so that further relief could be granted. Following the practice adopted in the earlier year, the Tribunal restored the matter to the AO for fresh decision with similar directions. [Paras 10]

Ground No.12 allowed for statistical purposes - transfer pricing adjustment remanded to the Assessing Officer for fresh consideration.

Disallowance under section 14A and computation of book profit under section 115JB - Adjustment of 'expenses disallowed u/s 14A' for computation of book profit under section 115JB (MAT) - allowability - HELD THAT: - The Tribunal followed the earlier Tribunal decision in Goetz (India) Ltd. v. CIT (32 SOT 101 (Del.)) and, in the absence of any contrary decision or distinguishing facts, decided the issue in favour of the assessee. The AO's adjustment was not sustained. [Paras 11]

Ground No.13 allowed; the disallowance under section 14A need not be added back for computation of book profit under section 115JB as held in the precedent followed.

Final Conclusion: The appeal of the assessee for AY 2007-08 was partly allowed: registration and trademark/patent expenses were held revenue in nature and allowed; weighted deduction under section 35(2AB) in respect of clinical trials, regulatory approvals and patent filing was allowed; certain issues (section 14A adjustment for regular assessment and MAT, depreciation on the imported car, and transfer pricing adjustment) were remitted to the Assessing Officer for fresh consideration with directions; deductions under section 80 IC/80 IB and allowance of mark to market forex loss were allowed; additions under section 69 were deleted.

Reopening of assessment - change of opinion - reason to believe - Explanation 3 to Section 43(1) - determination of actual cost - main purpose of transfer - valuation by independent/departmental valuer - allowability of depreciation on intangible asset - dislodging registered valuer's report

Reopening of assessment - change of opinion - reason to believe - Reopening of assessment under section 147/148 was invalid as it amounted to a mere change of opinion. - HELD THAT: - The Assessing Officer had raised queries under section 142(1) during original assessment, the assessee had replied and the assessing officer accepted depreciation claim in the original order without making any disallowance. The Tribunal, following the Gujarat High Court and Supreme Court authorities, held that where the AO examined a claim in scrutiny, elicited replies and nevertheless did not disallow the claim in the assessment order, reopening within four years on the same basis without new or additional material is a mere change of opinion and not a valid 'reason to believe'. The reasons recorded for reopening did not disclose any fresh material; the valuation report relied upon was already available during original assessment and the AO's chart of royalty rates was taken from that same report. For these reasons the AO failed to demonstrate a legitimate new ground justifying reopening and the reassessment under section 147/148 was therefore invalid. [Paras 2]

Reopening of assessment quashed as based on mere change of opinion; grounds No.2-4 of the assessee's appeal allowed.

Explanation 3 to Section 43(1) - determination of actual cost - main purpose of transfer - allowability of depreciation on intangible asset - valuation by independent/departmental valuer - dislodging registered valuer's report - Explanation 3 to Section 43(1) could not be invoked because the AO did not establish that the 'main purpose' of the transfer was reduction of tax liability, and even if invoked, the AO's valuation was unsustainable for ignoring expert valuation reports and failing to obtain independent departmental valuation. - HELD THAT: - Explanation 3 permits the AO to determine 'actual cost' only if he is satisfied that the main purpose of transfer was to reduce income-tax liability by claiming depreciation on an enhanced cost. The Tribunal held that mere allegations or inference of tax planning or payment of an inflated price do not suffice; the AO must establish on objective material that the main purpose of the transfer was tax avoidance by enhanced-depreciation. In the present case the AO's order did not record any cogent basis to conclude that business use was not a main purpose; at best the AO showed a contention of over-valuation. Further, after invoking Explanation 3 the AO ignored multiple valuation reports produced by the assessee and did not obtain any independent/departmental valuation to displace the registered valuers' reports. The AO also improperly adopted a historic/past royalty rate and reduced it without adequate justification, whereas the agreement provided for higher future royalty rates which the valuers had adopted. For these reasons the Tribunal found both the precondition and the valuation exercise under Explanation 3 to be wanting and allowed the assessee's claim for full depreciation. [Paras 3]

Explanation 3 to Section 43(1) not attracted and AO's valuation displaced; assessee entitled to depreciation as claimed - Grounds No.5-6 allowed.

Allowability of depreciation on intangible asset - consequential relief - Revenue's appeal against the Commissioner (Appeals)'s restriction of disallowance was rendered infructuous by allowance of the assessee's appeal; the revenue appeal is dismissed. - HELD THAT: - The revenue challenged limitation of disallowance of depreciation. The Tribunal observed that the revenue ground was connected to the issues decided in the assessee's appeal and, having allowed the assessee on the merits (full depreciation claim sustained), there was no subsisting grievance for the revenue to pursue. The Tribunal declined to interfere with the Commissioner (Appeals)'s order and dismissed the revenue appeal. [Paras 6]

Revenue's appeal dismissed as infructuous/consequentially resolved in favour of the assessee.

Final Conclusion: The Tribunal allowed the assessee's appeal: the reassessment was quashed as a mere change of opinion and the assessee's claim for depreciation on the acquired trademark was sustained in full. The revenue's cross-appeal was dismissed.

Capital expenditure versus revenue expenditure - repair and maintenance - tests to determine capital or revenue nature - creation of new identifiable assets - extension of economic life - increase in profitability not determinative of nature of expenditure

Repair and maintenance - capital expenditure versus revenue expenditure - tests to determine capital or revenue nature - creation of new identifiable assets - Whether the expenditures disallowed as capital in nature by the lower authorities were revenue expenditure allowable as repair and maintenance and rightly restored by the Tribunal - HELD THAT: - The Tribunal applied established tests recognising that no single test is universally applicable and that each item must be examined in light of its facts and use. Although the Commissioner (Appeals) found that certain purchases resulted in new identifiable assets, extended the economic life of existing assets, and increased profitability, the Tribunal concluded that the items, even if usable independently, were employed for repair and maintenance. The High Court observed that extension of economic life and enhancement of profitability are not conclusive indicators converting repair expenditure into capital expenditure, and that legitimate repairs may prolong useful life without losing revenue character. On the material findings that the items were used for repair and maintenance, the Tribunal's conclusion was a factual finding supported by application of the relevant tests.

Tribunal's factual finding that the expenditures were revenue in nature and allowable as repair and maintenance is sustained.

Capital expenditure versus revenue expenditure - increase in profitability not determinative of nature of expenditure - Whether any substantial question of law arises to entertain the appeal under Section 260A - HELD THAT: - The High Court held that the Tribunal's conclusions were findings of fact reached after applying recognised tests; the appellate contentions based on extended economic life or increased profitability did not raise a pure question of law. Since the Tribunal addressed the characterisation by examining each item and concluded they were for repair and maintenance, there was no substantial question of law warranting interference under Section 260A.

No substantial question of law arises; appeal dismissed.

Final Conclusion: The Tribunal's factual determination that the disputed expenditures were revenue in nature as repair and maintenance is upheld; the appeal under Section 260A is dismissed for lack of any substantial question of law.

Stay of demand - conditional stay - opportunity of hearing - principle of natural justice - security for interest of revenue - statutory duty to pay tax and penalty

Stay of demand - conditional stay - security for interest of revenue - statutory duty to pay tax and penalty - Validity of the communication directing payment of a specified amount as condition for continuing stay of the remaining tax demand pending appeal - HELD THAT: - The Court noted that the petitioner was assessed to tax and an equal penalty for Assessment Year 2009-2010 and had appealed to the Commissioner (Appeals). A prior communication had extended a stay of the entire demand up to 31.12.2012, but a subsequent communication directed payment of a specified sum by a stipulated date while the balance demand remained stayed until 31.1.2013. Having regard to the magnitude of the demand, the Court held that directing payment of a reasonable amount as security was fair and necessary to protect the revenue while preserving the petitioner's right to pursue the appeal on merits. The Court observed that payment of assessed tax and penalty is a statutory duty and that merely because the earlier indulgence had been granted does not preclude a subsequent conditional order to secure the revenue. On this basis the Court found no grounds to interfere in writ jurisdiction and dismissed the petition.

