Supreme Court
Whether payment of non-compete fee is a revenue expenditure or capital expenditure? The Supreme Court faced with the abovementioned issue, ruled that the payment made to Larsen and Toubro (L&T) only to ensure that the appellant (taxpayer) operated the business more efficiently and profitably, cannot be considered as an expenditure incurred for acquisition of any capital asset or towards bringing into existence a new profit earning apparatus. That being the position, the payment to L&T as noncompete fee is an allowable revenue expenditure under Section 37(1) of the Income Tax Act.
On account of payment of non-compete fee, the Court found that the appellant had not acquired any new business and there is no addition to the profit-making apparatus of the appellant. The assets remained the same, and the expenditure incurred was essentially to keep a potential competitor out of the same business. Therefore, the Court concluded that when there is no complete elimination of competition, then payment made by the appellant to L&T did not create a monopoly of the appellant over the business of electronic products/ equipment, and hence, such payment of non-compete fee cannot be treated as capital expenditure.
A Two-Judge Bench comprising Justice Manoj Misra and Justice Ujjal Bhuyan observed that the non-compete fee only seeks to protect or enhance the profitability of the business, thereby facilitating the carrying on of the business more efficiently and profitably. Such payment neither results in creation of any new asset nor accretion to the profit earning apparatus of the payer. The enduring advantage, if any, by restricting a competitor in business, is not in the capital field.
While explaining that Section 44C of the Income Tax Act is a special provision that exclusively governs the quantum of allowable deduction for any expenditure incurred by a non-resident taxpayer that qualifies as ‘head office expenditure’, the Supreme Court ruled that Section 44C would come into play irrespective of fact that expenditure was ‘common’ or ‘exclusive’, once it is incurred by non-resident taxpayer outside India.
The Court clarified that it does not matter whether expense was common expense or expense exclusively for Indian branch, so long as expense incurred is for business or profession. This view is fortified by the fact that Section 44C does not distinguish between head office expenditure incurred by non-resident taxpayer as is attributable to business or profession of taxpayer in India, or expenses incurred exclusively for Indian branches, for claiming deduction under Section 37 of the Income Tax Act.
A Two-Judge Bench comprising Justice J B Pardiwala and Justice K V Viswanathan observed that for an expenditure to be brought within the ambit of Section 44C, two broad conditions must be satisfied: (i) The non-resident taxpayer claiming the deduction must be a non-resident; and (ii) The expenditure in question must strictly fall within the definition of ‘head office expenditure’ as provided in the Explanation to Section 37.
While refusing to extend the fiscal benefit of Section 36(1)(viii) of the Income Tax Act to the ‘dividend income on investments in shares’, the Supreme Court ruled that the statute specifically mandates ‘interest on loans’ for allowing deduction under the said provision, and extending the said benefits to ‘dividends on shares’ would defy the legislative intent. Therefore, the Court held that the dividend income does not qualify as ‘profits derived from the business of providing long-term finance’.
The Court clarified that a fundamental distinction exists between a shareholder and a creditor, and the basic characteristic of a loan is that the person advancing the money has a right to sue for the debt. In stark contrast, a redeemable preference shareholder cannot sue for the money due on the shares or claim a return of the share money as a matter of right, except in the specific eventuality of winding up.
The Court explained that the dividends are a return on investment dependent on the profitability of the investee company, and this distinction is fundamental to the genealogy of the income. Essentially, dividend income is derived from the contractual relationship of the shareholder, not the underlying activity or the nature of the funds.
As far as the interest on short-term deposits in banks is concerned, the Court said that there is a vital distinction between the general genus of “Business Income” and the specific species of “profits derived from the business of providing long-term finance”. Just because an income falls into the broad bucket of “Business Income” does not automatically mean it qualifies for the 40% deduction under Section 36(1)(viii) for the later specific species.
The Court explained that even if a receipt is classified as “Business Income” under Section 28 of the Income Tax Act, it does not automatically qualify for the special deduction unless it satisfies the strict rigour of being “derived from” the specific activity of long-term finance defined in the Explanation. The legislative intent was to incentivise the specific act of providing long-term credit, not the passive investment of surplus capital. The Court therefore concluded that interest earned from bank deposits, at best, is attributable to the business, but certainly not derived from the activity of providing long-term finance.
A Two-Judge Bench of Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar referred to Section 28, which provides a deduction in respect of any financial corporation engaged in providing long-term finance for industrial or agricultural development, and observed that ‘long-term finance’ means any loan or advance where the terms provide for repayment along with interest during a period of not less than five years.
While emphasising that the power of the Municipal Authorities in revising the property tax rates with the passage of time shall not be fettered upon by the Writ Courts, the Supreme Court asserted that the cost of the welfare and developmental activities has been constantly increasing with passage of time, and therefore, the property tax, which is the main source of revenue for undertaking these activities, calls for revision.
The Court has strongly deprecated the action of the Bombay High Court in invoking powers of judicial review in a public interest litigation to interfere in the economic policy decision taken by the appellant-Corporation to increase the rates of the property taxes, particularly when such revision was made after a considerable gap of about 16 years.
A Two-Judge Bench of Justice Vikram Nath and Justice Sandeep Mehta observed that if the taxes are not revised in keeping with the rise in cost of infrastructure, human resources, etc., that would make the municipal bodies defunct and nonfunctional. In essence, their functional efficacy, financial stability and administrative independence are integral to the discharge of these statutory obligations.
