2016-TII-66-HC-MUM-INTL

CIT Vs UMICORE FINANCE LUXEMBORG : BOMBAY HIGH COURT (Dated: November 25, 2016)

Income Tax Act - Sections 2(47), 45(1), 47(xiii), 47A, 48, 245N(a)(i)(ii) or (iii)

Keywords - sale of shares - capital gain - conversion of firm - partnership firm

The assessee, a non-resident company incorporated under the laws of Luxembourg and it is the holding of its wholly owned subsidiary M/s. Anandeya Zinc Oxides Pvt. Ltd. (Anandeya), an Indian Company. The assessee entered into a share purchase Agreement with Anandeya Zinc Oxides Private Limited for the purchase of 100% equity shares which was completed in 2008. Anandeya was incorporated as Private Limited Company in 2005 succeeding erstwhile firm M/s. Anandeya Zinc Oxides and such conversion was affected on 13.09.2005 under part IX of the Indian Companies Act 1956. The assets of the partnership was revalued and the excess of the revaluation of assets was credited to the respected partners account. The firm, however, continued to claim, the depreciation value of the asset prior to the revaluation for the purpose of computation of income under the Income Tax Act. The department (petitioner) contended that the company acquired the shareholding of Ms/. Anandeya and, therefore, has violated the provisions of Section 47(xiii)(d) read with Section 474A(3) of the Income Tax Act. Hence, the exemption from capital gains enjoyed by the assessee firm upon conversion into limited company ceased to be in force. It was also the contention of the department that the assessee acquired shares of M/s. Anandeya and was not connected in any way to the transaction which had taken place on 13.09.2005. Therefore, it is the case of the Petitioners that the transaction on 13.09.2005 was not within the purview of Section 245N(a)(i)(ii) or (iii) and the Order of the AAR is without jurisdiction.

Having heard the parties, the High Court held that,

Whether there arises any incidence of capital gains tax when the shares allotted to the partners of the existing firm consequent upon the registration of the firm as a company, did no give rise to any profit or gains - NO: HC

Whether there is sale/extinguishment of any rights and transfer of asset as envisaged in Section 45(1) of the Income Tax Act, when a firm is converted into a company - NO: HC

Whether under part IX of the Companies Act, the company is not liable to pay capital gains tax, even when there is violation of clause (d) of the proviso of Section 47(xiii) of the Income Tax Act by premature transfer of shares - NO: HC

+ the AAR has in a very reasoned Order, has taken a view that no capital gains accrued or attracted at the time of conversion of the partnership firm into a Private Limited Company. In part IX of the Companies Act, therefore, notwithstanding the non-compliance with clause (d) of the proviso of Section 47(xiii) of the Income Tax Act by premature transfer of shares, the said Company is not liable to pay capital gains tax. These findings have been arrived at essentially looking into the fact that there was revaluation of assets at the time of conversion of the firm M/s. Anandeya Zinc Oxides Private Limited. The said finding of fact has not been disputed by the Counsel appearing for the Petitioners and, as such, the finding of the AAR that there was no capital gains in the transaction in question cannot be faulted;

+ it is also to be noted that even immediately after such conversion in question from the partnership firm into a Private Limited Company, the assessment with regard to the income of the new Company as well as of the respective partners were filed and there was no objection or grievances raised by the Assessing Officer that any capital gains had to be paid on account of the incorporation of the Company in terms of the said provisions. The transfer of shares in favour of the Respondent by the erstwhile partners who were shareholders of M/s. Anandeya Zinc Oxides Private Limited and such partners/share holders are liable to pay capital gains even if acceptable, would not affect the decision passed by the AAR whilst coming to the conclusion that there were no capital gains at the time of incorporation of the new Company by the said partnership firm;

+ the contention of the Petitioner that in view of the violation of clause (d) of Section 47(xiii), the exemption from capital gains enjoyed by the Assessing firm upon conversion into a Private Limited Company, ceases to be in force cannot be accepted;

Whether the question capital gains are liable to be paid or not in terms by the transferee company being a non resident Company, is a question which comes within the scope of advanced ruling - YES: HC

+ the main submission on that aspect is that the Respondents not being parties to the transaction, the question of seeking an advance ruling at the instance of the Respondents is not covered under clause (i) (ii) and (iii) of Section 245(N)(a) of the said Act;

+ considering the said aspect and as looking into the question as reformulated, the question as to whether capital gains are liable to be paid or not in terms by the transferee Company being a non resident Company, the Respondent herein, would be a matter which would come within the scope of advanced ruling in terms of the said depreciation.

