TaxTMI Updates e-Newsletter
Jan 31,2017

Classification of income as business income or capital gains - treatment of gains arising from transactions executed through Portfolio Management Services (PMS) - choice of portfolio treatment: investment portfolio v. trading (stock in trade) - consistency principle in treatment of shares across assessment years - disallowance under section 14A read with Rule 8D - onus on Assessing Officer to record satisfaction under section 14A(2) before invoking Rule 8D

Classification of income as business income or capital gains - treatment of gains arising from transactions executed through Portfolio Management Services (PMS) - choice of portfolio treatment: investment portfolio v. trading (stock in trade) - consistency principle in treatment of shares across assessment years - Whether the gains on sale of shares and mutual funds are assessable as business income or as capital gains. - HELD THAT: - The Tribunal affirmed the CIT(A)'s finding that the assessee's gains are assessable as capital gains. The conclusion rests on the factual matrix: (a) substantial income of the assessee derived from non trading activities (sports endorsements) and the relatively small proportion of total investments managed through PMS; (b) investments were made out of own funds with no borrowings and were consistently shown as 'investments' in the balance sheet over several assessment years; (c) significant dividend receipts relative to capital gains and absence of stock in trade valuation practices (no valuing at cost or market whichever is less) pointed to investor, not trader, treatment; (d) detailed breakup of PMS and direct investments demonstrated that PMS transactions formed a limited part of overall activity and that capital gains arose mainly from direct investments; (e) CBDT circulars and judicial decisions endorse that use of PMS does not ipso facto convert investment transactions into business income and that a taxpayer may have distinct investment and trading portfolios; (f) the Tribunal relied on subsequent judicial pronouncements (including reversal of the Radial International view by the Delhi High Court) to hold that PMS arrangements are agency in nature and do not denote trading intent; and (g) in view of the assessee's consistent treatment over years, the principle of consistency militated against recharacterisation by the AO. On these determinative factual and legal considerations the AO's blanket assessment of all gains as business income (without segmenting PMS and direct investments or addressing the assessee's consistent stance) was held unsustainable. [Paras 20, 21, 22, 23, 24]

Findings of the CIT(A) that the gains on sale of shares and mutual funds are assessable as capital gains are upheld; Revenue's ground on recharacterisation to business income is dismissed.

Disallowance under section 14A read with Rule 8D - onus on Assessing Officer to record satisfaction under section 14A(2) before invoking Rule 8D - Whether disallowance under section 14A read with Rule 8D was rightly made by the AO. - HELD THAT: - The Tribunal upheld the CIT(A)'s deletion of the section 14A/Rule 8D disallowance. The assessee had not claimed expenses in the profit and loss account attributable to exempt income; expenditure incurred for investments (including PMS fees) was debited to the capital account and not charged to P&L. The AO invoked Rule 8D without recording the requisite satisfaction under section 14A(2) or performing the necessary analysis to identify any P&L expenses attributable to exempt income. Given that (a) direct investment related expenses had not been claimed against taxable income, (b) interest expense was nil, and (c) only a small amount of common P&L expenses could at best be treated as deemed expenses, the CIT(A) correctly found the AO's disallowance excessive and procedurally unsound. The Departmental Representative did not controvert the factual findings on record showing absence of P&L claims relating to exempt income. [Paras 28, 29, 30, 31, 32]

Disallowance under section 14A read with Rule 8D deleted; CIT(A)'s order on this issue is upheld and Revenue's ground is dismissed.

Final Conclusion: Both appeals filed by the Revenue for A.Y. 2010 11 and A.Y. 2011 12 are dismissed; the orders of the CIT(A) upholding the assessee's treatment of gains as capital gains and deleting the section 14A/Rule 8D disallowance are affirmed.

Royalty under the DTAA - business profits attributable to a permanent establishment - copyright versus copyrighted article - effective connection with permanent establishment - interpretation of Article 12(3) of the Indo-China DTAA - interest under Section 234B of the Income tax Act

Royalty under the DTAA - copyright versus copyrighted article - business profits attributable to a permanent establishment - interpretation of Article 12(3) of the Indo-China DTAA - Payments for software supplied with telecom equipment do not constitute "royalty" under Article 12(3) of the Indo China DTAA or under Section 9(1)(vi) of the Act and are to be treated as business profits/sale of goods linked to the supply of hardware. - HELD THAT: - The court applied the reasoning in Ericson and related authorities to hold that where software is supplied as an integral, indispensable part of equipment and cannot be used independently, the transaction must be viewed as supply of goods/business income rather than a payment for transfer of copyright. A mere bifurcation of price or separate invoicing does not alter substance. Section 14 of the Copyright Act distinguishes acquisition of copyright (transfer/assignment of exclusive rights) from acquisition of a "copy" or "copyrighted article"; to qualify as royalty under Explanation II to Section 9(1)(vi) there must be vesting of copyright rights (or a licence amounting to transfer of such rights) which was not established on the facts. The nomenclature of a licence in the supply contract is not decisive where the software and hardware form a single, inseparable commercial transaction and the customer does not acquire the copyright rights contemplated by Section 14. The revenue's reliance on Explanations 5 & 6 and the characterisation as royalty was rejected as contrary to the factual matrix and established precedents. [Paras 22]

Payments for the software were held to be business profits/sale of goods (not royalty) and taxable accordingly; the ITAT's finding in favour of the assessee on this point is upheld.

Interest under Section 234B of the Income tax Act - Interest charged under Section 234B was not sustainable in the facts of the case and was deleted. - HELD THAT: - The court followed the reasoning in GE Packaged Power Inc. and related authority relied upon by the ITAT, concluding that the conditions for levy of interest under Section 234B were not satisfied on the facts before the tax authorities. Accordingly, the interest imposed was not upheld. [Paras 23]

Interest under Section 234B was held not chargeable and the relief granted by the ITAT in favour of the assessee is affirmed.

Final Conclusion: Both questions framed were answered against the revenue and in favour of the assessee; the appeals by the revenue are dismissed.

Requirement of a reasoned and speaking order before making disallowance where documentary evidence is produced - disallowance under section 40A(3) of the Act - addition under section 68 on unexplained receipts and reconciliation of impounded books with regular books - treatment of company expenses charged by credit card and principle against treating company expenditure as personal - reasonableness of directors' remuneration and allowance as business expenditure - allowability of payments to junior artistes and restriction of disallowance on other production expenses - applicability of Rule 9A(5) vis-a -vis Rule 9A(2) for apportionment of cost of production - clubbing of inter-divisional incomes and expenses for assessing production cost - prohibition against double taxation / taxing same income in multiple years

Requirement of a reasoned and speaking order before making disallowance where documentary evidence is produced - Addition of Rs. 1.38 crores treated as bogus expenditure deleted for lack of reasoned findings by AO - HELD THAT: - AO added the amount treating the expenditure as bogus despite the assessee having furnished details and documentary evidence. The Tribunal held that where the assessee produces documentary evidence the AO must record reasoned findings explaining why the expenditure is not genuine; mere ipse dixit or general observations are inadequate. As AO failed to explain how the claimed "other production expenses" were non-genuine, the appellate order deleting the addition was sustained.

Addition deleted; FAA order upheld.

Disallowance under section 40A(3) of the Act - Disallowance under section 40A(3) restricted to Rs. 10 lakhs on verification of cash books - HELD THAT: - AO made an adhoc 20% disallowance without itemising payments hit by section 40A(3). The FAA examined the cash book and found most individual payments were below the monetary threshold, though some exceeded it. On that factual basis the FAA appropriately restricted the disallowance to Rs. 10 lakhs. Tribunal found no infirmity in this factual conclusion and restriction.

Disallowance sustained in part; restricted to Rs. 10 lakhs.

Addition under section 68 on unexplained receipts and reconciliation of impounded books with regular books - Addition of Rs. 96.50 lakhs under section 68 deleted after reconciliation accepted - HELD THAT: - Difference between impounded books and audited financials arose from presentation and misclassification; assessee furnished a reconciliation showing the receipts were offered to tax. FAA found AO did not rebut or explain the reconciliation. Tribunal agreed that AO had not appreciated the presentation difference and therefore there was no basis to invoke section 68.

Addition deleted; FAA order upheld.

Treatment of company expenses charged by credit card and principle against treating company expenditure as personal - Disallowance of credit-card incurred expenses as personal deleted - HELD THAT: - AO classified certain credit-card expenses as personal. Earlier Tribunal and CIT(A) findings for adjacent years established that as a corporate entity the assessee's claimed entertainment/business expenses could not be treated as 'personal' in the sense applicable to individuals, and in any event the assessee had returned such expenses in FBT returns. Applying that precedent, the Tribunal deleted the addition.

Addition deleted.

Reasonableness of directors' remuneration and allowance as business expenditure - Additions disallowing substantial director remuneration deleted as remuneration was commensurate with services - HELD THAT: - AO disallowed large portions of remuneration paid to directors on generalized assumptions about customary fees. Tribunal for subsequent years had examined the nature of film production, producers' post production roles and promotional responsibilities, and found the remuneration reasonable and supported by the business context. Following that detailed factual and legal appreciation, the present additions were deleted.

Additions deleted; remuneration allowed as business expenditure.

Allowability of payments to junior artistes and restriction of disallowance on other production expenses - Payments to junior artistes allowed in full; disallowance on other production expenses restricted to 5% - HELD THAT: - Tribunal followed its prior reasoning for an earlier year which allowed 100% deduction for payments to junior artistes and restricted disallowance on other production-related payments to a nominal percentage. Applying that consistent approach, the Tribunal directed AO to allow payments to junior artistes fully and restrict other disallowances to 5%.

Payments to junior artistes allowed fully; other production expenses disallowance limited to 5%.

Applicability of Rule 9A(5) vis-a -vis Rule 9A(2) for apportionment of cost of production - Rule 9A(5) not to be invoked where Rule 9A(2) applies; entire cost allowed where films released at least 90 days before year end - HELD THAT: - AO applied Rule 9A(5) to proportionately disallow production costs because certain receipts were not credited in the year. Tribunal analysed Rule 9A(2) and Rule 9A(5) and held that where films are released on commercial basis at least 90 days before the end of the previous year, Rule 9A(2) permits full deduction of cost of production. On facts all three films met the 90 day release condition and aggregate income exceeded production cost; hence proportionate disallowance under Rule 9A(5) was not warranted.

Proportionate disallowance under Rule 9A(5) deleted; full cost of production allowed in terms of Rule 9A(2).

Clubbing of inter-divisional incomes and expenses for assessing production cost - prohibition against double taxation / taxing same income in multiple years - Expenses incurred by one division but recorded in another may be clubbed; same income cannot be taxed twice - HELD THAT: - On survey and impoundment discrepancies, assessee furnished reconciliation showing certain production costs were paid by the distribution division but included in production division accounts; FAA accepted that view and previous years' authorities supported clubbing divisions to view overall picture. Tribunal found AO had not shown these transfers were inflated or unsupported. Separately, where an amount had been taxed in an earlier year, it could not be taxed again; Tribunal directed AO to follow earlier year findings and not tax the same amount twice.

Inter-divisional expenses accepted on reconciliation; AO directed not to tax same income in multiple years.

Final Conclusion: The Tribunal sustained the appellate findings and allowed major grounds raised by the assessee (including deletions of additions for bogus expenditure, director remuneration, credit card expenses, Rule 9A proportionate disallowance, and payments to junior artistes), restricted certain disallowances (section 40A(3) and other production expenses), accepted reconciliations between impounded and regular books, and directed that the same income not be taxed in multiple years. Consequentially, AO's appeal for AY 2005-06 is partly allowed; appeals for AY 2006-07 and 2008-09 are dismissed; assessee's appeal is allowed.

