TaxTMI Updates e-Newsletter
May 05,2016

Comparability of uncontrolled transactions - Turnover filter as comparator criterion - Concurrent findings of fact - Reappreciation of evidence by High Court - Substantial question of law arising from findings based on no evidence

Comparability of uncontrolled transactions - Turnover filter as comparator criterion - Exclusion of HCL Comnet Systems & Services Ltd., Infosys BPO Ltd. and Wipro Ltd. as comparable companies for transfer pricing purposes - HELD THAT: - The Tribunal and the Commissioner (Appeals) excluded the three companies from the comparable set on the basis that their turnovers (Rs. 260.18 crores, Rs. 649.56 crores and Rs. 939.78 crores respectively) were massively disproportionate to the assessee's turnover (around Rs. 11 crores). The Tribunal applied the turnover filter as a relevant and determinative criterion for selection of comparables, endorsed the CIT(A)'s conclusions and relied on earlier decisions treating size/turnover as a material factor in comparability. The High Court found that these conclusions constitute appreciation of evidence and concurrent findings of fact which are supported by the material on record and therefore contain no infirmity. [Paras 5, 6]

The exclusion of the three named companies as comparables on the turnover criterion is sustained; no illegality is shown in the concurrent factual findings of the authorities below.

Concurrent findings of fact - Reappreciation of evidence by High Court - Substantial question of law arising from findings based on no evidence - Whether the High Court should reappraise evidence or treat the Tribunal's findings as giving rise to a substantial question of law - HELD THAT: - The Court held that the Tribunal's findings were concurrent findings of fact based on evidence on record and endorsed the CIT(A)'s reasoning. Reliance was placed on the principle that a finding of fact only gives rise to a substantial question of law if it is based on no evidence, ignores relevant admissible evidence, relies on inadmissible evidence, misreads evidence or neglects legal principles. The revenue did not demonstrate that the lower authorities' conclusions suffered from any such defect; accordingly, reappreciation of the material by this Court was not permissible and the substantial questions of law framed by the appellant did not arise. [Paras 6, 7, 10]

The High Court will not reappreciate the evidence; no substantial question of law is established to disturb the concurrent factual findings.

Final Conclusion: The appeal is rejected and the Tribunal's order excluding the three companies as comparables on the turnover criterion is upheld; there is no substantial question of law warranting interference with the concurrent findings of fact.

Receipts of a casual and non-recurring nature - taxability of capital receipts - application of Section 10(3) read with Section 56 - chargeability under Section 45 (capital gains) - burden on the Revenue to prove that a receipt falls within a charging provision - prohibition on taxing a capital receipt under a residuary head - consideration for relinquishment/extinguishment of rights

Receipts of a casual and non-recurring nature - application of Section 10(3) read with Section 56 - taxability of capital receipts - chargeability under Section 45 (capital gains) - burden on the Revenue to prove that a receipt falls within a charging provision - prohibition on taxing a capital receipt under a residuary head - Nature and taxability of the amounts received by the assessees and whether they were exigible to tax as casual and non-recurring receipts under Section 10(3) read with Section 56 or otherwise taxable - HELD THAT: - The Court examined whether the sums of Rs. 10,00,000 received by each assessee (aggregate Rs. 20,00,000 deposited in Court) pursuant to the Supreme Court compromise were taxable as receipts of a casual and non-recurring nature under Section 10(3) read with Section 56 or as income under some other head. It reiterated the elementary principle that the burden lies on the Revenue to show that a receipt falls within a charging provision. Relying on precedents which distinguish capital receipts from income (including decisions holding that amounts received in connection with the cancellation or surrender of rights related to capital assets are capital receipts), the Court held that the Revenue had not established that the sums were casual and non-recurring receipts liable to tax under Section 10(3). The Court further explained that where a receipt is in the nature of a capital receipt (or arises directly out of a transaction connected with a capital asset) it cannot be shifted to a residuary income head merely because computation under the capital gains machinery may be impracticable; the Revenue cannot, by invoking Section 10(3) read with Section 56, tax a receipt that is essentially capital in character. The Court rejected the Revenue's belated alternative contention (first advanced in this Court) that the amount represented revenue/interest, noting that the Supreme Court compromise made specific provision for interest separately and there was no basis to treat the entire payment as interest. Applying these principles to the facts, the Court concluded that the Revenue failed to make out a case for taxing the amount as a casual and non-recurring receipt or as revenue receipt. [Paras 23, 31, 32, 33]

The sums received by the assessees were not taxable as receipts of a casual and non-recurring nature under Section 10(3) read with Section 56, and the Revenue could not tax the amounts by recourse to those provisions; the assessments and appellate orders sustaining such taxation were set aside.

Final Conclusion: Appeals allowed. The impugned orders of the AO, the CIT(A) and the ITAT insofar as they treated the payments as taxable casual/non-recurring receipts are set aside; the amounts received by the assessees are not exigible to tax under Section 10(3) read with Section 56. Order as to costs.

Transactional Net Margin Method - Berry ratio - inclusion of cost of sales in profit level indicator - computation of operating profit margin - scope of Rule 10B(1)(e) - Arm's Length Price - second proviso to Section 92C

Transactional Net Margin Method - Berry ratio - inclusion of cost of sales in profit level indicator - scope of Rule 10B(1)(e) - computation of operating profit margin - Arm's Length Price - Validity of the TPO's adjustment which treated the Assessee's support services as trading by increasing costs (including cost of sales) for computing the Berry ratio under TNMM to determine the ALP. - HELD THAT: - The ITAT's order disallowing the TPO's approach was affirmed. The Court followed its earlier decision in Li & Fung India Pvt. Ltd. where it was held that enhancing the denominator by including cost of sales so as to compute an altered operating profit margin and thereby arbitrarily adjust the Assessee's income falls outside the Rules and the Act. The TPO's reasoning to augment costs by treating the support services as equivalent to trading and by considering costs of manufacture and export was not supported by Rule 10B(1)(e) and could not be sustained. Consequently, the adjustments made by the TPO/DRP to determine the ALP on that basis were set aside. [Paras 8, 9]

The TPO's inclusion of cost of sales in the PLI denominator and the resultant adjustment to the Assessee's income is unsustainable and the ITAT's rejection of that approach is upheld.

Second proviso to Section 92C - consequential determination - Whether the Court should keep open the question as to the correctness of consequential additions determined on the basis that the Assessee's transactions fell within the +/-5% range in terms of the second proviso to Section 92C. - HELD THAT: - The Court declined the Revenue's request to keep this question open. Since the principal issue concerning the modus of computing the operating profit margin was decided in favour of the Assessee, the consequential issue was treated as incidental and did not warrant reserving for later consideration. The Court found no basis for the Revenue's apprehension that the ITAT's order would operate as an unwarranted precedent in later cases and therefore refused to keep the matter open. [Paras 10]

The request to keep open the consequential question under the second proviso to Section 92C is refused.

Final Conclusion: The Revenue's appeals are dismissed: the ITAT's rejection of the TPO's adjustment based on augmenting costs for Berry ratio/TNMM is affirmed, and the Revenue's request to reserve the consequential proviso issue is refused.

Allowability of business expenditure under Section 37(1) - characterisation as fees for technical services and obligation to deduct tax at source - concurrent findings of fact - perverse or arbitrary finding of fact - binding precedent

Allowability of business expenditure under Section 37(1) - concurrent findings of fact - perverse or arbitrary finding of fact - Whether the payment of commission of Rs. 1.13 crores to Mr. John/Jonathan Smith was allowable as business expenditure under Section 37(1) having regard to the documentary discrepancies and the Assessing Officer's finding that the document was dubious. - HELD THAT: - The Tribunal and the Commissioner of Income Tax (Appeals) found on evidence before them that the payment was made to and received by the agent, that the commission rate and link to export sales were established, and that the expenditure was for business purposes of promoting sales. Those concurrent findings of fact represent a possible view on the material and were not shown to be perverse or arbitrary. As the impugned conclusion of allowability stems from factual findings accepted by two appellate authorities, the question does not raise a substantial question of law warranting interference. [Paras 3]

The disallowance was not sustained; the concurrent factual findings upholding the deduction were accepted and question (i) not entertained.

Characterisation as fees for technical services and obligation to deduct tax at source - binding precedent - Whether the payment constituted fees for managerial and professional services in the nature of fees for technical services under the Act and was disallowable under Section 40(a)(i) for failure to deduct tax at source. - HELD THAT: - Counsel for the Revenue conceded that the legal issue is concluded against the Revenue by earlier decisions of this Court. Having regard to those binding precedents on the point, the Court held that the question does not give rise to any substantial question of law requiring determination in the present appeal. [Paras 4]

Question (ii) not entertained as concluded by binding precedent.