The Supreme Court has clarified that the entire series of integrally connected processes, even if split between legally distinct entities, must be considered as a whole, for claiming an excise duty exemption conditional on “processing without aid of power”. The Court ruled that the use of power at any critical stage in the integrated manufacturing chain nullifies the exemption, upholding the principle of substance over form in fiscal statutes.
As all the activities commencing from bleaching and mercerising, thereafter leading to squeezing and stentering and culminating into the product being bailed and packed being integral processes in the conversion of grey fabrics into cotton fabrics, the Court ruled that the entire activity of undertaking the various processes amounted to “manufacture” for the purposes of Section 2(f) of the Central Excise Act, 1944.
A Two-Judge Bench comprising Justice Pamidighantam Sri Narasimha and Justice Atul S. Chandurkar observed that manufacture is the cumulative effect of the various processes to which the raw material is subjected, after which the manufactured product emerges. The requirement is that the individual processes should be integrally connected, leading to the ultimate final product. The Bench also pointed out that a particular activity may be subordinate but related to the further process of manufacture.
All High Courts
Giving significant weight to the fact that the petitioner trust was already registered as a “charitable organisation” under Section 12A of the Income Tax Act, the Madras High Court cited Section 52 of the FCRA, which states the same is “in addition to, and not in derogation of” other laws, and concluded that an organisation deemed charitable under tax law cannot cease to be one under the FCRA regime.
The Court noted that Section 11(1) of the FCRA explicitly allows organisations with a “definite cultural, economic, educational, religious or social programme” to receive foreign contributions after obtaining registration. Hence, the Court described the failure to consider the charitable certificate as a non-application of mind by the Revenue Authorities.
A Single Judge Bench of Justice G.R. Swaminathan observed that once the offence of receiving foreign funds without permission was compounded under Section 41 of the FCRA, the contravention could not be used as an adverse ground for rejection. The act of compounding wipes the slate clean, and the authority’s failure to consider this relevant material vitiated its decision.
The Delhi High Court reiterated that if transactions between an associated enterprise (that also constitutes a PE) and the foreign enterprise are remunerated on an arm’s length basis, no further profits would be left to be attributed to the PE. The Court also reiterated that since the appellant is a non-resident and tax is deductible at source under Section 195 of the Income Tax Act from payments made to it, there was no liability for payment of advance tax.
As the Transfer Pricing Officer (TPO) had already deleted the transfer pricing adjustments, the Court asserted that this deletion implied that the transactions were considered to be at arm’s length, and therefore, no further income could be attributed to a PE in India, even if one were deemed to exist.
The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that a fixed place Permanent Establishment (PE) requires a fixed place of business to be “at the disposal” of the foreign enterprise. It found the facts of the case to be pari materia with the Supreme Court’s ruling in eFunds IT Solution [399 ITR 34], where it was held that an Indian subsidiary does not become a PE merely because of cross-transactions or outsourcing of back-office operations.
Rehabilitation Grant to District Cooperative Milk Union Is Capital Receipt: Madras HC
The Madras High Court has ruled that when the dominant purpose of providing financial assistance was towards the rehabilitation of the loss-making society, and the funds were to be utilised for clearing all loans and liabilities, which the society was unable to clear because of the financial stringency, then the receipt in the hands of the society would be capital receipt and not a revenue receipt.
The ruling came after observing that the object and purpose of the grant of financial assistance and consequent receipt in the hands of the taxpayer society was to pull it out of the financial crunch, as a part of rehabilitation. The funds were to be first utilised for clearing its loan liabilities.
Emphasising that the dominant purpose shall be a decisive factor for considering the nature of receipt, the Division Bench comprising the Chief Justice Manindra Mohan Shrivastava and Justice G. Arul Murugan observed that the financial assistance which was provided to the appellant was towards rehabilitation. One of the important conditions was that the milk union should first clear up their liabilities in the order of DCS, other milk unions and employers, respectively.
The Delhi High Court has dismissed a writ petition filed by LG Electronics India Pvt. Ltd., upholding the Income Tax Department’s decision to treat 1/3rd of the payment of USD 11,000,000 made to a Global Cricket Corporation Pvt. Ltd. (GCC), as royalty, liable to Tax Deduction at Source under Section 195 of the Income Tax Act.
A Division Bench of Justice V. Kameswar Rao and Justice Vinod Kumar held that the right granted to LG to use the International Cricket Council (ICC) marks and event marks under a Global Partnership Agreement was a substantive commercial right and not merely incidental to advertising, thereby attracting the definition of “royalty” under Section 9(1)(vi) of the Income Tax Act, 1961, read with Article 12 of the India–Singapore Double Taxation Avoidance Agreement (DTAA).
The Kerala High Court has quashed the assessment order passed under the Kerala Value Added Tax Act, 2003 (hereinafter the “KVAT” Act) by holding that SIM cards, rechargeable coupons, fixed monthly charges, and value-added services provided in relation to SMS, ringtones, and download music cannot be treated as “goods”, therefore no levy can be imposed under the KVAT Act.
The Division Bench comprising Justice A.K. Jayasankaran Nambiar and Justice Jobin Sebastian has observed that since the final decision on the issue already decided in the above-mentioned case, would be meaningless to relegate the assessee to pursue the statutory authorities. Accordingly, the High Court allowed the writ appeal by quashing the assessment order to the extent it demanded VAT on telecom receipts, holding that such receipts do not constitute a sale of goods under the KVAT Act.
The Allahabad High Court clarified that the service of an SCN and orders under the State/Central Act, by making such documents available on the Common Portal or by making dispatch through electronic mode, is permissible in law, and therefore a valid procedure. Further, no order of priority exists between the first five modes of service that may be adopted by the revenue authorities amongst clauses (a) to (e) of Section 169(1) of the CGST Act.