The communication directing the petitioner to pay the specified amount as condition for continued stay is upheld and the writ petition is dismissed.

Opportunity of hearing - principle of natural justice - Allegation that the conditional order was passed without affording opportunity of hearing and violated natural justice - HELD THAT: - The petitioner relied on a precedent of this Court which held that declining stay without hearing can breach natural justice. The Court acknowledged the principle but declined to interfere because the exercise of discretion to require payment was driven by the need to safeguard the revenue in the face of a substantial demand and the petitioner had already been granted earlier indulgence. In these circumstances the Court did not find that the absence of an additional hearing amounted to a violation warranting intervention in writ jurisdiction.

Complaint of breach of natural justice is rejected and does not justify interference with the impugned communication.

Final Conclusion: Writ petition challenging the communication directing payment of a specified amount as condition for stay of the remaining demand is dismissed; the conditional requirement to pay is held to be a fair measure to secure the revenue and not susceptible to interference under writ jurisdiction.

Provision of owelty - immovable property - capital gain/transferability on partition - family arrangement/family settlement - lien or charge arising from owelty

Provision of owelty - immovable property - capital gain/transferability on partition - Amount paid as compensation to equalize inequalities in partition (owelty) is immovable property and not income exigible to tax. - HELD THAT: - The Court accepted the characterisation of the Rs.24 crores paid to Group A as a provision of owelty made to equalize unequal allotment on partition. Reliance on established authorities established that owelty represents the unpaid price or substituted property forming part of the partitioned estate, and that an owelty ordinarily imports a lien or charge on the property allotted to the party with excessive allotment. The payment received to equalize shares in partition is therefore in substance part of the property rights crystallised on partition and not a taxable transfer giving rise to capital gain. Applying those principles, the amount deposited by Group B to settle inequalities in partition must be treated as immovable property (owelty) and not as income; hence it does not attract capital gains tax. The Court noted that the Assessing Officer's levy of long term capital gain was contrary to this legal characterisation, and observed that the Tribunal and the Commissioner (Appeals) correctly declined to treat the sum as income. The contention regarding taxable interest on the deposit was not adjudicated by the Tribunal and therefore was not decided by the Court.

Appeal dismissed; payment characterised as owelty (immovable property) and not exigible to capital gains tax.

Final Conclusion: The question of law is answered against the Revenue: the compensation paid to equalize inequalities on partition is a provision of owelty constituting immovable property and does not attract capital gains tax; the appeals are dismissed accordingly.

Rejection of books of account - addition on estimate basis - estimation of yield of oil from oilseeds - consolidation of accounts for different oilseeds - findings of fact - disallowance of interest on amounts advanced - advances from cash credit account - commercial expediency

Rejection of books of account - addition on estimate basis - estimation of yield of oil from oilseeds - consolidation of accounts for different oilseeds - findings of fact - Validity of the Tribunal's confirmation of addition made on estimate basis by adopting a higher yield percentage and rejecting books where yields and sales were presented in consolidated form - HELD THAT: - The Tribunal observed that in the year under assessment the assessee presented consolidated quantities and consolidated sales for different oilseeds whereas in earlier years these were shown separately. There was wide variation in percentage yields and market rates for oil and oil cakes, and the assessee chose to prepare consolidated accounts for reasons not explained. On these factual findings the Tribunal rejected the books for the purpose of assessing yield and computed income adopting a higher yield percentage. The High Court held that the Tribunal's conclusion rests on factual findings relating to the manner of account preparation, variation in yields and market prices, and the consolidation chosen by the assessee, and that these findings are determinative. Consequently no substantial question of law arises from the Tribunal's estimation and confirmation of the addition.

Tribunal's confirmation of the addition based on estimated higher yield and rejection of books upheld as a finding of fact; first substantial question of law not entertained.

Disallowance of interest on amounts advanced - advances from cash credit account - commercial expediency - Legitimacy of disallowing interest expenditure where the assessee advanced funds (interest-free) to a firm of his son from his cash credit account on which the assessee paid interest - HELD THAT: - The assessee advanced two interest-free loans to his son's firm by utilising amounts from his cash credit account and continued to pay interest on the overdraft. The Assessing Officer disallowed the interest paid as business expenditure since the interest related to funds advanced for the benefit of another business. The Court agreed that where the assessee has advanced funds from an interest-bearing cash credit account and there is no genuine business purpose or entitlement to claim the interest as expenditure, disallowance is justified. The plea that the advances were interest-free and made out of commercial expediency was rejected on the facts. The Tribunal's disallowance of interest was therefore sustained.

Disallowance of interest paid on amounts advanced from the cash credit account to the son's firm sustained; second substantial question of law rejected.

Final Conclusion: Appeal dismissed; Tribunal's factual finding upholding addition on estimated yield and its disallowance of interest on advances from the cash credit account to the son's firm are sustained.

Research and Development expenditure - Capital expenditure on research and development - Allowability of Research and Development expenditure under the Income Tax Act - continuous nature of research and development - prototyping and subsequent improvement - factual finding on existence of R&D activities

Research and Development expenditure - continuous nature of research and development - Allowability of Research and Development expenditure under the Income Tax Act - Whether the Tribunal was correct in allowing capital expenditure claimed as Research and Development despite the products being marketed - HELD THAT: - The Tribunal found as a factual matter that the assessee had incurred capital expenditure on research and development for products (14 Pin Double Decker Relay Socket and 48x96 panel meter) and that research and development is a continuous process which may require further improvement of prototypes despite units being sold. The High Court accepted the Tribunal's factual finding that R&D activities were carried out and emphasised that mere sale of units does not demonstrate that the assessee's technology was complete and no further development was possible. Since the issue turned on fact-existence and continuity of R&D work-the Tribunal's conclusion was upheld. The Court held that no substantial question of law arose from the Tribunal's factual determination and therefore there was no scope for interference with the allowance made by the Tribunal.

Tribunal's factual finding that the assessee carried out R&D and that such work is continuous was upheld; no substantial question of law arises and the appeal is dismissed.

Final Conclusion: The High Court dismissed the Revenue's appeal, upholding the Tribunal's factual finding that the assessee incurred capital expenditure on R&D and that continued development/prototyping justified allowance of the claimed expenditure; no substantial question of law was found.

Validity of notice of demand under Section 156 of the Income Tax Act - Requirement that levy of interest be specified in the assessment order - Availability of statutory remedy before appellate authorities as exclusive forum - Annexures and computation sheets as part of the assessment order - Abuse of writ jurisdiction and lack of bona fides - Discretion under Section 220(6) and Board Circular No.530 regarding stay/instalment

Availability of statutory remedy before appellate authorities as exclusive forum - Validity of notice of demand under Section 156 of the Income Tax Act - Challenge to a departmental letter demanding payment of arrears is not maintainable in writ jurisdiction when the assessment orders are the subject matter of statutory appeals before the appellate authorities. - HELD THAT: - The Court held that the petitioner has statutory remedies in the appeals pending before the Commissioner of Income Tax (Appeals) or the Income Tax Appellate Tribunal and must pursue those remedies, including applications for interim relief. The writ petition challenges only a letter demanding arrears while the substantial assessments are under appeal; consequently the High Court will not entertain the substantive legal/contentious questions which are pending before the appellate forum. The Court observed that consequences of appellate orders will flow automatically and that the petitioner cannot seek in writ proceedings what it failed to obtain by interlocutory applications in the appellate proceedings. The Court therefore declined to adjudicate the merits of the demand in these proceedings and treated the writ as an attempt to circumvent the statutory appellate process. [Paras 7]

Writ petition challenging the demand-letter is not maintainable; petitioner must pursue relief in the pending appeals.