Final Conclusion: The appeal is dismissed; the appellate authorities' concurrent factual determination allowing the commission expenditure is maintained, and the legal contention on characterization and TDS was not entertained in view of binding precedent. No order as to costs.

Power of appellate tribunal to enhance assessment - cross-objections by revenue - deemed acquiescence of non-appealing party - excess of jurisdiction

Power of appellate tribunal to enhance assessment - cross-objections by revenue - deemed acquiescence of non-appealing party - excess of jurisdiction - Whether the Appellate Tribunal could confirm an addition of Rs. 1,59,38,774/- made for the first time by the Tribunal in the absence of any cross-objections or appeal by the revenue. - HELD THAT: - The Court held that the Tribunal had no jurisdiction to confirm or make an addition in favour of the revenue when the revenue had neither preferred an appeal nor filed cross-objections against the order of the Commissioner (Appeals). The statutory scheme embodied in sub section (4) of section 253 was considered together with the established principle that a party who does not appeal or file cross objections is to be taken as satisfied with the decision of the lower authority. The Tribunal, having set aside the addition of Rs. 2.02 crores (which was the subject of the appeal), could not in the same proceedings make or confirm a separate addition of Rs. 1,59,38,774/- adverse to the assessee when the revenue declined to invoke the remedy of cross objections. Reliance was placed on the elementary appellate principle - reflected in earlier decisions cited in the judgment (Motor Union Insurance Co. Ltd.-vs-Commissioner of Income Tax ; New India Life Assurance Co. Ltd.-vs-Commissioner of Income Tax ; State of Kerala -vs- Vijaya Stores ) - that in the absence of an appeal or cross objections a respondent cannot seek enhancement or relief detrimental to the appellant. Applying this principle, the addition confirmed by the Tribunal amounted to an impermissible enhancement and was thus in excess of the Tribunal's jurisdiction.

Addition of Rs. 1,59,38,774/- confirmed by the Tribunal was in excess of jurisdiction and cannot be sustained.

Final Conclusion: The appeal is allowed on the ground that the Appellate Tribunal had no jurisdiction to confirm the addition of Rs. 1,59,38,774/- in the absence of any cross objections or appeal by the revenue; parties to bear their own costs.

Reopening of assessment - reasons recorded under Section 148 - failure to disclose fully and truly all material facts - live link between reasons and formation of belief that income escaped assessment - change of opinion - prohibition on supplying fresh reasons after recording - validity of reassessment jurisdiction

Reasons recorded under Section 148 - failure to disclose fully and truly all material facts - live link between reasons and formation of belief that income escaped assessment - Adequacy of the reasons recorded for reopening the assessments under Section 148 for AYs 2007-2008 to 2012-2013. - HELD THAT: - The recorded reasons were incoherent, grammatically defective and failed to indicate a clear basis for the formation of belief that income had escaped assessment. The Court examined the statutory requirement that reasons must demonstrate (i) failure by the assessee to disclose fully and truly all material facts necessary for assessment and (ii) a live link between those facts and the belief that income escaped assessment. Applying the authorities cited, the Court held that the reasons as recorded (and as partly deciphered by the Revenue) did not satisfy these jurisdictional requirements. The facts relevant to the various assessment years were jumbled together and material averments relied upon subsequently were absent from the reasons as recorded, so that the foundational trigger for reopening under Section 147/148 was not established. [Paras 9, 11, 12, 17, 18]

The reasons recorded for reopening are inadequate and do not satisfy the requirements of Section 147/148; the notices issued on 28th March 2014 are quashed.

Prohibition on supplying fresh reasons after recording - validity of reassessment jurisdiction - change of opinion - Permissibility and legal effect of supplying or supplementing reasons for reopening subsequently (by order rejecting objections or by affidavit). - HELD THAT: - The Court reiterated the settled principle that the validity of the assumption of jurisdiction under Section 147 must be tested by reference to the reasons recorded under Section 148(2) alone, and that the Assessing Officer cannot supply or expand reasons later in an order rejecting objections or in affidavits. Reliance on additional factual allegations in the objection-rejection order and in the counter-affidavit cannot cure the deficiency in the original reasons. Even the reasons advanced later were examined and found insufficient to establish the required failure to disclose and the live link to escapement of income. [Paras 14, 15, 16, 17]

Reasons introduced subsequently cannot validate an otherwise deficient Section 148 record; the post hoc explanations do not cure the jurisdictional defect.

Final Conclusion: The Court quashed the notices dated 28th March 2014 issued under Section 148 and the orders dated 24th October 2014 rejecting objections for the Assessees in respect of AYs 2007-2008 to 2012-2013; the writ petitions are allowed and disposed of with no order as to costs.

Provision for warranty - application of Rotork Controls principle - scope of remand - remand to assessing officer - last fact-finding authority - exercise of remand power

Scope of remand - remand to assessing officer - The Tribunal exceeded the scope of the remand by further remanding the matter to the Assessing Officer for verification instead of deciding the issue itself as directed by this Court. - HELD THAT: - This Court had earlier remanded the appeals to the Tribunal for disposal in accordance with law applying the principles in Rotork Controls. The Tribunal, after recording a positive finding that the assessee's methodology for estimating warranty provisions was scientific and reasonable, nevertheless remanded the matter to the Assessing Officer to verify whether the provision was based on past history or actual expenditure. The High Court held that when materials are available on record and the Tribunal is the last fact-finding authority, it ought to have arrived at a conclusion rather than further remanding the matter; no proper reasoning was given by the Tribunal for exercising the power of remand and its order was therefore in disregard of the earlier direction of this Court. [Paras 8, 9]

Remand to the Assessing Officer was beyond the permissible scope; the Tribunal's remand was unsustainable and is set aside.

Application of Rotork Controls principle - provision for warranty - last fact-finding authority - The Tribunal was obliged to examine and decide the assessee's claim for warranty provision in the light of the principles laid down in Rotork Controls rather than remanding the matter for verification. - HELD THAT: - This Court directed that the Tribunal consider the case in the light of para 10 of the Supreme Court's decision in Rotork Controls. The Tribunal had the jurisdiction and duty, being the last fact-finding authority, to apply those legal principles to the materials on record and determine the assessee's entitlement. Remanding the legal issue for fresh fact-finding to the Assessing Officer was contrary to the remit of the earlier order and frustrated the obligation on the Tribunal to give a conclusive decision. [Paras 8, 10, 11]

The Tribunal must decide the appeal applying the Rotork Controls principles; it cannot remit the legal issue to the Assessing Officer for further verification when materials permit determination.

Exercise of remand power - scope of remand - The Tribunal failed to give proper reasons for exercising remand and thereby disregarded the High Court's directions. - HELD THAT: - Remand is an exceptional power to be sparingly exercised. The Tribunal did not articulate adequate reasons to justify further remand after making a positive finding on the assessee's methodology. The High Court concluded that the Tribunal did not consider the remand order of this Court in its true spirit and that the remand was not a limited verification consonant with the earlier directions. [Paras 9, 10]

The Tribunal's exercise of the remand power without proper reasoning was unjustified; its order is set aside.

Final Conclusion: The appeal is allowed. The impugned order of the Tribunal is set aside and the matter is remitted to the Tribunal to consider and decide the assessee's claim for provision for warranty in accordance with the directions of this Court and the principles laid down in Rotork Controls, after affording parties an opportunity of hearing, to be disposed of expeditiously preferably within three months.

Reopening of assessment - notice under Section 148 - reasons to believe - Assessing Officer - jurisdiction of the Assessing Officer - limitation under Section 149(1)(b) - power under Section 147/148 - prior approval of the CIT under Section 151 - remedy under Section 263 - change of opinion

Assessing Officer - jurisdiction of the Assessing Officer - notice under Section 148 - reasons to believe - power under Section 147/148 - Validity of reopening where reasons for reopening were recorded and notice issued by an ITO who was not the Assessing Officer who passed the original assessment order for AY 2007-08 - HELD THAT: - The Court held that the officer who passed the original assessment under Section 143(3) alone is empowered to exercise powers under Sections 147/148 to reopen that assessment because only that officer would be in a position to form the requisite "reasons to believe" that income of that assessment year has escaped assessment. The fact that the reasons for reopening were recorded and the notice under Section 148 was issued by an ITO who was not the AO who had passed the original assessment vitiates the reopening. The departmental contention that the definition of Assessing Officer under Section 2(7A) or orders under Section 120 could cure the defect was rejected; where a superior officer considers the original assessment prejudicial to revenue, Section 263 is the appropriate provision. The Court concluded that an ITO who was not the original AO cannot validly invoke Sections 147/148 to reopen that particular assessment, and that such action is legally impermissible and void. [Paras 15, 16]

Notices and proceedings founded on the reasons recorded by the ITO who was not the original AO are invalid and are quashed.