Condonation of delay in filing appeal - admission of additional evidence in appellate proceedings - admissibility of auditor's certificate / Form 56G as procedural requirement - availability of deduction under section 10B from date of STPI registration - penalty under section 271(1)(c): concealment vs bona fide mistake

Condonation of delay in filing appeal - Whether the delay of 134 days in filing the assessee's appeal should be condoned. - HELD THAT: - The assessee explained the delay as inadvertence and oversight in communicating records to its authorised representative and provided evidence of bonafides. The Tribunal found no material to displace these averments and accepted that the delay was neither intentional nor deliberate. In these circumstances the CIT(A)'s exercise in condoning the delay and admitting the appeal for adjudication on merits was upheld. [Paras 6]

Delay of 134 days in filing the appeal condoned; appeal admitted on merits.

Admission of additional evidence in appellate proceedings - admissibility of auditor's certificate / Form 56G as procedural requirement - Whether the CIT(A) was justified in admitting the assessee's additional evidence (including STPI rectification and auditor's report) during appellate proceedings. - HELD THAT: - The assessee produced contemporaneous documentary proof that STPI registration existed with effect from 18/02/2009 and furnished the STPI ratification communication and auditor's report during the appellate proceedings. The Assessing Officer's remand report did not dispute these facts. The Tribunal accepted the CIT(A)'s view that the auditor's report/Form 56G is a procedural verification tool whose non-filing with the return does not necessarily disentitle a rightful claim and therefore the additional evidence was properly admitted for consideration. [Paras 7]

Additional evidence admitted; Form 56G/auditor's certificate treated as procedural compliance that can be furnished during appellate proceedings.

Availability of deduction under section 10B from date of STPI registration - Extent and effective date of the assessee's entitlement to deduction under section 10B. - HELD THAT: - Material on record established that the assessee was registered with STPI w.e.f. 18/02/2009 and that all other statutory conditions for section 10B were satisfied (export nature of receipts, realisation in foreign exchange, and verification by auditor). The CIT(A) held that deduction is available from the date of STPI registration and directed the AO to compute the proportionate profit eligible for deduction from that date. The Tribunal found no reason to interfere with this conclusion, the finding on factual registration date being undisputed by Revenue. [Paras 8]

Section 10B deduction allowed on proportionate basis w.e.f. 18/02/2009; AO to compute eligible deduction accordingly.

Penalty under section 271(1)(c): concealment vs bona fide mistake - Whether penalty under section 271(1)(c) for concealment should be sustained despite reversal of the quantum disallowance. - HELD THAT: - The CIT(A) found that the erroneous statement made by the chartered accountant during assessment about absence of STPI registration was a bona fide mistake and that the assessee otherwise satisfied conditions for deduction, had relied on bona fide belief and produced supporting material during appellate proceedings. Relying on principles that not every adverse quantum finding attracts penalty where bona fides are shown, the Tribunal agreed with the CIT(A)'s application of the Supreme Court precedent and concluded that concealment penalty was not exigible in the circumstances. [Paras 11]

Penalty under section 271(1)(c) deleted.

Final Conclusion: Both Revenue appeals and the assessee's cross-objection are dismissed; delay in filing the appeal was condoned, additional evidence was admitted, section 10B deduction allowed proportionately from 18/02/2009, and the penalty under section 271(1)(c) deleted.

Advances given in the course of business are revenue expenditure - transactions in form of loans may be recharacterised as business transactions where they arise from and are integrally connected with the business - liability written back/arising from settlement in the normal course of business is taxable as business income

Advances given in the course of business are revenue expenditure - commercial expediency in conducting business - Allowability of advances written off as deductible in computing business income - HELD THAT: - The Tribunal concurred with the CIT(A) that the advances paid by the assessee to the spinning mills were made in the ordinary course of its business to secure processing of goods and to ensure continuity of supply. Relying on commercial expediency and precedent treating advance payments made to suppliers/contractors as revenue in nature, the advances were held to represent current account transactions and revenue expenditure, and thus allowable in computing business profits. The assessing officer's objections about absence of written arrangements and non-pursuit of recovery did not, on the facts, negate the commercial character of the advances. [Paras 8]

The addition disallowing advances of Rs.2,04,39,222/- and debtors amount of Rs.56,10,934/- was deleted; advances allowed as revenue deduction.

Transactions in form of loans may be recharacterised as business transactions where they arise from and are integrally connected with the business - recharacterisation of capital-form transactions to revenue where substance aligns with business operations - Allowability of interest-bearing loan written off as deductible business loss - HELD THAT: - Although the loan to the spinning mills was treated by lower authorities as a capital-account transaction, the Tribunal examined the substance and context - the loan was made to the same mills to whom advances were given and arose from the assessee's business operations. Applying the principle that a transaction's substance governs its tax character, and following authority recognising waiver/settlement consequences arising from business transactions, the Tribunal held that the loan bore the colour of a business transaction and its write-off was allowable for computing business income. [Paras 9]

The addition of Rs.16,35,010/- on account of the interest-bearing loan was reversed and the write-off allowed as business loss.

Liability written back/arising from settlement in the normal course of business is taxable as business income - treatment of remission/waiver of liabilities in profit and loss account as business income when arising in normal course - Treatment of liability written back (principal and interest components) on settlement with bank as taxable business income - HELD THAT: - The assessee sought exclusion of the principal portion of the loan written back on settlement with the bank, contending it was not business income. The CIT(A) had held, and the Tribunal affirmed, that the remission of liability arose in the normal course of the assessee's business and was correctly credited as 'liabilities written back' in the profit and loss account. The assessee had neither claimed a deduction nor filed a revised return; the Tribunal found no error in treating the written-back liability as business income and dismissed the assessee's additional grounds. [Paras 10, 11]

The claim to exclude the principal amount written back was rejected; the liability written back was rightly assessed as business income.

Final Conclusion: Revenue appeal dismissed; assessee's appeal partly allowed - advances and the loan write-off allowed as deductions for business, but the liability written back on bank settlement upheld as taxable business income.

Protective assessment - disallowance of commission payments - genuineness of firm - related-party transactions - burden of proof for deduction of business expenditure - assessment on substantive basis

Disallowance of commission payments - related-party transactions - burden of proof for deduction of business expenditure - Validity of disallowance of commission payments claimed by M/s. Asha Industries for AYs 1990-91 to 1992-93 - HELD THAT: - The Tribunal upheld the disallowance because the assessee failed to produce documentary evidence specifying services rendered by the payee-firm and linking marketing services to corresponding sales and commission entries. Oral statements of partners, without corroborative documents, were held insufficient to discharge the burden of proof for allowing the claimed business expenditure, particularly where the payee and payer were related concerns. The Tribunal rejected the contention that prior acceptance of similar claims in earlier years estops the Revenue, observing each assessment year is independent. A coordinate-bench order relied upon by the assessee was found to be based on an incorrect appreciation of facts and not persuasive. On these grounds the CIT(A)'s confirmation of the disallowance was sustained and the appeals dismissed. [Paras 8, 9, 11]

Appeals against disallowance of commission payments for AYs 1990-91 to 1992-93 dismissed; disallowances and protective assessment upheld for lack of evidence proving genuineness of services.

Protective assessment - genuineness of firm - assessment on substantive basis - Sustainability of protective assessment and disallowance of expenses (salary, travelling, advertisement) in case of M/s. Tona Tab Agency for AY 1993-94 - HELD THAT: - Relying on the findings reached in the case of M/s. Asha Industries, the Tribunal concluded that M/s. Tona Tab Agency failed to establish it as a genuine firm that rendered the claimed marketing services. The assessee did not furnish documentary evidence to substantiate the agreement terms or the services corresponding to commission receipts; in appellate proceedings it also failed to controvert the AO/CIT(A) findings or produce supporting documents. Given the close relation between the parties and absence of cogent evidence, the AO's protective assessment and disallowances were affirmed by the CIT(A) and upheld by the Tribunal. [Paras 10, 11]

Appeal for AY 1993-94 dismissed; protective assessment and disallowance of the specified expenses upheld for failure to prove genuineness and services rendered.

Final Conclusion: Condonation of delay in filing the appeals was allowed and, on merits, all four appeals were dismissed: the Tribunal upheld the disallowance of commission payments in AYs 1990-91 to 1992-93 and affirmed the protective assessment and disallowance of expenses in AY 1993-94 on the ground that the assessees failed to produce documentary evidence proving genuineness of services and the claimed expenditures.

Entitlement to higher rate of depreciation for commercial vehicles - definition of "commercial vehicle" under New Appendix-I - heavy goods vehicle and goods carriage requirement - exemption of road-rollers and graders under section 65 of the Motor Vehicles Act - conflict of judicial authorities on classification of earth moving machinery - two views rule in favour of the assessee

Entitlement to higher rate of depreciation for commercial vehicles - definition of "commercial vehicle" under New Appendix-I - heavy goods vehicle and goods carriage requirement - conflict of judicial authorities on classification of earth moving machinery - two views rule in favour of the assessee - Assessee's claim for depreciation at 50% on JCB Excavator, Tata Motor Grader and Soil Compactor for A.Y. 2010-11 - HELD THAT: - The Tribunal considered competing decisions and the reasoning in the assessment and appellate orders. The CIT(A) had held that higher depreciation applies only to vehicles used 'solely for the carriage of goods' as per the Motor Vehicles Act definitions and New Appendix I, and relied on section 65(2)(c) (exemption power for road rollers, graders, etc.) to distinguish earth moving machinery from commercial vehicles, thereby restricting depreciation to the general machinery rate. The assessee relied on High Court and Tribunal decisions holding that certain earth moving equipment registered as motor vehicles qualify for higher depreciation. Noting conflicting views of coordinate Benches and High Courts, the Tribunal applied the settled Supreme Court principle that where two views are possible, the view favourable to the assessee should be adopted. Respectfully following that principle, the Tribunal concluded that the assessee is entitled to the higher rate of depreciation claimed and directed the Assessing Officer to allow depreciation at 50% for the year under appeal.

Depreciation at 50% allowed on JCB Excavator, Tata Motor Grader and Soil Compactor for A.Y. 2010-11; appeal allowed.

Exemption of road-rollers and graders under section 65 of the Motor Vehicles Act - classification of machinery vs. motor vehicle for depreciation computation - Direction to Assessing Officer to examine earlier year treatment and modify WDV if necessary - HELD THAT: - The CIT(A) observed that the items were purchased in FY 2008-09 (relevant to A.Y. 2009-10) and depreciation for that year appeared to have been allowed at 50%. The appellate authority therefore directed the Assessing Officer under the relevant provisions to examine the issue for A.Y. 2009-10, if not already done, and take appropriate action including reassessment under section 148 and modification of the written down value as on 01.04.2009. The Tribunal endorsed the need for the Assessing Officer to verify and rectify the WDV computation arising from the acceptance of higher depreciation in the year of acquisition.

AO directed to examine A.Y. 2009-10, take appropriate action under section 148 if required, and modify WDV as on 01.04.2009.

Final Conclusion: The Tribunal allowed the assessee's appeal for A.Y. 2010-11, holding that on conflicting authorities the view favourable to the assessee applies and directing the Assessing Officer to allow depreciation at 50% on the JCB Excavator, Motor Grader and Soil Compactor; the AO was also directed to examine and, if necessary, rectify the WDV for A.Y. 2009-10.

