2018-TII-INSTANT-ALL-554
04 April 2018   
CASE LAWS

2018-TII-24-HC-DEL-TP

PR CIT Vs H & S SOFTWARE DEVELOPMENT AND KNOWLEDGE MANAGEMENT CENTRE PVT LTD: DELHI HIGH COURT (Dated: January 3, 2018)

Income tax - ALP - international transaction - ITES segment - functional filter - exclusion of comparables

The Revenue Department preferred present appeal challenging the decision, whereby the ITAT had further narrowed down the downward revision of profit margin made by the FAA in assessee's international transaction and ALP adjustment made by the TPO, and ruled out the five comparables used for the ALP determination.

On appeal, the HC held that,

Whether significant brand presence for profits and larger corporate size, makes an entity uncomparable to a pure ITES service provider - YES: HC

Whether company rendering IT enabled services can be compared to a KPO, for purposes of benchmarking - NO: HC

Whether companies which fails the test of appropriate filter, can be selected as comparables for benchmarking purposes - NO: HC

+ this Court is of the opinion that the exclusion of five comparables in the present case by the ITAT is on sound basis. The ITAT quite correctly found that the exclusion of Eclerx Services Ltd and Vishal Information Technologies Ltd., both of which transact entirely different business i.e. KPO, was justified. The assessee concerns itself with the broader range of IT enabled Back Office Support Services. In the other two cases of M/s Infosys BPO and Wipro BPO Ltd., the ITAT again quite correctly held that the corporate entities had a significant brand presence for profits and large corporate size, which could not be compared to the assessee’s transactions. As far as HCL Commet Systems & Services Ltd. was concerned, the Revenue’s contention that it was an apt comparable, was rejected on the ground that it did not pass the appropriate filter and related party transactions were used for the pricing exercise. In these circumstances, out of the seven comparables, the five are to be ruled out and no question of law arises in this case;

+ as far as Accentia Technology Pvt. Ltd. and Bodhtree Consulting Ltd. is concerned, this Court admits the matter for further hearing regarding their selection criteria and comparability.

Case deferred

2018-TII-23-HC-DEL-INTL

GE INDIA INDUSTRIAL PVT LTD Vs PR CIT: DELHI HIGH COURT (Dated: April 3, 2018)

Income tax - Sections 9(1)(vi) & 40(a)(i)

Keywords - licence fees - royalty - use of copyright

The Assessee company is engaged in power distribution and protection systems, in addition to manufacturing of water treatment plants and equipment for industrial use. During the relevant year, various kinds of software were licenced by arrangements between the Assessee and its AE, General Electronic Company, US, and the licence fee so paid, was held to be "royalty" by the tax authorities and affirmed by the Bangalore Bench of the ITAT. Subsequently, the Pr CIT transferred the assessments and all pending proceedings to Delhi. Therefore, relying on the ratio of Bangalore Bench decision in Commissioner Income Tax v. Samsung Electronics Ltd - 2011-TII-43-HC-KAR-INTL, the assessee contended that the jurisdiction having changed, the views of the ITAT was not in consonance with the view of this Court.

On appeal, the HC held that,

Whether licence fee paid to overseas AE for mere use of copyright, will not tantamount to royalty - YES: HC

+ it is seen that the Karnataka High Court in the case of Commissioner Income Tax v. Samsung Electronics Ltd - 2011-TII-43-HC-KAR-INTL has held that the licence fee was not "royalty", because the copyright in the software was not transferred, but was merely allowed to be used, and it being a part of operative standard. That reasoning squarely applies in the facts of this case; therefore, it is held that the licence fee paid by the assessee to its AE, is not "royalty" u/s 9 of the 1961 Act, nor does it fall within the meaning of this term under Article 12 of the DTAAs in question;

+ an identical situation pertaining to the issue of royalty was decided by this Court in GE India Industrial Pvt. Ltd. v. Principal Commissioner of Income Tax, Delhi-IV [ITA 61-62/2018] between the same parties. The reasoning squarely applies to the facts of the case. Therefore, the license fee paid by the assessee to the AE is not “royalty” under the provisions of the DTAAs in question.