Limitation under Section 149(1)(b) - notice under Section 148 - power under Section 147/148 - Validity of the subsequent notice dated 23rd June, 2014 issued by the AO where it was issued after the expiry of the extended period of limitation - HELD THAT: - The Court noted that even if a subsequent notice under Section 148 was issued by the AO, that notice dated 23rd June, 2014 came after the expiry of the extended limitation period which expired on 31st March, 2014 under Section 149(1)(b). Consequently, the second notice was time-barred. The combination of the initial invalid issuance by a non-AO officer and the subsequent notice issued beyond the statutory limitation period rendered the reopening procedure legally infirm. [Paras 5, 7, 15]

The notice dated 23rd June, 2014 issued after the expiry of the extended limitation period is invalid and cannot sustain reopening.

Reopening of assessment - notice under Section 148 - Assessing Officer - Validity of the order dated 28th January, 2015 rejecting the assessee's objections to reopening the assessment - HELD THAT: - The Court examined the order rejecting objections and observed that it proceeded despite the patent illegality in invoking Sections 147/148: the initial reasons were recorded and notice issued by an officer who was not the original AO, and the subsequent notice was time-barred. Given these defects, the impugned order rejecting objections could not stand. The Court therefore quashed the order rejecting objections as it was predicated on invalid reopening notices. [Paras 11, 17]

Order dated 28th January, 2015 rejecting objections is quashed.

Final Conclusion: The writ petition is allowed: the notices dated 14th March, 2014 and 23rd June, 2014 and the order dated 28th January, 2015 rejecting objections are quashed; petition disposed of with no order as to costs.

Applicability of CBDT Circular No.21/2015 to pending References under Section 256(1) - Retrospective application of departmental instructions to pending proceedings - Tax effect threshold for filing appeals before High Court - Non-filing/withdrawal of appeals where tax effect below monetary limit - No presumption of departmental acquiescence when appeals not filed due to monetary limits

Applicability of CBDT Circular No.21/2015 to pending References under Section 256(1) - Retrospective application of departmental instructions to pending proceedings - Tax effect threshold for filing appeals before High Court - CBDT Circular No.21/2015 applies to pending References under Section 256(1) of the Income Tax Act even though the Circular does not specifically mention References. - HELD THAT: - The Court compared the 2015 Circular with earlier Instruction No.5 of 2014 and observed they are identically worded except for the enhanced monetary threshold and express retrospective application to pending appeals. Prior decisions of this Court (including M/s. Computer Point (I) Ltd. and other References decided on 24 July 2015) had held that the 2014 instruction applied to pending References. The Court reasoned that References originate from tribunal orders arising out of parties' disputes, functionally resembling admitted appeals and that the stated policy aim of the Circular-to limit departmental litigation to matters with substantial financial stake-would be defeated if the Circular were confined only to statutory appeals. For these reasons the Circular must be construed to govern pending References as well as pending appeals where the tax effect falls below the prescribed threshold. [Paras 6, 7, 8]

The Circular dated 10th December, 2015 is applicable to pending References under Section 256(1) of the Act.

Non-filing/withdrawal of appeals where tax effect below monetary limit - No presumption of departmental acquiescence when appeals not filed due to monetary limits - Where the tax effect in a pending Reference is less than Rs. 20 lacs, the Reference is to be returned unanswered and not pursued by the Revenue under the policy of the Circular. - HELD THAT: - The Circular prescribes that departmental appeals shall not be filed where the tax effect falls below the monetary limits and declares retrospective application so that pending appeals may be withdrawn or not pressed. Applying that policy to pending References, and given the admitted tax effect in this Reference is below Rs. 20 lacs, the Court concluded the Reference should be returned unanswered. The Court also noted paragraph 6 of the Circular protects the Revenue from any presumption of acquiescence in other matters where appeals are not pursued solely due to the monetary threshold. [Paras 9]

The present Reference, having an admitted tax effect of less than Rs. 20 lacs, is returned unanswered.

Final Conclusion: The Court holds that CBDT Circular No.21/2015 applies to pending References under Section 256(1) and, as the tax effect in this Reference is admitted to be less than Rs. 20 lacs, the Reference is returned unanswered; the substantive question of law is left open for consideration in an appropriate case.

Deduction under section 35AD based on capital expenditure for a specified business - specified business - setting up and operating a warehousing facility for storage of agricultural produce - captive use of an asset and entitlement to investment linked deduction - investment linked rationale for deduction

Specified business - setting up and operating a warehousing facility for storage of agricultural produce - captive use of an asset and entitlement to investment linked deduction - deduction under section 35AD based on capital expenditure for a specified business - Whether capital expenditure incurred on construction of a SILO (warehouse) used for captive storage of agricultural produce qualifies for deduction under section 35AD as expenditure for a 'specified business'. - HELD THAT: - The Tribunal examined the language and rationale of section 35AD which grants deduction for expenditure of a capital nature incurred wholly and exclusively for the purposes of any 'specified business', and noted that clause (c) of sub section (8) includes 'setting up and operating a warehousing facility for storage of agricultural produce' within that expression. On the facts the assessee constructed a SILO used to store castor seeds both of its own and those received for job work; the facility was used for captive purposes and resulted in savings on prior storage costs. The court held that the deduction is investment linked and rests on the fact of capital investment in a facility used in the course of business; mere captive use (as opposed to letting the facility to third parties) does not disentitle the assessee where the warehousing facility is otherwise set up and operated for storage of agricultural produce and the statutory conditions are satisfied. Applying this reasoning to the admitted facts, the Tribunal affirmed the CIT(A)'s conclusion that the expenditure on the SILO qualified for deduction under section 35AD. [Paras 8, 9]

Claim for deduction under section 35AD in respect of capital expenditure on the SILO used for storage of agricultural produce is allowable despite its captive use; the CIT(A)'s order is affirmed.

Final Conclusion: Revenue's appeal is dismissed; the Tribunal affirms that capital expenditure on the SILO used for storage of agricultural produce qualifies for deduction under section 35AD for Assessment Year 2010-11.

Taxation of long-term capital gains on transfer of shares - Proviso to section 112(1) - 10% special rate - Section 112(1)(c) - 20% rate for non-residents/foreign companies - Interaction between proviso to section 112(1) and provisos to section 48 - Computation under first proviso to section 48 - foreign currency conversion

Proviso to section 112(1) - 10% special rate - Section 112(1)(c) - 20% rate for non-residents/foreign companies - Taxation of long-term capital gains on transfer of shares - Whether the proviso to section 112(1) applies so as to restrict tax on the assessee's long-term capital gain from sale of shares to 10% instead of 20% - HELD THAT: - The assessee, a foreign company resident of Japan, realised long-term capital gain on sale of shares of an Indian company. Clause (c)(ii) of section 112(1) prima facie prescribes tax at 20% for a foreign company; however the proviso to section 112(1) provides that where tax payable in respect of the long-term capital gain exceeds 10% of the amount of such gain (computed before giving effect to the second proviso to section 48), the excess shall be ignored for computing tax, effectively limiting the tax to 10%. The Tribunal held that the statutory prerequisites in the opening part of section 112(1) and clause (c) are satisfied and, on reading clause (c)(ii) with the proviso, a case falling within the proviso must be taxed at 10%. The Tribunal followed the view of the jurisdictional High Court in Cairn UK Holdings Ltd., accepting the application of the proviso to permit the 10% rate in the facts of this case. [Paras 5, 8, 9]

The proviso to section 112(1) applies and the long-term capital gain is taxable at 10%.

