TaxTMI Updates e-Newsletter
Feb 13,2012

Profit on transfer of Duty Entitlement Pass Book (DEPB) as sale value less face value - deduction under Explanation (baa) to Section 80HHC - profits of the business as computed under the head "Profits and Gains of Business or Profession" - ninety per cent exclusion to be applied to amounts actually included in profits (net receipts) and not to gross receipts

Profit on transfer of Duty Entitlement Pass Book (DEPB) as sale value less face value - Section 28(iiid) of the Income Tax Act, 1961 - Characterisation of amount received on sale of DEPB for taxation under Section 28(iiid). - HELD THAT: - The Court applied its prior decision in Topman Exports and held that where an assessee sells a DEPB the taxable 'profit on transfer of DEPB' is the sale consideration less the face value of the DEPB. The High Court's contrary view that the entire sale proceeds represent profit was displaced by the Supreme Court's ruling that only the excess over face value constitutes taxable profit on transfer. [Paras 2]

The first issue is decided in favour of the assessee: profit on sale of DEPB equals sale value less face value.

Deduction under Explanation (baa) to Section 80HHC - profits of the business as computed under the head "Profits and Gains of Business or Profession" - ninety per cent exclusion to be applied to amounts actually included in profits (net receipts) and not to gross receipts - Whether ninety per cent exclusion under Explanation (baa) to Section 80HHC applies to gross receipts of interest and rent or only to the net amounts actually included in profits and gains of business. - HELD THAT: - The Court construed Explanation (baa) on its plain language, following the principle in Distributors (Baroda) P. Ltd. v. Union of India that the words qualifying 'such profits' refer both to the category and the quantum of receipts included in the profits. Profits of the business must first be computed under the head 'Profits and Gains of Business or Profession' (Sections 28-44D), allowing expenses under Sections 30-44D. Clause (1) of Explanation (baa) permits deduction of ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or similar receipts only to the extent such receipts are included in those computed profits. If a portion of such receipts is disallowed from inclusion because corresponding expenditure has been allowed, that portion cannot be subjected to the ninety per cent exclusion. Thus the exclusion applies to the net amount of such receipts actually included in profits, not to gross receipts. The Court rejected the High Court's reliance on the explanatory memorandum and on Asian Star Co. Ltd. to the extent it required exclusion of ninety per cent of gross interest and rent. [Paras 11, 12, 13, 15, 16]

The Supreme Court held that ninety per cent is to be excluded only of the net interest or net rent actually included in the profits of business as computed under the head 'Profits and Gains of Business or Profession'; the matter is remanded to the Assessing Officer to work out deductions from rent and interest in accordance with this view.

Final Conclusion: The appeal is allowed in part: (i) amounts on sale of DEPB are taxable only to the extent sale proceeds exceed face value; and (ii) Explanation (baa) to Section 80HHC permits exclusion of ninety per cent only of those interest/rent receipts actually included in business profits, not of gross receipts; the case is remanded to the Assessing Officer for computation in accordance with this legal interpretation.

Cash assistance received or receivable by any person against exports - profit on transfer of the Duty Entitlement Pass Book - neutralisation of customs duty under the DEPB scheme - meaning of 'profit' as gross proceeds less costs - deduction under Section 80HHC and exclusion under explanation (baa) - double taxation

Cash assistance received or receivable by any person against exports - neutralisation of customs duty under the DEPB scheme - DEPB is chargeable as "cash assistance" under clause (iiib) of Section 28 of the Income Tax Act when it accrues on application for credit. - HELD THAT: - On construction of the DEPB scheme (Hand Book on DEPB and Export-Import Policy) the DEPB is a duty credit granted to neutralize customs duty on import content of export products and is receivable once exports are made and application for credit is filed. The Court held that DEPB therefore falls within clause (iiib) of Section 28 as "cash assistance (by whatever name called) received or receivable by any person against exports" and is chargeable to tax under the head "Profits and Gains of Business or Profession" at the time of accrual, i.e., when the exporter applies for the DEPB credit. The conclusion rests on the statutory language and the scheme's objective of neutralising customs duty. [Paras 10, 11, 12]

DEPB is taxable as cash assistance under Section 28(iiib) on accrual.

