ADMINISTRATIVE ORDER

F.No.500/06/2017-FTD-I

CBDT invites applications for Director / DS in FT & TR division

CASE LAWS

2017-TII-02-HC-MAD-FEMA

CHERUVATHUR CHAKKUTY THAMPI Vs UoI: MADRAS HIGH COURT (Dated: January 24, 2017)

Income Tax - Section 131 - FEMA 1999 - Section 37 - Passport Act - Section 10 & Code of civil procedure - Section 102(1)

Keywords: Look out Circular - Habeas Corpus Petition - detention of passport - principles of natural justice & investigating agency

The petitioner, an NRI, is a promoter of various businesses in UAE. He had been investing money in India by purchasing agricultural lands. Revenue initiated investigation against him for having purchased agricultural lands in India in violation of FEMA. For this, a summon was issued to petitioner requiring him to appear for an enquiry. Petitioner also received series of summons from the respondents for his appearance in connection with the investigation both at Cochin and Delhi. Challenging the initiation of investigation against him, petitioner had filed writ petition before the Kerala HC and obtained interim stay. Ultimately, Kerala HC dismissed the writ petition filed by the petitioner. Thereafter, summon was issued to petitioner calling upon him to appear for an inquiry. According to petitioner, before he could appear on the relevant date, he landed at Chennai Airport on a private visit and on that date he was wrongfully detained in custody for one day on the basis of the alleged LOC, which according to petitioner, was issued without any prior notice to him. In such circumstances, petitioner filed Habeas Corpus Petition before HC and on the basis of an order passed by HC in the above said case, he was released from detention. On the same date, petitioner's passport was ordered to be impounded under the provisions of FEMA read with Income Tax Act. Later, a corrigendum was issued by the second respondent clarifying that the passport of the petitioner was impounded for 90 days. In the meantime, petitioner was directed to appear for inquiry which was postponed on being informed about the demise of petitioner's sister. On the next hearing date, HC permitted petitioner to appear before the concerned authority at New Delhi for an enquiry along with his lawyer. It was then brought to the notice of HC that on that day, the enquiry was adjourned. On both the dates of enquiry, petitioner appeared before the respondents.

On appeal, the High Court held that,

Whether fundamental right guaranteed to a petitioner under Article 21 of the Constitution of India can be curtailed merely by an investigating agency - NO: HC

Whether in case there is no notice issued to petitioner before issuing a Look Out Circular, it is to be considered that the same has been issued in violation of principles of natural justice - YES: HC

+ in so far as impounding of passport is concerned, SC in the case of Suresh Nanda vs. CBI, has held that police may not have power u/d 102 (1) of Code of Civil Procedure to seize a passport or to impound the same. It was further held that impounding of a passport can only be done by the Passport Authority u/s 10 (3) of the Passports Act, 1967. SC has also laid down a distinction and difference between seizing a document and impounding a passport by holding that a seizure is made at a particular moment when a person or authority takes into his possession some property which was earlier not in his possession. However, if after seizing of a property or document the said property or document is retained for some period of time, then such retention amounts to impounding of the property or document. In that case, SC held that the detention of passport by the CBI is held to be illegal and impounding and revoking the passport u/s 10 of the Passport Act is illegal. It was further held that as per Section 104 of Cr.P.C., a 'document' does not include a passport. In the present case, it is not the case of the respondents that they have taken necessary steps u/s 10 of the Passports Act to impound the passport Act and therefore, the mere detention of the passport of the petitioner at the airport without following the provisions contained under Section 10 of the Passport Act and issuing the look out circular without issuing prior notice are not legally sustainable;

Whether when necessary steps u/s 10 of the Passports Act have not been followed, mere detention of petitioner's passport at the airport is legally sustainable - NO: HC

+ after dismissal of writ petitions filed by petitioner before the Kerala HC, the respondents themselves wanted the petitioner to appear for inquiry only at Delhi on the ground that cumulatively, investigation can be done in Delhi. At any rate, it is contended that petitioner is cooperating with the enquiry. It is to be noted that the petitioner's passport, which has been impugned by the second respondent, is in the custody of authorities concerned for the past 30 days. In the meantime, petitioner has appeared before the authorities for inquiry on 15.01.2017 and 23.01.2017 and extended his cooperation for conducting the enquiry. Therefore, as per the decision rendered by the SC as well as the Division Bench judgment of the Bombay High Court, impounding of petitioner's passport is not warranted. In this case, in the impugned notices, there is no reason has been mentioned for calling the petitioner an absconder. It is also to be noted that the impugned look out circular has been issued without any prior notice to the petitioner and without giving him a reasonable opportunity. It is also not the case of the respondents that they have taken necessary action as contemplated under Section 10 of the Passport Act, without doing so, the impugned orders are legally not sustainable. In the light of the above and as per the judgment of SC, this Court direct the respondents to return the passport to the petitioner forthwith after cancelling the Look Out Circular with stringent conditions. It is made clear that since the next inquiry is on 03.02.2017 the petitioner has to necessarily appear before the respondents without fail. In the result, the writ petitions are allowed and the orders, impounding the passport of the petitioners are quashed. No costs. Consequently, connected Miscellaneous Petitions are closed. The respondents are directed to forthwith handover the passport to the petitioner after withdrawing the look out circular notices issued against him subject to the conditions mentioned above.

Assessee's writ allowed

2017-TII-13-HC-MUM-TP

CIT Vs MERCK LTD: BOMBAY HIGH COURT (Dated: February 22, 2017)

Income tax - Section 92, Rule 10(B)(1) - entity level benchmarking.

The assessee, incorporated in India, is part of Merck Group of Germany, and engaged in the business of manufacture and sale of distribution of pharmaceuticals formulations, bulk drugs, and chemicals. Based on TP Report, the AO made additions but the same were deleted by the Tribunal.