The Court ruled that service of notices and orders through electronic modes is legally permissible. However, there is no deeming fiction of law for constructive service when notices/orders are made available on the Common Portal or sent via email under Section 169(1)(c) and (d). Only before adopting service through affixation under clause (f), satisfaction must be recorded that it is not ‘practicable’ to serve such notice or order through any of the modes specified in clauses (a) to (e).
The Division Bench comprising Justice Indrajeet Shukla and Justice Saumitra Dayal Singh observed that the Income Tax Act is clearly applicable to the State/Central Acts, to the extent its provisions may be invoked in matters not squarely covered by or provided for under the State/Central Act. To that extent, the provisions of Sections 4, 12 and 13 are invokable with reference to ‘despatch’ & ‘receipt’ service attempted through electronic modes but not to actual or constructive service provided under Section 169 of the State/Central Acts, there is no conflict between the two sets of legislation, one relating to GST laws and the other to IT laws.
Tax Evasion Above ?25 Lakh: CCIT/DGIT Collegium Lacks Power to Sanction Prosecution Under Section 276C: Delhi HC
The Delhi High Court has clarified that where the amount of tax sought to be evaded was more than Rs. 25 lakhs, then the appropriate authority for initiating prosecution proceedings would be the sanctioning authority, i.e., Principal Commissioner of Income Tax (Pr. CIT) and not the collegium of two CCIT/DGIT rank officers.
The Court referred to the CBDT Circular dated September 09, 2019, which deals with offences under section 276(C)(1) of the Income Tax Act, and clarified that when the amount sought to be evaded or taxed is below the sum of Rs. 25 lakhs, such cases shall not be processed for prosecution except with the previous administrative approval of collegium of two CCIT/DGIT rank officers. However, this stipulation/ restriction is not meant for cases where the amount sought to be evaded or taxed on under-reported is more than Rs. 25 lakhs.
The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar observed that the Circular grants a discretion that the prosecution can be launched at any stage of the proceedings before the Income Tax Authority. Further, the prosecution in other cases, including cases covered under sections 132, 132A and 133A of the Income Tax Act, may be launched at any stage before the Income Tax Authority with the previous approval by the collegiums of two CCIT/DGIT rank officers.
The Telangana High Court (Hyderabad Bench) has ruled that income earned by the biotechnology company from the sale of tissue-cultured plants would constitute ‘agricultural income’, exempt from tax under Section 10(1) of the Income Tax Act. The ruling came after finding that the cultivation of mother plants on land involved all basic agricultural operations contemplated under Section 2(1A) of the Income Tax Act, and the tissue culture process was merely an advanced method of propagating and multiplying plant material derived from those mother plants.
The Division Bench comprising Justice P. Sam Koshy and Justice Narsing Rao Nandikonda observed that the fundamental question is whether the employment of advanced scientific techniques and laboratory-based processes necessarily transforms what is essentially an agricultural activity into a commercial or business operation.
The Bench pointed out that the legislature, in defining agricultural income, did not intend to freeze the concept of agriculture in a time warp or restrict it to primitive methods of cultivation. Hence, to deny the agricultural character of operations merely because they employ modern scientific techniques would be ignoring the reality of contemporary agricultural practices and would create an arbitrary distinction that finds no support in the statutory language or legislative intent.
The Bombay High Court (Aurangabad Bench) clarified that the operations of testing and pairing of the smart cards sent to the Set Top Box manufacturer would be covered under the phrase ‘further processing, testing or any other purpose’, and hence, Cenvat Credit availed by Dish TV at the time of clearance of the smart card to the Set Top Box manufacturer (Trend Electronics) is not liable for reversal under Rule 3(5) of Cenvat Credit Rules, 2004.
The Court emphasised that the basic objective behind allowing Cenvat Credit on inputs, input services or capital goods is to provide instant credit of duties/taxes paid thereon and consequential reduction in the cost. If the Cenvat credit availed on inputs or capital goods is not used for the intended purpose, then to counteract such eventualities, an embargo has also been created in the statute for not extending the benefit of the Cenvat facility.
The Division Bench comprising Justice Vibha Kankanwadi and Justice Hiten S. Venegavkar observed that though the smart cards were imported, they were not inserted in the Set Top Boxes as such, and they were required to be given for processing to Trend Electronics, which did not carry any manufacturing activities as regards the smart cards received from the respondent, rather, they simply paired the bar code of the smart card with that of Set Top Box.
Referring to the definition of “manufacture” as per section 2(72) of the GST Act, the Gujarat High Court (Ahmedabad Bench) ruled that the small retail pouches of tobacco leaves sold by the petitioners would be classified under the category of chewing tobacco under Tariff Heading 2403 9910 in view of the description mentioned in Explanatory Note of HSN read with definition of “manufacture” in Section 2(72) of the GST Act as well as provisions of the ‘Copta’.
The High Court clarified that the Notification No. 1/2017-Central Tax (Rate) dated June 28, 2017, prescribing the GST rate based on Tariff Heading as specified in the First Schedule to the Customs Tariff Act, 1975, would have to align with the definition of “manufacture” as provided in the GST Act, and therefore, the petitioners would be liable to pay GST and Compensation Cess applicable as per Tariff Heading 2403 9910 and not as per Tariff Heading 24012090.
