TaxTMI Updates e-Newsletter
Mar 26,2012

Indivisible contract - association of persons (AOP) - dissecting approach / 'look at' test - situs of contract - taxability of offshore components linked to onshore works - joint and several liability of consortium members - permanent establishment (PE) - non existence where assessment as AOP - taxability under the Income tax Act

Indivisible contract - dissecting approach / 'look at' test - situs of contract - Whether the contract between OPAL and the Consortium is indivisible and not susceptible to a dissecting approach for taxation. - HELD THAT: - The contract and its annexures must be read as a whole and the nature and object of the transaction as a composite erection/turnkey contract determine its character. The operative agreement, notification of award, project instructions, payment formula and related documents show that rights and obligations were conferred on OPAL and the Consortium jointly, payments were for the entire scope of works and obligations (including risk until acceptance after commissioning) continued until completion. The Internal Consortium Agreement is an internal arrangement between members and is not part of the contract with OPAL; its terms cannot alter the legal effect of the contract documents. Applying the 'look at' test, the court rejected an artificial splitting of the contract into off shore and on shore components merely for tax purposes and held that the situs is to be determined by the nature and object of the overall contract. [Paras 16, 17, 18, 19, 21]

The contract is one and indivisible; a dissecting approach to split it for taxation is not permissible.

Association of persons (AOP) - joint and several liability of consortium members - taxability under the Income tax Act - Whether the applicant and Samsung, having formed the Consortium, are taxable in India as an Association of Persons (AOP). - HELD THAT: - Relevant authorities establish that formation of an AOP depends on facts and volition to join together for a common purpose of producing income. Here, the two independent entities came together to bid for and perform the entire project; the contract was awarded to the Consortium and not to the members individually; the Consortium was jointly and severally liable to OPAL; payments were for the whole work and responsibility for completion (including post commissioning liabilities) rested with the Consortium. Internal allocation of responsibilities and separate payments to members do not negate the common enterprise and joint liability arising from the accepted bid. On these facts, the members formed an AOP in respect of the work undertaken and the Consortium is the taxable unit under the Act. [Paras 22, 29, 30, 31, 32]

The applicant and Samsung constitute an Association of Persons and the Consortium is assessable as an AOP.

Taxability of offshore components linked to onshore works - indivisible contract - taxability under the Income tax Act - Whether amounts receivable for design and engineering prepared offshore and for supply of equipment/materials outside India are taxable in India under the Income tax Act or the DTAA. - HELD THAT: - The claim that parts of design/engineering or supply occurring outside India are beyond Indian jurisdiction rests on a dissected view of the contract. Given the contract's indivisible nature and the finding that the Consortium is an AOP liable for the composite works, offshore components which are inextricably linked to the erection and commissioning in India cannot be treated in isolation. Consequently, such amounts fall to be taxed in India as part of the income from the composite undertaking. [Paras 15, 33, 34, 35, 36]

Amounts for design/engineering and for supply of equipment/materials linked to the contract are taxable in India.

Permanent establishment (PE) - non existence where assessment as AOP - taxability under the Income tax Act - Whether the question of existence of a Permanent Establishment (PE) arises once the Consortium is held liable and assessable as an AOP in India, and related queries on computation of PE profits under Section 44DA/44C. - HELD THAT: - Because the Consortium is to be assessed as an Association of Persons and the contract is taxable in India as a composite undertaking, the separate question of whether a PE exists for one or other member does not arise for determining taxability of the Consortium's income. The issues framed in respect of profits attributable to a PE and the allowance of head office expenditures were answered on the same basis: they do not arise once assessment is as an AOP under the Act. [Paras 37, 38]

The question of a PE is rendered inapplicable by the conclusion that the Consortium is assessable as an AOP; related PE based computations do not arise.

Final Conclusion: The Authority ruled that the contract with OPAL is indivisible, the Consortium members formed an Association of Persons and the Consortium is assessable as an AOP; accordingly amounts (including design/engineering and supply components linked to the on site erection and commissioning) are taxable in India, and the separate question of a PE for members does not arise.