Unexplained cash credits under section 68 of the Income tax Act - onus to prove identity, genuineness and creditworthiness - cash receipts as business collections on behalf of a related party - test of human probabilities - failure to produce corroborative evidence and confirmations

Unexplained cash credits under section 68 of the Income tax Act - onus to prove identity, genuineness and creditworthiness - cash receipts as business collections on behalf of a related party - failure to produce corroborative evidence and confirmations - test of human probabilities - Addition of Rs. 1,34,70,822 made as unexplained cash credits under section 68 was sustainable - HELD THAT: - The assessee claimed the impugned cash credits were collections from M/s. Accost Impex Ltd. on behalf of its sister concern M/s. Metal Enterprise Pvt. Ltd., and produced company documents, sale invoices, ledger extracts, bank statements and a confirmation. The Assessing Officer and the CIT(A) rejected the explanation because no satisfactory reason was offered why the purchaser paid the assessee instead of the seller, no independent confirmation from the payee was on record, and no evidence of the alleged dispute or bounced cheques between the purchaser and the sister concern was produced. The Tribunal applied the established test that the assessee bears the onus of proving identity, genuineness and creditworthiness; the explanation must satisfy ordinary probabilities. In absence of corroborative material demonstrating why the payment route was adopted and without adequate evidence of the asserted dispute or other supporting documents, the Tribunal found the assessee failed to discharge its onus and upheld the addition under section 68. [Paras 5]

Addition of Rs. 1,34,70,822 as unexplained cash credit under section 68 is confirmed.

Unexplained cash credits under section 68 of the Income tax Act - failure to produce corroborative evidence and confirmations - Addition of Rs. 6,00,000 as unexplained cash deposits was sustainable - HELD THAT: - The assessee asserted the Rs. 6,00,000 deposits were advances from customers which were later returned, but failed to furnish the list or details of the customers or any corroborative evidence to substantiate the payments. Both the Assessing Officer and the CIT(A) recorded non-satisfaction with the explanation and the Tribunal found no reason to interfere with those findings. In absence of supporting particulars identifying payors and proving the nature of receipts, the invocation of section 68 was justified. [Paras 7]

Addition of Rs. 6,00,000 as unexplained cash deposit under section 68 is confirmed.

Final Conclusion: Both additions-of Rs. 1,34,70,822 and Rs. 6,00,000-treated as unexplained cash credits/deposits under section 68 are upheld for AY 2009-10, and the assessee's appeal is dismissed.

Deduction of interest on housing loan - co-ownership and beneficial ownership - proof of payment and financial contribution - allocation of rental income - operation of joint bank account as evidentiary factor - remand for verification and remand report

Deduction of interest on housing loan - co-ownership and beneficial ownership - proof of payment and financial contribution - operation of joint bank account as evidentiary factor - remand for verification and remand report - entitlement to deduction of interest in respect of property at C-440, Sushant Lok 1, Gurgaon where title and loan are in joint names but payment and funding are claimed to be from the assessee alone - HELD THAT: - The Tribunal found that the CIT(A) failed to examine or address the assessee's evidences and explanations that the property was purchased entirely from the assessee's own funds and that EMIs and initial down payment were paid from the assessee's bank account. The mere fact of joint title or joint operation of an account is not by itself determinative to deny deduction where contemporaneous evidence shows the claimant alone applied for the loan, paid the EMIs and received rent receipts. The Tribunal held that the question of who is entitled to the deduction turns on factual verification of who applied for and obtained the loan, who paid the EMIs, and into whose account rental income is deposited. In view of the fresh evidence filed before the CIT(A) and the lack of a remand report from the AO, the Tribunal set aside the impugned order and remanded the issue for further verification and for the CIT(A) to obtain (or in default verify) a remand report and pass a speaking order after giving the assessee an opportunity of being heard; it also directed that persistent non cooperation by the AO in furnishing a remand report be reported for administrative action. [Paras 5]

Impugned disallowance set aside and matter remanded to the CIT(A) for verification of the assessee's claim and for obtaining/considering a remand report, with directions as to opportunity of hearing and reporting AO's dereliction if remand report is not furnished.

Deduction of interest on housing loan - allocation of rental income - proof of payment and financial contribution - remand for verification and remand report - allowability of interest deduction in respect of A 1210, Tris Springfields, Bangalore where rent and title were treated as divided 73%/27% but assessee claims receipt of 100% rent and that spouse did not contribute to acquisition - HELD THAT: - The Tribunal concluded that the CIT(A) wrongly assumed that the assessee's spouse owned 27% of the Bangalore property and disallowed interest accordingly without properly verifying the assessee's documentary evidence that 100% of rent had been declared by the assessee and that amounts for furniture/appliances received by the spouse did not amount to ownership of 27% of the property. The Tribunal emphasised that allocation of interest must follow factual verification of who financed the acquisition, who paid EMIs and who received rent proceeds. Given the fresh evidence on record and absence of an AO remand report, the Tribunal set aside the CIT(A) order insofar as it disallowed interest and remanded the matter for verification and adjudication in accordance with law after affording the assessee a reasonable opportunity to be heard. [Paras 5]

Impugned disallowance in respect of Bangalore property set aside and matter remanded to the CIT(A) for verification and decision after obtaining/considering a remand report and giving the assessee an opportunity of being heard.

Final Conclusion: The appeal is allowed for statistical purposes; the CIT(A)'s confirmation of additions is set aside and both contested issues (Gurgaon and Bangalore properties) are remanded to the CIT(A) for fresh verification of the assessee's evidences, obtaining or preparing a remand report and passing speaking orders after affording the assessee a reasonable opportunity of being heard, with a direction to report the AO's failure to furnish a remand report for administrative action if non cooperation continues.

Reopening of assessment after four years - requirement of failure to disclose fully and truly - Tax deduction at source obligation under section 195 - Treatment of commission paid to a non-resident agent for export sales - Disallowance under section 40(a)(i)

Reopening of assessment after four years - requirement of failure to disclose fully and truly - Validity of reassessment initiated after four years from the end of the assessment year - HELD THAT: - The Tribunal held that for a reopening after four years the conditions in the proviso to section 147 require existence of failure by the assessee to disclose fully and truly all material facts necessary for assessment. The original assessment record shows that the assessee produced the cash book, ledger, sales tax order, TDS details and creditors' confirmations and complied with information called for by the Assessing Officer. There is nothing on record to demonstrate any failure to disclose material facts in the original proceedings. Accordingly, the reassessment initiated after four years was not justified and must fail. [Paras 6]

Reopening after four years quashed for lack of failure to disclose fully and truly all material facts; assessee succeeds on this ground.

Treatment of commission paid to a non-resident agent for export sales - Tax deduction at source obligation under section 195 - Disallowance under section 40(a)(i) - Allowability of commission paid to non-resident foreign agents and consequent applicability of TDS/disallowance under section 40(a)(i) - HELD THAT: - On the merits the Tribunal accepted the remand findings that the foreign agents acted as procuring agents and were paid commission as a percentage of turnover and that the facts were similar to precedents where the Supreme Court and the Jurisdictional High Court held that TDS under section 195 arises only if the payment is chargeable to tax in India. The Assessing Officer's own remand report recorded verification of invoices, shipping bills, purchase orders and ledger entries and found the facts comparable to GE India Technology Centre P. Ltd. and Faizan Shoes (P.) Ltd., decisions which support non-applicability of TDS where services are rendered outside India for export sales. In those circumstances the disallowance under section 40(a)(i) could not be sustained. [Paras 6]

Commission paid to non-resident export agents held not to attract TDS liability and disallowance under section 40(a)(i) is displaced; claim of the assessee allowed.

Final Conclusion: The reassessment initiated after four years is quashed for absence of failure to disclose material facts, and the disallowance of commission paid to non-resident foreign agents (and the consequential TDS/section 40(a)(i) treatment) is reversed on the facts and precedents; the assessee's appeal is allowed.

Genuineness of purchases - treatment of unverifiable purchases as embedded profit - addition under section 68-verifiability of creditors - use of gross profit rate to quantify addition - reopening of assessment-reasons recorded

Genuineness of purchases - addition under section 68-verifiability of creditors - use of gross profit rate to quantify addition - Validity of deletion of addition of alleged bogus purchases for assessment year 2010-11 - HELD THAT: - The Assessing Officer treated purchases from certain parties as bogus because notices under section 133(6) were unserved or unresponded and therefore made an addition. The CIT(A) examined the record and found that the assessee had produced supporting documentary evidence including ledger entries, confirmations, invoices, bank statements showing payments by account payee cheques and documents evidencing use of materials in execution of government contracts; there was no material to show that payments were returned in cash or that suppliers had implicated the assessee. The Tribunal held that the CIT(A)'s factual findings were unassailed and based on relevant material and therefore affirmed the conclusion that purchases were genuine. The CIT(A)'s alternative approach-quantifying any unverified purchases only to the extent of embedded profit-was applied, and having regard to the declared gross profit rate of 11.67% (exceeding the accepted rate of 10% for the business segment), the CIT(A) deleted the entire addition. The Tribunal found no infirmity in this reasoning and affirmed the deletion. [Paras 6]

Order of CIT(A) deleting the entire addition for AY 2010-11 is affirmed; purchases held genuine and no addition warranted.

Genuineness of purchases - treatment of unverifiable purchases as embedded profit - use of gross profit rate to quantify addition - Extent of deletion/confirmation of addition for alleged bogus purchases for assessment year 2011-12 - HELD THAT: - For AY 2011-12 the CIT(A) applied the same factual approach as for AY 2010-11 and held the purchases to be genuine on the documentary record; however, observing that the declared gross profit rate of 8.60% was below the acceptable 10% for the business, the CIT(A) quantified and retained an addition equal to the shortfall in gross profit (difference between 10% and declared 8.60%). The Tribunal found this approach reasonable and based on plausible reasoning, and accordingly declined to interfere with the CIT(A)'s partial confirmation of addition. [Paras 6]

Order of CIT(A) for AY 2011-12 is affirmed; purchases treated as genuine but addition retained to the extent of the embedded profit shortfall.

Reopening of assessment-reasons recorded - Cross objections challenging reopening of assessment under section 148 - HELD THAT: - The assessee contested the validity of reopening on the ground that reasons were based on information from DGIT(Inv.) without forming belief that income had escaped assessment and that there was no live link to tangible material. The Tribunal, however, dismissed the cross objections for lack of persuasive argument and did not find cause to quash the reopening, treating the matter as ancillary to the substantive findings on purchases. [Paras 7]

Cross objections contesting reopening are dismissed.

Final Conclusion: The Tribunal dismissed the Revenue appeals and the assessee's cross objections. For AY 2010-11 the CIT(A)'s deletion of the addition on account of alleged bogus purchases is affirmed in full. For AY 2011-12 the CIT(A)'s view that purchases are genuine is affirmed but an addition is sustained to the extent of the shortfall in declared gross profit; challenges to the reopening of assessment were dismissed.

Change in shareholding - carry forward and set off of losses - application of section 79 (carry forward and set off of losses) - beneficial ownership of shares - control over the company - acquisition of company to avoid tax by buying losses - remand for fresh adjudication

Application of section 79 (carry forward and set off of losses) - change in shareholding - beneficial ownership of shares - control over the company - acquisition of company to avoid tax by buying losses - remand for fresh adjudication - Whether the assessee was entitled to carry forward past losses in view of a change in shareholding and whether the First Appellate Authority's findings warranted restoration for fresh adjudication. - HELD THAT: - The Tribunal reviewed the scope and object of section 79, explaining that it applies to companies not substantially owned by the public and was enacted to prevent acquisition of control for the purpose of utilising carried forward losses. The provision contemplates a change in shareholding which may disqualify carry forward unless: (a) persons who beneficially held not less than 51% of voting power on the relevant earlier date also beneficially hold not less than 51% on the last day of the previous year, or (b) the Income tax Officer is satisfied that the change was not effected with a view to avoiding or reducing tax. The Tribunal found that the First Appellate Authority's order did not set out clear findings on the relevant shareholdings, failed to apply clauses (a) and (b) of section 79 to the material facts, and thus was non speaking on the determinative question. In the interest of justice the matter was restored to the First Appellate Authority for fresh adjudication after affording the assessee a reasonable opportunity of hearing. The Tribunal recorded that the effective ground of appeal was decided in part in favour of the Revenue and accordingly allowed the appeal partly. [Paras 5]

Matter remanded to the First Appellate Authority for fresh adjudication on applicability of section 79 after hearing the assessee; effective ground of appeal decided in part for the Revenue and the appeal is partly allowed.