The Division Bench comprising Justice Bhargav D. Karia and Justice Pranav Trivedi observed that the core of the issue lies in the change of the definition of “manufacture” from the Central Excise Act, 1944, to the GST Act, 2017, and applying the said definition under Section 2(72) of the GST Act, clarified that the processing undertaken by the petitioners (drying, cleaning, sieving, cutting, and packing) results in the emergence of a new product, which has a distinct name, character and use, as ‘chewing tobacco’.
The Bombay High Court clarified that an ongoing investigation is not a sufficient ground to continue the Look Out Circular (LOC), especially when considerable time has passed without initiation of any criminal proceedings. Accordingly, the Court held that insistence on demanding US customs declarations is no justification for invoking the coercive measure like LOC, which trammels the fundamental right to travel under Article 21 of the Constitution.
The Court therefore quashed the LOC, pointing out that when the petitioners are neither accused of committing a cognisable offence, nor any criminal case was registered against them, then the essential parameters for issuing the LOC are not met.
The Division Bench comprising Justice Bharati Dangre and Justice Shyam C. Chandak observed that the recourse to an LOC is to be taken in cognizable offences under the IPC or other penal laws. Finding that the petitioners have strong business roots in the country, have been in business for forty years, own several immovable properties, and have always returned from their travels abroad, undertaken with court permission, the Bench negated the apprehension that the petitioners would flee the country, calling it ‘manifestly untenable’.
The Delhi High Court has ruled that when an advertising agency is rendering services to its client and not to the media houses, and no separate obligation or contract with media houses exists, then incentives given by media houses would not be susceptible to service tax under ‘business auxiliary services’ in terms of the provisions of Section 65A of the Finance Act, 1994.
The Court explained that an advertising agency primarily books slots on electronic media and books space in the print media on behalf of its clients, and the advertising plans are negotiated with the media houses, with the help of the advertising agency and are finally approved by the clients.
The Court also clarified that the advertising agency merely renders service as per the advertising plans, which are approved by its clients and does not render any additional service to the media house. Moreover, achieving targets or revenue benchmarks is part of the service that is already being rendered, and since there is no additional service to the media house, it cannot be held that the incentives that are given by the media houses would be liable to service tax as it constitutes a ‘business auxiliary service’.
The Division Bench comprising Justice Prathiba M Singh and Justice Shail Jain observed that even under Section 66E(e) of the Finance Act, 1994, the advertising agency is neither carrying out any specific act nor is refraining from any specific act, and primarily, the advertising agency is rendering service on behalf of its clients to book the slots and space with the media houses.
The Bombay High Court ruled that the Municipal Commissioner has the authority to charge a fee for issuing licenses for sky-signs and hoardings. Since the statute itself recognises “fees” as a component of the Municipal Fund, distinct from “taxes”, the Court explained that the levy of fees by the municipal authority is a ‘regulatory fee’ and not a tax.
Finding no merit in the contention of the petitioners, the Court held that the Pune Municipal Corporation (PMC) has the authority to levy the license fee, which is a regulatory fee and not a tax. At the same time, it strongly asserted that the introduction of GST does not impact this power, and the retrospective sanction of the enhanced rate, derived from a market-based tender process, would be valid.
The Division Bench comprising Justice G S Kulkarni and Justice Advait M Sethna observed that for a regulatory fee, a direct service to the fee-payer is not essential, and a broad correlation between the fee collected and the expenses incurred for regulation is sufficient. Thus, the Bench explained that the functions of the Pune Municipal Corporation (PMC), including inspections for structural stability, traffic safety, and environmental impact, constitute a comprehensive regulatory mechanism justifying the fee.
The Gauhati High Court clarified that the Input Tax Credit (ITC) benefit to a bona fide buyer cannot be avoided, as that would be against the object and purpose of the CGST Act itself, which is to charge tax only on “value additions” and avoid a cascading effect of taxes. The Court agreed that any exemption available in the taxing regime is dependent on certain conditions and the conditions are required to be complied with; however, it found that in the present case, the conditions are that the GSTR-2 Form should reflect the payment of tax/invoice, which may or may not have been paid or correctly uploaded.
The Court also said that a person who claims an exemption or concession has to establish that he is entitled to that exemption or concession. However, Section 16(2)(aa) puts a condition on such exemption or concession, namely, the compliance by the seller over which a buyer may or may not have any actual control.
The Division Bench comprising the Chief Justice Ashutosh Kumar and Justice Arun Dev Choudhury observed that the restriction is quite iniquitous because an onerous burden is placed on the purchasing dealer. However, the object and purpose of the amendment in the Act is to prevent fraudulent ITC claims and to promote supplier compliance.
The Kerala High Court (Ernakulam Bench) ruled that the South Indian Bank (appellant) is justified in not deducting tax at source in cases where senior citizens had furnished a valid Form 15H declaration, irrespective of whether the interest amount exceeded the basic exemption limit.
The Court clarified that for the depositors aged 60 years and above (senior citizens), a special provision under Section 197A(1C) of the Income Tax Act allows for non-deduction of tax if the depositor furnishes a declaration in the prescribed Form 15H, stating that the tax on their estimated total income for the relevant previous year would be NIL.
The Division Bench comprising Justice A. Muhamed Mustaque and Justice Harisankar V. Menon analysed the structure of Section 197A and noted that while sub-section (1A) provides for non-deduction upon furnishing a declaration, sub-section (1B) carves out an exception. Sub-section (1B) explicitly states that the provisions for non-deduction shall not apply if the aggregate income paid exceeds the maximum amount not chargeable to income tax.
The Calcutta High Court (Jalpaiguri Bench) held that the CBIC Circular dated December 31, 2018, cannot be applied in cases where the genuineness of the transaction itself is doubted by the authorities. Since the authorities questioned the petitioner’s procurement and found discrepancies, the Court stated that the Circular cannot be used as a shield to ward off legal scrutiny in cases involving dubious invoices or undisclosed transactions.