Approval under section 80G(5) - established in India for a charitable purpose - Commissioner satisfaction under Rule 11AA - registration under section 12AA as evidence of charitable establishment - scope of enquiry confined to clauses (i) to (v) of section 80G(5) - amendment of trust deed and reconsideration by the Commissioner

Approval under section 80G(5) - established in India for a charitable purpose - scope of enquiry confined to clauses (i) to (v) of section 80G(5) - registration under section 12AA as evidence of charitable establishment - Denial of approval under section 80G(5) solely because the trust deed contained a clause permitting activities outside India was not justified where conditions of sub clauses (i) to (v) were satisfied and the trust was registered under section 12AA. - HELD THAT: - The Tribunal held that for grant of approval under section 80G(5) the Commissioner is to be satisfied only about the conditions enumerated in sub clauses (i) to (v) of that sub section and the procedural requirements under Rule 11AA. Registration under section 12AA and compliance with sub clauses (i) to (v) demonstrate that the trust is established for charitable purposes and satisfy the statutory test. The mere presence in the trust deed of a clause permitting activities outside India does not, by itself, negate eligibility under section 80G(5) where the statutory conditions are otherwise fulfilled and no activities have in fact been carried out outside India. The Tribunal relied on precedents emphasising that technicalities in objects clauses should not defeat substantive satisfaction of the statutory conditions and that the scope of the Commissioner's enquiry is confined to the prescribed conditions. [Paras 7, 8, 13, 14]

The denial of approval on the ground that the objects clause permitted activities outside India is unsustainable; the trust satisfies clauses (i) to (v) and its registration under section 12AA supports eligibility for approval under section 80G(5).

Amendment of trust deed and reconsideration by the Commissioner - Commissioner satisfaction under Rule 11AA - The amendment to the trust deed confining activities to India was to be considered by the DIT(E) and the application for approval remitted for decision in accordance with law. - HELD THAT: - The Tribunal noted that the trust had effected an amendment to clause 3.2 so as to confine activities to India and had applied to the Commissioner to record the amendment. Given that the statutory conditions for approval under section 80G(5) read with Rule 11AA are otherwise met, the matter was directed to be reconsidered by the DIT(E) in the light of the amendment and on the basis of satisfaction of the prescribed conditions. The direction requires the Commissioner to examine the existing record and the amended clause and to record reasons while granting or refusing approval. [Paras 14, 15]

Matter remitted to the DIT(E) to consider the amendment and decide the application for approval under section 80G(5) in accordance with law.

Final Conclusion: The appeal is allowed; the Tribunal held that eligibility for approval under section 80G(5) is governed by satisfaction of clauses (i)-(v) and not defeated merely by an objects clause permitting activities outside India where no such activities were carried out and the trust is registered under section 12AA; the DIT(E) is directed to consider the amendment to the trust deed and decide the approval application in accordance with law.

Interpretation of exemption/beneficial customs notification - eligibility under Entry 8 of the table appended to the exemption notification (High Speed Warping Machine with yarn tensioning, pneumatic suction devices and accessories) - trade understanding and expert opinion in classification of goods - liberal construction of beneficial exemptions in fiscal law

Eligibility under Entry 8 of the table appended to the exemption notification (High Speed Warping Machine with yarn tensioning, pneumatic suction devices and accessories) - interpretation of exemption/beneficial customs notification - trade understanding and expert opinion in classification of goods - Imported High Speed Draw Warping Machine with drawing unit but without pneumatic suction device falls within Entry 8 of the table appended to the exemption notification and is entitled to benefit thereunder. - HELD THAT: - The Court accepted the CESTAT's approach that Entry 8 describes a composite machine and that the drawing unit imported by the assessee is an essential accessory to the High Speed Warping Machine. The textile commissioner's expert opinion that the imported goods are covered by Entry 8, and that the drawing unit is an essential accessory, was taken into account by the Tribunal and approved. The Court reiterated the settled principle that, in classification and scope of entries under fiscal statutes where no statutory definition exists, the trade understanding and opinion of experts who deal with the goods are a safe and material guide. Applying established precedents, the Court further held that beneficial exemption notifications should be given a liberal interpretation in favour of the object of the notification, provided such interpretation does not violate the language employed. Having noted that the Tribunal applied these principles correctly and that the factual conclusion that the imported machine falls within Entry 8 was supported by expert opinion, the Court found no error in granting the assessee relief. [Paras 8, 9, 10, 13, 15]

The Tribunal's grant of relief to the assessee was upheld and the Revenue's appeal was rejected.