Requirement that levy of interest be specified in the assessment order - Annexures and computation sheets as part of the assessment order - Where assessment orders or their annexures expressly record demand including interest, the demand notice under Section 156 cannot be impugned on the ground that interest was not specified; annexures form part of the assessment order. - HELD THAT: - On the material produced, the Court noted that for A.Y. 2005-06 and A.Y. 2006-07 the assessing officer's orders (and annexures) set out demands including interest under the relevant sections, followed by notices under Section 156. The Court treated annexures to assessment orders as integral to the orders and therefore rejected the petitioner's contention that interest was not chargeable because not reflected in the assessment order. The Court also observed that the petitioner had not produced assessment orders for some years and, if produced, those orders would likewise disclose interest charges; suppression of such orders was viewed unfavourably. Given that the substantive challenge to the assessments is pending on appeal, the correctness of interest computation is for the appellate forum to decide. [Paras 6, 7]

Where interest is reflected in the assessment order or its annexures, the demand is not vitiated for want of specification; such objections should be raised in the pending appeals.

Discretion under Section 220(6) and Board Circular No.530 regarding stay/instalment - Abuse of writ jurisdiction and lack of bona fides - Contentions as to entitlement to depreciation benefit, discretion under Section 220(6) and compliance with Board Circular No.530, and asserted hardship are matters to be agitated before the assessing or appellate authorities; invoking writ jurisdiction on these grounds without pursuing appellate remedies amounted to abuse and lack of bona fides. - HELD THAT: - The Court observed that the petitioner's factual and legal pleas regarding depreciation entitlement and requests for relief under Section 220(6) / Board Circular No.530 were not appropriately before the High Court because the appellate remedy had not been exhausted or interlocutory relief sought in the appeals. The petition was filed in a manner suggesting an attempt to delay recovery by raising hyper-technical pleas in writ proceedings. The Court characterised this conduct as mala fide and an abuse of process. It recorded that financial hardship or applications for stay/instalment are matters for the appellate authority or assessing officer and cannot justify bypassing the statutory appeal mechanism. [Paras 7]

Those pleas are not maintainable in writ jurisdiction; the petition is dismissed as lacking bona fides and amounting to abuse of process.

Final Conclusion: The writ petition challenging the letter dated 15.10.2012 demanding arrears (tax and interest for A.Ys. 1993-94, 1994-95, 1998-99, 2005-06 and 2006-07) is devoid of merit and dismissed; M.P.No.1 of 2012 is also dismissed and no costs are imposed.

Exports out of India - deemed exports - rectification under section 254(2) - mistake apparent on the record - recall of Tribunal order - Rule 24 ITAT Rules - recall for ex parte decision

Exports out of India - deemed exports - Whether branch sales retained abroad qualify as 'exports out of India' for claiming deduction under section 10B. - HELD THAT: - The Tribunal held that the phrase 'exports out of India' is not defined in the Act and carries the ordinary meaning that goods must be transferred out of the territory of India; tangible goods must physically move out of India. The concept of 'deemed exports' from import export policy cannot be imported into the Income tax Act unless the Act expressly provides. The assessee's branch sales, not involving physical export of goods out of India, therefore do not satisfy the necessary condition precedent for claim of deduction under section 10B. Prior decisions relied upon by the assessee concerning on site software development or retention of export proceeds abroad were distinguished as dealing with different factual and legal matrices and are not applicable to branch sales treated as sales abroad. [Paras 4, 6]

Branch sales which do not involve physical export out of India are not eligible to be treated as 'exports out of India' for deduction under section 10B; the assessee's claim was rejected.

Rectification under section 254(2) - mistake apparent on the record - recall of Tribunal order - Rule 24 ITAT Rules - recall for ex parte decision - Whether the Tribunal can recall its entire order by exercising power under section 254(2) to rectify alleged mistakes apparent on the record. - HELD THAT: - The Court explained that section 254(2) requires the Tribunal to 'make such amendment' where a mistake is brought to its notice, which permits correction of the specific mistake in the original order but does not empower the Tribunal to recall the entire order and pass a fresh decision. Recalling the whole order would amount to a review/rehearing, a power not conferred by the Act. The power to recall an order in entirety is provided only by Rule 24 of the ITAT Rules and is confined to circumstances such as a reasonable cause shown for absence when an appeal was heard ex parte. Consequently, the scope of s.254(2) is limited and cannot be used to reopen and re adjudicate the appeal; the Tribunal's decision taken after considering the arguments cannot be treated as a mistake apparent on the face of the record merely because it is adverse to the assessee. [Paras 4, 5]

The Tribunal cannot recall its entire order under section 254(2); rectification is limited to correcting mistakes apparent on the record and does not permit rehearing the appeal.

Final Conclusion: Miscellaneous application by the assessee seeking rectification/recall of the Tribunal's order was dismissed: branch sales were not held to be 'exports out of India' for section 10B purposes, and the Tribunal has no power under section 254(2) to recall and re adjudicate its entire order.

Depreciation on intangible assets - goodwill as a business or commercial right - use of acquired clientele as a tool of trade - Rule of ejusdem generis in interpretation of "business or commercial rights of similar nature" - deduction of tax at source on subscription/online data services - deemed dividend under section 2(22)(e)

Depreciation on intangible assets - goodwill as a business or commercial right - use of acquired clientele as a tool of trade - Rule of ejusdem generis in interpretation of "business or commercial rights of similar nature" - Payment for purchase of retail clientele and attendant goodwill constitutes an intangible asset eligible for depreciation under section 32(1)(ii). - HELD THAT: - The Tribunal examined the Deed of Assignment which expressly transferred the retail clientele together with the goodwill attached thereto to the assessee. Applying section 32(1)(ii) and the principle of ejusdem generis, the expression "business or commercial rights of similar nature" is to be read as including intangible rights that operate as tools of trade facilitating carrying on of business. Acquisition of the right to deal directly with an existing client base (3709 clients) and the marketing/network benefits flowing therefrom amount to commercial rights akin to licence/goodwill which enable the assessee to access the market without starting afresh. Reliance upon precedents treating acquired business rights, client lists and goodwill as intangible assets for depreciation was noted. Accordingly, the sum paid for acquisition of the clientele/goodwill is capital in nature and depreciation at the prescribed rate (25%) was held to be allowable. [Paras 13, 14, 15, 18, 21]

Depreciation of Rs.62,50,000 (25% of the consideration) allowed; Ground No.1 allowed.

Capital expenditure v. revenue expenditure - depreciation on intangible assets - Alternative plea that the payment be treated as revenue expenditure was dismissed as otiose once payment was held to be capital expenditure eligible for depreciation. - HELD THAT: - The Tribunal recorded that having held the payment to be for acquisition of an intangible capital asset eligible for depreciation, the alternative contention that the amount be allowed as revenue expenditure no longer survives. [Paras 22]

Alternative plea dismissed as otiose; Ground No.2 dismissed.

Deduction of tax at source on subscription/online data services - Payment to Bloomberg Data Services for terminal/online information and database access was a subscription for e magazine/journal services and not subject to TDS; disallowance under section 40A(ia) was deleted. - HELD THAT: - On facts the CIT(A)'s finding that the payment related to subscription for online financial information/e magazine was not controverted before the Tribunal. The Revenue failed to produce distinguishing facts to establish liability to deduct tax at source. The Tribunal found no infirmity in the appellate authority's conclusion that TDS was not required. [Paras 25, 26]

Addition for non-deduction of TDS on Bloomberg charges deleted; Revenue's Ground No.1 dismissed.

Deemed dividend under section 2(22)(e) - Loan/advance received from a related enterprise (Nich Financial Services Ltd.) was not taxable as deemed dividend under section 2(22)(e) in the hands of the assessee-company. - HELD THAT: - The Tribunal followed earlier findings in the assessee's own preceding year and authority that where lending of money is a substantial part of the lender's business and advances are in ordinary course of that business, clause (ii) to section 2(22)(e) excludes such advances from being treated as dividends. No distinguishable fact was shown by Revenue to depart from that conclusion; the Tribunal therefore affirmed deletion of the addition. [Paras 28, 29]

Addition on account of deemed dividend under section 2(22)(e) deleted; Revenue's Ground No.2 dismissed.

Final Conclusion: Assessee's appeal partly allowed by permitting depreciation on the amount paid for acquisition of clientele/goodwill; alternative revenue-expenditure plea dismissed. Revenue's appeal dismissed in entirety - deletion of TDS-related addition and deletion of deemed-dividend addition affirmed.