Interaction between proviso to section 112(1) and provisos to section 48 - Computation under first proviso to section 48 - foreign currency conversion - Whether the capital gain must be computed after giving effect to the second proviso to section 48 or whether the first proviso to section 48 (foreign currency conversion for non-residents) governs, thereby rendering the second proviso inapplicable - HELD THAT: - Section 48 prescribes mode of computation of capital gains. The first proviso to section 48 requires conversion of cost, expenditure and consideration into the foreign currency initially used for purchase in the case of a non-resident's transfer of shares of an Indian company. The second proviso (providing indexed cost substitution) applies to long-term capital gains other than those governed by the first proviso. Since the assessee is a non-resident and the transaction involves shares of an Indian company, the first proviso applies and the second proviso is inapplicable. Consequently, for purposes of the proviso to section 112(1), the amount of long-term capital gain is to be taken before giving effect to the second proviso to section 48, bringing the case within the ambit of the 10% limitation in the proviso to section 112(1). [Paras 6, 7, 8]

The second proviso to section 48 does not apply to the non-resident's transfer of Indian shares; computation governed by the first proviso to section 48, and the proviso to section 112(1) is attracted.

Final Conclusion: The Tribunal dismissed the Revenue's appeal and sustained the Dispute Resolution Panel's direction: the long-term capital gain arising to the foreign company from sale of Indian company shares is to be computed under the first proviso to section 48 and taxed at the 10% rate prescribed by the proviso to section 112(1).

Unabsorbed depreciation - set off against income from any head for the immediate assessment year - subsequent set off only against business income for eight assessment years

Unabsorbed depreciation - set off against income from any head for the immediate assessment year - subsequent set off only against business income for eight assessment years - Whether the unabsorbed depreciation as on April 1, 1997 can be set off against income from any head in the immediate assessment year following April 1, 1997 and the extent to which it may be set off thereafter. - HELD THAT: - The Court dismissed the special leave petition while recording the rule applicable to unabsorbed depreciation existing on April 1, 1997. The unabsorbed depreciation as on that date is permitted to be set off against income under any head for the immediate assessment year following April 1, 1997 (assessment year 1998-99). Thereafter, any remaining unabsorbed depreciation may be carried forward and set off only against business income for a period of eight assessment years. The order corrects and clarifies the temporal application of set-off and carry forward permitted in respect of the unabsorbed depreciation standing as on April 1, 1997. [Paras 2]

Unabsorbed depreciation as on April 1, 1997 may be set off against income from any head in assessment year 1998-99, and any balance thereafter may be set off only against business income for eight assessment years.

Final Conclusion: Special leave petition dismissed subject to the declaration that unabsorbed depreciation as on April 1, 1997 is available for set-off against any head in assessment year 1998-99 and thereafter only against business income for eight assessment years.

Disallowance under section 14A - Rule 8D(2)(ii) - apportionment of interest expenditure - Rule 8D(2)(iii) - 0.5% of average investment disallowance - Attribution of interest to specific income - Presumption of investment from own funds where own funds exceed investment

Rule 8D(2)(ii) - apportionment of interest expenditure - Attribution of interest to specific income - Validity of disallowance of interest under rule 8D(2)(ii) in respect of investments yielding exempt (dividend) income - HELD THAT: - The Assessing Officer applied the formula in rule 8D(2)(ii) to apportion interest not directly attributable to any particular receipt. The Tribunal found from the assessee's interest ledger that interest paid related to secured loans for specific export orders and therefore was attributable to business income which is assessable. Where interest is identifiable as incurred for taxable business operations it cannot be disallowed under rule 8D(2)(ii). Further, the Tribunal applied the principle that, where the assessee's own funds (capital, reserves and surplus) exceed the investment in exempt income earning assets, it is to be presumed that such investments were made out of interest-free own funds; accordingly the apportioned interest disallowance could not be sustained. Following relevant precedents, the Tribunal deleted the interest disallowance computed under rule 8D(2)(ii). [Paras 5]

Disallowance under rule 8D(2)(ii) in respect of apportioned interest (Rs. 12,27,050/-) set aside; no addition on this ground.

Rule 8D(2)(iii) - 0.5% of average investment disallowance - Disallowance under section 14A - Validity of disallowance computed under rule 8D(2)(iii) as 0.5% of average investment - HELD THAT: - The Assessing Officer computed an additional disallowance under rule 8D(2)(iii) equal to 0.5% of the average value of investments yielding exempt income. The Tribunal examined the computation and held that the AO's application of rule 8D(2)(iii) was in conformity with the prescribed method and there was no justification to interfere with that part of the disallowance. Consequently, that component of expenditure disallowance was sustained. [Paras 5]

Disallowance under rule 8D(2)(iii) (0.5% of average investment) upheld.

Final Conclusion: Appeal partly allowed: the Tribunal deleted the interest disallowance computed under rule 8D(2)(ii) but upheld the disallowance computed under rule 8D(2)(iii); overall the assessee's ground on section 14A is partly allowed.

Computation of deduction under section 10A before adjustment of brought forward business losses and unabsorbed depreciation - Exclusion of telecommunication/leased line charges from export turnover (and consequential exclusion from total turnover) - Computation of book profit under section 115JB - treatment of reversal of provision for Employee Stock Option Plan (ESOP) - Lease rent equalization provision treated as ascertained liability for computation of book profit under section 115JB

Computation of deduction under section 10A before adjustment of brought forward business losses and unabsorbed depreciation - Deduction under section 10A is to be allowed first against the eligible profits of the undertaking and only thereafter any leftover profits (if any) may be adjusted against brought forward business losses and unabsorbed depreciation. - HELD THAT: - The Tribunal examined the sequence of computing deduction under section 10A in the post amendment regime (where the benefit is in the form of a deduction rather than exemption) and followed coordinate decisions applying the ratio of the Bombay High Court in CIT v. Black & Veatch Consulting Pvt. Ltd. The Court held that the income of the eligible business must be computed (applying sections 28-44D including section 32(2)), and the deduction under section 10A is to be allowed against those eligible profits. Brought forward unabsorbed depreciation and business losses cannot be set off against eligible profits before computing the section 10A deduction; those carried forward amounts are to be adjusted only against any residual profits after allowance of the section 10A deduction. The Tribunal therefore set aside the CIT(A)'s contrary view and directed recomputation accordingly. This conclusion was applied consistently to the appeals before the Court. [Paras 11, 12]

Allowed; section 10A deduction to be computed against eligible profits first, with brought forward losses/depreciation adjustable only against any leftover profits.

Exclusion of telecommunication/leased line charges from export turnover (and consequential exclusion from total turnover) - Leased line/telecommunication charges not separately recovered do not get excluded from export turnover; where evidence shows such charges are not separately recovered, they should not be deducted from export turnover, and accordingly need not be excluded from total turnover either. - HELD THAT: - The Tribunal analysed Explanation 2(iv) to section 10A which excludes freight, telecommunication charges and certain expenses from the defined term 'export turnover' only to the extent such items are part of the consideration 'received'. The assessee had represented to the AO that leased line charges were not separately recovered but formed part of a consolidated invoice; the Tribunal followed the Hyderabad Bench decision in Patni Telecom and held that if the invoice/contract does not show a separate recovery, there is no scope to exclude such charges from the consideration received in convertible foreign exchange. Applying that position the Tribunal set aside the CIT(A)'s direction to exclude the leased line charges and directed that those amounts not be reduced from export turnover (and accordingly not excluded from total turnover). The Tribunal also upheld the CIT(A)'s alternate reliance on the Bombay High Court's decision in Gemplus Jewellery where exclusion from total turnover may follow, but on the facts here the assessee's evidence established non separate recovery and the exclusion was disallowed. [Paras 25, 27, 29]

Allowed for the assessee (leased line charges not to be excluded from export turnover on the facts); revenue ground dismissed where CIT(A) followed binding authority but facts warranted opposite conclusion here.

Computation of book profit under section 115JB - treatment of reversal of provision for Employee Stock Option Plan (ESOP) - Reversal of provision for ESOP (withdrawal of earlier provision) is deductible from book profit under section 115JB where the same provision had previously been added back to book profit in an earlier year. - HELD THAT: - The assessee showed that in the earlier year the ESOP provision had been added back to book profit in the MAT computation (the figure of provision was included in the working before computing book profit). The AO rejected the reversal in the current year because of a technical contention about under which clause of the Explanation the addition had been made. The Tribunal found that whether the earlier add back was characterised under clause (f) or clause (c) of Explanation 1 to section 115JB made no difference to the outcome; since the book profit had indeed been increased by the provision in the earlier year (a fact not controverted), the subsequent reversal legitimately reduced the book profit for the relevant year. The Tribunal therefore allowed the deduction of the reversal from book profit. [Paras 40]

Allowed; reversal of ESOP provision reduces book profit under section 115JB where that provision had earlier been added back to book profit.