The Court clarified that a circular issued by the Central Board of Indirect Taxes & Customs would be binding on all its officers, but at the same time, there can also not be any cavil to the proposition that a circular issued by the Board whether instructive or clarificatory or otherwise has to operate within the statutory framework and has to be applied only when there is no doubt raised regarding the genuineness of the consignment and the transaction and the
A Single Judge Bench of Justice Om Narayan Rai observed that the relevant GST authority has concluded that the petitioner “is procuring and supplying dried areca nut procured from other sources, evading duty and reflecting under his own firm under the guise of their own GST credential and Bills” for “tax evasion”.
The Bombay High Court ruled that absence of any allegation of falsity, misstatement, misdeclaration, suppression or the like in the voluntary disclosure made in the declaration filed under the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 (SVLDRS), renders demand of interest on delayed payments contrary to the provisions of Sections 124, 126 and 129 of the Finance Act, 2019.
Essentially, the Court clarified that when a discharge certificate for the settlement of all tax dues has been issued under the SVLDRS Scheme, the demands raised by the show cause notices would be ex facie contrary to law. The Court also pointed out that in light of a clear statutory provisions under the Finance Act, 2019, the manufacturer/ supplier (petitioner) could not have been foisted with payment of any further amount to avail the benefit under the Scheme.
The Division Bench comprising Justice Advait M. Sethna and Justice M.S. Sonak observed that merely because the petitioner had incorrectly filed its declaration under arrears category and not under audit, enquiry, investigation category, it would not deprive the petitioner to claim relief which is available under the statutory framework of the Finance Act, 2019.
Citing Section 21(b) of the Chit Fund Act, 1982, which places a cap on the service fees that can be collected by a foreman to 7% of the gross chit amount, the High Court of Andhra Pradesh (Amaravati Bench) ruled that the interest or the penalty recovered by a foreman from a defaulting chit subscriber would clearly fall under Entry No.27 of the notification No.12 of 2017.
In such a situation, the Court, therefore, clarified that the right to interest and penalty, if any, payable on any default in payment of instalments set out in Section 21(c) falls outside the purview of commission or remuneration specified in Section 21(b). Accordingly, the Court held that the interest or penalty recovered by a foreman, on account of defaulting payment of instalments, cannot be treated as a service fee or another charge, mentioned in the definition of interest, in the notification No.12 of 2017.
The Division Bench comprising Justice R Raghunandan Rao and Justice T C D Sekhar observed that there is no dispute that the petitioner is liable to pay GST on the remuneration or commission paid to the foreman under Section 21(b) of the Chit Fund Act, 1982.
The Bombay High Court declared the treatment being given to the sole manufacturer of country liquor, whose average production was below the threshold of 10 lakh cases and whose actual production was in excess of such threshold, as arbitrary. Accordingly, the Court held that the discrimination against manufacturers whose production exceeded 10 lakh cases in 2016-17, only because their preceding three-year average production had been below 10 lakh cases, is irrational.
Emphasising that the licence fee is a fee payable for the privilege of legitimately carrying out the activity for which a licence is necessary by law, the Court observed that the privilege in question covered by the CL-1 (Country Liquor) Licence was the production of country liquor for the year 2016-17, and the basis for charging the licence fee, specifically, was the overall production in that year.
A Single Judge Bench of Justice Somasekhar Sundaresan observed that where the production of any CL-1 License holder exceeds the three-year average, which formed the basis of paying the fees in advance, the fees payable are governed by the Notification issued under the Maharashtra Potable Liquor Rules, 1996.
While clarifying that Section 129 of the CGST Act are standalone provisions as far as no element of intention of evasion of tax is involved, the Gujarat High Court (Ahmedabad Bench) ruled that there is no bar in invoking the provision of Section 130 of the CGST Act for confiscation at threshold, if on the seizure of goods and conveyance it is found that the entire transaction reveals the intention to evade the tax.
Since the confiscation of goods was resorted to by invoking Section 130 of the CGST Act by issuance of MOV-10 or MOV-11 midway, without completing the entire procedure contemplated under Section 129 of the CGST Act, the Court cautioned that the action taken under FORM MV-10 and 11 for confiscation of goods or penalty other than the Officer having jurisdiction as mentioned herein above will be without authority and illegal.
Thus, the formation of the opinion of ‘intent to evade tax’, on the act or omission of a person, who is not proximately or directly linked to such activity with the dealer, cannot be made the foundation for confiscation of goods, added the Court.
Emphasising that the quintessential feature is of forming an opinion of “evasion” of tax, the Division Bench comprising Justice A.S. Supehia and Justice Pranav Trivedi observed that from the stage of “detention” to “seizure”, the proper officer is authorised to form an opinion for “confiscation” under section 130 of the CGST Act, which is a harsh action taken against the dealer/trader. Once the goods and conveyance are seized, no remedy of provisional release of the same is available under Section 67(6) of the CGST Act after the amendment, and the only remedy is the one prescribed under Section 129 of the CGST Act.
The Madhya Pradesh High Court (Jabalpur Bench) refused to quash the notices issued under Section 143(2) and Section 147 of the Income Tax Act on the mere allegation that they contravene the very Voluntary Disclosures of Income Scheme, 1997, after finding that the instructions came into operation with effect from June 09, 2000, whereas the notice had already been issued under Section 147 before the said date.
