27 July 2020


Judgments

Income Tax Appellate Tribunal

DE Diamond Electric India Pvt. Ltd. vs. ACIT

MANU/ID/0574/2020

23.07.2020

Direct Taxation

An unregistered agreement cannot be a ground for invoking provisions of Section 40A(2)(b) of the IT Act in absence of requirement of law

The Assessee Company was engaged in business of manufacturing and trading of ignition coils for motor vehicle engines. For the year under consideration, the assessee filed return of income under normal provisions of the Income Tax Act, 1961 (IT Act) and book profit under Section 115JB of the IT Act. The case was selected for scrutiny assessment and statutory notices were issued and complied with. The scrutiny assessment was completed under Section 143(3) of the IT Act, after making certain additions/disallowances. One of the disallowance made is under Section 40A(2)(b) of the IT Act on account of the excessive royalty payment made to related party. On appeal by the assessee, the Learned CIT(A) upheld this addition. Aggrieved with the finding of the CIT(A), the Assessee is in appeal before the Income Tax Appellate Tribunal.

As regard to addition on merit is concerned, disallowance under Section 40A(2)(b) of the IT Act can be made by the Assessing Officer, if he is of the opinion that such expenditure is excessive or unreasonable having regard to: (i) the fair market value of the goods, services or facilities for which payment is made or; (ii) the legitimate needs of the business of profession of the assessee or; (iii) the benefit derived by or accruing to him therefrom. In above circumstances, the Assessing Officer shall disallow the excessive or reasonable expenditure.

One of the ground taken by the AO for invoking Section 40A(2)(b) of the IT Act is the agreement between the parties has not been registered. An unregistered agreement cannot be a ground for invoking provisions of Section 40A(2)(b) of the IT Act in absence of requirement of law. For invoking the provision of section 40A(2)(b) of the Act, the Assessing Officer has to form an opinion of expenses more than the fair market value or not according to the legitimate needs of the business or no benefit derived.

In the instant case, the Assessing Officer has only compared royalty expenses of the preceding assessment year and no efforts have been made for identifying the fair market value of such expenses during relevant period, which is one of the requirement for invoking the provisions of Section 40A(2)(b) of the IT Act. Under transfer pricing provisions, the arm’s-length price is compared with similar transactions. Though the provisions of Section 40A(2)(b) of the IT Act are general provision as compared to the specific provisions of the transfer pricing, the Assessing Officer was required to compare the royalty expenses paid in case of the similar product by other companies during the relevant period. The Assessing Officer has not done any such exercise and only made basis of expenses paid in earlier years.

The Learned Counsel of the Assessee submitted that, in assessment year 2013-14 the transaction of the royalty expenses were subjected to transfer pricing provisions. He submitted that in assessment year 2013-14 average royalty payment was 2.99% of the sales, which stands accepted by the Department and therefore, no disallowance should be made in the year under consideration, where the royalty expenses are only 2.77% of the sales. This contention of the learned Counsel is rejected as the fair market value of the expenses have to be identified for the relevant year and percentile of the earlier year cannot be made basis for comparison. The disallowance made out of royalty expenses is deleted. The appeal of the Assessee is allowed.

Tags : Additions Provision Applicability

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Supreme Court

Director of Income Tax-ii (International Taxation) New Delhi & Anr. Vs. M/s Samsung Heavy Industries Co. Ltd.

MANU/SC/0534/2020

22.07.2020

Direct Taxation

Profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment

Present appeal by the Department revisits the question as to the taxability of income attributable to a “permanent establishment” set up in a fixed place in India, arising from the ‘Agreement for avoidance of double taxation of income and the prevention of fiscal evasion’ with the Republic of Korea (“DTAA”). The Oil and Natural Gas Company ("ONGC") awarded a "turnkey" contract to a consortium comprising of the Respondent/Assessee, i.e. Samsung Heavy Industries Co. Ltd. (a Company incorporated in South Korea), and Larsen & Toubro Limited, being a contract for carrying out the "Work", of surveys, design, engineering, procurement, fabrication, installation and modification at existing facilities, and start-up and commissioning of entire facilities covered under the 'Vasai East Development Project' ("Project").

The Assessee set up a Project Office in Mumbai, India, which, as per the Assessee, was to act as "a communication channel" between the Assessee and ONGC in respect of the Project. With regard to Assessment Year 2007-2008, the Assessee filed a Return of Income showing nil profit.