Discrepancy between TDS certificate and books of account - credit of tax deducted at source to deductee despite excess TDS certificate - bonafide clerical error in TDS reporting and its tax consequences - remand for verification of documentary evidence

Discrepancy between TDS certificate and books of account - bonafide clerical error in TDS reporting and its tax consequences - Deletion of the addition of Rs. 80,88,000/- made by the Assessing Officer on account of difference between the amount shown in the TDS certificate and the amount credited in the assessee's books. - HELD THAT: - The assessee's books showed lower receipts than the amount reflected in the TDS certificate because it had issued a credit note for the differential which, according to the assessee, was not accounted for by the deductor. That position was confirmed by the deductor and characterized as a bonafide inadvertent clerical mistake. Applying the precedent of the Delhi High Court in Sudhir Sekhri, the Tribunal held that an addition cannot be sustained solely on the basis of the higher figure in the TDS certificate where the assessee's books and corroborative confirmation establish that the higher amount was not actually received. On these facts the addition was held to be unwarranted and the appellate order deleting the addition was affirmed. [Paras 12, 13]

Addition of Rs. 80,88,000/- deleted; order of ld. CIT(A) confirmed.

Credit of tax deducted at source to deductee despite excess TDS certificate - credit of TDS where TDS certificate issued on higher amount - Whether the assessee is entitled to credit of TDS of Rs. 84,924/- attributable to the deleted addition despite the excess having been reflected in the TDS certificate. - HELD THAT: - Relying on the decision of the Delhi High Court in Lear Automotive India Ltd., the Tribunal held that the substantive right of the deductee to claim credit of tax deducted cannot be abrogated by CBDT circulars allowing the deductor to seek refund in certain circumstances. Once a TDS certificate is issued and tax has been deducted in respect of amount treated as income of the deductee, the deductee is entitled to credit/refund of such tax to the extent the underlying amount was not taxable in its hands. Applying this principle, the Tribunal upheld the CIT(A)'s direction to grant credit of the excess TDS to the assessee, while endorsing the CIT(A)'s withholding of interest under section 244A on equitable grounds given the mistake was attributable to both parties. [Paras 22, 23]

Credit of Rs. 84,924/- to be allowed to the assessee; interest under section 244A to be withheld as directed.

Remand for verification of documentary evidence - Allowability of provision for audit fees of Rs. 2,10,138/- claimed by the assessee where the supporting bill was not placed before the Assessing Officer. - HELD THAT: - Ld. CIT(A) accepted collateral and circumstantial evidence in respect of certain personnel expenses but the bill said to support the provision for audit fees (issued by Price Waterhouse) was not on record before the AO. Since that specific bill was not considered by the AO, the Tribunal found it appropriate in the interest of justice to restore the matter to the file of the AO for limited purpose of examining the genuineness of the bill and verifying the claim. The Tribunal did not decide the merit of the audit fee claim on substance but directed verification by the AO. [Paras 29, 30]

Matter remanded to the Assessing Officer for limited verification of the Price Waterhouse bill; appellate finding on personnel expenses left undisturbed.

Final Conclusion: The Tribunal dismissed the Revenue's challenge to deletion of the addition of Rs. 80,88,000/- and upheld the grant of TDS credit of Rs. 84,924/- to the assessee (withholding interest as directed), while partially restoring the appeal for limited verification of the audit-fee bill by the Assessing Officer.

Recovery of government dues under Section 142(1) - Meaning of "such person" in Section 142(1) - Attachment and sale of defaulter's property under the Customs (Attachment) Rules, 1995 - Requirement of certificate and show-cause notice under Rule 3 and Rule 4 of the 1995 Rules - Lifting the corporate veil to hold directors liable for company dues

Recovery of government dues under Section 142(1) - Meaning of "such person" in Section 142(1) - Requirement of certificate and show-cause notice under Rule 3 and Rule 4 of the 1995 Rules - Lifting the corporate veil to hold directors liable for company dues - Whether Section 142(1) and the 1995 Attachment Rules permit recovery proceedings, demand notices or attachments to be directed at a person who was not the defaulter named in the certificate and against whom no adjudicatory order or show-cause notice was issued - HELD THAT: - Section 142(1) and the Attachment Rules form a cohesive scheme to recover government dues from the defaulter - i.e., the person from whom government dues are recoverable. Clauses (a) and (b) of Section 142(1) and clause (c) operate against "such person" meaning the person by whom the amount is payable. Rule 3 requires the Assistant/Deputy Commissioner to prepare a certificate specifying the amount due from the defaulter; Rule 4 permits service of notice on that defaulter; and Rule 5 contemplates attachment and sale of the defaulter's property. There is no provision in the Customs Act analogous to provisions in other statutes that make directors automatically liable for corporate dues. To fasten liability on directors or third parties, the Revenue must demonstrate grounds to lift the corporate veil and take steps to make them liable; absent such an exercise, recovery cannot be transposed from a corporate entity to its directors or related persons. Therefore a certificate and consequent demand or attachment addressed to a person who was not named as defaulter in the certificate and against whom no adjudication or show-cause had been undertaken is without authority of law. [Paras 9, 11, 13]

Section 142(1) and the 1995 Rules must be invoked against the defaulter named in the certificate; the Revenue cannot validly proceed against the petitioner merely because she is a director unless the corporate veil is pierced following appropriate adjudicatory steps.

Attachment and sale of defaulter's property under the Customs (Attachment) Rules, 1995 - Requirement of certificate and show-cause notice under Rule 3 and Rule 4 of the 1995 Rules - Lifting the corporate veil to hold directors liable for company dues - Whether the notice of demand dated 1 November 2011 addressed to the petitioner and the consequential attachment of her interest in flat No.1501B were lawful - HELD THAT: - The adjudicatory order and the certificates under Section 142(1)(c)(ii) were in the names of Mehul Exports, Nisum Exports & Finance Pvt. Ltd. and Nisum Global Ltd.; no notice to show cause under Section 124 was issued to the petitioner and no adjudication was passed against her. The certificate was therefore not addressed to the petitioner. Given the statutory scheme, the Revenue's action of issuing a demand to the petitioner and attaching her interest in flat 1501B lacked legal authority. The factual disputes raised by the Revenue about the composite nature of the flat and other matters do not permit the Revenue to bypass the statutory requirement of issuing the certificate and notice to the person in whose name recovery is sought, nor do they substitute for a proper lifting of the corporate veil inquiry which was not undertaken here. [Paras 13, 14, 15]

The notice of demand dated 1 November 2011 and the attachment of the petitioner's interest in flat 1501B are unlawful and are set aside insofar as they affect the petitioner.

Final Conclusion: The writ petitions are allowed: the demand notice dated 1 November 2011 addressed to the petitioner and the attachment insofar as it affects her interest in flat No.1501B are quashed. The order is confined to the petitioner and her interest in flat 1501B; there shall be no order as to costs.

Immunity from penalty and prosecution - immunity from interest - discretion of the Settlement Commission in fixing interest - non-interference with findings of fact recorded by the Settlement Commission - prohibition on dissecting a Settlement Commission order - recovery of duty with interest under the Customs Act

Immunity from interest - discretion of the Settlement Commission in fixing interest - recovery of duty with interest under the Customs Act - Whether the Settlement Commission erred in imposing interest (fixed at 10% per annum) despite the assessee's cooperation and payment of duty as per the admission order - HELD THAT: - The Court upheld the Settlement Commission's exercise of discretion in respect of interest. Although the petitioner paid the duty after admission, the Commission considered the delay (approximately 11 months after issuance of the show cause notice) and the Revenue's loss due to non-payment at the time of import, and fixed interest at 10% per annum. The High Court declined to reappraise the merits of that discretionary assessment of interest, noting that interest is payable under the Act and that the Commission may, case by case, determine appropriate interest in light of the circumstances. [Paras 4, 5, 6]

The levy of interest by the Settlement Commission is justified and will not be interfered with.