Final Conclusion: The Supreme Court affirmed the CESTAT's decision that the imported machine, including its drawing unit, falls within the scope of Entry 8 of the exemption notification and is entitled to the benefit of the notification; the Revenue's appeal is dismissed.

Customs duty exemption - import licence condition - description of goods "for use as manure" and end-use requirement - waiver of pre-deposit of duty and interest - penalty for breach of import licence - pre-deposit of penalty for stay

Customs duty exemption - description of goods "for use as manure" and end-use requirement - waiver of pre-deposit of duty and interest - Whether customs duty and interest demand could be sustained when the exemption notification described the goods as "urea, for use as manure" but contained no condition of actual user, despite breach of an import licence condition - HELD THAT: - The Tribunal determined that the customs duty exemption must be construed by reference to the exemption notification and any conditions expressly incorporated therein; where the impugned Notification Nos. 11/97, 23/98 and 20/99 specified "urea, for use as manure" but contained no actual-user condition, no additional obligation to prove end-use could be imported from the separate import licence. The appellants had imported urea purportedly for further manufacture and, according to their affidavit, sold the urea to authorised dealers under statutory fertilizer control orders so as to be used as manure. The absence of an express condition of actual use in the exemption notification precluded denial of exemption merely because the import licence condition was violated. Instances of alleged diversion by dealers, being unquantified and subject to enforcement under other laws, did not justify treating the exemption as conditional. In consequence, the adjudicating authority was not justified in upholding the duty and interest demand on the ground of breach of the import licence when the exemption notification imposed no such condition; accordingly the Tribunal ordered waiver of predeposit of the duty and interest during the appeal's pendency. [Paras 6, 7, 8]

Predeposit of the customs duty and interest waived during pendency of the appeal; exemption upheld because the notification contained no actual-user condition.

Import licence condition - penalty for breach of import licence - pre-deposit of penalty for stay - Whether the penalty imposed on the appellant-PSU for violation of the import licence condition was sustainable and what pre-deposit, if any, was required for grant of stay - HELD THAT: - The Tribunal held that the import licence condition requiring use of imported urea for further manufacture was binding and its breach attracts penal consequences under customs law. However, the adjudicating authority had not established any personal culpability of company officials and had in fact dropped proceedings against individual officials and the Customs House Agent. In these circumstances, imposition of a very large penalty solely on the appellant-PSU was prima facie unjustified. While some penalty was deemed appropriate for the statutory breach, equity and the absence of proved personal involvement required moderation of the predeposit. The Tribunal therefore directed a specific, limited predeposit towards penalty to secure the appeal process, and stayed recovery of the balance during pendency subject to compliance with that predeposit. [Paras 9]

Directed predeposit of Rs.5,00,000 towards penalty within four weeks; balance of penalty predeposit waived during pendency of the appeal upon compliance.

Final Conclusion: Duty and interest demand set aside for the purposes of predeposit and waived during the appeal because the exemption notification imposed no actual-user condition; penalty for breach of import licence sustained in principle but limited - appellant directed to predeposit a moderate amount towards penalty with the balance stayed pending appeal.

Waiver of pre-deposit - Stay of recovery - Prima facie case for waiver - Business Auxiliary Services - Business Support Services - Principal-to-principal transaction - Infrastructural support service

Business Auxiliary Services - Principal-to-principal transaction - Prima facie case for waiver - Liability to service tax on IPO financing fees charged as revenue share with NBFCs - HELD THAT: - The Tribunal examined the MOU between the applicants and sister NBFCs and found that the applicants arranged finance through the NBFCs and shared profit after expenses; the applicants also agreed to compensate NBFCs for any demand. On these facts the applicants did not act as commission agents but dealt on a principal-to-principal basis and shared profits. Consequently the activity did not constitute rendering of a service under the head Business Auxiliary Services, and the applicants established a strong prima facie case against the demand adjudged for IPO financing fees. [Paras 3]

Prima facie not liable to service tax under Business Auxiliary Services; case for waiver of pre-deposit made out.