Lease rent equalization provision treated as ascertained liability for computation of book profit under section 115JB - Provision for lease rent equalization is not an unascertained liability and therefore need not be added back while computing book profit under section 115JB. - HELD THAT: - The Tribunal reviewed the lease agreements and related factual findings recorded by the CIT(A) - fixed initial term with contractual renewals and specified escalation clauses - and accepted that the lessee had, in substance, an effective long term lease exposure. Applying persuasive precedents (including the Delhi Bench decisions concerning lease equalization) and noting that the AO had not requested the lease agreement during assessment, the Tribunal agreed with the CIT(A) that the provision represents a recognised accounting adjustment (ascertained/quantifiable liability) under AS 19 and, therefore, is not to be added back in the MAT book profit computation. The Tribunal also rejected the revenue's contention that admission of the lease agreement at appeal violated Rule 46A on the facts presented. [Paras 49, 52, 53]

Allowed for the assessee; lease rent equalization provision excluded from add backs in computing book profit under section 115JB; revenue grounds dismissed.

Final Conclusion: The Tribunal allowed the assessee's appeals in part and dismissed the revenue's appeals: (a) section 10A deduction must be computed against eligible profits first, with any residual profits thereafter available to be set off against carried forward losses and unabsorbed depreciation; (b) on the facts, leased line/telecommunication charges not separately recovered are not to be excluded from export turnover; (c) reversal of ESOP provision is deductible in computing book profit under section 115JB where the provision had earlier been added back; and (d) lease rent equalization provisions are not required to be added back to book profit under section 115JB.

Deductibility of business expenditure - Explanation to section 37(1) - expenditure characterised as bribes or illegal gratification - Expenditure incurred on behalf of clients - Books of account not conclusive on the nature of expenditure - Prevailing trade practice and absence of statutory prohibition

Deductibility of business expenditure - Explanation to section 37(1) - expenditure characterised as bribes or illegal gratification - Expenditure incurred on behalf of clients - Books of account not conclusive on the nature of expenditure - Disallowance of commission payments treated as bribes under the Explanation to section 37(1) set aside and deleted. - HELD THAT: - The Tribunal found that the payments were made by the assessee on behalf of its clients as incentives to dock workers to expedite loading and unloading, and therefore did not constitute the assessee's own expenses. Although the amounts were routed through the assessee's profit and loss account, the Tribunal applied the settled principle that the books of account are not the sole determinative factor in characterising an expenditure. The Assessing Officer invoked the Explanation to section 37(1) but did not point to any law prohibiting such payments, and the assessee's assertion that the payments were made to workers was not disproved. In these circumstances the disallowance under the Explanation to section 37(1) was held not sustainable.

Impugned disallowance deleted and Assessing Officer directed to give effect to the deletion.

Final Conclusion: The appeal is partly allowed by deleting the disallowance of the commission payments; the Assessing Officer is directed to delete the disallowance for AY 2009-10.

Right to copies of documents - pre-adjudication disclosure - reliance on documents - stage of adjudication - principles of natural justice

Right to copies of documents - pre-adjudication disclosure - reliance on documents - Whether appellants can compel production of copies of documents mentioned in the show cause notice when the Department states those documents are not relied upon at the adjudication stage. - HELD THAT: - The appellants sought copies of certain documents referred to in the show cause notice on the ground that those documents had been sent for verification abroad. The adjudicating authority, by letter, expressly stated that those documents were not being relied upon in the adjudication proceedings. The Court held that where the Department disclaims reliance on particular documents during pending adjudication, the appellant cannot compel production of such documents at the pre-adjudication stage so as to forestall the enquiry. If the Department subsequently relies upon any document which was not furnished earlier, the appellant retains the remedy to challenge the final adjudication order on natural justice grounds. The Court therefore found no error in the lower court's dismissal of the writ petitions challenging the refusal to furnish the copies prior to completion of adjudication. [Paras 6]

Writ appeals dismissed; appellants cannot compel production of documents not relied upon by the Department during pending adjudication, but may challenge any later reliance in the final order on grounds of violation of principles of natural justice.

Final Conclusion: The appeals are dismissed; the appellants may raise their contentions before the adjudicating officer and, if the Department relies upon any undisclosed document in the final order, challenge the adjudication on natural justice grounds.

Maintainability of writ petition after dismissal of statutory appeal on ground of limitation - finality of administrative orders and effect of limitation - condonation of delay and limitation bar to appellate remedy

Maintainability of writ petition after dismissal of statutory appeal on ground of limitation - finality of administrative orders and effect of limitation - Whether the writ petition challenging the Bill of Entry dated 01.05.2014 is maintainable after the appellate remedy was dismissed as time-barred and the writ challenging that dismissal was dismissed by this Court - HELD THAT: - The petitioner had earlier appealed against the Bill of Entry dated 01.05.2014 to the Commissioner of Appeals-II; that appeal was dismissed on the ground of limitation. A subsequent writ petition seeking condonation of delay was dismissed by this Court. The petitioner thereafter instituted the present writ petition challenging the original Bill of Entry. The Court held that permitting a fresh writ petition after exhaustion and dismissal of the statutory appeal (for delay) and dismissal of the writ seeking condonation would defeat finality. Where a specific limitation is prescribed and the appellant fails to file the appeal within the stipulated period and the court refuses condonation, a collateral writ challenging the original order is not maintainable; allowing it would circumvent the limitation regime and prevent finality of proceedings. The Court therefore declined to entertain the present challenge to the Bill of Entry succeeding a time barred appeal and dismissal of the writ for condonation. [Paras 5, 6]

The writ petition is not maintainable and is dismissed.

Final Conclusion: The writ petition challenging the Bill of Entry dated 01.05.2014 is dismissed as devoid of merits because the statutory appeal was time barred, the writ seeking condonation was dismissed, and permitting the present challenge would frustrate finality; no costs.

Service of notice under Section 153 of the Customs Act - Extension of seizure period under proviso to Section 110(2) of the Customs Act - Right of owner to notice and hearing before extension of seizure period - Authority and functions of customs broker (CHA) under Section 146 / Section 146A / Section 147 and Customs Broker Licensing Regulations, 2013 - Effect of 2012 amendment deleting "or to his agents" from Section 153

Service of notice under Section 153 of the Customs Act - Effect of 2012 amendment deleting "or to his agents" from Section 153 - Validity of service of the show cause notice / order by serving the customs agent instead of the owner in proceedings under proviso to Section 110(2). - HELD THAT: - The Court held that Section 153 prescribes service by tendering or sending by registered post or approved courier to the person to whom it is intended and, if not possible, by affixation on the customs house notice board. The 2012 amendment removing the words "or to his agents" from Section 153 manifests a legislative intent to require service on the person concerned and not on their agent. Consequently, service effected on the customs agent/CHA without any specific authority from the owner does not constitute valid service for the purposes of extending the seizure period under proviso to Section 110(2). The functions of a customs broker under Section 146 and Regulation 2(c) of the Customs Broker Licensing Regulations, 2013 relate to transaction of import/export business and do not, in the ordinary course, encompass receipt of penal notices or orders of confiscation; for that, a special authority from the owner would be necessary. The show cause notice and impugned order in the present case were dispatched after their purported date and were served on the customs agent; such service was held to be no service and vitiates the extension order. [Paras 13, 15, 16, 21, 22]

Service on the customs agent was invalid and the order extending the seizure period dated 23.01.2015 is vitiated for failure to effect service as required by Section 153.

Extension of seizure period under proviso to Section 110(2) of the Customs Act - Right of owner to notice and hearing before extension of seizure period - Whether the extension of the six-month period for seized goods under proviso to Section 110(2) was valid in the absence of valid service and opportunity to be heard. - HELD THAT: - Section 110(2) entitles the owner to restoration of seized goods if no notice is issued under Section 124 within six months; the proviso permits the Commissioner to extend that six-month period for sufficient cause for up to six months more. The Court reiterated the settled principle that the owner's right to restoration cannot be defeated without notice and an opportunity to be heard before any extension is ordered. Reliance was placed on precedent establishing that an ex parte extension without proper notice is vitiated. In the present case the extension was ordered without valid service on the owner, and therefore the extension was invalid. The Single Judge's quashing of the extension order and direction for release of the seized goods (subject to ongoing investigation and compliance with Section 124) was upheld. [Paras 12, 16, 23]

The extension under proviso to Section 110(2) was invalid for want of proper service and hearing; the extension order is quashed and the seized goods are to be released while permitting the authority to continue investigation as per law.