Profit on transfer of the Duty Entitlement Pass Book - meaning of 'profit' as gross proceeds less costs - Profit on transfer of DEPB under clause (iiid) of Section 28 means the excess of sale proceeds over the face value of the DEPB (sale value minus face value), not the entire sale consideration. - HELD THAT: - The Court applied the ordinary meaning of "profit"-the gross proceeds less the costs of the transaction-and authorities construing "profits" as the gain obtained by comparison of asset values at acquisition and disposal. Because DEPB has a cost-element (it represents remission of customs duty attributable to the exporter's import content), the face value of the DEPB represents the cost to the exporter. Consequently, when the DEPB is sold, only the amount realised in excess of that face value constitutes the profit on transfer chargeable under clause (iiid). The Tribunal's approach and textual analysis of Section 28 were endorsed; the High Court's view treating the entire sale proceeds as profit was rejected. [Paras 11, 13, 14, 15]

Profit on transfer under Section 28(iiid) is sale proceeds less the face value of the DEPB.

Deduction under Section 80HHC and exclusion under explanation (baa) - double taxation - The statutory scheme of Section 80HHC and explanation (baa) does not produce impermissible double taxation; the face value (DEPB as cash assistance) is excluded under explanation (baa) in the year it accrues and any subsequent profit on transfer (sale minus face value) is treated under clause (iiid) in the year of transfer; the High Court's contrary treatment was erroneous. - HELD THAT: - Explanation (baa) to Section 80HHC reduces "profits of the business" by ninety per cent of sums referred to in clauses (iiia)-(iiie) of Section 28. The Court explained that where DEPB accrues in one previous year and transfer occurs in a later year, ninety per cent exclusion applies separately to (a) the DEPB as cash assistance in the year of accrual under clause (iiib) and (b) to ninety per cent of the profit on transfer (i.e., excess over face value) in the year of transfer under clause (iiid). Thus the correct interpretation prevents double taxation of the same economic amount; the High Court erred in treating the entire sale proceeds as profit under clause (iiid) and in its understanding of entitlement under Section 80HHC provisos. The Assessing Officer was directed to recompute deductions under Section 80HHC accordingly. [Paras 18, 20, 21, 22, 23]

No double taxation arises; compute Section 80HHC deduction treating face value as cash assistance on accrual and only excess as profit on transfer for subsequent computation.

Final Conclusion: The High Court's orders are set aside. DEPB is taxable as cash assistance under Section 28(iiib) on accrual, and only the excess of sale proceeds over the DEPB face value is taxable as profit on transfer under Section 28(iiid); the Assessing Officer is directed to recompute deductions under Section 80HHC in accordance with this interpretation.

Treatment of DEPB under income tax - profits on transfer of DEPB - cash assistance classification of DEPB - deduction under Section 80HHC - Explanation (baa) under Section 80HHC - precedential effect of Special Bench decision

Treatment of DEPB under income tax - profits on transfer of DEPB - precedential effect of Special Bench decision - Disposition of Revenue's appeal in ITA No.185 of 2011 (assessment year 2001-2002) against the Tribunal's ruling on DEPB treatment. - HELD THAT: - The Tribunal had followed the Special Bench decision in M/s Topman Exports, treating the face value of DEPB as cash assistance and the sale proceeds in excess of face value as profit on transfer of DEPB. The Supreme Court has today delivered its judgment in the connected Topman Exports appeals and, in view of that judgment, disposed of the present appeal in ITA No.185 of 2011 in terms of the decision rendered in those connected matters. The disposal follows the Court's determination in the connected appeals concerning the legal characterisation and precedential weight of the Special Bench ruling.

Appeal disposed of in terms of the judgment delivered today in the connected Topman Exports matters.

Deduction under Section 80HHC - Explanation (baa) under Section 80HHC - precedential effect of Special Bench decision - Disposition of Revenue's appeal in ITA No.308 of 2011 (assessment year 2004-2005) including the question whether Explanation (baa) under Section 80HHC excludes DEPB profits from total turnover. - HELD THAT: - The Tribunal's decision in respect of AY 2004-2005 was founded on the Special Bench approach and did not give effect to Explanation (baa) under Section 80HHC. The Supreme Court has concurrently delivered judgments in the connected appeals-one setting aside the Bombay High Court's contrary view in the Kalpataru Colours and Chemicals matter and another affirming the Delhi High Court's view in Commissioner of Income Tax v. Shri Ram Honda Power Equip. In light of those delivered judgments, the present appeal ITA No.308 of 2011 is disposed of accordingly, taking into account the Court's rulings on the legal effect of Explanation (baa) and the classification of DEPB receipts.