Business Auxiliary Services - Prima facie case for waiver - Liability to service tax on interest share received by applicants for deposits collected on behalf of IPO-issuing companies - HELD THAT: - The Tribunal found that applicants collected money on behalf of the IPO-issuing company and deposited it in a designated bank; the bank earned interest and shared that interest with the applicants. The interest share arose from the bank's earnings on deposits and not because the applicants were promoting or marketing the bank's services. Therefore the transaction did not prima facie fall within Business Auxiliary Services, and the applicants established a case for complete waiver of pre-deposit in respect of this processing fee activity. [Paras 3]

Prima facie not liable to service tax under Business Auxiliary Services; case for 100% waiver of pre-deposit made out.

Business Support Services - Infrastructural support service - Prima facie case for waiver - Liability to service tax on recovery of common expenses from co-users of premises - HELD THAT: - The Tribunal observed that the applicants incurred common expenses for the premises and recovered those expenses from co-users on actual usage basis. As the recoveries were reimbursement of actual expenses incurred on behalf of co-users and not a separate service provision, the activity did not prima facie amount to rendering Business Support Services or Infrastructural support service. On that basis the applicants were held not to be rendering any taxable service in this respect and established a prima facie case for waiver. [Paras 3]

Prima facie not liable to service tax under Business Support Services; case for 100% waiver of pre-deposit made out.

Final Conclusion: The Tribunal found prima facie absence of liability under the challenged service categories for the IPO financing fees, processing fee interest share, and recovery of common expenses, and accordingly granted complete waiver of the pre-deposit of the service tax demand, interest and penalties and stayed recovery during the pendency of the appeal; appeal listed for final hearing on 06.03.2012.

Banking and other financial services - taxable service - body corporate - any other person - ejusdem generis - penalty under section 76 - penalty under section 78

Body corporate - Whether a co-operative society is covered by the expression "body corporate" as used in section 65(105)(zm) and section 65(12) of the Finance Act, 1994. - HELD THAT: - The Tribunal accepted that for understanding the phrase "body corporate" the definition in the Companies Act, 1956 (section 2(7)) can be relied upon and that a co-operative society is specifically excluded from that definition. The Court observed that the exclusion in the Companies Act demonstrates legislative intent to keep co-operative societies outside the regime of the Companies Act, but this exclusion does not by itself create an exemption from a taxing statute which employs a separate residual expression. Consequently, the Court held that a co-operative society is not a "body corporate" within the meaning of the impugned entries in the Finance Act, 1994, insofar as the Companies Act definition governs that term. [Paras 4, 9]

Co-operative societies are not covered by the expression "body corporate" for the purposes of the cited entries in the Finance Act, 1994.

Any other person - ejusdem generis - banking and other financial services - Whether a co-operative society falls within the residual expression "any other person" in section 65(105)(zm) and, correspondingly, within the definition of "banking and other financial services" in section 65(12). - HELD THAT: - The Tribunal examined whether the residual phrase "any other person" could bring co-operative societies within the scope of the taxing entries. It rejected the appellant's contention that co-operative societies are of a different genus and therefore excluded by application of ejusdem generis. The Court reasoned that the specific exclusion of co-operative societies from the Companies Act definition indicates that co-operatives are of the same genus as companies in relevant respects, and that the taxing statute contained no specific exclusion of co-operative societies. The Tribunal also considered and distinguished the departmental Circular relating to Department of Posts, observing that the Post Office is materially different from co-operative banks and that the Circular's classification of Department of Posts services does not imply that co-operative banks are outside the taxing entry. In view of these factors, the Court concluded that services provided by banks run by co-operative societies fall within the residual expression "any other person" and thereby within the taxable category of banking and other financial services under the Finance Act. [Paras 10, 11, 12, 13, 14]

Services rendered by banks run by co-operative societies are covered by the expression "any other person" and therefore fall within the taxable entry for "banking and other financial services" under the Finance Act, 1994, for the relevant period.