Final Conclusion: The Tribunal set out the legal principles governing section 79, found the FAA's order to be non speaking on the decisive question of change in shareholding and entitlement to carry forward losses, and therefore remitted the matter to the First Appellate Authority for fresh consideration after hearing the assessee; the Revenue's appeal is partly allowed.

Levy of penalty under section 271(1)(c) of the Income-tax Act - surrender of income to "buy peace" and voluntariness of offer - bogus purchases / hawala entries as concealment of income - reliance on investigative report of DGIT(Inv.) and Sales Tax findings as basis for addition - precedential principle that surrender after detection is not voluntary

Levy of penalty under section 271(1)(c) of the Income-tax Act - surrender of income to "buy peace" and voluntariness of offer - bogus purchases / hawala entries as concealment of income - reliance on investigative report of DGIT(Inv.) and Sales Tax findings as basis for addition - Whether penalty under section 271(1)(c) was rightly levied on the assessee for the addition of bogus purchases - HELD THAT: - The Tribunal upheld the confirmation of penalty. The Assessing Officer added bogus purchases disclosed by a DGIT(Inv.) communication and Sales Tax findings that four parties were involved in hawala entries; notices were issued and served. The assessee admitted that the bills did not represent genuine purchases and offered to disallow the claimed expenses and pay tax, stating this was to "buy peace". The Tribunal distinguished authorities relied upon by the assessee where additions arose without detection or mens rea was absent, and applied the principle that an offer to surrender income made after detection by authorities is not voluntary. In view of the investigative material and the post-detection admission, the surrender amounted to concealment/furnishing inaccurate particulars and attracted penalty; therefore the CIT(A)'s confirmation was held to be correct. [Paras 4, 5, 6, 7]

Penalty under section 271(1)(c) confirmed and the assessee's appeal dismissed.

Final Conclusion: The appellate tribunal dismissed the assessee's appeal for A.Y.2010-11 and upheld the levy of penalty under section 271(1)(c) on the basis that the surrender of income following detection by investigative authorities was not voluntary.

Deduction under section 80IC - validity of return under section 139(1) - notional carry forward and set-off of earlier years' losses for computation of deduction under section 80IC - remand for verification of allocation of common expenditure and profit attributable to non eligible components - precedential effect of coordinate bench and High Court/Supreme Court decisions

Validity of return under section 139(1) - deduction under section 80IC - Original return was filed within time so as to entitle the assessee to claim deduction under section 80IC. - HELD THAT: - The CIT(A) called for and relied upon the AO's remand report which accepted the assessee's evidence that the original return was filed on 30.09.2009 and that the subsequent filing on 30.03.2011 was a revised return. On this basis the Tribunal found no infirmity in the CIT(A)'s conclusion that the time limit condition under section 139(1) for claiming deduction under section 80IC was satisfied and declined to interfere with that finding. [Paras 8]

Assessee's return held validly filed within time; entitlement to claim deduction under section 80IC recognised.

Remand for verification of allocation of common expenditure and profit attributable to non eligible components - deduction under section 80IC - Computation and allocation of common expenditure and the profit attributable to smaller/non eligible components remitted to AO for verification. - HELD THAT: - The assessee accepted that profit attributable to certain smaller components of the sales kit was not eligible for deduction and furnished a computation and apportionment among eligible units. The AO had earlier not examined that computation because he had proceeded on the view that the return was time barred. Having accepted the validity of the return, the Tribunal held that the AO must be given the opportunity to verify the working and directed remand for verification and consequent recomputation in accordance with law. [Paras 9]

Issue remitted to the AO for verification and fresh computation of allocation; Revenue's grounds on this point allowed for statistical purposes.

Notional carry forward and set-off of earlier years' losses for computation of deduction under section 80IC - precedential effect of coordinate bench and High Court/Supreme Court decisions - Notional carry forward and set off of earlier years' losses is not required for computation of deduction under section 80IC; decision in favour of the assessee upheld. - HELD THAT: - The Tribunal examined conflicting authorities and accepted that the coordinate Bench decision in Hyderabad Chemicals Supply Ltd (and supporting precedents) and the Madras High Court decision in Velayudhaswamy Spinning Mills - as confirmed by the Supreme Court on SLP - support the view that the income of the eligible unit for computation of deduction under section 80IC/80IA is to be considered on a standalone basis without notionally bringing forward and setting off losses already adjusted against other income in earlier years. Applying these precedents, the Tribunal allowed the assessee's appeal on this point. [Paras 10, 12, 13]

Assessee's contention accepted; notional carry forward and set off of earlier years' losses for computing section 80IC deduction disallowed by Revenue and appeal allowed in favour of assessee.

Final Conclusion: Assessee's appeal allowed insofar as (a) the original return was held validly filed and (b) notional carry forward/set off of earlier years' losses is not required for computing deduction under section 80IC; Revenue's appeal partly allowed only to remit computation and allocation of common expenditure and non eligible components to the AO for verification.

Section 50C - prospective application of amendment - registered and unregistered agreement - substitution of actual consideration with stamp valuation/ready reckoner - CBDT Circular No. 5 of 2010

Section 50C - prospective application of amendment - CBDT Circular No. 5 of 2010 - Whether the amendment to Section 50C inserting the word 'assessable' with effect from 01.10.2009 could be invoked to substitute the actual sale consideration in respect of the assessee's transfer which was completed prior to 01.10.2009. - HELD THAT: - The Tribunal found it undisputed that the agreement of sale was executed on 28.07.2007 and that the balance consideration was fully paid by 26.09.2009. The Tribunal applied the CBDT Circular No. 5 of 2010 and the reasoning in the Madras High Court decision reproduced in the judgment to hold that the insertion of the word 'assessable' by the amendment w.e.f. 01.10.2009 created a new class of transactions and is prospective in operation. Since the impugned transfer, for all practical purposes, stood completed before 01.10.2009, the amended provision could not be applied to substitute the actual consideration. Consequently, the Tribunal held that Section 50C as amended could not be invoked retrospectively in the assessee's case. [Paras 3]

The amended provision of Section 50C (w.e.f. 01.10.2009) is not applicable to the assessee's transfer completed before that date; invocation of Section 50C was therefore improper and the addition is deleted.

Substitution of actual consideration with stamp valuation/ready reckoner - registered and unregistered agreement - Whether the Assessing Officer was entitled to adopt Stamp Duty Ready Reckoner valuation in place of the actual agreed consideration where the agreement was unregistered and no stamp valuation had been assessed by the Stamp Valuation Authority. - HELD THAT: - The Tribunal noted that the agreement was unregistered and that no stamp valuation had been assessed by the Stamp Valuation Authority; because the amended Section 50C did not apply to the transaction, there was no statutory basis for the AO to substitute the actual sale consideration by his own computation or by adopting ready reckoner rates. In absence of an assessment or adoption by the stamp authorities, the AO lacked power to replace the agreed consideration with a deemed valuation under Section 50C, and therefore the substitution effected by the lower authorities was beyond law. [Paras 3]

In the absence of a registered agreement and any stamp valuation assessment, the AO/first appellate authority could not substitute the actual agreed consideration with Ready Reckoner/stamp valuation; the substitution was unlawful and is set aside.

Final Conclusion: The appeal is partly allowed: the invocation of amended Section 50C (w.e.f. 01.10.2009) and the substitution of actual sale consideration by the AO are set aside because the transfer was completed before 01.10.2009 and the agreement was unregistered; the addition is deleted.

Limitation under Section 155(2) of the Customs Act - protection under Section 155(1) of the Customs Act - scope of the expression 'no proceedings' - distinction between civil suits/other legal proceedings and criminal prosecution - pari materia construction - quashing of criminal prosecution

Limitation under Section 155(2) of the Customs Act - scope of the expression 'no proceedings' - distinction between civil suits/other legal proceedings and criminal prosecution - pari materia construction - Whether Section 155(2) of the Customs Act bars initiation of criminal prosecution against a customs official on account of delay. - HELD THAT: - The Court held that Section 155(2) of the Customs Act does not prescribe any limitation for initiation of criminal prosecution and, unlike the pre-amendment text of Section 40(2) of the Central Excise and Salt Act earlier considered in R. Raju, the word 'prosecution' is not contained in Section 155(2). The absence of the term 'prosecution' is decisive: the expression 'no proceedings' in sub-section (2) does not extend to criminal proceedings where statutory language elsewhere (Section 155(1)) separately provides protection in respect of suit, prosecution or other legal proceedings. The Court distinguished precedents which applied the earlier unamended provision containing an express bar to 'prosecution' and agreed with later authority holding that protection under Section 155(2) is not available to stave off criminal prosecution. Consequently, limitation as envisaged by Section 155(2) cannot be read to bar criminal prosecution in the facts of this case.

Section 155(2) of the Customs Act does not bar criminal prosecution; the plea of bar by limitation under that provision is not available to the petitioner.

Protection under Section 155(1) of the Customs Act - quashing of criminal prosecution - Whether the High Court should interfere with the trial court's order dismissing the petitioner's application under Section 155 of the Customs Act. - HELD THAT: - The Court observed that the petitioner had not earlier raised a specific plea under Section 155(2) before the trial court when cognizance was taken or charges framed, and that the trial was well advanced with witnesses examined. On the merits, having found Section 155(2) inapplicable to criminal prosecutions and having considered the authorities relied upon by both parties, the High Court concluded that the trial court's order dismissing the Section 155 application was based on a fair appreciation of law and facts. There was no ground to exercise inherent jurisdiction under Section 482 Cr.P.C. to quash or stay the criminal trial.

No interference with the impugned order; the petition is dismissed and the trial may continue.

Final Conclusion: Petition dismissed. The High Court held that Section 155(2) of the Customs Act does not bar criminal prosecution and found no merit to interfere with the trial court's dismissal of the Section 155 application; the trial shall continue.

Classification - General Rules for Interpretation of Import Tariff - finished leather - residual entry - accessories and parts of motor vehicles - exemption notification - proviso to section 28(1) of the Customs Act, 1962 - competence to invoke extended period - unsuitable for manufacture of leather articles

Classification - finished leather - residual entry - General Rules for Interpretation of Import Tariff - exemption notification - accessories and parts of motor vehicles - Appropriateness of classifying imported bovine leather cut pieces under Chapter 41 (411520) and entitlement to exemption confined to goods classifiable under Chapter 41. - HELD THAT: - The Tribunal examined whether the imported leather cut pieces - trimmed and cut to specific designs for use as car seat covers supplied as original equipment - could properly be placed in the residual sub-heading of Chapter 41 (411520) and thereby qualify for the notification exempting finished leather classifiable under Chapter 41. Having regard to the Hon'ble Supreme Court's direction to consider alternative headings, the Tribunal rejected the approach of treating exclusion from Chapter 42 as determinative. Applying the General Rules for Interpretation of the Import Tariff (rule 2(a)), the Tribunal found that leather cut to specific designs and having slots for assembly had acquired the character of goods intended for seat covers and therefore could fall within alternative chapters dealing with parts or accessories of motor vehicles (including chapter 87 and chapter 94). The expression 'unsuitable for the manufacture of leather articles' in 411520 was held inapplicable to such cut-to-design finished leather; consequently classification under 411520 was not appropriate and the goods did not meet the condition of being goods "classifiable under chapter 41" required by the exemption notification. [Paras 6, 7, 9]

Classification as 411520 was not appropriate; the imported leather cut pieces do not qualify for the exemption limited to goods classifiable under Chapter 41.