Appeal disposed of in terms of the judgments delivered today in the connected appeals, with no order as to costs.

Final Conclusion: Both appeals are disposed of in terms of the Supreme Court's separate judgments delivered today in the connected appeals dealing with the characterisation of DEPB receipts and the application of Explanation (baa) under Section 80HHC; there shall be no order as to costs.

Fees for technical services - consultancy services - make available - royalty - permanent establishment - withholding tax under section 195 of the Act - income in the hands of a non-resident

Income in the hands of a non-resident - consultancy services - Payment made by the applicant to SIPCL for General Business Support Services (General BSS) under the CCA constitutes 'income' in the hands of SIPCL within the meaning of Section 2(24) of the Act. - HELD THAT: - The Authority examined the nature of services described in Appendix 2 to the CCA and concluded that the bundle of General BSS-including advisory support in contract and procurement, taxation, legal, information technology, marketing and other managerial support-involves specialised expertise and human intervention and is therefore consultancy in nature. The Authority rejected the contention that cost-sharing among group entities negates the existence of income, observing precedent where such shared-cost arrangements were nonetheless treated as yielding taxable fees for technical services. On that basis the payments are income chargeable to SIPCL. [Paras 14]

The payments constitute income in the hands of SIPCL.

Fees for technical services - make available - consultancy services - The payments for General BSS are in the nature of 'fees for technical services' within the meaning of Article 13.4(c) of the India UK Tax Treaty. - HELD THAT: - Applying the Article 13.4(c) test, the Authority found that the General BSS are consultancy/technical services and that such services 'make available' technical knowledge, experience, skill or know how to the recipient. The services are provided through close working interchanges with the applicant's staff and impart industry specific expertise that the applicant can apply independently thereafter; ownership of any know how generated under the contractual arrangement further supports that the services enable the recipient to derive an enduring benefit and utilize the knowledge in future on its own. Consequently the payments fall within Article 13.4(c) as fees for technical services. [Paras 14]

The payments are fees for technical services under Article 13.4(c) of the India UK Tax Treaty.

Royalty - Explanation 2 to clause (vi) of Section 9(1) of the Act - The payments are not in the nature of 'royalty' within the meaning of Explanation 2 to clause (vi) of Section 9(1) of the Act. - HELD THAT: - Having characterised the services as consultancy/technical services that make available know how and expertise, the Authority nonetheless distinguished the payments from 'royalty' as defined in Explanation 2 to clause (vi) of Section 9(1), and ruled that the nature of the consideration is for technical/consultancy services rather than a payment constituting royalty. [Paras 14]

The payments are not royalty under Explanation 2 to clause (vi) of Section 9(1).

Royalty - Article 13 of the India UK Tax Treaty - The payments are not 'royalty' within the meaning of Article 13 of the India UK Tax Treaty. - HELD THAT: - Consistent with the Authority's construction under domestic law, the services were held to be fees for technical services (Article 13.4(c)) and not payments of the character contemplated as 'royalty' under the Treaty; accordingly the contractual and factual matrix did not render the payments as royalty under the Treaty. [Paras 14]

The payments are not royalty under Article 13 of the India UK Tax Treaty.

Permanent establishment - withholding tax under section 195 of the Act - income in the hands of a non-resident - Despite SIPCL's declaration of no Permanent Establishment in India, the payments received by SIPCL are chargeable to tax in India and the applicant is obliged to withhold tax under section 195 of the Act. - HELD THAT: - On the basis that the payments qualify as fees for technical services chargeable under the Treaty and domestic law, the Authority held that such receipts are chargeable to tax in India. Noting SIPCL's declaration that it lacks a Permanent Establishment in India under Article 5, the Authority nevertheless concluded that the applicant must withhold tax under section 195, since the payments give rise to income chargeable to tax in India. [Paras 14]

Payments are chargeable to tax in India and the applicant must withhold tax under section 195.