Non-interference with findings of fact recorded by the Settlement Commission - prohibition on dissecting a Settlement Commission order - Whether the writ court could dissect the Settlement Commission's order and disturb only the interest portion while leaving other benefits intact - HELD THAT: - Relying on the Supreme Court's principle that findings of fact recorded by the Settlement Commission are not reopenable and that a party cannot accept favourable portions of a settlement order while rejecting unfavourable ones, the High Court held that the petitioners cannot selectively challenge only the interest component. The Court therefore refused to dissect the order and declined to re-examine the settled factual conclusions or the Commission's overall exercise of discretion. [Paras 3, 5]

The petitioners cannot dissect the Settlement Commission's order; selective interference with the interest portion is impermissible.

Immunity from penalty and prosecution - Whether the Settlement Commission's grant of immunity from penalty and prosecution should be disturbed - HELD THAT: - The Settlement Commission granted immunity from penalty and prosecution after considering the conduct of the petitioner, including surrender of the balance DEPB licence and payment of duty. The High Court found the Settlement Commission's order to be a well-considered exercise of discretion based on the materials and declined to interfere with the grant of immunities. [Paras 6]

The grant of immunity from penalty and prosecution by the Settlement Commission is sustained.

Final Conclusion: The High Court dismissed the writ petitions, upholding the Settlement Commission's order in its entirety: the grant of immunity from penalty and prosecution is sustained and the Commission's discretionary imposition of interest is justified and not open to interference.

Quantity/Value Based Duty Exemption Entitlement Certificate - obligations under advance licences - benefit of import duty exemption - waiver of interest under Section 127(h) - powers of the Settlement Commission to refuse claims

Quantity/Value Based Duty Exemption Entitlement Certificate - obligations under advance licences - powers of the Settlement Commission to refuse claims - Claim based on alleged fulfilment by realisation of foreign exchange in respect of advance licence ending No.504 - HELD THAT: - The Court held that the advance licence under challenge is a Quantity/Value Based Duty Exemption Entitlement Certificate whose obligations are framed with reference to supply/quantity and value conditions specified in the licence and not by reference to the quantum of foreign exchange realised from exports. Therefore, realisation of actual foreign exchange cannot substitute for compliance with the licence obligation regarding supply/quantity. On that basis the Settlement Commission was justified in rejecting the appellant's claim in respect of licence No.504. [Paras 2]

The claim relating to licence No.504 is rejected; non-realisation of foreign exchange does not excuse shortage of supply under the licence.

Benefit of import duty exemption - obligations under advance licences - powers of the Settlement Commission to refuse claims - Claim that loss due to buyer's non-payment absolves exporter of licence obligations in respect of advance licence ending No.906 - HELD THAT: - The Court held that an exporter who has obtained the benefit of duty exemption on import cannot thereafter seek to pass on the inadequacy or deficit arising from a buyer's non-payment to the Department. Having availed the import benefit, the exporter remains subject to the licence obligations, and cannot excuse non-compliance on the ground of the buyer's default. Accordingly, the Settlement Commission rightly rejected the claim in respect of licence No.906. [Paras 3]

The claim relating to licence No.906 is rejected; benefit obtained on import does not permit passing buyer's default to the Department.

Waiver of interest under Section 127(h) - powers of the Settlement Commission to refuse claims - Availability and temporal application of waiver of interest under Section 127(h) and relief limited to representation for waiver of interest - HELD THAT: - The Court observed that waiver of interest, fine or penalty as contemplated by Section 127(h) can be extended to a licensee either wholly or in part, but such relief must be applied in accordance with the procedure and law applicable at the relevant point of time (i.e., prior to any subsequent amendment). The Court therefore upheld the limited relief of permitting a representation for waiver of interest (as granted by the Single Judge) and clarified that waiver must follow the procedure applicable when the liability arose, not under any later-amended provision. The Court also granted an extension of time to comply with the direction of the Single Judge regarding payment of 50% of the impugned demand up to 28.02.2013. [Paras 4]

Waiver of interest may be considered only in accordance with the procedure applicable at the relevant time (prior to amendment); representation for waiver is permissible and time to pay 50% of the demand extended to 28.02.2013.

Final Conclusion: The Writ Appeal is disposed of: both substantive claims under the two advance licences are rejected for non-compliance with licence obligations, while the limited relief regarding waiver of interest is confined to consideration under the procedure applicable at the relevant time; time to pay 50% of the demand extended to 28.02.2013.

Assessable value - Customs Valuation Rules - addition and deduction - Despatch money and demurrage - comparative treatment - Refund of duty - entitlement where freight component is adjusted - Limits of adjudication - decision confined to matters in the show cause notice

Limits of adjudication - decision confined to matters in the show cause notice - Reckitt & Colman principle - Ld. Commissioner (Appeals) acted beyond the scope of the show cause notice by dismissing the refund claim on the ground that the assessment order was not under challenge. - HELD THAT: - The show cause notice directed to the appellant rejected the refund claim on three specific grounds: (i) Rule 10 permits addition of certain costs but not deduction; (ii) despatch money cannot be equated with demurrage; and (iii) no legal provision supported the refund claim. The Commissioner (Appeals) however dismissed the appeal relying on a Supreme Court decision that refund is not admissible where the assessment order is not under challenge - a ground that was not raised in the show cause notice nor canvassed in adjudication. Applying the principle in Reckitt & Colman that an adjudicatory authority cannot decide the case on a basis never put to the parties and which they were not required to meet, the Commissioner (Appeals) travelled beyond the scope of the proceedings and thus exceeded jurisdiction. [Paras 5]

The Commissioner (Appeals) erred in dismissing the appeal on a ground not part of the show cause notice; that reasoning is set aside.

Assessable value - Despatch money and demurrage - comparative treatment - Customs Valuation Rules - addition and deduction - Refund of duty - entitlement where freight component is adjusted - Whether despatch money (a rebate/benefit arising from quick unloading) is deductible from the freight component of assessable value and thereby supports a refund claim. - HELD THAT: - The Tribunal examined precedents where demurrage and rebates arising from shipping operations were treated in calculating assessable value. It followed decisions holding that where despatch money is a part of freight or a rebate/benefit accruing on quick unloading, that element may be excluded from the assessable value. The Tribunal relied on earlier Tribunal and Supreme Court authorities which allowed deduction or rebate in computing assessable value and rejected the Revenue's contention that cost of transport is immutable. Applying those authorities, the Tribunal held that despatch money earned for early unloading should be excluded from the costs forming assessable value and entitles the appellant to the refund claimed. [Paras 5]

The refund claim based on deduction of despatch money from the freight component is sustainable; the orders of the lower authorities rejecting the refund are set aside and the appeal is allowed with consequential relief as per law.

Final Conclusion: The orders of the lower authorities are set aside. The appeal is allowed: the appellant is entitled to exclusion of despatch money from the assessable value and to consequential refund relief, with further quantification and relief to follow as per law.

Review jurisdiction - Appropriation and refund of interim deposit - Maintenance and utilization of funds by the Official Liquidator - Acceptance of unconditional apology in contemptous pleadings - Warning and discretionary exercise against invocation of jurisdiction - Correction of clerical/typographical error in court record

Review jurisdiction - Maintainability of review application - Whether the review applications (MCA No.184 of 2011 and MCA No.181 of 2011) warrant recalling or reviewing the judgment and orders dated 7.10.2011 in OJ Appeal No.8 of 2009 and Civil Application No.138 of 2009 respectively - HELD THAT: - The Court examined the grounds urged for review and found that the submissions challenging the original appellate judgment did not raise any valid error of law or apparent error of appreciation of facts sufficient to recall or review the earlier order. The contention that the appearance of an advocate for the Official Liquidator vitiated the proceedings was rejected in the absence of material showing the advocate acted against the interest of the company in liquidation; lack of subsequent ratification would at most affect entitlement to fees, and does not ipso facto nullify the defence taken on behalf of the Official Liquidator. Consequently, the appeal judgment cannot be reviewed on the merits save for limited relief concerning the interim deposit. [Paras 12, 16, 17, 19]

Review of the appellate judgment on its merits is refused; MCA No.184 of 2011 is partly allowed only to the extent of directions regarding the interim deposit, and otherwise the review is dismissed; MCA No.181 of 2011 is dismissed (disposed of) without recalling the order in Civil Application No.138 of 2009.