Proviso to section 28(1) of the Customs Act, 1962 - competence to invoke extended period - exemption notification - Sustainability of the departmental demand when the adjudicating authority lacked power to invoke the extended period and exceeded the financial limit for an Assistant Commissioner. - HELD THAT: - Revenue's appeal against the Commissioner (Appeals) order was confined to disputing the fresh classification; it did not challenge the findings that (a) the adjudicating authority (an Assistant Commissioner) was not empowered under the proviso to section 28(1) to invoke the extended period as then worded, and (b) the demand exceeded the financial limit for exercise of adjudication powers by an Assistant Commissioner. The Tribunal observed that even if classification were resolved in Revenue's favour, either of the unchallenged jurisdictional/financial-limit grounds would suffice to render the demand unsustainable. The review under section 129D was limited to classification and did not assail the competence findings. [Paras 3]

Revenue's appeal dismissed; the demand is unsustainable on the unchallenged grounds of lack of power to invoke extended period and excess of financial limit for the Assistant Commissioner.

Final Conclusion: The Tribunal held that the imported leather pieces, cut to specific designs for automobile seat covers, could not be validly classified under 411520 and therefore were not eligible for the exemption confined to items classifiable under Chapter 41; accordingly the impugned order confirming duty was upheld. Revenue's separate appeal against the Commissioner (Appeals) order was dismissed because the jurisdictional and financial limit grounds sustaining the appellate order were not challenged.

Valuation of imported goods - enhancement of declared value on import - redemption fine - penalty for misdeclaration - relevance of expert certificate - assessment of declared value

Valuation of imported goods - enhancement of declared value on import - relevance of expert certificate - Enhancement of the declared value of the imported photocopier machines - HELD THAT: - The Tribunal examined the impugned orders and found no record of any defence by the appellants establishing the correctness of the declared value. Having regard to the Chartered Engineer's certificate, the historical stream of imports by the appellants, the utility of the goods and their remaining life span, the Tribunal concluded that the enhancement of the declared value was justified. The Revenue's method of valuation did not disclose consideration of any irrelevant factors or an irrational approach warranting interference; accordingly the assessing authority's determination on valuation was left undisturbed. [Paras 7, 8]

Enhancement of the declared value is upheld and the valuation orders are maintained.

Redemption fine - penalty for misdeclaration - assessment of declared value - Appropriateness and quantum of redemption fine and penalty imposed on the importers - HELD THAT: - While accepting the enhanced assessable value, the Tribunal considered the extent of enhancement, the determined assessable value and other relevant factors such as the age of the imported machines. Applying these considerations, the Tribunal found the originally imposed redemption fines and penalties excessive and reduced them to amounts proportionate to the assessable value and the condition/age of the machines. The Tribunal specified revised amounts for redemption fine and penalty in each appeal and granted partial relief accordingly. [Paras 9, 10]

Redemption fine and penalties are reduced to the specified amounts in the order and the appeals are allowed partially to that extent.

Final Conclusion: Valuation enhancements challenged by the appellants are affirmed; however, the redemption fines and penalties are reduced to the specified justifiable amounts and the appeals are allowed partially to that limited extent.

Customs valuation - transaction value and sequential application of valuation rules - Rejection of declared transaction value and resort to alternative valuation - Classification of 'knocked down' or semi knocked down assemblies under General Rules of Interpretation - Applicability of section 4A of Central Excise Act regarding levy on maximum retail price - Legal Metrology - retail package and obligation to declare Maximum Retail Price

Customs valuation - transaction value and sequential application of valuation rules - Rejection of declared transaction value and resort to alternative valuation - Enhancement of assessable value under Customs Valuation (Determination of Price of Imported Goods) Rules, 2007 was legally sustainable. - HELD THAT: - The authorities rightly invoked the provision permitting rejection of the declared transaction value in view of admissions as to different payable invoice amounts; accordingly Rule 12 (rejection) was not interfered with. However, once the transaction value is rejected the valuation must proceed by sequential application of the subsequent valuation rules (Rules 5 to 8) as required by binding precedent. The lower authorities did not undertake the mandated sequential exercise or apply the alternate rules to determine value; the process of enhancement therefore lacked the legally required foundation and cannot be sustained. [Paras 5, 6]

Enhancement of value is set aside for failure to apply the valuation rules sequentially.

Classification of 'knocked down' or semi knocked down assemblies under General Rules of Interpretation - Applicability of section 4A of Central Excise Act regarding levy on maximum retail price - Legal Metrology - retail package and obligation to declare Maximum Retail Price - Whether the imported consignments were properly classifiable as finished 'induction cookers' attracting additional duty under section 4A of the Central Excise Act by reference to MRP obligations under the Legal Metrology regime. - HELD THAT: - The adjudicating authorities treated semi knocked down consignments as the finished product for classification purposes relying on the rule permitting classification of knocked down assemblies as the finished article. That principle is recognised but must be applied in the context and purpose of tariff classification. Critically, goods which are not packaged or permitted for retail sale to the ultimate consumer and which require statutory testing before marketing do not fall within the definition of 'retail packages' under the Legal Metrology rules and therefore are not within the ambit of section 4A which operates by reference to MRP obligations. Because the imported consignments were not liable to be treated as retail packages subject to MRP declaration, the imposition of additional duty under section 4A was without lawful basis. Consequential measures based on that finding were also unsustainable. [Paras 7, 8, 9]

Levy of differential duty under section 4A, and consequential confiscation and penalties, are without authority of law and are set aside.

Final Conclusion: The appeals are allowed: the enhancement of assessable value is quashed for failure to follow the sequential valuation rules, and the levy of additional duty under section 4A (and attendant confiscation and penalties) is set aside as the imported consignments were not within the Legal Metrology based concept of retail packages; consequential orders are annulled.

Non-compliance with requirement of shareholder approval for alteration of share capital - compounding of offences under the Companies Act, 1956 (procedure under section 621A) - imposition of penalty in compounding proceeding - regularisation by passing of shareholders' resolution post-facto - inadvertent oversight and first-offence consideration in compounding

Non-compliance with requirement of shareholder approval for alteration of share capital - Non-compliance of the statutory requirement to obtain members' approval for increase in authorised share capital was established. - HELD THAT: - The Registrar's inspection and the company's admission in reply and in the compounding application established that the company had filed Form No.5 for increase of authorised capital but had not obtained the requisite members' approval as required by the statute. The company accepted the omission as an oversight, and on that basis the Tribunal found the contravention of the provision to be established.

The Tribunal held that the non-compliance with the requirement of shareholder approval for alteration of share capital stood proved.

Compounding of offences under the Companies Act, 1956 (procedure under section 621A) - imposition of penalty in compounding proceeding - inadvertent oversight and first-offence consideration in compounding - Compounding of the established offence was appropriate and penalties were to be levied on the company and officers in default. - HELD THAT: - Having accepted the company's contention that the omission was inadvertent and a first offence, and having regard to the admission and the compounding application filed under the statutory procedure, the Tribunal exercised its compounding jurisdiction. In the exercise of discretion the Tribunal fixed a monetary penalty on the company and on the directors named as applicants, directing payment within a specified period and warning against repetition.

The Tribunal compounded the offence and imposed penalties on the company and the directors, directing payment and compliance.

Regularisation by passing of shareholders' resolution post-facto - The company was directed to regularise the non-compliance by passing the appropriate shareholders' resolution within a stipulated time and to report compliance to the Registrar and the Registry. - HELD THAT: - Recognising that the defect arose from omission to pass a members' resolution, the Tribunal directed remedial action: the company and its directors must pass the requisite resolution within one month from receipt of the order and report compliance to the Registrar of Companies and to the Tribunal registry, thereby regularising the alteration of authorised capital.

The Tribunal ordered that the company pass the appropriate resolution to regularise the increase in authorised share capital and report compliance.

Final Conclusion: The Tribunal found that the company had contravened the statutory requirement to obtain shareholders' approval for increasing authorised share capital, accepted the company's explanation of inadvertent first-time default, compounded the offence by imposing monetary penalties on the company and the responsible directors, and directed the company to pass the necessary shareholders' resolution to regularise the non-compliance and report compliance.

Sanction of scheme of arrangement under Sections 391 and 394 - transfer and vesting of assets and liabilities on demerger - continuing enforceability of transferred liabilities - reduction of share capital and consideration without mandatory valuation report - court's power to require undertakings and compliance with statutory conditions - sanction not to confer exemption from stamp duty, taxes or other statutory compliances

Sanction of scheme of arrangement under Sections 391 and 394 - Sanction of the proposed scheme of arrangement between the Demerged Company and the Resulting Company. - HELD THAT: - The Court considered that the proposed scheme had been approved by the requisite classes of creditors, that the Registrar/Regional Director's observations had been addressed, and that there was no other impediment to sanction. Consequently the Court granted sanction to the proposed scheme and directed that, upon sanction becoming effective from the Appointed Date (1st January, 2015), the Demerged Undertaking shall stand merged into the Resulting Company. [Paras 24]

Sanction granted to the proposed scheme; Demerged Undertaking to merge into the Resulting Company with effect from the Appointed Date.

Transfer and vesting of assets and liabilities on demerger - continuing enforceability of transferred liabilities - All debts, liabilities, contingent liabilities, duties and obligations of the Demerged Undertaking (including provisions for LTA, gratuity and leave encashment) shall stand transferred to and be enforceable against the Resulting Company. - HELD THAT: - The Court construed Clause 6 of the Scheme and held that, by its terms, all assets and liabilities of the Demerged Undertaking are transferred to the Resulting Company as a going concern. This includes provisions made for LTA, gratuity and leave encashment, which shall be transferred and continue to be enforceable against the Resulting Company with no variation in claimants' rights pre- and post-sanction. [Paras 17, 18]

The liabilities of the Demerged Undertaking, including provisions for LTA, gratuity and leave encashment, stand transferred to and remain enforceable against the Resulting Company.

Reduction of share capital and consideration without mandatory valuation report - Registrar/Regional Director's observations on valuation and accounting treatment were considered and found to be satisfied by the explanations/affidavits filed by the Petitioner Companies. - HELD THAT: - The Registrar had queried the basis for the cash consideration for cancellation of equity and certain entries in the Resulting Company's balance sheet. The Resulting Company explained the commercial background (losses, acquisition of shares and debentures, cancellation post-scheme) and submitted that Sections 100-104 of the Act do not mandate a valuation report for the reduction of capital in the circumstances presented, and that shareholders had consented. On this basis the Regional Director recorded no objection, and the Court treated those observations as satisfied. [Paras 20, 21, 22]

The Registrar/Regional Director's observations were answered to satisfaction and do not impede sanction of the Scheme.

Court's power to require undertakings and compliance with statutory conditions - Direction that the Resulting Company must file an undertaking to take over and defray all liabilities of the Demerged Undertaking. - HELD THAT: - Although the Scheme provides for transfer of liabilities, the Court required the Resulting Company to file an express undertaking within two weeks confirming it will take over and defray all liabilities of the Demerged Undertaking, thereby securing an additional assurance of compliance with the Scheme's obligations. [Paras 25]

Resulting Company to file an undertaking within two weeks to take over and defray all liabilities of the Demerged Undertaking.