Authority and functions of customs broker (CHA) under Section 146 / Section 146A / Section 147 and Customs Broker Licensing Regulations, 2013 - Whether Sections 146, 146A and 147 and the Customs Broker Licensing Regulations authorize service of show cause notices relating to seizure/confiscation on the customs broker in the absence of specific authority from the owner. - HELD THAT: - Sections 146/146A/147 and Regulation 2(c) define and permit customs brokers to act as agents for transaction of import/export business and, in certain proceedings, to appear as authorised representatives. However, confiscation or seizure being penal in nature does not fall within the ordinary transactional functions of a customs broker as defined in Section 146 and the Regulations. For a customs broker to validly accept service of notices relating to seizure/extension under Section 110(2), the owner must give special authority to the broker to receive such notices. No such authority existed or was produced in this case; reliance on those provisions to validate the impugned service was therefore without merit. [Paras 17, 18, 20, 21, 22]

Sections 146/146A/147 and the Customs Broker Licensing Regulations do not, without specific authority from the owner, permit service of show cause notices relating to seizure/confiscation on the customs broker; the contention to the contrary is rejected.

Objections raised for the first time on appeal - Competence of raising the contention that the goods were detained under Section 17(2) and not seized under Section 110, when that contention was not raised before the Single Judge. - HELD THAT: - The Court observed that the argument about Section 17(2) being the basis for detention was not pressed before the Single Judge and was raised for the first time in this appeal. A reading of Section 17 shows it deals with self-assessment of duty and does not provide for detention of goods. The appellate contention was therefore found to be without merit and not sustainable as a fresh ground on appeal. [Paras 10, 11]

The contention that Section 17(2) applied (and not Section 110) was raised for the first time on appeal and is without merit; it is rejected.

Final Conclusion: The appeal is dismissed. The High Court's order quashing the Commissioner of Customs' order dated 23.01.2015 (extending the seizure period) and directing release of the seized goods is upheld on the ground of invalid service and denial of the owner's right to notice and hearing; the investigatory authority may, however, proceed further in accordance with law.

Summary order. Delay condoned and notice issued on the petition challenging the findings below; petitioner's claim that clause 7.17 of the Policy permits clearance of goods imported prior to grant of a duty free licence was sought to be examined.

Testimonial compulsion / right against self-incrimination - Article 20(3) of the Constitution of India - summons under Section 50 of the PMLA - investigation under PMLA vs prosecution / accused status - ECIR not equivalent to FIR - Section 63(4) PMLA - initiation of penal proceedings for non-compliance - proceedings under Section 50 deemed judicial proceedings under Sections 193 and 228 IPC

Summons under Section 50 of the PMLA - Article 20(3) of the Constitution of India - testimonial compulsion / right against self-incrimination - ECIR not equivalent to FIR - investigation under PMLA vs prosecution / accused status - Validity of summons issued to the second petitioner under Section 50(2) and (3) of PMLA vis-a -vis the protection under Article 20(3). - HELD THAT: - The Court held that the ECIR registered with the Directorate of Enforcement is an investigation-stage information and is not filed before a Magistrate; it is not equivalent to an FIR and does not, by itself, render the persons named in the ECIR 'accused' under PMLA. Investigation under PMLA is concerned with tracing proceeds of crime and collecting evidence, distinct from the stage where a complaint is filed and a person is formally accused or prosecuted. Applying the precedents interpreting provisions analogous to Section 50 (such as Section 108 of the Customs Act and related authorities), the Court concluded that mere summoning under Section 50 at the investigation stage does not attract the constitutional protection against testimonial compulsion under Article 20(3). Consequently, the petitioners could not claim that the summons issued under Section 50(2) and (3) violated Article 20(3), and there was no occasion to read down Section 50 in this case. [Paras 42, 43, 47, 48, 49]

Summons under Section 50(2) and (3) of PMLA did not violate Article 20(3) on the facts; petitioners are not 'accused' under PMLA at the investigation stage and the writ petition is dismissed.

Section 63(4) PMLA - initiation of penal proceedings for non-compliance - investigation under PMLA vs prosecution / accused status - summons under Section 50 of the PMLA - Challenge to further action including initiation of proceedings under Section 63(4) of PMLA for alleged non-compliance with summons. - HELD THAT: - The Court observed that the challenge to initiation of penal proceedings under Section 63(4) is dependent on the conclusion reached in the petition impugning the summons under Section 50. Having concluded that the summons and investigation-stage action did not infringe Article 20(3) and that the petitioners were not 'accused' under PMLA at the investigation stage, the consequent prosecution-stay granted earlier did not yield a ground to sustain the separate writ challenging steps taken under Section 63(4). Therefore the writ challenging initiation of penal proceedings also failed. [Paras 50, 51, 52, 53]

Writ challenging further steps including proceedings under Section 63(4) does not survive in view of the dismissal of the challenge to the summons and is accordingly dismissed.

Final Conclusion: Both writ petitions challenging summons issued under Section 50 of PMLA and subsequent proceedings under Section 63(4) were dismissed: the Court held that the ECIR is an investigation-stage report not equivalent to an FIR, the petitioners were not 'accused' under PMLA at that stage, Article 20(3) was not attracted and no reading down of Section 50 was required; consequential challenge to initiation of penal proceedings also failed.

Refund of excess service tax - verification of books of account - prima facie refundable - opportunity of personal hearing - remand for de novo adjudication

Refund of excess service tax - verification of books of account - opportunity of personal hearing - remand for de novo adjudication - Claim for refund of alleged excess payment of service tax remitted by the appellant was not finally adjudicated and required fresh verification. - HELD THAT: - The appellant produced reconciliations and audited figures asserting an excess payment of service tax. The adjudicating authority rejected the refund claim without conducting appropriate verification of the books of account or seeking clarifications from the appellant. The Tribunal observed that if the gross receipts on which service tax was paid exceed the actual gross receipt of service charges, the excess amount is prima facie refundable. Where there is doubt about accounting or calculations, the correct course is to call the appellant, examine the submitted records and permit explanation. In view of the lack of proper verification and absence of personal hearing, the Tribunal remanded the matter to the original adjudicating authority for fresh adjudication de novo, with directions to verify the claim against the books and details produced, to afford the appellant sufficient opportunity of personal hearing, and to grant refund in accordance with law if excess payment is established.

Appeal allowed by way of remand to the original adjudicating authority with directions to verify the refund claim against books of account, afford personal hearing, and refund any excess service tax found to have been paid.

Final Conclusion: The appeal is allowed by way of remand: the matter is directed to be re-adjudicated de novo with proper verification of accounts and opportunity of personal hearing; if excess service tax is found on verification, it shall be refunded in accordance with law.

Cenvat credit inadmissible where input service is exclusively used for non taxable output activity - Definition of input service requires use in providing an output taxable service - Trading activity not taxable (status change w.e.f. 01.04.2011) irrelevant to prior periods - Extended limitation period and suppression of facts - Penalty under Section 78 sustainable only where suppression, fraud or willful misstatement is established

Cenvat credit inadmissible where input service is exclusively used for non taxable output activity - Definition of input service requires use in providing an output taxable service - Admissibility of Cenvat credit on input services used exclusively for auction sale of abandoned goods and for export cargo - HELD THAT: - The Tribunal found that the appellant had availed Cenvat credit on input services which were exclusively used for activities that were not taxable services (auction sale of abandoned cargo and export of cargo). The definition of input service contemplates use in providing an output taxable service; where no output service is within the charge of service tax, credit is not admissible at the time of receipt of the input service. The fact that trading activities were later classified as exempted services w.e.f. 01.04.2011 does not render credit admissible for prior periods when the output activity was outside service tax levy. Consequently, the credit availed for the impugned non taxable activities was rightly disallowed.

Cenvat credit on input services used for auction sale of abandoned goods and export cargo is not admissible; the demand for such credit is sustained.

Extended limitation period and suppression of facts - Validity of invocation of extended limitation period for the first show cause notice dated 03.10.2006 (period October 2003 to September 2005) - HELD THAT: - The Tribunal held that the existence of departmental proceedings and notices on the question of taxability of auction of abandoned cargo alerted the appellant to the correctness of its credit availment. Despite such awareness, the appellant continued to avail credit without informing the department of the inadmissible nature and the specific use of the input services, which amounted to suppression of facts. In these circumstances the extended period for issuance of the first show cause notice was rightly invoked by the department.