Appropriation and refund of interim deposit - Maintenance and utilization of funds by the Official Liquidator - Appropriate directions for appropriation, maintenance and possible refund of the sum deposited (Rs.25,00,000/-) by the applicant pursuant to an interim order pending the appeal - HELD THAT: - The Court accepted the Official Liquidator's accounting that a portion of the deposit was expended towards security expenses already paid and transfers to the CPSSRF account, leaving a calculable balance from the deposit. Because substantial security bills remain outstanding and are the subject of separate proceedings (including Company Application No.242 of 2012), the Court declined to direct immediate refund. Instead the Court directed the Official Liquidator to separately mark and maintain the net balance available from the deposit and to utilize that fund against finalized security liabilities; any surplus after finalization must be refunded to the applicant. The Court therefore granted limited review relief strictly confined to accounting and safeguarding the deposit pending resolution of disputes with security agencies. [Paras 8, 13, 14]

Official Liquidator to mark and maintain the net balance of the interim deposit and to apply it, if required, towards finalized security bills; no immediate refund ordered until outstanding security claims are adjudicated, and any surplus thereafter to be refunded to the applicant.

Acceptance of unconditional apology in contemptous pleadings - Warning and discretionary exercise against invocation of jurisdiction - Treatment of contemptuous language used in the review application by the party-in-person and whether contempt proceedings should be initiated - HELD THAT: - The Court observed that portions of the review grounds used language prima facie contemptuous and undermining of the Court's authority. The party-in-person tendered an unconditional written apology which the Court accepted. In exercise of its discretion and in the interest of magnanimity, the Court declined to initiate contempt proceedings but issued a stern warning that repetition of such language in court proceedings may invite proceedings under the Contempt of Courts Act. The Court also allowed deletion of specified objectionable paragraphs from the review application as sought during hearing. [Paras 6, 7, 11]

Unconditional apology accepted; no contempt proceedings initiated but warning issued; specified objectionable portions of the review application to stand deleted.

Correction of clerical/typographical error in court record - Correction of a typographical error in the record relating to the numbering of an interim civil application - HELD THAT: - The Court noted a typographical error where 'Civil Application No.54' had been recorded incorrectly and directed correction to show the accurate reference as 'Civil Application No.54/09', since the appeal concerned the year 2009 and the interim application could not precede that year. [Paras 18]

Record to be corrected to reflect 'Civil Application No.54/09' in place of the incorrect entry.

Resort to alternative remedies as shareholder - Whether dismissal of Civil Application No.138 of 2009 and rejection of the revival scheme operate as a bar to the applicants pursuing other remedies in their capacity as shareholders of the company in liquidation - HELD THAT: - The Court held that dismissal of the applicants' plea in their capacity as ex-directors who sought revival does not preclude them from pursuing appropriate proceedings available to them as shareholders to protect the company's interest, if legally permissible. The order disposing Civil Application No.138 of 2009 was not intended to operate as an absolute bar to such remedies. [Paras 20, 21, 22]

Civil Application No.138 of 2009 stands disposed of consequent to dismissal of the appeal, but applicants remain free to pursue legitimate shareholder remedies to protect the company's interest.

Final Conclusion: Both review applications are disposed of: MCA No.184 of 2011 is refused in respect of merits but partly allowed to the limited extent of directing accountal, segregation and conditional utilization of the net balance of the interim deposit by the Official Liquidator pending finalization of security claims; MCA No.181 of 2011 is disposed of and does not preclude the applicants from pursuing available shareholder remedies; unconditional apology by the party-in-person accepted and no contempt proceedings initiated, subject to a warning; clerical correction in the record is ordered.

Entitlement to Cenvat credit for rent-a-cab and outdoor catering services - Definition of input service under Rule 2(1) of the Cenvat Credit Rules, 2004 - Non-entitlement to Cenvat credit for event management and clearing & forwarding services - Waiver of pre-deposit and stay of recovery where reversal has already been made - Amendment/substitution of cause title

Entitlement to Cenvat credit for rent-a-cab and outdoor catering services - Reliance on Tribunal precedent - Input Cenvat credit for rent-a-cab service and outdoor catering service was allowed. - HELD THAT: - The Tribunal held that rent-a-cab services availed for conveying employees and outdoor catering services provided to employees qualify for input credit. The decision was expressly founded on the Tribunal's earlier ruling in CCE v. Tanzen Toyotesu India (P) Ltd reported in 2011 (23) STR 444 (Kar), which the Bench treated as determinative for allowing the claimed input credit for these categories of services. [Paras 3]

The applicants are entitled to take Cenvat/input credit for rent-a-cab and outdoor catering services.

Definition of input service under Rule 2(1) of the Cenvat Credit Rules, 2004 - Non-entitlement to Cenvat credit for event management and clearing & forwarding services - Waiver of pre-deposit and stay of recovery where reversal has already been made - Event management and clearing & forwarding services do not qualify as input services under Rule 2(1) and the applicants are not prima facie entitled to input service credit; recovery is stayed and pre-deposit waived as reversal was already effected. - HELD THAT: - On scrutiny of the activities undertaken by the applicants, the Tribunal concluded that event management and clearing & forwarding services do not fall within the definition of input service as envisaged by Rule 2(1) of the Cenvat Credit Rules, 2004; accordingly, entitlement to input credit for these services was not accepted prima facie. However, because the applicants had already reversed the disputed amount, the Tribunal waived the requirement of a pre-deposit of the balance service tax, interest and penalty and ordered a stay of recovery during the pendency of the appeal. [Paras 4]

Input credit for event management and clearing & forwarding services denied prima facie; requirement of pre-deposit waived and recovery stayed since reversal was made.

Amendment/substitution of cause title - Application for substitution of the respondent in the cause title was allowed. - HELD THAT: - The Revenue's miscellaneous application seeking correction of the cause title-substituting Commissioner of Service Tax, Chennai in place of Commissioner of Central Excise, Chennai III-was permitted and the cause title was amended accordingly.

Cause title amended to substitute Commissioner of Service Tax, Chennai as the respondent.

Final Conclusion: The Tribunal allowed Cenvat credit for rent-a-cab and outdoor catering services based on precedent; denied prima facie input credit for event management and clearing & forwarding services while waiving pre-deposit and staying recovery because reversal had been effected; and permitted amendment of the cause title substituting the Commissioner of Service Tax, Chennai.

Charter of aircraft - supply of tangible goods service - transport of passengers by air service - right of possession and effective control - classification of service - pre-deposit for stay

Charter of aircraft - transport of passengers by air service - classification of service - Whether the appellant's activity of hiring out aircraft on charter is classifiable as transport of passengers by air service or as supply of tangible goods service. - HELD THAT: - The Tribunal held that the appellant's activity is not covered by transport of passengers by air service, which relates to scheduled or non scheduled air transport of passengers and is focused on carriage of passengers. The services in question were provided to companies which chartered aircraft for specified time or journeys; payments were not based on number of passengers, no tickets were issued, and no charges were collected from passengers. The Tribunal concluded that the correct classification is charter of aircraft, attracting supply of tangible goods service, because the contractual arrangement places the aircraft at the charterers' use for the journey/time and the nature of charges (by distance/time) reflects hiring of the aircraft rather than passenger transportation.

Service is to be treated as supply of tangible goods service (charter of aircraft) and not as transport of passengers by air service.

Right of possession and effective control - supply of tangible goods service - Relevance of the right of possession and effective control to classification and whether possession/control is parted with on time charter. - HELD THAT: - The Tribunal observed that where the right of possession and effective control of the aircraft remains with the charterer during use, the arrangement is indicative of a hire/charter and attracts supply of tangible goods service. It rejected the appellant's reliance on authorities where lack of parting with possession and control led to different conclusions, finding on the facts that the charter arrangement conformed to hiring of the aircraft and that the mode of levy (based on distance/time rather than per passenger) supports that characterisation.

The fact that possession and effective control are with the charterer during use supports classification as supply of tangible goods service.