A show-cause notice was issued to the Assessee by the Income Tax authorities requiring it to show cause as to why the Return of Income had been filed only at nil, which was replied to in detail by the Assessee. Being dissatisfied with the reply, a draft Assessment Order was then passed by the Assistant Director of Income Tax International Transactions at Dehradun ("Assessing Officer"). This Draft Order went into the terms of the agreement in great detail, and concluded that the Project in question is a single indivisible "turnkey" project, whereby ONGC was to take over a project that is completed only in India. Resultantly, profits arising from the successful commissioning of the Project would also arise only in India. The Draft Order then went on to attribute 25% of the revenues allegedly earned outside India as being the income of the Assessee exigible to tax.

The High Court held that, the question as to whether the Project Office opened at Mumbai cannot be said to be a "permanent establishment" within the meaning of Article 5 of the DTAA would be of no consequence. The High Court then held that, there was no finding that 25% of the gross revenue of the Assessee outside India was attributable to the business carried out by the Project Office of the Assessee. According to the High Court, neither the Assessing Officer nor the ITAT made any effort to bring on record any evidence to justify this figure. The High Court set aside the judgment and order under appeal as well as the assessment order insofar as the same relates to imposition of tax liability on the 25% of the receipt upon the Appellant.

When it comes to “fixed place” permanent establishments under double taxation avoidance treaties, the condition precedent for applicability of Article 5(1) of the double taxation treaty and the ascertainment of a “permanent establishment” is that it should be an establishment “through which the business of an enterprise” is wholly or partly carried on. Further, the profits of the foreign enterprise are taxable only where the said enterprise carries on its core business through a permanent establishment. The maintenance of a fixed place of business which is of a preparatory or auxiliary character in the trade or business of the enterprise would not be considered to be a permanent establishment under Article 5. Also, it is only so much of the profits of the enterprise that may be taxed in the other State as is attributable to that permanent establishment.

A reading of the Board Resolution would show that, the Project Office was established to co-ordinate and execute “delivery documents in connection with construction of offshore platform modification of existing facilities for ONGC”. Unfortunately, the ITAT relied upon only the first paragraph of the Board Resolution, and then jumped to the conclusion that, the Mumbai office was for coordination and execution of the project itself. The finding, therefore, that the Mumbai office was not a mere liaison office, but was involved in the core activity of execution of the project itself is therefore clearly perverse. Equally, when it was pointed out that, the accounts of the Mumbai office showed that no expenditure relating to the execution of the contract was incurred, the ITAT rejected the argument, stating that as accounts are in the hands of the Assessee, the mere mode of maintaining accounts alone cannot determine the character of permanent establishment. This is another perverse finding which is set aside. Equally the finding that, the onus is on the Assessee and not on the Tax Authorities to first show that the project office at Mumbai is a permanent establishment is again in the teeth of judgment in Assistant Director of Income Tax v. E-Funds IT Solution Inc.

Though it was pointed out to the ITAT that there were only two persons working in the Mumbai office, neither of whom was qualified to perform any core activity of the Assessee, the ITAT chose to ignore the same. This being the case, it is clear, therefore, that no permanent establishment has been set up within the meaning of Article 5(1) of the DTAA, as the Mumbai Project Office cannot be said to be a fixed place of business through which the core business of the Assessee was wholly or partly carried on. Also, as correctly argued by Shri Ganesh, the Mumbai Project Office, on the facts of the present case, would fall within Article 5(4)(e) of the DTAA, as the office is solely an auxiliary office, meant to act as a liaison office between the Assessee and ONGC. The appeal against the impugned High Court judgment is therefore dismissed.

Tags : Project Office Taxability Income

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High Court of Delhi

Raj Kumar Singh vs Union of India & ors.

MANU/DE/1407/2020

21.07.2020

Service

Guidelines cannot be read as mandatory Rules to be adhered to in all circumstances or to take away all discretionary powers of transfer from the competent authorities

Present petition has been filed by the Petitioner, who is employed as a Sub-Inspector in CISF, presently at NLC, Barsingsar, Bikaner, for issuance of appropriate Writ, Rule, Order or Direction quashing/setting aside the transfer letter and Pass such other or further order as this Hon'ble Court may deem fit and proper in the facts and circumstances of the case in favour of the Petitioner and as against Respondents.

The posting order has been challenged on the ground that, it was vindictive as the Petitioner had filed Writ Petition in the High Court praying for a direction to the Respondents to pay Transportation Allowance (TPTA) which was pending and in which the Court had issued notice after which the respondents had started harassing and pressurizing the Petitioner to withdraw it. The transfer was clearly malafide and liable to be set aside.

No doubt, the ‘Guidelines for Posting/Transfer of CISF Personnel’ being Circular No.22 of 2017 dated 25th September, 2017, recommends the tenure of posting in a Unit/Station of three years. But these are only guidelines intended to “serve as broad parameters for posting the personnel” and the final decision to transfer them have been left even under this circular to the discretion of the competent authorities of the CISF. They would be best placed to determine operational and/or administrative necessities of the Force so that personnel can be optimally deployed. The ‘Guidelines’ cannot be read as ‘mandatory Rules’ to be adhered to in all circumstances or held to take away all discretionary powers of transfer from the competent authorities.