Extended limitation invoked for the first show cause notice (October 2003 to September 2005) is valid; the demand for that period is sustainable.

Penalty under Section 78 sustainable only where suppression, fraud or willful misstatement is established - Sustainability of penalty under Section 78 for periods before and after September 2005 - HELD THAT: - The Tribunal found suppression of fact in relation to the first show cause notice (covering October 2003 to September 2005) and therefore upheld imposition of penalty under Section 78 for that period. However, for periods from October 2005 onwards the department issued subsequent show cause notices after becoming aware of the matters raised in the first notice; therefore the requisite concealment or suppression for imposing penalty under Section 78 was not made out for periods after September 2005. Accordingly, penalties for October 2005 onwards were held to be not sustainable.

Penalty under Section 78 upheld for October 2003 to September 2005; penalty under Section 78 dropped for October 2005 onwards.

Final Conclusion: Appeals partly allowed: Cenvat credit disallowance sustained; extended period invocation and associated penalty under Section 78 upheld for October 2003 to September 2005; penalty for October 2005 onwards dropped.

Reimbursement of expenses - pure agent - taxable value - management consultancy services - cenvat credit - TDS credit as accounting entry - advance received prior to change in taxability - penalty under Section 76

Reimbursement of expenses - management consultancy services - taxable value - Taxability of amounts paid to DGFT and shown as reimbursable by the appellant in relation to management consultancy and manpower recruitment services. - HELD THAT: - The Tribunal found on record that the amounts claimed as reimbursable were payments made to DGFT authorities as application fees, licence fees and similar statutory charges, with demand drafts raised in the name of DGFT and receipts issued by DGFT in respect of the appellant's clients. Those amounts were not consideration for the appellant's services but reimbursements of expenses incurred on behalf of clients. Consequently the service tax demand premised on treating those sums as part of the taxable value for appellant's output services was incorrect. [Paras 4]

The demand insofar as it treats the DGFT-related sums as part of the taxable value is set aside and the appeal is allowed on this ground.

Cenvat credit - input service eligibility - Allowability of cenvat credit which was disallowed by the lower authority. - HELD THAT: - The disallowed amount related to service tax paid on broadband, courier, internet and automobile services which were utilised by the appellant in rendering output management consultancy services. The Tribunal concluded that such input services were eligible for credit and that the appellant was entitled to avail cenvat credit in respect of the disputed amount. [Paras 5]

The disallowance is set aside and the cenvat credit is allowed; the impugned order is set aside to that extent.

TDS credit as accounting entry - advance received prior to change in taxability - Treatment of service tax on TDS credited to debtor ledger and taxability of advance payments received prior to change in law. - HELD THAT: - The Tribunal observed that the question of service tax payable on TDS credited to the debtors ledger may be essentially an accounting matter requiring fresh appreciation. Similarly, the taxability of advance payments received before the change in legal position was not addressed by lower authorities and involves contested factual and legal considerations. Both items therefore require fresh examination by the adjudicating authority with opportunity to the parties to be heard. [Paras 7]

The impugned findings on these two heads are set aside and the matters are remanded to the adjudicating authority for fresh consideration after following the principles of natural justice.

Pure agent - reimbursement of statutory expenses - Taxability of amounts characterized by lower authorities as receipts for exempted services and reimbursements (relating to services to SEZ clients and licence fees etc.). - HELD THAT: - The Tribunal found that the impugned demands in these items related to payments which were reimbursable expenses incurred by the appellant as a pure agent and/or were receipts in respect of exempted services provided to SEZ clients. There was no dispute that these payments were reimbursements of statutory fees and similar charges; on that basis the appellant's case succeeded. [Paras 8]

The impugned order is set aside in respect of these heads and the appeal is allowed to that extent.

Pure agent - service tax liability - penalty under Section 76 - Whether certain disputed receipts constituted pure agent reimbursements or taxable receipts, and whether penalty should be imposed. - HELD THAT: - On the record the Tribunal found that the appellant charged clients amounts in excess of the actual expenditure incurred and therefore failed to establish the pure agent character of those receipts. The factual finding was that the appellant billed more than the reimbursable expenditure, vitiating the pure agent claim. Accordingly the amounts were held to be part of taxable value and subject to service tax and interest. The Tribunal also held that penalty under Section 76 was attracted on this amount. [Paras 9]

The service tax demand and interest in respect of these receipts is upheld and the appellant is held liable to penalty under Section 76; the impugned order is upheld on this point.

Final Conclusion: Both appeals are disposed of: certain demands and the cenvat disallowance are set aside in favour of the appellant, specific heads are remanded for fresh adjudication after following principles of natural justice, while one category of receipts is upheld as taxable with interest and penalty under Section 76.

Limitation for refund under Section 11B - pre-deposit during adjudication proceedings treated as refundable only upon final adjudication - refund claim not time barred where deposit was made as pre deposit during demand proceedings - remand for verification of unjust enrichment

Limitation for refund under Section 11B - pre-deposit during adjudication proceedings treated as refundable only upon final adjudication - refund claim not time barred where deposit was made as pre deposit during demand proceedings - Whether the one year limitation under Section 11B for filing refund is to be reckoned from the date of deposit where the amount was deposited as a pre deposit during demand proceedings, or from the date of the adjudication order by which the demand was dropped. - HELD THAT: - The Tribunal found that the amount paid by the assessee at the instance of the audit officer in respect of overseas services under reverse charge was a pre deposit made during adjudication proceedings. The refund in respect of any amount deposited during the course of demand proceedings arises only upon final adjudication in favour of the assessee. Consequently the relevant date for reckoning limitation under the refund provision is the date of the adjudication order which disposes of the demand, and not the earlier date of deposit made as a pre deposit. The Tribunal observed that in such circumstances the one year period from date of deposit does not apply and therefore the refund claim cannot be rejected as time barred where the claim accrues only on final adjudication.

The Tribunal held that limitation under Section 11B is to be reckoned from the date of the adjudication order dropping the demand and not from the date of deposit; the refund claim is not time barred.

Remand for verification of unjust enrichment - Whether the adjudicating authority and the first appellate authority had to examine the question of unjust enrichment before allowing refund. - HELD THAT: - Although the Tribunal ruled that the refund was not barred by limitation, it noted that neither the adjudicating authority nor the first appellate authority had considered whether the incidence of the tax (the amount sought to be refunded) had been passed on to any other person. The Tribunal therefore directed that the matter be remanded to the adjudicating authority for verification of facts on unjust enrichment, so that refund may be allowed or denied after such examination.

Matter remanded to the adjudicating authority to examine and decide the issue of unjust enrichment before adjudicating the refund claim.

Final Conclusion: The appeal is allowed in part: the refund claim is not time barred because limitation is to be reckoned from the adjudication order dropping the demand; the case is remanded to the adjudicating authority for verification of unjust enrichment and fresh decision on the refund.

Doctrine of unjust enrichment - Burden of proof to show incidence of duty passed on - Showing tax payment as expenditure not conclusive proof of passing on - Refund of erroneously paid service tax - Credit to Consumer Welfare Fund

Doctrine of unjust enrichment - Burden of proof to show incidence of duty passed on - Showing tax payment as expenditure not conclusive proof of passing on - Whether the sanctioned refund claim is barred by the doctrine of unjust enrichment because the amount was shown as expenditure in the assessee's books. - HELD THAT: - The Tribunal held that mere classification of the amount as expenditure in the books does not establish that the incidence of tax was passed on to customers. The burden lies on the department to adduce material showing that the tax incidence was recovered by the assessee by way of higher price. The assessee had consistently disputed tax liability, paid the sum under departmental pressure prior to any quantified demand, and furnished a Chartered Accountant's certificate stating the incidence was not passed on; the Commissioner (Appeals) did not accept or rebut that evidence. Reliance was placed on earlier precedents where showing payment as expenditure was held insufficient to infer passing on of duty. Applying that principle, the Tribunal found the refund claim not hit by unjust enrichment and therefore not liable to be withheld on that ground. [Paras 5, 6, 7]

The refund claim is not barred by the doctrine of unjust enrichment and the department failed to prove that the incidence of tax was passed on to others.