Sanction not to confer exemption from stamp duty, taxes or other statutory compliances - Sanction of the Scheme does not exempt the parties from payment of stamp duty, taxes, other charges or from obtaining applicable permissions or compliances under law; sanction will not prevent action for violations. - HELD THAT: - The Court clarified that the order sanctioning the Scheme is not to be construed as granting any exemption from payment of stamp duty, taxes or other charges or from any required permissions or compliances. The Court also observed that if any deficiency or violation of any enactment or regulation is found, the sanction will not preclude action being taken against concerned persons in accordance with law. [Paras 26, 27]

Sanction does not confer exemptions from statutory dues or compliances; enforcement or action for violations remains open.

Court's power to impose costs/contributions to funds - Direction to deposit a sum with the Delhi High Court Bar Association Lawyers Social Security and Welfare Fund. - HELD THAT: - As part of the order disposing the petition, the Court directed the Petitioner Companies to deposit a specified sum with the designated welfare fund within two weeks, as an incident of granting the sanction. [Paras 29]

Petitioner Companies directed to deposit the stated sum with the specified welfare fund within two weeks.

Final Conclusion: The High Court sanctioned the proposed scheme of demerger effective from the Appointed Date (1 January 2015); all assets and liabilities of the Demerged Undertaking (including provisions for LTA, gratuity and leave encashment) are transferred to and remain enforceable against the Resulting Company; Registrar/Regional Director's observations were satisfied; the Resulting Company must file an undertaking to defray those liabilities; sanction does not relieve parties from stamp duty, taxes or other statutory compliances; and the petition is disposed with the directed deposit to the welfare fund.

Scheme of Arrangement and Demerger - Approval under Sections 391-394 of the Companies Act, 1956 - Dispensation of convening meetings of shareholders and creditors - Dispensation of publication of notices for meetings - Shareholders' and creditors' written consent as substitute for meeting

Dispensation of convening meetings of shareholders and creditors - Shareholders' and creditors' written consent as substitute for meeting - Requirement of convening a meeting of the equity shareholders of the Transferor Company to consider and approve the proposed scheme dispensed with - HELD THAT: - The Transferor Company has seven equity shareholders and all have given written consents/NOCs to the proposed scheme, copies of which are on record and were examined by the Court and found in order. In view of the unanimous written consent of all equity shareholders, the Court dispensed with the requirement of convening the meeting of equity shareholders under the Companies Act, 1956 for consideration and approval of the proposed scheme. [Paras 15, 16]

Meeting of the equity shareholders of the Transferor Company dispensed with.

Dispensation of convening meetings of shareholders and creditors - Shareholders' and creditors' written consent as substitute for meeting - Requirement of convening a meeting of the Unsecured Creditor of the Transferor Company to consider and approve the proposed scheme dispensed with - HELD THAT: - The Transferor Company has one Unsecured Creditor who has given written consent/NOC to the proposed scheme; the consent is on record and was examined and found in order. Given the sole unsecured creditor's consent, the Court dispensed with the requirement of convening a meeting of the unsecured creditor for consideration and approval of the scheme. [Paras 17, 18]

Meeting of the Unsecured Creditor of the Transferor Company dispensed with.

Dispensation of convening meetings of shareholders and creditors - Shareholders' and creditors' written consent as substitute for meeting - Requirement of convening a meeting of the equity shareholders of the Transferee Company to consider and approve the proposed scheme dispensed with - HELD THAT: - The Transferee Company has seven equity shareholders and all have furnished written consents/NOCs to the proposed scheme; those consents are on record and were examined and found in order. Accordingly, the Court dispensed with the requirement of convening the meeting of the Transferee Company's equity shareholders for consideration and approval of the proposed scheme. [Paras 19, 20]

Meeting of the equity shareholders of the Transferee Company dispensed with.

Dispensation of publication of notices for meetings - Dispensation of convening meetings of shareholders and creditors - Requirement of publishing notices for meetings in newspapers dispensed with - HELD THAT: - Since the Court dispensed with convening the meetings of the shareholders and the unsecured creditor (as recorded), the ancillary statutory requirement of publishing notices for such meetings in newspapers was also dispensed with by the Court. The Court directed accordingly. [Paras 21, 22, 23]

Publication of notices for meetings in newspapers dispensed with.

Final Conclusion: The joint application under Sections 391-394 of the Companies Act, 1956 for sanction of the proposed scheme of arrangement and demerger is allowed to the extent recorded: meetings of the specified shareholders and creditor are dispensed with and publication of meeting notices is dispensed with; the application is disposed of accordingly.

Refund of service tax in respect of export of services - eligibility for Cenvat credit/input services availed prior to registration - effect of registration date on accrual of Cenvat credit - claim barred by limitation under Section 11B of the Central Excise Act - binding effect of jurisdictional High Court precedents

Eligibility for Cenvat credit/input services availed prior to registration - effect of registration date on accrual of Cenvat credit - binding effect of jurisdictional High Court precedents - Whether refund/credit in respect of export of services for the period 24.6.2010 to 6.7.2010 is admissible where input services were availed prior to the assessee obtaining registration. - HELD THAT: - The Tribunal held that it was bound by the decision of the Hon'ble Madras High Court in CCE Coimbatore v. Sutham Nylocots, which concluded that where the assessee was not registered at the relevant time, any entitlement to Cenvat credit would accrue only subsequent to the date of registration. The High Court's reasoning emphasised that registration not being in existence during the relevant period precluded availment of credit for inputs/services used earlier, and the Tribunal found no reason to depart from that jurisdictional precedent. Applying that binding principle to the facts, the Tribunal concluded that the refund/credit claimed for the period when inputs/services were availed prior to registration could not be allowed. [Paras 4, 5]

Appeal of the department allowed; refund/credit claim for the period 24.6.2010 to 6.7.2010 disallowed as credit accrues only after registration in view of the Madras High Court precedent.

Final Conclusion: Following the precedent of the jurisdictional High Court, the Tribunal allowed the department's appeal and disallowed the assessee's refund/credit claim for the period 24.6.2010 to 6.7.2010 on the ground that entitlement to Cenvat credit accrues only after registration.

Refund of unutilized Cenvat credit - quarterly refund claims - carry forward of Cenvat credit - refund entitlement of exporter of services - one-to-one relation and indefeasible right of Cenvat credit - rectification of clerical error in memo of appeal

Refund of unutilized Cenvat credit - quarterly refund claims - carry forward of Cenvat credit - refund entitlement of exporter of services - one-to-one relation and indefeasible right of Cenvat credit - Entitlement and manner of grant of refund of unutilized Cenvat credit to an exporter of services and the manner of computation where credit was availed in an earlier quarter and carried forward. - HELD THAT: - The Tribunal applied the Board's Circular No. 20/01/2010-ST (para 3.3) which permits refund of credit availed in an earlier quarter when exports occur in a subsequent quarter and allows carried forward input/input service credit to be taken into account in computing the refund for the quarter in which exports take place. The Tribunal noted its earlier decision in Imcola Export Ltd (Final Order No.41372/2015) and observed that the adjudicating authority and Commissioner (Appeals) failed to follow that principle. The authority is directed to re-calculate the refund admissible to the appellant by taking into consideration both the carried forward refundable amount and the refund accrued in the relevant quarter, ensuring that the calculation does not deprive the appellant of relief admissible in that quarter and giving effect to the principle of an indefeasible, one-to-one relation of Cenvat credit as recognised in the authorities relied upon by the Tribunal. The adjudicating authority must provide the appellant a reasonable opportunity of hearing before recomputation and disposal.

Re-computation of the refund claim directed, allowing carried forward credit to be considered; opportunity of hearing to be granted and the matter to be disposed of by the end of December, 2016.

Rectification of clerical error in memo of appeal - Application for rectification of a clerical defect in the memo of appeal. - HELD THAT: - The Tribunal took note of the miscellaneous application filed by the appellant to rectify a clerical error in the memo of appeal (incorrect order number of the original order-in-original). Having disposed the substantive appeal as directed, the Tribunal allowed the application, directed the clerical error to be rectified and ordered the miscellaneous application to be disposed of with registry recording and numbering the application as disposed.

Clerical error in the memo of appeal ordered to be rectified and the miscellaneous application disposed; registry directed to number and record the disposal.

Final Conclusion: The appeal was disposed by directing the adjudicating authority to re-compute and grant the refund of unutilized Cenvat credit in accordance with the Board Circular and Tribunal precedent, after providing hearing, with disposal to be completed by end of December 2016; the clerical defect in the memo of appeal was ordered to be rectified and the miscellaneous application disposed.

Admissibility of Cenvat credit on capital goods - transfer note as valid documentary evidence of duty payment - centralised purchase scheme of a Public Sector Undertaking - registration and entitlement to credit upon production of duty paying documents

Admissibility of Cenvat credit on capital goods - transfer note as valid documentary evidence of duty payment - centralised purchase scheme of a Public Sector Undertaking - Cenvat credit of capital goods availed by one unit of BSNL on the basis of a transfer note issued by another unit is admissible despite absence of conventional invoices. - HELD THAT: - The Tribunal found on the material that the capital goods were received and used by the Coimbatore unit and that the transfer advice from the Madurai unit exhibited the duty element. Given BSNL's centralised purchase policy and its status as a Public Sector Undertaking, the transfer note containing relevant particulars satisfied the purpose of demonstrating duty payment in the absence of any prescribed proforma for invoices. The Tribunal noted consistent precedent allowing credit on the basis of inter unit transfer notes and accepted the appellant's explanation regarding registration. In the absence of any questionable conduct by the appellant and having regard to the documentary evidence provided, denial of Cenvat credit was not justified.

Appeal allowed and Cenvat credit granted on the basis of the transfer note.

Final Conclusion: The Tribunal allowed the appeal and directed grant of Cenvat credit for the capital goods on the basis of the transfer advice from another BSNL unit, holding that such transfer note sufficed as duty paying documentation in the facts of the case.

CENVAT credit of input services - Direct nexus between input service and output service - Renting/hiring of immovable property as input service - Consultancy services including manpower recruitment, marketing and insurance as input services - Banking and financial services as input services - Convention/membership services and statutory obligation - Management and business consultancy services as input services

CENVAT credit of input services - Direct nexus between input service and output service - Renting/hiring of immovable property as input service - CENVAT credit on service tax paid for hiring/renting of immovable property used to house software professionals is admissible - HELD THAT: - The Tribunal found that when the hired campus accommodated software professionals engaged in software development, there was an inherent and direct nexus between the renting service and the output (software) service. Absence of direct nexus was regarded as inconceivable in the factual matrix where the premises were used for generation of the output service; the authority below failed to rule out the use of the campus for housing employees and therefore denial of credit was not justified. The Tribunal accordingly held that service tax paid on renting of immovable property qualifies as CENVAT creditable input service. [Paras 6]

CENVAT credit of service tax paid on hiring/renting of immovable property is allowed.

CENVAT credit of input services - Direct nexus between input service and output service - Consultancy services including manpower recruitment, marketing and insurance as input services - CENVAT credit on service tax paid for consultancy services (manpower recruitment, marketing, legal, insurance) availed for export of software is admissible - HELD THAT: - The Tribunal examined the details placed on record regarding consultancy services-manpower recruitment, marketing professionals, legal consultation and insurance-and concluded these services bore a direct relation to the output service. It reasoned that without recruitment of manpower or contribution of marketing professionals, the appellant could not generate the output service; insurance similarly had direct nexus. The adjudicating authority's disallowance without thorough examination was set aside and credit was allowed. [Paras 3, 7]

CENVAT credit of service tax paid on the stated consultancy services is allowed.

CENVAT credit of input services - Direct nexus between input service and output service - Banking and financial services as input services - Convention/membership services and statutory obligation - CENVAT credit on banking and financial services and on convention/membership services (where membership was a statutory requirement) is admissible - HELD THAT: - The Tribunal held that banking services necessary for day-to-day fund movement and realisation of foreign currency have direct nexus to the appellant's output service and are therefore creditable. As to the convention/membership service, the Tribunal accepted the appellant's case that membership of the federation was required under STPA regulation; when membership of a statutory body recognised by law is obligatory, denial of input credit on such membership service would be contrary to that statutory object, and hence credit was allowable. [Paras 12]

CENVAT credit of service tax paid on banking/financial services and on the convention/membership service is allowed.