Penalty under section 76 - penalty under section 78 - Whether penalties imposed on the appellants are justified and, if so, under which provision(s) penalty should subsist. - HELD THAT: - The Tribunal noted that the appellants had been previously registered and were paying service tax but ceased payments claiming a new interpretation. The Court found that there was no reasonable ground for adopting the new interpretation and upheld the imposition of penalty under section 76. The Tribunal observed that both penalties under sections 76 and 78 had been imposed by the adjudicating authority. Relying on precedent that simultaneous penalties under sections 76 and 78 are not warranted, the Tribunal held that penalty under section 76 was more appropriate and set aside the penalty under section 78. The option to pay a reduced amount under section 78 was noted as not having been exercised. [Paras 15, 16, 17]

Penalty under section 76 is upheld; penalty under section 78 is set aside.

Final Conclusion: Appeals dismissed on the substantive issue of liability: services provided by banks run by co-operative societies during April 06 to Sep 06 are taxable under the Finance Act, 1994. Penalty under section 76 is sustained; penalty under section 78 is vacated.

Determination of inter-state sale versus intra-state sale - Adjudication by the Assessing Authority on mixed questions of law and fact - Application of Section 3 and Section 9(i) for classification of sale and levy of tax - Limitations on exercise of writ jurisdiction under Article 226 where factual adjudication is required

Determination of inter-state sale versus intra-state sale - Adjudication by the Assessing Authority on mixed questions of law and fact - Limitations on exercise of writ jurisdiction under Article 226 where factual adjudication is required - High Court erred in deciding, by writ, that the transactions were purely intra-state sales; such classification is a mixed question of law and fact for the assessing authority to determine. - HELD THAT: - The Court held that whether a sale originating in a State is inter state or intra state involves application of the charging and definitional provisions of the relevant statutes to the facts and thus constitutes a mixed question of law and fact. Consequently, the High Court should not have entertained the writ petitions to determine the tax character of the transactions solely on the basis of clauses in the tender documents. The proper course is for the assessees to place relevant facts before the Assessing Authority, which must apply the statutory tests (including the tests in Section 3 and Section 9(i) of the Act) and adjudicate the classification and levy of tax; only after such adjudication can appellate remedies be invoked. The Court relied on the need to apply Section 3 for deciding inter state character and Section 9(i) for determining the State in which tax is leviable, and therefore set aside the High Court's conclusion. Reference to prior authorities [Tata Iron and Steel Co. Limited ] and [Bharat Heavy Electricals Ltd. ] was made in support of these principles. [Paras 8, 9]

The High Court's orders holding the transactions to be intra state sales are set aside and the question of classification is to be adjudicated afresh by the Assessing Authority.

Adjudication by the Assessing Authority on mixed questions of law and fact - Interim protection against demand notices pending reassessment - Directions for procedural steps following remand: filing of returns, adjudication timeline, restraint on further demand notices, and treatment of amounts deposited. - HELD THAT: - The Court directed the appellants/assessees to file their monthly/annual returns before the Assessing Authority within one month if not already filed. The Assessing Authority was directed to adjudicate the returns in accordance with law after affording opportunity of hearing within two months from filing of the returns, uninfluenced by the High Court's observations. Pending completion of those proceedings, the Assessing Authorities are restrained from issuing further demand notices for recovery of taxes under the VAT Act or Central Sales Tax Act. The Court further clarified that amounts deposited by the assessees during the pendency of proceedings before the High Court or this Court shall not be demanded to be refunded. [Paras 10]

Assessees to file returns within one month; Assessing Authority to adjudicate within two months; further demand notices restrained; deposits need not be refunded.

Final Conclusion: Orders of the High Court declaring the sales to be intra state are set aside; the matters are remitted to the Assessing Authority for fresh adjudication in accordance with law after filing of returns as directed, with interim protection against further demand notices and preservation of deposits; appeals disposed of accordingly with no order as to costs.