Assessee's appeal allowed

2018-TII-22-HC-DEL-INTL

GE INDIA INDUSTRIAL PVT LTD Vs PR CIT: DELHI HIGH COURT (Dated: February 12, 2018)

Income tax - Sections 9(1)(vi), 40(a)(i) & 206AA

Keywords - licence fees - overriding effect of DTAA - royalty - rate of taxation - use of copyright

The Assessee company is engaged in power distribution and protection systems, in addition to manufacturing of water treatment plants and equipment for industrial use. During the relevant year, various kinds of software were licenced by arrangements between the Assessee and its AE, General Electronic Company, US, and the licence fee so paid, was held to be "royalty" by the tax authorities and affirmed by the Bangalore Bench of the ITAT. Subsequently, the Pr CIT transferred the assessments and all pending proceedings to Delhi. Therefore, relying on the ratio of Bangalore Bench decision in Commissioner Income Tax v. Samsung Electronics Ltd - 2011-TII-43-HC-KAR-INTL, the assessee contended that the jurisdiction having changed, the views of the ITAT was not in consonance with the view of this Court.

On appeal, the HC held that,

Whether licence fee paid to overseas AE for mere use of copyright, will not tantamount to royalty - YES: HC

+ it is seen that the Karnataka High Court in the case of Commissioner Income Tax v. Samsung Electronics Ltd - 2011-TII-43-HC-KAR-INTL has held that the licence fee was not "royalty", because the copyright in the software was not transferred, but was merely allowed to be used, and it being a part of operative standard. That reasoning squarely applies in the facts of this case; therefore, it is held that the licence fee paid by the assessee to its AE, is not "royalty" u/s 9 of the 1961 Act, nor does it fall within the meaning of this term under Article 12 of the DTAAs in question. Also, an identical situation pertaining to the issue of royalty was decided by this Court in GE India Industrial Pvt. Ltd. v. Principal Commissioner of Income Tax, Delhi-IV [ITA 61-62/2018] between the same parties. The reasoning squarely applies to the facts of the case. Therefore, the license fee paid by the assessee to the AE is not “royalty” under the provisions of the DTAAs in question;

Whether provision of Section 206AA can override the provisions of the applicable DTAA so as to get the maximum rate of taxation - NO: HC

+ the other question of law urged is with respect to the applicability of Section 206AA of Income Tax Act. The ITAT held that the rate of tax mandated by that provision applies. However, recently, in Danisco India Pvt. Ltd. Vs. Union of India - 2018-TII-09-HC-DEL-INTL, this Court has held that the said provision cannot apply or override the provisions of the applicable DTAA so as to get the maximum rate of taxation, agreed to by the parties i.e. the concerned foreign State and the Indian Government.

Assessee's appeal allowed

2018-TII-01-HC-MUM-FEMA

ESAB INDIA LTD Vs UoI: BOMBAY HIGH COURT ( Dated: March 21, 2018)

FEMA - Sections 16(3) & 49(3) - FERA - Sections 8(3), 50 & 53

Keywords - acquisition of foreign exchange - bills of entry - evidences of import - jurisdiction to adjudicate - levy of penalty - submission of exchange control copy

The Petitioner during the course of its business, imported goods in India and in consideration thereof, they were supposed to have remitted foreign exchange. However, they were served with notices alleging their failure to submit respective bills of entry/postal/courier wrapper evidencing import of goods into India, for which, the foreign exchange remittances were effected and in addition to their failure to submit requisite documentary evidence in respect of the import to their authorised dealer. This non-submission of documentary evidence of import of goods into India being contrary to the terms of the Exchange Control Manual, 1993, land the petitioner in trouble and it was issued show cause as to why the adjudication proceedings as contemplated u/s 51 of the FERA r/w/s 49(3) of FEMA should not be held against it for the said contravention. Thereafter, there was an order passed by the authority which noted that the petitioner was one such importer who had acquired foreign exchange equivalent to Rs.28,47,215/-, Rs.62,16,661/-, Rs.33,38,300/- and Rs.28,33,948/- and had failed to submit the exchange control copy of bills of entry of the relevant imports to their authorised dealer evidencing the imports of goods as required in the Exchange Control Manual. However, no response was made in respect of the show cause notices issued. Therefore, a call notice was issued to the petitioner under Rule 3 of the Adjudication Proceedings and Appeal Rules, 1974, requiring them to appear for personal hearing, but the petitioner even failed to respond to the call notice. Subsequent to the same, summons u/s 53 of the FERA r/w/s 49(4) of the FEMA was also sent to the Branch Manager, Standard Chartered Bank, Fort Mumbai to ascertain the actual position of the case. In response to summons, the Standard Chartered Bank intimated that the petitioner importer had submitted evidence of import in respect of remittance of Rs.33,38,300/- and had not submitted the same in case of four remaining remittances. That was how the another call notice was served on the petitioner requiring them to appear for personal hearing. In response, the Petitioner's advocate submitted that the petitioner were not able to locate the documents pertaining to the subject matter of the show cause notice and therefore requested for adjournment of hearing. After some time, the petitioner stated that their previous registered office situated at Poonam Chambers collapsed in September, 1997, due to which, some of their vital records/documents had been misplaced and not traceable and therefore pleaded for one month time to enable them to obtain required information, which was however denied. This resulted in levy of penalty in respect of the remittances for which no evidence of import was submitted.