The Court therefore refused to interfere in the best judgment assessment passed by the AO, as the petitioner shall have a remedy to approach the Central Board of Direct Taxes, and he can still thereafter approach the Writ Court, in case aggrieved.
The Division Bench comprising Justice Vivek Rusia and Justice Pradeep Mittal observed that under Section 64 of the Finance Act, the minor would be entitled to make a voluntary disclosure for his income under the Voluntary Disclosures of Income Scheme, 1997, and the Authorities are not entitled to make any enquiry from the sources from where he has earned the income.
The Gujarat High Court (Ahmedabad Bench) ruled that the Indian subsidiary’s software consultancy and support services rendered exclusively to its foreign parent company would qualify as “export of services”, and not as “intermediary services” under the IGST Act. Accordingly, the Court directed the Revenue Department to process the refund claim in accordance with the law, considering the services provided by the petitioner as export of services to its parent company.
The Court explained that the Indian subsidiary (petitioner) was providing services on its own and not arranging or facilitating services between two different parties, and it had earned cost plus an 8% markup and bore all operational expenses independently. Thus, the activities satisfied all conditions under Section 2(6) of the IGST Act for export of services and did not fall within the statutory definition of intermediary services under Section 2(13) of the IGST Act.
The Division Bench comprising Justice A.S. Supehia and Justice Pranav Trivedi observed from perusal of the terms of the service agreement, that the petitioner is required to assist the US entity in carrying on the business of providing information and consultancy in business of software development and for that purpose, the petitioner is required to set up consultations and meetings between globally based experts and globally based clients and to participate in any business of consultants, agents, sub-agents, liaison agents/liaison sub-agents for its parent company and foreign clients for such activities.
ITAT/ CESTAT/ AAR
Delhi ITAT: Ownership of Multiple Residential Houses Bars Deduction Under Section 54F
The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) ruled that where the taxpayer, after demolishing one house, constructed three independent residential units with separate kitchens and earned rental income therefrom, he was held to own more than one residential house and thus not eligible for deduction under Section 54F of the Income Tax Act.
The Tribunal also held that the provisions of Section 54 are very clear that the taxpayer cannot have more than one house, which means that the taxpayer can have one house plus another independent residential house to claim the deduction. The residential house means it should contain a room, a hall and a kitchen. Therefore, what is relevant to treat the independent residential house to mean are there should be a common kitchen, and the number of units may vary.
The Division Bench comprising Anubhav Sharma (Judicial Member) and S. Rifaur Rahman (Accountant Member) observed that the appellant had entered into a JV agreement with the joint developer, and as per the agreement, the developer had completed the project during the year under consideration. He had built three floors, and he retained the second floor with 25% of the parking area. The appellant retained the first and third floors, completed the registration formalities during the year, and declared the sale proceeds and claimed the deduction under Section 54F.
In a case where the Direct-to-Home (DTH) service provider had paid a variable license fee to the Ministry of Information and Broadcasting (MIB), the Income Tax Appellate Tribunal (ITAT) New Delhi, ruled that DTH services constituted broadcasting services and were not akin to telecommunication services, provisions of section 35ABB were inapplicable, and such license fee was allowable as revenue expenditure under Section 37(1) of the Income Tax Act.
The Tribunal noted that Section 35ABB applies to capital expenditure incurred for acquiring a right to operate telecommunication services, whereas “Telecommunication services”, as defined in clause (k) of section 2 of the TRAI Act, 1997, expressly exclude broadcasting services.
Since the appellant was engaged in DTH services and merely functioned as a distribution platform using satellite transmission to broadcast television signals directly to subscribers’ homes, it was not providing telecommunication services. The Tribunal thus held that DTH services were in the nature of broadcasting services, not akin to telecommunication services, and provisions of section 35ABB were inapplicable.
The Division Bench comprising C.N. Prasad (Judicial Member) and M. Balaganesh (Accountant Member) accordingly held that a variable licence fee paid to MIB, being a recurring revenue-linked payment conferring no enduring right, was allowable as revenue expenditure under Section 37(1).
The Income Tax Appellate Tribunal (ITAT), Hyderabad Bench, clarified that where the taxpayer has received cash towards the sale of immovable property, and the agreement to sell was entered into before the amendment to Section 269SS of the Income Tax Act, then there existed reasonable cause under Section 273B, warranting no levy of penalty under Section 271D.
The Tribunal has given thoughtful consideration to the reasons given by the Assessing Officer to impose penalty under section 271D in light of various arguments of the appellant and does not subscribe to the reasons given by the Assessing Officer for the simple reason that, the appellant had entered into agreement for sale of property and had also received Rs.15 lakhs before the amendment came to provisions of section 269SS, by insertion of ‘specified sum’ which includes any amount received towards sale of property whether the transactions takes place or not.
The Division Bench comprising Ravish Sood (Judicial Member) and G. Manjunatha (Accountant Member) found that the appellant had also declared the sale consideration and paid the relevant taxes in the return of income filed for the relevant assessment year. Since the appellant has received the consideration in cash as per the contractual agreement entered into with the purchaser, and the said agreement was executed before the amendment to section 269SS, there exists a reasonable cause for accepting the consideration in cash.
Copyrighted Logo Not Taxable as IPR Service: CESTAT Sets Aside Service Tax Demand
The registration of a logo under the Copyright Act, 1957, as an artistic work is exempt from service tax liability under the Finance Act, 1994. The Customs, Excise and Service Tax Appellate Tribunal, Chennai (“CESTAT”), sets aside the impugned order of the Commissioner of Service Tax, holding that the Respondent’s service tax demand was unsustainable as the royalty received by the Appellant for the use of his logo does not qualify as taxable IPR services given under Section 65(55b) read with Section 65(105)(zzr) of the Finance Act.