Credit to Consumer Welfare Fund - Refund of erroneously paid service tax - Whether the Commissioner (Appeals)'s direction to credit the sanctioned refund to the Consumer Welfare Fund was sustainable. - HELD THAT: - Because the Tribunal concluded that the refund was not hit by unjust enrichment and the Commissioner (Appeals) did not properly consider or rebut the assessee's evidence, the direction to divert the sanctioned refund to the Consumer Welfare Fund was unsustainable. The Tribunal set aside that portion of the impugned order and directed that the sanctioned amount be refunded to the assessee, allowing the appeal with consequential reliefs. [Paras 7, 8, 9]

The order directing credit of the sanctioned refund to the Consumer Welfare Fund is set aside; the sanctioned amount is to be refunded to the appellant.

Final Conclusion: The appeal is allowed: the Tribunal holds that the refund claim for the period 01-07-2003 to 31-03-2005 is not barred by unjust enrichment and the direction to credit the sanctioned refund to the Consumer Welfare Fund is set aside; the sanctioned amount is to be refunded to the appellant with consequential reliefs, if any.

Assessable value - factory gate sales - depot sales - approved price-lists - adoption of approved assessable value - remand for de novo proceedings

Depot sales - assessable value - Validity of confirmation of duty demand in respect of models for which no factory gate sale price was available - HELD THAT: - The Tribunal records that for certain models there were no factory gate sales on record. In respect of those models the adjudicating authority adopted depot sale prices, allowed permissible deductions and confirmed the duty demand. The appellant did not contest this part of the determination before the Tribunal and conceded that depot sale price was correctly adopted where factory gate sale price was absent. Accordingly the confirmation of demand in respect of models cleared exclusively from depots stands upheld. [Paras 3]

Demand confirmed in respect of models for which no factory gate sale price was available; depot sale price correctly adopted.

Factory gate sales - approved price-lists - adoption of approved assessable value - remand for de novo proceedings - Whether the adjudicating authority could reassess factory gate assessable value instead of adopting the assessable value approved in the price-lists for models having both factory gate and depot sales - HELD THAT: - The Tribunal observed that its earlier remand required the lower authorities to consider the appellants' factory gate sale prices as reflected in the price-lists filed and approved by the jurisdictional Central Excise Officer. The original show-cause related to depot sale prices and did not challenge the correctness of the approved factory gate assessable values. The adjudicating authority, however, declined to adopt the approved assessable values and re-evaluated factory gate prices by reference to certain higher-priced factory gate clearances. The Tribunal found this to be impermissible because the approved assessable value in the price-lists had not been put in issue for reassessment and the remand was to adopt those approved values. Therefore the matter is sent back for compliance with the Tribunal's directions. [Paras 5, 10]

Matter remanded to the adjudicating authority to adopt the assessable value as approved in the price-lists for models cleared both from the factory gate and from depots; reassessment of the approved factory gate value is not permitted in this exercise.

Final Conclusion: The Tribunal upheld the demand where no factory gate sale price existed and remanded the remaining matters for the adjudicating authority to adopt the assessable values as approved in the price-lists for models having both factory gate and depot clearances, directing expeditious finalisation for the year 1993-94.

Summary order. Review Petition dismissed; application for oral hearing rejected.

Summary order. Appeal dismissed on the ground that the tax effect is low.

Summary order. Appeals against the Tribunal's judgment and order dismissed; delay in filing condoned.

Remand for fresh consideration - opportunity to file objections - opportunity of personal hearing - quashing of orders passed without adjudication of objections

Quashing of orders passed without adjudication of objections - opportunity to file objections - remand for fresh consideration - opportunity of personal hearing - Whether the impugned orders passed by the respondent without the petitioner having filed objections should be set aside and the matters remanded for fresh consideration after permitting the petitioner to file objections and be heard. - HELD THAT: - The Court noted that notices proposing suppressed turnover were issued and that the petitioner did not file any objections before the respondent, after which the respondent accepted the proposal and passed orders dated 20.08.2010. In view of the absence of objections and on the petitioner's request for an opportunity to file objections, the Court exercised its supervisory jurisdiction to set aside the impugned orders and remand the matters. The Court granted liberty to the petitioner to file objections within two weeks from receipt of the order and directed the respondent to decide the matter afresh after giving an opportunity of personal hearing to the petitioner. The relief granted does not decide the merits of the proposed additions but confines the direction to fresh consideration in light of the objections and an oral hearing.

Impugned orders dated 20.08.2010 are set aside; matters remanded to the respondent to allow the petitioner to file objections within two weeks and for fresh decision after personal hearing.

Final Conclusion: Writ petitions disposed by setting aside the impugned orders and remanding the matters for fresh consideration after permitting the petitioner to file objections within two weeks and after affording personal hearing to the petitioner; no costs.

Rectification of assessment - attachment of bank account for recovery of tax - belated submission of statutory forms (Form C/Form F) - opportunity to produce statutory forms for assessment - requirement of sufficient cause for delayed statutory declarations - finality of assessment order - consideration of rectification under Section 73 of the Pondicherry VAT Act read with Section 9(2) of the Central Sales Tax Act

Rectification of assessment - belated submission of statutory forms (Form C/Form F) - requirement of sufficient cause for delayed statutory declarations - consideration of rectification under Section 73 of the Pondicherry VAT Act read with Section 9(2) of the Central Sales Tax Act - Rectification applications filed by the petitioner and the claim for reconsideration of assessment on production of statutory Form C/Form F despite belated filing. - HELD THAT: - The Court held that although rules prescribe time limits for furnishing Forms C and F under the Pondicherry VAT Rules, the claim for concessional levy or exemption cannot be unjustifiably rejected solely for belated production where furnishing those statutory forms is not wholly within the assessee's control and is dependent on other dealers. The Court relied on the Full Bench decision in 51-STC-281 that belated Form C may be accepted upon showing good and sufficient reason and observed that the petitioner filed rectification applications under Section 73 read with Section 9(2) seeking such reconsideration. In consequence, the Court quashed the impugned orders to the extent necessary and directed the assessing authority to consider the rectification applications, accept and examine the statutory forms filed online or manually, and rectify errors on the face of the record if justified, permitting the petitioner a fixed short period to produce the forms and imposing a time-bound obligation on the authority to pass orders thereafter. [Paras 8, 10, 11]

Rectification applications shall be considered; petitioner permitted two weeks to produce statutory forms and the assessing authority directed to pass appropriate orders within six weeks on receipt of the forms.

Attachment of bank account for recovery of tax - finality of assessment order - opportunity to produce statutory forms for assessment - Validity of attachment of the petitioner's bank account, including attachment made in respect of assessment years for which no assessment order had been passed (CST/TIN 2013-2014). - HELD THAT: - The Court found that attachment of the bank account was made while rectification applications remained unconsidered and, in respect of CST/TIN 2013-2014, in the absence of any assessment order to support recovery. Given the direction that the assessing authority must reconsider rectification applications and allow production of statutory forms, the impugned attachment notices were quashed and the assessing authority was directed to act in accordance with law after reconsideration. The Court thereby held that recovery steps taken without affording the opportunity to produce statutory forms and without lawful assessment support were unsustainable. [Paras 11]

Impugned attachment orders quashed; assessing authority directed to reconsider rectification applications and, after due consideration of statutory forms, to pass orders in accordance with law.

Final Conclusion: Writ petitions allowed in part: impugned orders quashed and respondents directed to consider the petitioner's rectification applications under Section 73 of the Pondicherry VAT Act read with Section 9(2) of the CST Act, permit production of Forms C/F within two weeks and pass appropriate orders within six weeks; attachment of bank accounts set aside pending such reconsideration.

Goods detention - one time tax payment for release of detained goods - right of revision - compounding under Section 72(1)(a) of the TNVAT Act

One time tax payment for release of detained goods - right of revision - Direction for conditional release of detained goods upon payment of a one time tax while preserving right to prosecute revision. - HELD THAT: - The High Court did not adjudicate the substantive question whether compounding under Section 72(1)(a) of the TNVAT Act was attracted or whether there was an attempt to evade tax. Instead, having noted that the petitioner retains a statutory right of revision before the appropriate authority, the Court directed an interim and conditional measure: payment of the one time tax proposed by the State would secure immediate release of the goods. The Court expressly recorded that the payment is made "without prejudice" to the petitioner's contentions in the revision, thereby preserving the petitioner's right to challenge the detention and any demand before the revisional authority. [Paras 5, 6]

Petitioner directed to pay the one time tax of Rs. 1,15,010/- to obtain release of the detained consignment; payment to be without prejudice to the petitioner's contentions in revision.

Final Conclusion: Writ petition disposed by directing conditional release of the detained goods on payment of the one time tax, with the petitioner's right to pursue revision against the detention and demand preserved.