Tuesday, March 1, 2016

Key Judgments nullified by the Fin Bill, 2016

Case Law # 1: Introduction of Chapter VIII [Clauses 160 to 177 of the Finance Bill, 2016] providing for Equalisation Levy to nullify the judgement given in the cases like ‘Yahoo India (P) Ltd Vs Dy CIT’

Clause 162 of the Finance Bill, 2016 reads as under.
162(1): On and from the date of commencement of this Chapter, there shall be charged an equalisation levy at the rate of six per cent. of the amount of consideration for any specified service received or receivable by a person, being a non-resident from––

(i) a person resident in India and carrying on business or profession; or

(ii) a non-resident having a permanent establishment in India.

Background of this amendment:
Payment for online advertisement is not ‘Royalty / FTS’:
Payment for online advertisement is not ‘Royalty’ or ‘Fees for Technical Services’. Consideration paid to non-resident for advertisement on search engine, banner advertisement services, etc, does not qualify as ‘Royalty’.
Hence, where a ‘Florist’ pays sums to search engines like ‘Google and Yahoo’ to promote its business, TDS provisions are not applicable as the recipients do not have Permanent Establishment in India.
ª      Online advertisement services provided by Google Ireland and Yahoo USA were wholly automated services with no human intervention. Hence, they cannot be taxed as FTS.
ª      The payment made to Google / Yahoo cannot be taxed as ‘Royalty’ as there was no material on record to suggest that any right in IPR / Technical Knowledge / Experience as specified in Sec 9(1)(vi) was transferred to the assessee company.
ª      Such amounts constituted business income of Google / Yahoo and in the absence of PE in India, such sums cannot be taxed in India.
As per Commentary on OECD Model convention:
Website does not constitute PE. On the other hand, Server / Computer Equipment can constitute PE.
‘Website does not constitute PE. The enterprise (Google / Yahoo) should have a right of access, control or management of its business through that place (Place in India) for a considerable time to bring that place within the scope of PE.

Viewed from this angle, a Server / Computer having a physical shape, and being an equipment through which business is carried out, can be a PE of an enterprise but a ‘Website / Software’ cannot be a PE, as it is virtual, does not have a physical shape, the owner of the ‘Website’ has no right to access on the equipment of the viewer on which such ‘Website’ is viewed. Therefore, advertisements / banners displayed on the SERPs of Google / Yahoo would fall in the category of virtual world. The equipments of the viewer are not under the control of ‘Google / Yahoo’; They do not have any access over such property of viewer; these advertisements are intangibles and do not have any fixedness or permanency. Therefore, viewings of advertisements of SERPs or linked websites are not PEs of Google / Yahoo and, therefore, payments made by the advertiser cannot be taxed as business income of Google / Yahoo deemed to have accrued or arisen in India.
[ITO Vs Right Florists (P) Ltd] [2013] [32 Taxmann.com 99] [Kolkatta –Tribunal]. Similar judgments were given in ‘Yahoo India (P) Ltd Vs Dy CIT’ [2011] [46 SOT 105] and also in ‘Pinstorm Technologies P Ltd Vs ITO’ [2012] [54 SOT 78] [Mumbai]

Case Law # 2: Belated Returns can be ‘Revised’ vide clause 65 of the Fin Bill, 2016:
It is proposed to substitute Sec 139(5) so as to provide that if any person, having furnished a return U/S 139(1), or U/S 139(4), discovers any omission or any wrong statement therein, he may furnish a revised return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.

Background of this amendment: As per the extant provisions, ‘A belated return cannot be revised’. It is so because what can be revised U/S 139(5) is only a return filed U/S 139(1) or a return filed in pursuance of a notice issued U/S 142(1)]. [Kumar Jagdish Chandra Sinha Vs CIT] [86 Taxman 122] [1996] [SC]; Now this case is nullified by amending Act.

Case Law # 3: Sec 28(va) is amended by adding the words ‘profession’ nullifying completely the Apex Court’s judgment in Guffic Chem (P.) Ltd. Vs CIT [2011] 198 TAXMAN 78 (SC); Earlier, this judgment was partly nullified by bringing within the scope of Sec 28 ‘Any sum for not carrying out any activity in relation to any business.’

Brief contents of the case ‘Guffic Chem (P.) Ltd. Vs CIT [2011] 198 TAXMAN 78 (SC)’: The assessee-company and Ranbaxy were carrying on business of manufacturing, selling and distribution of pharmaceuticals and medicinal preparations. During the assessment year 1997-98, it transferred its trademarks to Ranbaxy and entered into an agreement with Ranbaxy under which it was restricted from manufacturing the drugs mentioned in the agreement for a period of 20 years.
In consideration, the assessee received certain amount from Ranbaxy as non-compete fee. The Assessing Officer treated the said receipt as a revenue receipt. On appeal, the Commissioner (Appeals) held that the sum received by the assessee from Ranbaxy was a capital receipt and was not taxable under the Act during the relevant assessment year. That decision was affirmed by the Tribunal. However, the High Court reversed the decision of the Tribunal.
On appeal, to the Supreme Court :
The position, in law, is clear and well-settled. There is a dichotomy between the receipt of compensation by an assessee for the loss of agency and receipt of compensation attributable to the negative/restrictive covenant. The compensation received for the loss of agency is a revenue receipt, whereas the compensation attributable to a negative/restrictive covenant is a capital receipt. [Para 5]
Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide the Finance Act, 2002 with effect from 1-4-2003 that the said capital receipt is now made taxable under section 28(va). The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the Act. It became taxable only with effect from 1-4-2003. It is well-settled that a liability cannot be created retrospectively. In the instant case, compensation received under non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide section 28(va) and that too with effect from 1-4-2003. Hence, the said section 28(va ) is amendatory and not clarificatory. Lastly, in CIT v. Rai Bahadur Jairam Valji [1959] 35 ITR 148  it has been held by the Supreme Court that if a contract is entered into in the ordinary course of business, any compensation received for its termination (loss of agency) would be a revenue receipt. In the instant case, both the Commissioner (Appeals) as well as the Tribunal came to the conclusions that the agreement entered into by the assessee with Ranbaxy led to loss of source of business; that payment was received under the negative covenant and, therefore, the receipt of Rs. 50 lakhs by the assessee from Ranbaxy was in the nature of a capital receipt. In fact, in order to put an end to the litigation, the Parliament stepped in to specifically tax such receipts under non-competition agreement with effect from 1-4-2003. [Para 7]
For the above reasons, the impugned judgment of the Karnataka High Court, dated 29-10-2009 and the order of the Tribunal were to be set aside. [Para 8]

Case Law # 4: Appeal fee is not necessary where the AO had preferred an appeal with ITAT U/S 253(2A) [i.e Against DRP’s order] [Clause 93 of the Fin Bill, 2016 w.r.e.f 1st July 2012]:
Through this amendment the judgment of the Hyderabad Tribunal in the case of ‘ACIT Vs D.E.Shaw India Software (P) Ltd’ [2015] [64 Taxmann.com 95] got nullified.


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