On appeal, the counsel for the Revenue informed the court that the same issue pertaining to AY 2003-04 was decided by the Coordinate Bench of the Court agaisnt the Revenue.

Held that,

+ the issue does not give rise to any substantial question of law.

Revenue's appeal dismissed

2017-TII-37-ITAT-MUM-INTL

DCIT Vs AP MOLLER MAERSK: MUMBAI ITAT (Dated: February 15, 2017)

Income Tax - Sections 9(1)(vi) & (vii), 44B, 144C, - India-Denmark DTAA - Article 9 & 13

Keywords: procurement cost - operation of ships - royalty - Inland Haulage Charges - recoupment of costs & telecommunication business

The assessee is a company engaged in the business of conducting operation of ships in international traffic and not engaged in the business of providing communication services, and therefore, per se no separate royalty/FTS were rendered by the assessee.During the year assessee incurred certain expense towards operation, maintenance and upgradation of SAP based ERP solution (FACT), FACT has been procured by the assessee for efficient management of operations of its shipping business. This was done in order to streamline operations with its group companies around the world, and FACT is provided by the assessee to its agents across the globe including India. To streamline operations of its group companies having Container Inland Services (CIS) operations around the world, APMM requires them to install and use FACT system software. The Fact system software was used by CIS Division of Maersk India Pvt. Ltd. (MIPL.), an Indian agent of the assessee.

Having heard the matter, the Tribunal held that,

Whether in case utilisation of software merely allocates cost incurred, it is in the nature of reimbursement of expenses not having any element of profit embedded in it, any recoupment of such cost does constitute income chargeable to tax in assessee's hands - NO: ITAT

+ tribunal relying on the decision of Bombay HC is of the view that such cost is an integrated part of the Shipping business. Usage of such software by the CIS division, which handles tracking of the containers, accounting and in bills of freight receipts, warehouse functionality, etc. which in turn, helps the assessee in conducting its shipping business in more effective and efficient manner globally. This software in fact is a tool and integrated part of shipping operations only, usage of software cannot be segregated from such activities of overall shipping operations so as to hold it as rendering of any independent technical services. These activities are intrinsically linked to its business operation of ships in international traffic and therefore are a part of the business activity of the assessee. Which is operation of ships in international traffic. The FACT cost represent merely allocation of cost incurred and hence in the nature of reimbursement of expenses not having any element of profit embedded in it. Such recovery only includes proportionate cost incurred by the assessee for the development and maintenance of the system. Therefore, such recoupment of cost does not constitute income chargeable to tax in the hands of the assessee. We are conscious of the fact that FACT cost represents mere 0.07% of the total freight income of the assessee during the year. Further, the DRP held the facilities/systems is a software and the payments to be royalty under the retrospectively amendment of the Act. Accordingly, we are of the view that The FACT cost represent merely allocation of cost incurred and hence in the nature of reimbursement of expenses not having any element of profit embedded in it. Such recovery only includes proportionate cost incurred by the assessee for the development and maintenance of the system. Therefore, such recoupment of cost does not constitute income chargeable to tax in the hands of the assessee. It is undisputed that the assessee is in business of conducting operation of ships in international traffic and not engaged in the business of providing communication services, and therefore, per se no separate royalty/FTS were rendered by the assessee. Hence, we allow this issue of assessee’s appeal. Since facts in this regard are identical we do not find any infirmity in the direction of DRP in this regard. Accordingly, we uphold the same. Hence, the ground raised by the revenue on this issue stands dismissed;

Whether inland transport of cargo within India is covered under article 8(2)(b)(ii) and (c) of DTAA and, therefore, not liable to tax as per the provisions of the Act - YES: ITAT

+ further more we note that jurisdictional HC in assessee's own case in income tax appeal number 1306 and others 2015-TII-33-HC-MUM-INTL has considered the same issue elaborately and observed that the Tribunal had also decided in assessee's own case for the previous AY in favour of assessee and, therefore, upheld the order of Commissioner. HC vide an order dated 17" July, 2014 held that the inland transport of cargo within India was covered under article 8(2)(b)(ii) and (c) of DTAA between India and Belgium and, therefore, not liable to tax in India. The principles involved in the said decision also govern the present case. The Maersk Net used by the agents of the assessee entailed certain costs reimbursement to the assessee. It was part of the shipping business and could not be captured under any other provisions of the Income Tax Act except under DTAA. In the case of CIT V/s. Siemens Aktiongeselleschaft 2008-TII-21-HC-MUM-INTL, HC has held that once there is a treaty between two sovereign nations, though it is open to a sovereign Legislature to amend its laws, a DTAA entered into by the Government, in exercise of the powers conferred by section 90(1) must be honoured. The provisions of Section 9 were applicable and the provisions of DTAA, if more beneficial than the IT Act, the provisions of DTAA would prevail. Thus, in the instant case also, it is not possible for the revenue to unilaterally decide contrary to the Provisions of the DTAA. Agreements inter parties had been performed and the payments were made by the agents to use Maersk Net for the Maersk group’s global shipping business and for no other reason. It related to shipment of cargo and their movement across the oceans. The views of the revenue that it amounted to technical service is misconceived. There is no profit element in the pro rata costs paid by the agents of the assessee to the assessee and accordingly, we have no hesitation in holding that the amounts paid by the agents to utilize the amount arose out of the shipping business cannot be brought to tax as sought to be done. Thus from the above it is apparent that the issue involved is squarely covered in favour of the assessee. Accordingly, we uphold the direction of DRP in this regard also. In the result this appeal filed by the revenue stands dismissed.

Revenue's appeal dismissed