Classification of service - Whether prior payments made by the appellant and past departmental acceptance preclude reclassification for earlier periods. - HELD THAT: - The Tribunal noted that the appellant's internal method of computing liability (apportioning total receipt by number of passengers) and past payments do not bind the Department absent documentary evidence showing that the Department accepted the appellant's classification. In the current tax regime the assessee self classifies and pays; acceptance by the Department is not presumed without conclusive documentary proof. The Tribunal observed that the agreement and nature of transactions require consideration at the final hearing.

Past mode of payment or self classification does not estop the Department from taking a different view unless documentary evidence of departmental acceptance is produced.

Pre-deposit for stay - Whether stay of recovery should be granted and on what conditions. - HELD THAT: - Finding that the appellant had not established a prima facie case for complete waiver and that no financial hardship had been pleaded, the Tribunal directed a conditional stay. It required the appellant to make a specified pre deposit within a fixed period and, upon compliance, waived the requirement of pre deposit of the balance and granted stay of recovery of the balance during the pendency of the appeal.

Stay of recovery granted subject to compliance with the directed pre deposit within the stipulated period; balance pre deposit requirement waived during pendency of appeal.

Classification of service - charter of aircraft - Remand for examination of agreement and transaction details at final hearing. - HELD THAT: - Although the Tribunal reached an interim classification and addressed prima facie contentions, it recorded that the agreement, nature of transaction and documentary details must be considered at the time of final hearing. The Tribunal therefore left these aspects open for adjudication and verification on the merits at the concluding stage of the appeal.

Issue of detailed factual determination based on agreements and transaction documents remanded for fresh consideration at final hearing.

Final Conclusion: The Tribunal treated the chartering of aircraft as supply of tangible goods service rather than transport of passengers, rejected the appellant's claim of entitlement to the passenger transport classification on the facts, granted conditional stay of recovery subject to the specified pre deposit, and directed that documentary and contractual details be examined at final hearing.

Summary order. Appeal dismissed for non-compliance of Stay Order dated 31.07.2012.

Service tax liability for services not rendered - creation of book entry does not constitute receipt of consideration - retrospective effect of explanatory notification - taxability of supply of technical know-how under Consulting Engineering Service

Service tax liability for services not rendered - creation of book entry does not constitute receipt of consideration - retrospective effect of explanatory notification - Whether service tax could be demanded where no service was actually provided and no consideration was received, and whether mere accounting/debit entries attract service tax for the period prior to 16.06.2005. - HELD THAT: - The Tribunal found as an admitted fact that no service was rendered by the appellants and no consideration was received. Relying on precedent, the Tribunal held that service tax cannot be levied where no service has been rendered. Mere creation of book entries does not amount to receipt of consideration and cannot form the basis for a tax demand for periods prior to the levy. The explanation in Notification No.19/2008, which deems creation of a book entry as receipt, cannot be treated as having retrospective effect to validate demands for earlier periods. In these circumstances the demand and penalties based on accounting entries alone were held unsustainable.

Demand of service tax and penalties based on non-rendered services or mere book entries (for the period prior to 16.06.2005) set aside.

Taxability of supply of technical know-how under Consulting Engineering Service - Whether supply of technical know-how, as per the agreement, is taxable under the category of Consulting Engineering Service. - HELD THAT: - The Tribunal accepted the view in earlier authority that supply of technical know-how does not fall within the ambit of 'Consulting Engineering Service'. Applying that principle to the facts, the agreement for transfer of technical know-how could not be taxed as Consulting Engineering Service. Consequently, the impugned demand insofar as it sought to characterize the transaction as a taxable consulting engineering service was unsustainable.

Supply of technical know-how held not taxable as Consulting Engineering Service; related demands set aside.

Final Conclusion: The impugned orders confirming service tax demands and penalties were set aside and the appeals allowed, the Tribunal granting consequential relief in favour of the appellants.

Confiscation for clandestine removal due to non-entry in RG-I register - on-the-spot statement admission not amounting to admission of clandestine removal - penalty for technical violation arising from removal of goods from factory premises without permission - personal liability of a director for penalty where mala fide intention is not established

Confiscation for clandestine removal due to non-entry in RG-I register - on-the-spot statement admission not amounting to admission of clandestine removal - Whether the copper catenary wire found outside the factory gate, not entered in RG-I register, was liable to confiscation as clandestine removal. - HELD THAT: - The Tribunal accepted the appellant's explanation that the drums of wire were production of the previous day kept outside due to lack of space and situated on a dead-end road between the appellant's two premises; a sketch was placed before the adjudicating authority. The presence of goods outside the factory and the admitted non-entry in RG-I did not, on the material before the Tribunal, establish any mala fide intention to evade duty. The on-the-spot statement of the managing director acknowledged that the goods were kept outside but did not concede clandestine removal. The Revenue did not dispute that the raw material was reflected in accounts, and no independent evidence was produced to show evasion of duty. Having regard to these circumstances, confiscation for clandestine removal could not be sustained. [Paras 6, 7, 8]

Confiscation of the goods was not justified and is set aside.

Penalty for technical violation arising from removal of goods from factory premises without permission - Whether the manufacturing unit was liable to penalty for keeping the goods outside the factory premises without permission. - HELD THAT: - The Tribunal found that, irrespective of absence of mala fide intent, the removal of goods from the factory premises and placement near the factory gate without permission violated statutory rules. The violation was characterised as technical-attributable to lack of space-but nonetheless actionable. Exercising its appellate discretion, the Tribunal reduced the penalty imposed on the manufacturing unit to a nominal amount as appropriate punishment for the technical breach. [Paras 9]

Penalty on the manufacturing unit is sustained but reduced to a nominal amount of Rs. 10,000/-.

Personal liability of a director for penalty where mala fide intention is not established - Whether a separate penalty should be imposed on the managing director in respect of the technical violation when mala fide intention to evade duty was not established. - HELD THAT: - Having concluded that the goods were kept outside without intent to evade duty and that the unit has already been penalised for the technical contravention, the Tribunal found no justification for a separate personal penalty on the managing director. The Tribunal noted that the director's on-the-spot statement did not admit clandestine removal and that penalising him additionally would be unwarranted in the absence of culpable intent. [Paras 10]

Penalty imposed on the managing director is set aside.

Final Conclusion: Confiscation of the copper catenary wire is set aside for lack of mala fide intention to evade duty; the manufacturing unit is liable to a reduced nominal penalty for the technical contravention of keeping goods outside the factory, and the personal penalty on the managing director is quashed. Duty is to be paid when entries in RG-I are made at the time of clearance.

Natural justice - pre-deposit under Section 35F of Central Excise Act, 1944 - clandestine manufacture and removal of excisable goods - admissibility of statements recorded under Section 14 of the Central Excise Act, 1944 - inspection/collection of non-relied upon documents

Natural justice - inspection/collection of non-relied upon documents - Whether the adjudication suffered from violation of principles of natural justice by denial of opportunity to inspect or obtain un relied upon documents and by refusal of further adjournment. - HELD THAT: - The Tribunal found that the show cause notice (dated 20-10-2008) expressly provided for inspection of relied documents and collection of non-relied documents from the DGCEI office, and that the noticees did not respond to the SCN until receipt of personal hearing intimation of 3-3-2010. The adjudicating authority afforded personal hearings on three dates (12 3 2010, 22 3 2010 and 29 3 2010) and the applicants first raised non supply of non relied documents only on seeking adjournment; their earlier correspondence did not assert non receipt as a ground for non filing of reply. The Tribunal held that ample opportunities were given and that the conduct of the applicants indicated lack of bona fide participation rather than denial of opportunity. Previous authorities to the effect that non supply of un relied upon documents or non availment of adjournments does not automatically vitiate proceedings were applied. [Paras 8, 9, 10, 11, 12]

No violation of principles of natural justice; the adjudication was not vitiated by non supply of un relied upon documents or by refusal of further adjournment.