Final Conclusion: The Authority ruled that the payments for General Business Support Services made by the applicant to SIPCL constitute income in SIPCL's hands, are fees for technical services under Article 13.4(c) of the India UK Tax Treaty (and not royalty), are chargeable to tax in India, and that the applicant is obliged to withhold tax under section 195 of the Act.

Annual value - Deemed rental value - Self-occupied property option under section 23(4) - Occupation for residence under section 23(2) - Determination of annual letting value on fair market rent - Requirement of recording findings and opportunity to rebut inspection report

Self-occupied property option under section 23(4) - Occupation for residence under section 23(2) - Annual value - Which of the assessee's properties can be treated as self-occupied and the manner of determining annual value thereafter - HELD THAT: - The Tribunal held that an assessee is entitled to exercise the option under section 23(4) to designate one of the properties falling within section 23(2) as self-occupied and that the Assessing Officer or the Commissioner (Appeals) cannot impose their choice on the assessee. The AO and the CIT(A) failed to record determinations as to which properties in the case qualified under section 23(2). In these circumstances the Tribunal set aside the appellate finding and remanded the matter to the AO with directions to identify which properties fall within section 23(2), to permit the assessee to exercise the option under section 23(4), and thereafter to complete the assessment determining the annual letting value in accordance with law and judicial precedents. The assessee was directed to place all relevant facts before the AO and cooperate; the AO was permitted to make independent inquiries if necessary. [Paras 6]

Matter remanded to the Assessing Officer to identify properties within section 23(2), allow the assessee to exercise the option under section 23(4) and determine annual value accordingly; findings of CIT(A) on this point vacated.

Determination of annual letting value on fair market rent - Deemed rental value - Requirement of recording findings and opportunity to rebut inspection report - Validity of the addition made by AO on estimated market rent for the Greater Kailash property and related procedural objections - HELD THAT: - The Tribunal observed that the AO had relied on an inspector's report and estimated market rent without having any recorded findings as to qualification under section 23(2); the CIT(A) upheld the addition without addressing whether the property qualified as self-occupied and without accepting the evidence (bank statements, electricity bills) relied upon by the assessee. Because the threshold question of which properties qualify under section 23(2) was not decided, the correctness of the AO's estimate of deemed rental value could not be finally adjudicated and must be reconsidered by the AO after identification of qualifying properties and in the light of relevant authorities on determination of annual value. [Paras 6]

Addition and its quantum not finally adjudicated; matter restored to AO for fresh determination of annual value after identifying section 23(2) properties and permitting the assessee to exercise the option under section 23(4).

Interest under section 234B - Consequential adjudication dependent on remand - Levy of interest under section 234B - HELD THAT: - Because the primary issues on classification of properties and determination of annual value were restored to the file of the AO for fresh consideration, the Tribunal declined to adjudicate the ground relating to levy of interest under section 234B at this stage. [Paras 6]

Ground relating to interest under section 234B not decided (does not survive) and stands for consideration after remand.

Final Conclusion: The appellate order is set aside and the matter is remanded to the Assessing Officer to identify which properties fall within section 23(2), to allow the assessee to exercise the option under section 23(4), and to determine annual value and related consequences in accordance with law; the appeal is allowed for statistical purposes.

Concealment of particulars of income - furnishing inaccurate particulars of income - penalty under section 271(1)(c) for concealment or furnishing inaccurate particulars - disallowance under section 40A(2)(b) on estimate basis - full disclosure in tax audit report - computation under section 115JB

Penalty under section 271(1)(c) for concealment or furnishing inaccurate particulars - disallowance under section 40A(2)(b) on estimate basis - full disclosure in tax audit report - concealment of particulars of income - furnishing inaccurate particulars of income - Sustainability of penalty imposed under section 271(1)(c) in respect of the disallowance made under section 40A(2)(b). - HELD THAT: - The Tribunal noted that the assessee had made complete disclosure of the payments (including commission to the specified person) in the tax audit reports and had produced the relevant agreement. The assessing officer applied section 40A(2)(b) by making an estimated disallowance without pointing to any material showing that the payments were not made or were denied by the recipient. Reliance on the law laid down by the Hon'ble Supreme Court in Reliance Petroproducts (and other cited authorities) establishes that penalty under section 271(1)(c) requires concealment of particulars or furnishing of inaccurate particulars of income; an incorrect claim which is disclosed in the return or accompanying audit record does not, by itself, constitute furnishing inaccurate particulars. Applying that principle, and in absence of any finding that the particulars disclosed were false or that the claim was made with dishonest or mala fide intention, the Tribunal held that the ingredients of section 271(1)(c) were not made out and the penalty could not be sustained. [Paras 8, 9, 10]