CENVAT credit of input services - Direct nexus between input service and output service - Management and business consultancy services as input services - CENVAT credit on management and business consultancy services (including services of chartered accountants, training facilities, manpower recruitment and marketing agencies) is admissible - HELD THAT: - The Tribunal found that the particulars furnished showed these management and business consultancy services had a direct relationship with the output service rendered by the appellant. Services such as CA advice, training, recruitment and marketing were held integral to enabling the appellant to provide the output; accordingly the denial of credit by the authority was reversed and credit was permitted. [Paras 13]

CENVAT credit of service tax paid on management and business consultancy services is allowed.

Final Conclusion: All appeals are allowed to the extent that CENVAT credit was denied on the specified input services; the Tribunal grants CENVAT credit on hired immovable property, the listed consultancy services, banking and financial services, the convention/membership service (being statutorily compelled), and management/business consultancy services where a direct nexus to the output service exists.

Eligibility of input service under Rule 2(l) of the Cenvat Credit Rules, 2004 - interpretation of an inclusive definition using the word 'includes' - business auxiliary services (sales commission) as input services

Eligibility of input service under Rule 2(l) of the Cenvat Credit Rules, 2004 - business auxiliary services (sales commission) as input services - interpretation of an inclusive definition using the word 'includes' - Cenvat credit on Business Auxiliary Service (sales commission) availed during 1.7.2011 to 31.3.2012 is eligible under Rule 2(l) of the Cenvat Credit Rules, 2004. - HELD THAT: - The Tribunal examined the two-part structure of the definition of "input service" in Rule 2(l): an inclusive first portion and a specific exclusionary second portion. Applying the established principle that where a definition uses the term "includes" it is enumerative and not exhaustive, the inclusive portion should be understood as illustrative of the wider genus of services that qualify as input services. The Tribunal accepted the appellant's submission that "sales promotion" appearing in the inclusive part also covers attendant services necessary for sales promotion such as payment of sales commission to agents. Because the disputed Business Auxiliary Service (sales commission) was neither specifically excluded under the exclusionary clauses nor outside services that are "in relation to" or "essential for" manufacture or business activities, it falls within the ambit of Rule 2(l) as an eligible input service. The Tribunal relied on the cited precedent, Bharat Cooperative bank (Mumbai) Ltd. Vs Coop. Bank Employees Union , for the principle that "includes" extends rather than restricts the scope of a definition. On these grounds the denial of cenvat credit was set aside and the appeal allowed. [Paras 5, 6, 7]

The services comprising Business Auxiliary Service in respect of sales commission are eligible input services under Rule 2(l) and the appeal is allowed.

Final Conclusion: The Tribunal allowed the appeal, holding that Business Auxiliary Service in the form of sales commission for the period 1.7.2011 to 31.3.2012 qualifies as an eligible input service under Rule 2(l) of the Cenvat Credit Rules, 2004.

Admissibility of MODVAT credit - Exclusive use of input - Burden of evidence to prove exclusive use - Compromise by deposit of percentage of value - Penalty for duty default

Admissibility of MODVAT credit - Exclusive use of input - Burden of evidence to prove exclusive use - Whether the adjudicating authority validly disallowed MODVAT credit on the ground that the input was exclusively used to manufacture exempted goods supplied to the Indian Navy. - HELD THAT: - The Tribunal found that the adjudicating authority's conclusion of exclusive use was not supported by any trial run or evidential testing to establish that the input in question was the only input used to manufacture the exempted goods. The authority's reasoning (from paragraph 18 onwards in its order) dealt with legal propositions but did not test factual claims against evidence. In absence of evidence showing that the input was not commonly used with other inputs for manufacture of both exempted and dutiable goods, the disallowance for exclusive use could not be sustained. The Tribunal therefore held that the adjudicating authority's finding was arbitrary and unsupported by evidence. [Paras 7, 8]

The disallowance of MODVAT credit on the ground of exclusive use of the input is unsustainable for want of evidence.

Compromise by deposit of percentage of value - Admissibility of MODVAT credit - Whether the appellant's deposit of 8% of the value of goods cleared to the Indian Navy resolves the revenue's claim and what relief is appropriate to terminate long-running litigation. - HELD THAT: - The Tribunal noted that the appellant had deposited 8% of the value of the goods cleared to the Indian Navy and that the matter was earlier before the Settlement Commission, which rejected settlement without examining merits due to disagreement on quantum of deposit. Given the absence of evidence to sustain exclusive-use disallowance and to bring an end to protracted litigation, the Tribunal directed that the appellant be permitted to deposit 8% of the value of the goods cleared, with interest (if any) for the default amount, as a means to conclude the dispute. This direction is framed as a practical resolution in view of factual uncertainty and the longstanding nature of the dispute. [Paras 7, 9]

Appellant is directed to deposit 8% of the value of the goods cleared, with interest if any, to put an end to the dispute.

Penalty for duty default - Whether penalty should be imposed in respect of the disputed MODVAT credit/duty demand. - HELD THAT: - Having found that the adjudicating authority's order lacked evidential basis on the central factual issue and in view of the dispute on law and facts running for many years, the Tribunal held that no penalty should be imposed. The Tribunal treated the matter as one of contested law/fact and exercised its discretion to withhold penalty. [Paras 10]

No penalty shall be imposed.

Final Conclusion: Appeal allowed to the extent indicated: the disallowance of MODVAT credit for alleged exclusive use of the input is set aside for want of evidence; appellant directed to deposit 8% of the value of goods cleared (with interest, if any) to conclude the dispute; no penalty imposed.

Classification of goods - printed products of the printing industry - paper or paperboard labels of all kind - specific tariff heading covering particular goods - Tariff Heading 4901.90

Classification of goods - printed products of the printing industry - paper or paperboard labels of all kind - Tariff Heading 4901.90 - Whether the goods manufactured by the appellant fall under Tariff Heading 4901.90 as products of the printing industry or under Tariff Heading 4821.00 as paper or paperboard labels - HELD THAT: - The Tribunal examined the relevant tariff entries in Chapters 48 and 49. Heading 4901.90 covers "other" products of the printing industry and, on its plain language, embraces goods produced by a printing process. The record contained no description or evidence demonstrating that the goods were paper or paperboard labels manufactured unprinted, which alone would have engaged Heading 4821.00. In absence of any such evidence, the specific description in Heading 4901.90 applies. The Tribunal therefore accepted the characterization of the goods as printing-industry products and rejected Revenue's contention that the goods are not printed articles, noting that Revenue's argument would have merit only if the goods were shown to be paper or paperboard labels without printing. [Paras 5, 6]

The goods are classifiable under Tariff Heading 4901.90 as products of the printing industry and not under Heading 4821.00; appeal allowed and the exemption under the specific heading applies.

Final Conclusion: The Tribunal allowed the appeal, holding that the appellant's goods are products of the printing industry classifiable under Tariff Heading 4901.90 rather than under the paper-or-paperboard-labels entry, and that the specific tariff heading entitles the appellant to the relief claimed.

Marketability test - excisability of intermediate products - burden of proof on Revenue (pre amendment) - captively consumed goods

Marketability test - excisability of intermediate products - captively consumed goods - Whether the tissue culture media manufactured and captively consumed by the appellant were marketable and therefore excisable - HELD THAT: - The Tribunal applied the marketability test and accepted the adjudicating authority's findings that the tissue culture media are an intermediate produce requiring controlled conditions, are thermolabile, possess an extremely short shelf life and must be consumed almost immediately to retain sterility. The Tribunal held that where goods are not known to trade in the form in which they are produced and stored, commercial marketability is inconceivable and a solitary transaction does not establish marketability unless evidence demonstrates real trade in the goods. For the period in question (prior to the explanatory amendment to section 2(b) effective 10.05.2008), the Revenue bore the onus to prove marketability; that burden was not discharged. On these grounds the Tribunal found the goods not marketable and therefore not excisable. [Paras 4, 6, 7, 8]

The tissue culture media were held not to be marketable in the form produced and stored and consequently not excisable for the period before the statutory amendment.

Burden of proof on Revenue (pre amendment) - marketability test - Whether the appellate authority had properly examined and recorded evidence on manufacture and marketability - HELD THAT: - The Tribunal noted that the appellate authority failed to address whether the tissue culture media satisfied the legal definition of manufacture and did not examine evidence to satisfy the marketability test, despite recording that the goods had only a few hours' life. The Tribunal observed that such omissions meant the appellate order could not stand. The adjudicating authority's reasoned findings on the nature, storage, shelf life and limited use of the media were found to be sound and were accepted by the Tribunal. [Paras 5, 6, 8]

The appellate authority's order was set aside for lack of examination of manufacturing activity and marketability; the adjudicating authority's findings were upheld.

Final Conclusion: The appeal is allowed; the appellate order is set aside and the adjudicating authority's conclusion-that the tissue culture media produced and stored in the form described were not marketable and hence not excisable (for the period prior to the amendment effective 10.05.2008)-is accepted.

Evasion of duty - fabricated invoices - disguised clearance - sham processing to claim exemption - onus to rebut investigative material - appellate scrutiny of adjudication

Evasion of duty - fabricated invoices - sham processing to claim exemption - onus to rebut investigative material - appellate scrutiny of adjudication - Whether the adjudication sustaining duty demand and penalties against the appellants for clearing cone yarn as hank yarn by maintaining parallel/fabricated invoices and falsely claiming processing was supported by evidence. - HELD THAT: - The Tribunal examined the material recovered during investigation and the findings of the adjudicating and appellate authorities that the appellants maintained two sets of invoices: one showing dutiable clearance of cone yarn (allegedly destroyed) and another showing clearance as duty-exempt hank yarn after purported processing by M/s. Rockwell Textiles. Investigation at M/s. Rockwell Textiles disclosed no processing activity. The revenue quantified duty loss in respect of specified quantities and identified buyers and accommodating fictitious parties. The appellants failed to rebut the documentary and testimonial material supporting the modus operandi of issuing parallel invoices and fabricating records to claim exemption. There was no evidence before the Tribunal sufficient to displace the concurrent findings of falsification of records, issuance of fabricated invoices and resultant evasion of duty. Given the unrefuted investigative material and the failure of the appellants to provide a satisfactory defence, the Tribunal found no grounds to interfere with the Commissioner (Appeals)'s dismissal of the appeals. [Paras 4, 6, 8, 9, 10]

Appeals dismissed; adjudication upholding duty demand and penalties sustained.

Final Conclusion: The Tribunal upheld the concurrent findings that the appellants effected disguised clearances by issuing parallel and fabricated invoices and falsely claiming conversion into hank yarn, and, in the absence of any successful rebuttal of the investigative material, dismissed the appeals and sustained the adjudicated duty demand and penalties.