On appeal, the Appellate Tribunal for Foreign Exchange set aside the show cause notice and remitted the matter back to the adjudicating authority who once again, inquired with the petitioner's representative whether it desires to submit anything in support of their case on merits. The reply was, until and unless the question of jurisdiction was decided, to hold the inquiry or the question of conducting inquiry did not arise. Hence, the authority was duty bound to decide either way as to its own competence to conduct the inquiry. Accordingly, the impugned order was passed on a de-novo adjudication of the show cause notice, wherein the adjudicating authority noted that despite four opportunities for personal hearing were given, the petitioner remained negligent and careless towards these adjudication proceedings. The adjudicating authority proceeded on the footing that the jurisdiction was derived by it from a notification, based on which circular/order dated Sep 14, 2012 was issued by the Directorate of Enforcement. That was how the Deputy Director was empowered to adjudicate cases involving amount of value in excess of fifty lakhs, but not exceeding Rs. one crore. Accordingly, the show cause notices were taken up for adjudication and in the process, personal hearing opportunity was given to the petitioner. Finally, a penalty was imposed in terms of the powers conferred u/s 50 of FERA, 1973 r/w/s 49(3) and (4) of FEMA, 1999.

On Writ, the HC held that,

Whether competency of Directorate of Enforcement to adjudicate forex related matters under FEMA, need not be judged, when importer himself was negligent in responding to its numerous show cause notices - YES: HC

+ this Court is not obliged to go into the question of jurisdiction or competence of the authority. The petitioner may say it is purely a legal issue but on the own showing of the petitioner and the arguments on the point of jurisdiction, it is evident that it is a mixed one. If it is a mixed one, it ought to have been raised at the earliest possible opportunity. There was enough opportunity for the petitioner to raise it and seek a ruling on it. It was not raised during the first round of adjudication. On the other hand, when in the first round of adjudication the petitioner appeared, it indeed relied upon a proof of import. It also relied upon a contemporaneous record of the Standard Chartered Bank. That is how one of the demand or issue came to be answered in their favour and by dropping the show cause notice. Thus, partial relief was derived by arguing the case on merits. This is a voluntary submission of the petitioner to the authority, competence and jurisdictiion of the forum adjudicating the show cause notice. Equally, aggrieved by the partial loss and the order to that effect, when the matter was carried to the tribunal, even before the tribunal, the petitioner had an opportunity to raise all the arguments as are raised before this Court. It is expressly on the tribunal's findings and success that the petitioner's counsel/advocate desired an opportunity to produce the necessary documents or proof of import. That is how they desired to establish a nexus or co-relation with the import and the remittances abroad. Thus, this was an opportunity sought to make good their case on merits;

+ pertinently, despite many orders and decades from the import, the counsel for respondents in all fairness stated that even now if the petitioner is ready and willing to bring the necessary materials and prove the genuineness of the import transactions, the adjudicating body or authority will grant that opportunity and in this peculiar facts, but not treating this exercise as a precedent for future cases. When this suggestion was put to Petitioner's counsel, he says that the imports are as old as 1996, there are no chances of the records being available after more than two decades, the building in which the petitioner was having its office earlier being pulled down or has collapsed. All the more, therefore, there is nothing with the petitioner to substantiate and prove their case on merits. It is in these circumstances, this Court is of the opinion that though a writ of certiorari can be issued by this court despite the presence of alternate and equally efficacious remedy, that is not a prohibition or rule, but a matter of prudence, still, whether to issue such a writ or not depends upon the facts and circumstances of each case. No general rule can be laid down. Eventually, this court's jurisdiction under Article 226 of the Constitution of India is extraordinary, discretionary and equitable. One who invokes this jurisdiction must approach this court with clean hands. Once it is noted that the petitioner never disputed the power of the authority to issue the show cause notice, the competence to adjudicate it and pass a final order thereon and that the notice refers to both enactments, namely, FERA and FEMA, all the more this Court is not inclined to grant any relief in writ jurisdiction. Once it is noted that the legal and factual issues or the point of jurisdiction or competence of the authorities were never raised during the earlier round and even the subsequent round of adjudication and the petitioner is aware of the presence of an alternate and equally efficacious remedy of appeal against the impugned order to the appellate tribunal, this Court refuses to entertain this writ petition.

In favour of Respondent

 

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