Clandestine manufacture and removal of excisable goods - admissibility of statements recorded under Section 14 of the Central Excise Act, 1944 - Whether there was prima facie evidence of clandestine manufacture and removal of excisable goods by the appellant. - HELD THAT: - On facts the DGCEI seized private/pocket diaries from the possession of directors and their associates which contained ledger like entries of purchases, manufacture and clandestine sales; statements of the persons from whose possession the diaries were recovered admitted authorship and correctness of entries and acceptance of clandestine removals. The Tribunal treated those statements (recorded under Section 14 CEA) as admissible and noted that admitted facts need not be proved. Retractions filed with the appeal papers were present but, not having been placed before the investigating or adjudicating authority during adjudication, were not found to outweigh the documentary and testimonial evidence on record. The Tribunal concluded there was a prima facie case of unaccounted manufacture and clearance without payment of duty. [Paras 7, 14, 15]

There is a prima facie case against the appellants of clandestine manufacture and removal of goods without payment of duty.

Pre-deposit under Section 35F of Central Excise Act, 1944 - Whether the applications for waiver of pre deposit should be allowed and, if not, what pre deposit should be directed. - HELD THAT: - Applying the statutory framework and judicial principles governing applications under Section 35F, and having found a prima facie case against the appellants and noting the appellants' financial position, the Tribunal declined total waiver. Considering interest of revenue and precedents, the Tribunal directed part pre deposit: the assessee to deposit 25% of the duty confirmed (excluding an amount already deposited), and each director to deposit 10% of the penalty imposed, within eight weeks, failing which appeals would be dismissed. Compliance would stay recovery of the balance during pendency of the appeal. [Paras 15]

Partial waiver granted subject to conditions - deposit 25% of confirmed duty (less amount already paid) by the company and 10% of penalty by each director within prescribed time; balance stayed on compliance.

Final Conclusion: The Tribunal held that there was no breach of principles of natural justice in the adjudication; on merits found a prima facie case of clandestine manufacture and removal supported by seized diaries and admissible statements; accordingly total waiver of pre deposit was refused but a conditional partial pre deposit was directed (25% of duty by the company excluding amounts already deposited and 10% of penalty by each director), compliance to secure stay of recovery during the appeal.

Rebate of duty paid on excisable goods cleared from factory for export - Retrospective amendment to Rule 18 of the Central Excise Rules, 2002 - Interaction between rebate entitlement and special area-based exemption notifications - Exclusion of time spent before wrong forum and condonation of delay under Limitation Act principles - Relaxation of direct-from-factory export requirement under Part VI of Chapter 8 of the C.B.E. & C. Excise Manual

Exclusion of time spent before wrong forum and condonation of delay under Limitation Act principles - Whether the delay in filing the revision application was to be condoned and the period spent before the Tribunal excluded for computing limitation. - HELD THAT: - The Government examined the explanation for the four months' delay in filing the revision, noting that the applicants had earlier filed an appeal before the CESTAT, which was the wrong forum. Applying the principles in the cited High Court decisions, the Government held that time spent before the wrong forum can be excluded and sufficient cause shown for condonation. Consequently the revision application was to be treated as filed within time. [Paras 7]

Delay in filing the revision application is condoned and the period spent before the wrong forum excluded so that the revision is treated as timely.

Rebate of duty paid on excisable goods cleared from factory for export - Retrospective amendment to Rule 18 of the Central Excise Rules, 2002 - Interaction between rebate entitlement and special area-based exemption notifications - Relaxation of direct-from-factory export requirement under Part VI of Chapter 8 of the C.B.E. & C. Excise Manual - Whether rebate claimed on duty-paid tea procured from manufacturers/gardens availing area-based exemption was admissible in view of the retrospective amendment to Rule 18 and the procedures followed by the applicant. - HELD THAT: - The Government considered the retrospective proviso to Rule 18 inserted by Finance Act, 2008 and the CBEC instruction clarifying that rebate is admissible for goods cleared for export during 8-7-1999 to 7-12-2006 for that portion of duty subsequently refunded under special area-based exemption notifications. It noted the adjudicating authority had found that the applicant followed the procedures in Notification No. 41/2001-C.E. (N.T.) and Part VI of Chapter 8 of the C.B.E. & C. Excise Manual, and that duty-paid character of the tea was established from documents. The Government also observed that Commissioner (Appeals) had not taken into account the Manual provision which relaxes the direct-from-factory export requirement for tea. Applying the amended Rule 18 and the Manual instructions, the Government concluded that the rebate sanctioned by the original adjudicating authority was in order. [Paras 10, 11]

The rebate claims as sanctioned by the adjudicating authority under Rule 18 are admissible; the order-in-appeal is set aside and the order-in-original restored.

Final Conclusion: The revision application is allowed: the delay is condoned and the period before the wrong forum excluded; the Commissioner (Appeals) order is set aside and the adjudicating authority's order sanctioning the rebate under the amended Rule 18 is restored.

Non-supply of enquiry report - validity of domestic enquiry - reinstatement with back wages - proportionality of punishment - punitive dismissal vs retrenchment - remand for fresh inquiry under B. Karunakar procedure - principles of natural justice

Non-supply of enquiry report - reinstatement with back wages - remand for fresh inquiry under B. Karunakar procedure - principles of natural justice - Whether non-supply of the enquiry report prior to imposition of punishment vitiated the disciplinary proceedings and entitled the workman to reinstatement with full back wages and seniority without further inquiry - HELD THAT: - The High Court accepted the Labour Court's earlier finding that the domestic enquiry was conducted fairly and in accordance with principles of natural justice (accepted by the workman). The Court held that mere non-supply of the enquiry report does not automatically entitle the delinquent employee to reinstatement with full back wages; the correct course is the procedure in B. Karunakar. Once the report was furnished during Labour Court proceedings, the adjudicator should have required the workman to demonstrate specific prejudice caused by non-supply and, if prejudice were shown, should have set aside the punishment while granting liberty to the employer to proceed with the enquiry from the stage of furnishing the report (including placing the employee under suspension). The Labour Court erred in mechanically directing reinstatement with full back wages and seniority without following that procedure; on this short ground the award was set aside and the matter remanded to the Labour Court to proceed strictly in accordance with B. Karunakar. [Paras 10, 11, 21, 25, 26]

Impugned award directing reinstatement with full back wages was quashed; matter remanded to Labour Court to follow B. Karunakar procedure (supply report, opportunity to show prejudice, and if necessary allow fresh inquiry with suspension) rather than automatic reinstatement.

Punitive dismissal vs retrenchment - Section 25-F - Whether Section 25-F of the Industrial Disputes Act applies to the respondent's dismissal - HELD THAT: - The Court held that termination inflicted as a punishment after a disciplinary enquiry is excluded from the definition of 'retrenchment'. The Industrial Adjudicator's invocation of Section 25-F in this case was erroneous because the dismissal was punitive in nature and not a retrenchment; therefore Section 25-F had no application to the facts of this case. [Paras 12, 24]

Section 25-F did not apply to the respondent's dismissal, and the Industrial Adjudicator erred in treating the dismissal as falling within Section 25-F.

Validity of domestic enquiry - proportionality of punishment - Whether the misconduct proved against the workman was sufficient to warrant dismissal and whether the punishment was disproportionate - HELD THAT: - The High Court noted that the Labour Court had earlier held the enquiry valid and the findings of the Enquiry Officer were not perverse (a finding accepted by the workman). On the material, the Court found merit in the employer's contention that the proved misconduct (refusal to perform assigned duties/unauthorised absence) was sufficient to warrant dismissal, citing precedent that failure to carry out lawful orders can justify termination. The Court also found that the Labour Court did not apply its mind to the fact that the Enquiry Officer had found the respondent guilty before ordering reinstatement; thus the conclusion of disproportionateness was not adequately reasoned. [Paras 6, 17, 22, 23, 25]

Findings of misconduct could justify dismissal; the Labour Court's conclusion that dismissal was disproportionate lacked adequate application of mind and does not stand.

Final Conclusion: The writ petition succeeds: the award directing reinstatement with full back wages is quashed and set aside. The matter is remanded to the Labour Court to apply the procedure laid down in B. Karunakar (supply of report, opportunity to show prejudice, and, if warranted, fresh inquiry with suspension) and to decide consequential benefits in accordance with law; parties to bear their own costs.