Penalty imposed under section 271(1)(c) in respect of the disallowance under section 40A(2)(b) deleted and the assessee's appeal allowed.

Final Conclusion: The Tribunal allowed the assessee's appeal and deleted the penalty imposed under section 271(1)(c) insofar as it related to the disallowance under section 40A(2)(b), holding that there was no concealment or furnishing of inaccurate particulars of income.

Admission of additional evidence under Rule 46A - Best judgment assessment under section 144 - Remand for de novo assessment after opportunity to produce books and vouchers - Cessation of liability and section 41(1) - Requirement for reasoned orders as facet of natural justice and statutory mandate under section 250(6)

Best judgment assessment under section 144 - Admission of additional evidence under Rule 46A - Remand for de novo assessment after opportunity to produce books and vouchers - Requirement for reasoned orders as facet of natural justice and statutory mandate under section 250(6) - Validity of the CIT(A)'s disposal of appeals for AY 2005-06 where assessment was completed under section 144 and CIT(A) entertained evidence and gave partial relief without an adequate remand report and without reasoned findings. - HELD THAT: - The Tribunal noted that assessment for AY 2005-06 was completed under section 144 because the assessee failed to comply with notices and did not produce books and vouchers before the AO. Although the CIT(A) considered affidavits and some documentary material and deleted certain additions, the AO did not file a remand report despite being requested under Rule 46A. The Tribunal observed that the CIT(A)'s order was cryptic, lacked application of mind and cogent reasons as required by section 250(6) and principles of fair procedure. Given that relevant books and vouchers were neither produced before the AO nor examined by the authorities and that the AO had not had the opportunity to consider the evidence, the Tribunal concluded that it was fair and appropriate to vacate the CIT(A)'s findings and restore the matter to the file of the AO for fresh adjudication. The AO was directed to afford the assessee sufficient opportunity to produce relevant books and vouchers, to undertake independent enquiries if necessary, and to complete assessment de novo in accordance with law; the assessee was directed to cooperate and place all relevant material before the AO. [Paras 6]

Findings of the CIT(A) for AY 2005-06 vacated; matter remitted to the AO for de novo assessment after allowing sufficient opportunity to the assessee to produce books, vouchers and evidence.

Cessation of liability and section 41(1) - Admission of additional evidence under Rule 46A - Validity of the addition of Rs.1 crore under section 41(1) for AY 2007-08 on the ground that transfer of share application money to general account amounted to cessation of liability. - HELD THAT: - The CIT(A) found that the liability towards the holding company was confirmed on the basis of available confirmations/affidavits and that the only transaction in the year was transfer of Rs.1 crore from share application money to general account, which the AO himself admitted had been received in 1999-2000. The CIT(A) held that such transfer could not be characterised as cessation of liability attracting section 41(1), particularly because the amount had never been debited to profit and loss account. The Revenue failed to place before the Tribunal any material to controvert the factual findings recorded by the CIT(A) or to show that the CIT(A) had improperly admitted additional evidence; the Tribunal accordingly declined to interfere with the CIT(A)'s conclusion and dismissed the Revenue's appeal in respect of this addition. [Paras 10]

Addition of Rs.1 crore under section 41(1) for AY 2007-08 deleted; Revenue's appeal on this point dismissed.

Final Conclusion: The Tribunal vacated the CIT(A)'s findings in relation to AY 2005-06 and remitted the matter to the Assessing Officer for de novo assessment after providing the assessee sufficient opportunity to produce books, vouchers and evidence; the Tribunal upheld the CIT(A)'s deletion of the addition under section 41(1) for AY 2007-08 and dismissed the Revenue's appeal on that point.