Collaborative Healthcare Arrangements are Not Taxable; Chennai CESTAT Set Aside Service Tax Demand
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Chennai, has set aside the service tax demand of ?34.83 lakh, holding that amounts received under collaborative healthcare arrangements with other hospitals constituted revenue sharing for integrated clinical management and not consideration for taxable services such as manpower recruitment or supply agency service.
The Bench, comprising Mr. P. Dinesha and Mr. Vasa Seshagiri Rao, observed that the MOU arrangements reflected a principal-to-principal basis in which the appellant provided clinical supervision, training, and deputation of staff to ensure uniform standards of eye care, while the partner hospitals contributed the infrastructure and financial resources. Furthermore, the tribunal held that the amount described as “royalty” or “management fee” was not a payment for consultancy services, but was intended to meet operational costs. There was no evidence of any separate commercial consultancy or profit-oriented service.
The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), New Delhi, has set aside the Order-in-Original dated January 28, 2022, holding that the Customs Department was not justified in rejecting the declared transaction value of imported LED TVs and drywall screws based on third-party proforma invoices and inadmissible printouts bearing no signature. The Bench comprising Rachna Gupta and P.V. Subba Rao held that mere comparison with documents relating to other importers cannot form the basis for re-determination of value under Section 14 of the Customs Act, 1962, read with the Customs Valuation Rules, 2007.
The West Bengal Authority for Advance Ruling (AAR) has ruled that the transportation services proposed to be provided by Flipkart India Private Limited under its new logistics model qualify as Goods Transport Agency (GTA) services, and that such services, when provided through the e-commerce operator‘s portal, to unregistered end-customers, are eligible for exemption under Serial No. 21A of Notification No. 12/2017–Central Tax (Rate) dated June 28, 2017.
Emphasising that the fact of issuing a consignment note can be regarded as a sine qua non for the consideration of a supplier of transport services as GTA, the AAR referred to the exemption provided by Entry no. 21A of Notification No. 12/2017 – Central Tax (Rate) dated June 28, 2017, which has been extended to GTA only, not to a courier agency, and clarified that if the transportation of goods is done entirely by road and the person transporting the goods issues consignment note, the time sensitive transportation of goods is to be considered as services by GTA.
The Authority, comprising Shafeeq S (Member) and Jaydip Kumar Chakrabarti (Member), examined two questions: first, whether the proposed services qualify as GTA services; and second, whether such services would be exempt when supplied to unregistered customers through an e-commerce platform. Analysing the statutory definition of “goods transport agency”, the Authority observed that two conditions are decisive, namely the transport of goods by road and the issuance of a consignment note. The Authority held that issuance of a consignment note is the sine qua non for classification as GTA and signifies transfer of lien and responsibility over the goods to the transporter.
Referring to the CENVAT Credit Rules, 2004, which exclude only a specific type of works contract which is in the nature of works contract/construction of civil structure building, as well as construction of support structure for capital goods, the Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Bangalore, has ruled that the activities undertaken by the cement manufacturer (appellant) is ‘works service contract’ and not for ‘construction of building or civil structure’. Accordingly, the Tribunal allowed the CENVAT credit and quashed the service tax demand and penalty.
As regards the allegation of ineligible CENVAT credit availed by the appellant on lease premium, the CESTAT found that since the disputed services were ultimately meant for accomplishing the objective of providing the output service, it cannot be said that since the phrase ‘setting up’ was specifically excluded in the inclusive part of definition of input service, the benefit of CENVAT credit should be denied.
The Division Bench comprising P.A. Augustian (Judicial Member) and Pullela Nageswara Rao (Technical Member) observed that the appellant has availed Cenvat credit of Rs. 90,716 in respect of Service Tax paid on the invoice issued by Bigtree Advertising and Media Communications Pvt Ltd., towards expenditure that has been incurred for conducting a business meeting at the appellant’s plant in Cochin. The Bench therefore held that the appellant is eligible to avail the credit of service tax paid on the event management services utilised for organising various events for prospective clients/employees.
The Customs, Excise, and Service Tax Appellate Tribunal (CESTAT), Chandigarh, ruled that the revenue-sharing arrangements between the health service centre (appellant) and the diagnostic service providers (DSPs) are not subject to service tax under the ‘Business Support Services’ (BSS) as defined under Section 65(104c) read with Section 65(105)(zzzq) of the Finance Act, 1994.
Pointing out that ‘Healthcare Services’ are fully exempted from the tax w.e.f. April 25, 2011 vide Notification No. 30/2011-ST, the CESTAT held that the service, if any, rendered by the appellant is not ‘BSS’ and rather qualifies as ‘Healthcare Service’, which is exempted from the ambit of service tax. The Tribunal, therefore, quashed the demand and penalty.
The Division Bench comprising S.S. Garg (Judicial Member) and P. Anjani Kumar (Technical Member) observed that it is the appellant who established the Hospital and provided healthcare services to the patients, and DSPs are, in fact, a part of the appellant as a joint venture who are providing diagnostic services to the patients; it is the patient, who is ultimate recipient and beneficiary of medical services in the appellant’s Hospital.
The Chennai Customs, Excise, and Service Tax Appellate Tribunal (CESTAT) ruled that the packaged drinking water “Holy Aqua” manufactured and cleared by the Athur unit, being a potable drinking water, is not required to be assessed on MRP basis under Section 4A of the Central Excise Act, 1944. As the manufactured product is not mineral water, the CESTAT held that the demand for duty, which proceeds on MRP valuation under Section 4A of the Central Excise Act, 1944, is not sustainable.