Deeming provision as to manufacture in Note 10 of Chapter 28 of the Tariff Act - labelling/repacking from bulk packs to retail packs - treatment to render product marketable - mixture of gases and concept of new marketable product - precedential effect of Tribunal and departmental circular on repacking

Labelling/repacking from bulk packs to retail packs - deeming provision as to manufacture in Note 10 of Chapter 28 of the Tariff Act - precedential effect of Tribunal and departmental circular on repacking - Whether the first limb of Note 10 (labelling/repacking from bulk packs to retail packs) applied to the assessee's activity of transferring liquefied gases from cryogenic tankers to cylinders - HELD THAT: - Note 10 contains two distinct parts and the deeming effect for labelling/repacking is attracted only where repacking from bulk packs to retail packs is established in addition to labelling. The Tribunal's decision in Ammonia Supply Company that goods received in tankers cannot be treated as having come in bulk packs, and the Ministry Circular dated 08.10.1997 which indicates that mere transfer from one container to another may not constitute 'repacking', were relied upon. The Tribunal's view in Ammonia Supply Company has attained finality as the Department did not challenge it. On these authorities and the factual findings regarding receipt in cryogenic tankers and subsequent filling, the Court found no infirmity in the Tribunal's conclusion that the first limb of Note 10 was not attracted. [Paras 7, 8, 9, 10]

First limb of Note 10 (labelling plus repacking from bulk to retail packs) is not attracted on the facts; the Tribunal's conclusion on this point is affirmed.

Treatment to render product marketable - mixture of gases and concept of new marketable product - deeming provision as to manufacture in Note 10 of Chapter 28 of the Tariff Act - Whether mixing of inert gases with other gases in cylinders amounted to 'manufacture' under the second limb of Note 10 as adoption of treatment to render the product marketable - HELD THAT: - The Commissioner's own findings describe cleaning, grading by purity, mixing of gases in fixed proportions and affixation of labels. However, the Tribunal in Goyal Gases held that mixtures of inert gases with other gases did not produce a new commodity; the constituent gases remained individually identifiable and retained their properties. That Tribunal decision was affirmed by this Court, which found no evidence that mixing produced a new product with distinct usage and marketability. Applying that ratio to the present factual findings, the Court concluded that the second limb of Note 10-treatment resulting in a new marketable product-was not attracted. [Paras 11, 12, 13, 14, 15]

Mixing of the gases in the manner found does not amount to manufacture under the second limb of Note 10; the Tribunal's conclusion to that effect is affirmed.

Precedential weight of Air Liquide decision - treatment to render product marketable - Whether the decision in Air Liquide North India Pvt. Ltd. aided the Revenue in establishing manufacture in the present appeals - HELD THAT: - Air Liquide was distinguished on its facts: there the manufacturing process details were withheld as 'trade-secret' and the Court relied on other indicia such as high resale margins, grading under the appellant's own standard, and separate certificates for cylinders to infer treatment amounting to manufacture. Those factual indicia are absent here, where the process details are on record and the ratio in Goyal Gases applies. Consequently, Air Liquide does not assist the Revenue in these appeals. [Paras 16, 17]

Air Liquide decision is not applicable on the facts and does not assist the Revenue; the Revenue's reliance on it is rejected.

Final Conclusion: The Tribunal's finding that the processes undertaken by the assessee did not amount to 'manufacture' under Note 10 of Chapter 28 is affirmed and the appeals are dismissed; other issues decided by the adjudicating authority were not examined as unnecessary in view of this conclusion.

Exclusion of value of customer supplied chassis from aggregate value of clearances for SSI benefit - cum duty benefit where excise duty not collected from customers - entitlement to CENVAT credit upon payment of central excise duty - remand for quantification and penalty determination

Exclusion of value of customer supplied chassis from aggregate value of clearances for SSI benefit - interpretation of Notification No.8/2003 and Notification No.6/2002 - Value of chassis supplied by customers is not to be included in the aggregate value of clearances for home consumption for determining SSI eligibility. - HELD THAT: - The Tribunal examined Para 3 of Notification No.8/2003 and the explanation to the Table in Notification No.6/2002 and held that clearances of specified goods used as inputs for further manufacture within the factory are excluded from aggregate value. The appellant, engaged in body building, receives duty paid chassis from customers and mounts bodies thereon; accordingly the value of such customer supplied chassis falls within the exclusion and must be omitted when computing aggregate clearances for SSI purposes. The Tribunal relied on prior CESTAT decisions (Medopharm; Mukul Engineering Works) supporting exclusion of chassis value under the facts of the case. [Paras 6]

Value of customer supplied chassis excluded from aggregate clearances for SSI eligibility.

Cum duty benefit where excise duty not collected from customers - application of judicial precedent on cum duty entitlement - Appellant is entitled to cum duty benefit for clearances where excise duty was not collected from customers. - HELD THAT: - The Tribunal found that Revenue offered no acceptable reason to deny cum duty benefit to the manufacturer who did not collect duty from its customers. Following the decision of the High Court of Bombay in Larsen & Toubro, the Tribunal concluded that the manufacturer is entitled to cum duty benefit in such circumstances. [Paras 6]

Manufacturer entitled to cum duty benefit where duty was not collected from customers.

Entitlement to CENVAT credit upon payment of central excise duty - principle that payment of excise duty enables availment of input credit - Once the appellant crosses the SSI exemption threshold and pays central excise duty, it is entitled to claim CENVAT credit on inputs used in manufacture. - HELD THAT: - The Tribunal held that payment of central excise duty on manufactured goods removes any bar to availing CENVAT credit on inputs. The rule is that manufacturers who pay duty are eligible for input credit; the appellant, on payment of duty after losing SSI benefit, would therefore be entitled to CENVAT credit. The Tribunal cited the CESTAT, Delhi decision in Decent Foods to support this principle. [Paras 6]

Entitlement to CENVAT credit arises once central excise duty is paid by the appellant.

Remand for quantification and penalty determination - Quantification of duty and any penalty remanded to the original adjudicating authority for fresh determination. - HELD THAT: - Although the Tribunal pronounced legal conclusions on exclusion of chassis value, cum duty entitlement and CENVAT credit, it remanded the matter to the original adjudicating authority to quantify the demand of central excise duty and decide on penalty in light of the Tribunal's findings. The original authority is directed to decide within four months after affording the appellant opportunity of personal hearing and submission of evidence. [Paras 7]

Matter remanded for computation of duty and determination of penalty within four months after hearing.

Final Conclusion: Appeal allowed in part: legal issues decided in favour of the appellant (exclusion of customer supplied chassis from aggregate clearances; entitlement to cum duty benefit; entitlement to CENVAT credit on payment of duty) and matter remanded to the original adjudicating authority for quantification of duty and penalty in accordance with these findings.

Exemption under Notification No.6/2002-Central Excise - serial No.73 - plastic materials reprocessed out of scrap or waste - classification of copper scrap 'druid' as waste of copper wire/cables under Chapter 85 - recycled PVC granules falling under Chapter 39 - interpretation of ISRI specification for characterisation of scrap

Exemption under Notification No.6/2002-Central Excise - serial No.73 - plastic materials reprocessed out of scrap or waste - classification of copper scrap 'druid' as waste of copper wire/cables under Chapter 85 - recycled PVC granules falling under Chapter 39 - interpretation of ISRI specification for characterisation of scrap - Whether the respondent is entitled to exemption under serial No.73 of Notification No.6/2002 for recycled PVC granules manufactured from imported copper scrap 'druid'. - HELD THAT: - The respondent imported copper scrap described as 'druid' per ISRI specifications and manually separated copper wire and PVC coating to manufacture recycled PVC granules. ISRI defines 'druid' as copper wire scrap with various types of insulation including plastic, thus characterising the imported material as scrap/waste of goods falling within the tariff headings for copper wire/cables (Chapter 85). The recycled PVC granules manufactured therefrom fall under Chapter 39. Serial No.73 of Notification No.6/2002 grants exemption to 'plastic materials reprocessed in India out of the scrap or the waste of goods' falling within the listed chapters, which include the chapters under which the input scrap and the output plastic material are classified. Applying that provision to the facts, the exemption covers PVC granules reprocessed from the insulated wire scrap described as 'druid', and the Revenue's demand therefore cannot be sustained.

Respondent entitled to the benefit of serial No.73 of Notification No.6/2002; exemption applies to the recycled PVC granules manufactured from the imported copper scrap 'druid'.

Final Conclusion: The appeal by Revenue is rejected; the order of the Commissioner (Appeals) setting aside the original demand is sustained and the respondent is held entitled to the exemption under Notification No.6/2002 (serial No.73) for the recycled PVC granules.

Turnover - sale "for destination" - inclusion of freight in sale price - ownership remains with supplier until delivery - remand for fresh decision

Turnover - sale "for destination" - inclusion of freight in sale price - ownership remains with supplier until delivery - Freight and transportation charges form part of the assessee's taxable turnover where the contract is for supply of goods at destination (supply 'for destination') and ownership remains with the supplier until delivery. - HELD THAT: - The Court examined the contract terms which required supply of ballast at the railway site at Billi and held that the transaction was a supply to destination. Relying on the principle that in a FOR (destination) contract the property in goods remains with the supplier until delivery, the Court concluded that freight and related transportation charges are integral to the sale price and therefore includible in turnover. The Court treated the tribunal's contrary view as a misconstruction of the contract and endorsed the legal proposition applied in earlier authorities including M/s India Meters Limited and Commissioner of Trade Tax , to the effect that where delivery is at destination the freight forms part of the taxable sale price.

Freight incurred on supply to destination is includible in the assessee's turnover; the tribunal's conclusion to the contrary is unsustainable.

Remand for fresh decision - The tribunal's order is set aside and the matter is remanded to the tribunal for fresh decision in light of the Court's observations. - HELD THAT: - Having found that the tribunal misconstrued the contract and misstated the legal position regarding inclusion of freight in turnover, the Court set aside the tribunal's order dated 13.01.2011 and directed that the tribunal decide the appeal afresh taking into account the Court's observations and the applicable legal principles concerning FOR (destination) supplies and inclusion of freight in sale price.

Tribunal's order set aside; appeal to be decided afresh by the tribunal in accordance with the Court's observations.

Final Conclusion: The revision is allowed insofar as the tribunal's order holding freight not to be part of turnover is set aside; the tribunal is directed to reconsider and decide the appeal afresh in light of the Court's observations that freight on supply to destination forms part of the sale price and taxable turnover.

Abuse of the process of court - settlement and withdrawal of criminal complaint - discharge of liability by substituted cheque - continuance of complaint under Section 138 NI Act

Discharge of liability by substituted cheque - settlement and withdrawal of criminal complaint - abuse of the process of court - continuance of complaint under Section 138 NI Act - Effect of acceptance and encashment of a substituted cheque pursuant to a settlement agreement on the continuance of a complaint under Section 138 NI Act - HELD THAT: - The court found on admitted facts that the parties entered into a Memorandum of Agreement dated 7th October, 2013 by which the petitioner issued a new cheque (No.344158) for Rs.50 lakhs in lieu of two earlier dishonoured security cheques and the complainant agreed to withdraw the earlier complaint. The substituted cheque was presented and duly honoured and the respondent's earlier signatures on the agreement were admitted before the trial court. The complaint before the Court related specifically to the dishonour of the two original cheques and not to other debts. Having accepted and encashed the substituted cheque given in discharge of the liability that was the subject matter of the complaint, the respondent could not thereafter pursue the Section 138 complaint on the ground that he had adjusted the received amount towards other outstanding dues. The continuance of the complaint under those circumstances amounted to an abuse of the process of the Court. Applying the guiding principles for quashing under Section 482 Cr.P.C. (as explained in State of Haryana v. Bhajan Lal), the court concluded that the criminal proceedings were liable to be quashed because the settlement and the performance thereof extinguished the basis of the Section 138 complaint and it was mala fide to proceed thereafter. [Paras 6, 7, 10]

Complaint No. NI-1080/14, the order dated 16th January, 2015 issuing summons and the proceedings emanating therefrom are quashed as continuation of the Section 138 complaint after acceptance and encashment of the substituted cheque is an abuse of the process of the Court.

Final Conclusion: The petition is allowed; the complaint and consequent proceedings under Section 138 NI Act have been quashed in view of the settlement evidenced by the Memorandum of Agreement and the encashment of the substituted cheque, amounting to an abuse of the process of the Court.