Revenue's Writ petition dismissed

2016-TII-65-HC-MUM-INTL

DIT Vs CREDIT AGRICOLE INDOSUEZ : BOMBAY HIGH COURT (Dated: December 5, 2016)

Income tax - Sections 9(1)(vi), 14A, 40(a)(i) & 44C

Keywords - data processing charges - interest income - overseas expenses & royalty

A) The assessee for the purposes of conducting its operation, receives Information Technology support from its Asia Data Processing Centre (ADPC) at its Regional HO. This infrastructure facility to carry out the necessary exercise to provide necessary information technology support to the assessee by way of data processing. The expenses incurred by the Regional HO in running of the ADPC is allocated between different branches depending upon their respective users. During assessment, the amount so apportioned as payable by the assessee to the Regional HO was claimed as deduction. Both the AO as well as the CIT(A) disallowed the same holding that the amount paid to the Regional HO was in the nature of royalty for the use of asset specified in Explanation 2 to Section 9(1)(vi). On appeal, the ITAT held that the amount paid for data processing services, cannot be considered to be payment of royalty being consideration for the use of asset.

B) The Revenue had preferred the appeal challenging the order, whereby the ITAT held that the interest received by the Indian PE of the foreign bank from its HO and other overseas Branches, was not chargeable to tax computing the total income.

The Revenue had also challenged the action of ITAT in allowing deduction on account of interest paid by assessee disallowed by AO as per the provisions of Section 40(a)(i).

On appeal, the HC held that,

Whether a pending matter restored before the AO by the ITAT, can directly be agitated by the Revenue in HC - NO: HC

+ The ITAT has held that the data processing charges would fall within the ambit of HO expenses to be examined on the touchstone of Section 44C. It was in the aforesaid circumstances that the Tribunal restored the issue to the AO to consider the taxability or otherwise of the amount paid to the Regional HO by treating it as HO expenses in the context of Section 44C. It further holds that mere taking assistance from ADPC at its Regional HO, cannot be held to be payment of Royalty for the use of assets. The entire issue is now before the AO to determine whether or not the amount paid for the information technology facility to the Regional HO is at all taxable or not within the parameters of Section 44C even if it is treated as Head Office expenses. In the above view, the question as proposed does not give rise to any substantial question of law;

Whether once the Tribunal holds that interest income received from overseas branches is taxable, no occasion would arise to disallow expenditure u/s 14A - YES: HC

+ The ITAT holds that the interest income received from the Head Office and other overseas branches would be subjected to tax. In fact, the impugned order of the Tribunal upholds the view taken by the AO which is approved by the CIT(A). It is the assessee who had challenged the order of the CIT(A) to the extent it held that the interest received by the assessee from its Head Office and other overseas branches were liable to tax. However, before the Tribunal the assessee withdrew its grievance. In the above view, the Tribunal held that the amount of interest received from its Head Office and other overseas branches was taxable. In the above view, the Revenue's counsel was specifically asked as how is the Revenue is aggrieved by the Tribunal holding that interest received from Head Office and other overseas branches is taxable. In response, it was told that the Revenue is aggrieved because no disallowance u/s 14A has been done by the Tribunal on the interest income. This explanation for being aggrieved, we are unable to comprehend for the reason that once the Tribunal holds that interest income is taxable, no occasion would arise to disallow expenditure under Section 14A. This indicates the casual manner of filing appeals without any application of mind;

Whether when the interest income received from overseas branches are held to be taxable, then the interest paid by assessee to its overseas branches would also be deductible to bring to tax the net interest income - YES: HC

+ The assessee had challenged the order of the lower authorities bringing to tax the interest received by it from its Head Office and branch offices. However, at the hearing before the Tribunal, the assessee gave up this challenge. Consequently, the orders of the lower authorities bringing to tax the interest income received from its Head Office and other overseas branches were held to be taxable. It is in that context that the impugned order of the Tribunal held that the interest paid by the assessee to its Head Office / overseas branches would also be deductible to bring to tax the net interest income i.e. interest received less interest paid. In the above view, the question as proposed by the Revenue does not give rise to any substantial question of law.