The ruling came after referring to the certificate from an independent/ex-Government Scientist and the Appellant’s process details (filtration, chlorination, ozonisation, UV), which show no addition/removal of minerals. Since the appeal records do not identify any laboratory analysis demonstrating the addition of mineral salts or demineralisation to convert the product into mineral water for the Athur unit, the CESTAT ruled that the classification as “mineral water” is not tenable.
The Division Bench comprising P. Dinesha (Judicial Member) and Vasa Seshagiri Rao (Technical Member) observed that notifications (Nos.02/2006, 14/2008, 49/2008) under Section 4A of the Central Excise Act, 1944, which list “Mineral waters” (and aerated waters) under the relevant entries do not, by plain text, include all forms of packaged drinking water.
The New Delhi Income Tax Appellate Tribunal (ITAT) has clarified that if a non-profit entity was engaged in promoting commerce between the European Union business community and Indian public authorities through policy advocacy on trade policy, investment protection and ease of doing business, such activities qualified as objects of general public utility under Section 2(15) of the Income Tax Act. Accordingly, the Tribunal held that the Federation of European Business in India (appellant) would be eligible for registration under Section 12A of the Income Tax Act.
The Appellate Tribunal pointed out that Section 2(15) deals with the definition of charitable purpose, and the last limb in the definition is ‘advancement of any other object of general public utility’. ‘Charitable purpose’ is defined to include relief of the poor, education, yoga, medical relief, preservation of the environment and advancement of any other object of general public utility.
Emphasising that the expression “any other object of general public utility” is of the widest connotation, the Tribunal clarified that so long as the dominant object is of general public utility and there is no profit motive, it cannot be said that the trust/institution is not established for charitable purposes, even if there is some profit in the activity carried on by the trust/institution.
The Division Bench comprising Challa Nagendra Prasad (Judicial Member) and Avdhesh Kumar Mishra (Accountant Member) observed that the proviso to Section 2(15) inserted by the Finance Act, 2008 (and later on modified by subsequent Finance Acts) applies only to entities whose purpose is “advancement of any other object of general public utility”, i.e., the sixth limb of the definition of “charitable purpose” contained in Section 2(15).
The Customs Authority for Advance Ruling (CAAR), Mumbai, held that no substantive provision authorizes third-party invoicing under the Asia-Pacific Trade Agreement (hereinafter, ‘APTA’). The CAAR clarified that the preferential duty under Notification No. 50/2018 may be granted in a third-party invoicing where the importer satisfies the condition of the Deputy/Assistant Commissioner of Customs.
The Income Tax Appellate Tribunal (ITAT) Kolkata has clarified that in case seized papers showed that the taxpayer acted only as a broker between lenders and borrowers, then only brokerage income attributable to finance broking activities could be added as undisclosed income of the taxpayer, and no addition could be based on disclosure petition alone, unless there were corroborative materials.
The Division Bench comprising Pradip Kumar Chobey (Judicial Member) and Rajesh Kumar (Accountant Member) from the tabulation prepared by the AO himself of statement recorded wherein the AO himself stated the names of the borrowers and lenders, the amounts, duration, rate of interest and have also referred to number of specific seized papers without mentioning the source either in the disclosure petition or in the assessment order much less in the remand report too. In fact, the said disclosure was bereft of any corroborative material and was not coming out of any seized papers.
The New Delhi Income Tax Appellate Tribunal (ITAT) ruled that the excise duty subsidy and interest subsidy received with the objective of creating avenues for perpetual employment, and to eradicate the social problem of unemployment by accelerating industrial development, are capital receipts.
On the transfer pricing front, the Appellate Tribunal also clarified that where the manufacturing unit of the appellant (taxpayer) was located in a backward area of Himachal Pradesh, and the main incentives granted to the appellant were waiver of excise duty and the CST, then the operating profit margin shall be computed without considering the excise duty, sales tax and income tax.
The Division Bench comprising Vimal Kumar (Judicial Member) and M. Balaganesh (Accountant Member) observed that the excise duty exemption as a capital receipt while computing total income of normal provisions of the Act has been claimed by availing excise duty exemption during the year after the 10th year.
The Authority for Advance Ruling (AAR), Gujarat, has ruled that no GST is leviable on the amount representing the employee’s portion of canteen charges, which is collected by the employer and paid to the Canteen Service Provider. The AAR clarified that to levy tax on any activity, the activity is required to qualify as a ‘Supply’ in the first place, and hence, the recovery of the amount from the employees and workers cannot be subjected to GST, as the same cannot be considered as a “supply” as per Section 7 of the CGST Act.
The AAR explained that the applicant is merely providing demarcated space for the canteen facility as mandated under the provisions of the Factories Act to its employees and its workers. The supply is from the canteen Service provider to the employees and workers, and not from the Canteen Service provider to the applicant, as the food gets consumed only by the employees and workers.
Though the supplier is the canteen service provider and the invoice is raised on the applicant, the ultimate recipient of such canteen facility is the employee and workers, the AAR highlighted.
Referring to the Board’s Circular No. 172/04/2022-GST dated July 06, 2022, however, the Division Bench comprising Vishal Malani (Member CGST) and Sushma Vora (Member SGST) observed that GST is payable on the amount recovered as a deduction from the payment to workers’ contractors and not on the open market value. Hence, the GST is leviable on the amount representing the contractual worker portion of canteen charges, which is collected for payment to the Canteen Service provider, added the Bench.