Revenue's appeal dismissed

2016-TII-232-ITAT-MUM-INTL

TTI TEAM TELECOM INTERNATIONAL LTD Vs ADLL DIRECTOR OF INCOME TAX : MUMBAI ITAT (Dated: November 30, 2016)

Income tax - Section 9(1)(vi) - India & Israel DTAA - Article 12

Keywords - business income - dependant agent PE - FTS - royalty - reimbursement of expenses - software supply - source code - transfer of copyright & TDS credit

The assessee is a company incorporated in Israel and engaged in the business of supply of software. During assessment, the AO noted that the assessee had supplied software to Reliance Communications and in turn had received consideration. The AO therefore made analysis of various clauses of the agreement between the assessee & M/s Reliance Communication Ltd. After taking note of a clause with regard to transfer of Source Code of the software by the assessee to Reliance Ltd. i.e. the buyer, and held that the amount received by the assessee from Reliance amounted to payment for royalty' under the provisions of I-T Act as well as Indo Israel DTAA. On appeal, the CIT(A) confirmed the action of AO in holding that the consideration for supply of software should be taxed @ 10% by treating it as payment of royalty' within the meaning of section 9(1)(vi) as well as Article 12 of DTAA between India & Israel.

On appeal, the Tribunal held that,

Whether a supplimentary agreement formed to widen the scope of software supplied by a non-resident to an Indian entity, would render the consideration in respect of such supply as 'royalty', when it was factually found by the ITAT during earlier A.Ys that no copyright was transferred by the non-resident along with the softwares - NO: ITAT

+ It is noted that the impugned amounts have been received in pursuance to an agreement between the assessee and Reliance. It is also noted that the subsequent agreement between the two had been analysed by the Tribunal twice in two separate orders i.e. for A.Y. 2003-04 and A.Y. 2006-07 and detailed orders were passed wherein it was observed, after analyzing various clauses of the agreement and position of law, that the impugned amount did not constitute royalty' in the hands of the assessee. Under these circumstances, we shall not repeat the exercise done by the coordinate bench in assessee's own case, nor shall we like to modify the conclusion drawn by the coordinate bench as far as analysis of the original agreement is concerned. A Perusal of the clauses under new agreement clearly reveals that the assessee would continue to remain owner of the intellectual property rights embedded in the software and Reliance would be able to use software only in machine readable form. Reliance was not permitted to reverse engineer, alter, software programme or tinker with proprietary legends of the said software. The software was permitted to be located and used only at the sites designated in the purchase order issued by Reliance. Further, such software was not permitted to be freely sold by Reliance except for strict usages for Wireless Reliance Network only, as permitted in the agreement;

+ The AO however noted that in the said agreement, there were certain clauses with regard to transfer of source code by the assessee to Reliance. In turn, the assessee contended that the lower authorities mislead themselves by making incomplete reading of the said clause with regard to source code. It was further submitted that in any case, aforesaid agreement has been discussed and analysed in detail by the Tribunal in the order passed for A.Y. 2003-04 and 2006-07 and thereafter only decision has been taken which should be followed by us. We agree with the argument of assessee that as far as this agreement is concerned, we are bound to respectfully follow the order of the Tribunal on this issue. With regard to supplementary amendment agreement, it is noted with the assistance of the parties that this agreement was entered into by the parties mainly for the purpose of widening the scope of Wireless Reliance Network for which software was provided by the assessee to Reliance. The original agreement permitted usages of software for the Wireless Reliance network for the mobiles phones using CDMA technology. But, subsequently mobile phones based on GSM technology were also included under the aforesaid amendment agreement. Thus, in brief, main objective of the aforesaid amendment agreement was to include mobile phones using new technology. Thus, vide this supplementary agreement, though scope of usages of the software for relatively wider range of products has been increased, but all other terms and conditions remained same. It is noted that firstly, the source code was intended to be provided by the assessee to Reliance only for the limited purpose of enabling it maintenance and support of software in accordance with its rights under the said agreement. Secondly, in any case, it has been informed that the aforesaid Escrow Agreement was never entered into and therefore, there was no question of providing any source code by the assessee to Reliance in this regard;

+ Therefore, respectfully follow the order of the Tribunal for A.Ys. 2003-04 & 2006-07, we hold that the payment received by the assessee on account of supply of software by the assessee to Reliance in pursuance to the subsequent agreements made between both the parties r/w supplementary agreement, is not in the nature of Royalty' within the meaning of Article 12 of DTAA between India and Israel and therefore not liable to tax as such, but assessable as business income of the assessee subject to other provisions of the Act and DTAA.

Assessee's appeal partly allowed