The Petitioner has no vested right to continue to remain at Barsingsar till he completes three years, having been posted there in 2018. In fact, the posting details of the Petitioner reflects this fact that it is not mandatory that the person has to remain at a station for three years before he is transferred out.

There is sufficient administrative reason for justifying the transfer of the Petitioner from NLC, Barsingsar to NTPC, Tapovan. Annexure R-5 to the counter-affidavit records multiple times that the petitioner was counselled by the Asst. Commandant for his misbehaviour and indiscipline at NLC, Barsingsar.

The Petitioner belongs to a disciplined Force and is expected to conduct himself in an appropriate manner at all times. The history of the petitioner reflects his belligerent and temperamental attitude towards others. The Petitioner has repeatedly faced adverse remarks and penalties on account of his indiscipline and bad behaviour. It is clear that the authorities in the Force are entitled to take such administrative action as are required to remove such negative influences and to enhance the discipline and the spirit of personnel in the camp. One person cannot be seen to be repeatedly getting away with conduct that is not conducive either to the discharge of duties or to the peaceful residential environment of the camp. Seen from this angle too, the transfer order seems justified.

The Petitioner has failed to establish mala fides or discrimination in his transfer from NLC, Barsingsar to NTPC, Tapovan. The petitioner has failed to establish any ground for quashing the transfer order. The petition lacks in merit and is accordingly dismissed.

Tags : Discretionary powers Transfer Legality

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High Court of Karnataka

Marenna @ Mareppa vs. The State

MANU/KA/2555/2020

21.07.2020

Criminal

SC/ST Act guarantees a right to a victim or dependents to participate in any proceedings

Criminal Petition is filed under Section 439 of Code of Criminal Procedure, 1973 (CrPC) praying to release the Petitioner on bail in case registered for the offences punishable under Sections 143, 147, 148, 323, 307, 504 and 506 read with Section 149 of Indian Penal Code, 1860 (IPC) and Sections 3(1)(r), 3(1)(s) of Scheduled Castes and the Scheduled Tribes (Prevention of Atrocities) Act, 1989 (SC/ST Act) pending on the file of District and Sessions Judge.

The learned counsel for the Petitioner had submitted that, the Petitioner had not picked up any weapon to assault the minor injured and as against him the overt act alleged is only that, he has kicked the injured and abused him in filthy language. Therefore, submitted that there is no element of sharing of common intention between the Petitioners and other accused and therefore prayed to release the Petitioner on bail. Petitioner prayed to release the Petitioner on bail.

It is the case of the prosecution that, the Petitioner has assaulted on the head of the minor boy with Axe for which the Petitioner and other accused have abetted to kill the injured person. Upon considering the FIS and other materials at this stage, which are made available before this court that there is a prima facie element of sharing common intention between them in furtherance of commission of offence alleged. At this stage, it cannot be accepted the submission made by the learned counsel that there was no pre-meditation and sharing of common intention between the petitioners and the other accused and in a sudden spur of moment the incident has occurred. Whether the Petitioner and other accused have shared common intention or not in furtherance of commission of offence alleged, it may be elicited during the full- fledged trial but not at this stage.

Further, the prosecution papers prima facie reveals that, the first informant and injured are belonging to Scheduled Caste and knowing fully well the caste of the first informant and injured had abused in filthy language by mentioning the name of their caste. The offences foisted are attracted prima facie as against the Petitioners herein. Therefore, considering the gravity of offence alleged as it reveals from the prosecution papers and if the Petitioners were successful in their attempt, then the death of the injured person would have been caused. Thus, in view of gravity of the offence alleged and also the severity of the punishment to be imposed, present Court is of the opinion not to release the Petitioners on bail for the reason that, if they are released on bail then there would be of chances of threatening the injured, his parents and also tampering the evidences and also chances of absconding and fleeing away from justice. Therefore, the Petitioners are not entitled for enlarging them on bail. Thus, the petitions filed by the Petitioners are liable to be rejected.

Further, in the present case, the first informant is the mother of the injured person. Therefore, definitely the first informant is victim in the present case. Sub-section (5) of Section 15-A of the SC/ST Act guarantees a right to a victim or dependents to participate in any proceedings thus, right of 'Audi Alterm Partem' is conferred. Therefore, where a right of Audi Alterm Partem is conferred on the victim or his dependents, then the court has to give an opportunity/right of audience to the victim or his/her dependent to hear them as to enable them to participate in the proceedings including bail proceedings also. Therefore, a victim or dependent has a right to be heard by the Court enabling the victim or dependents to participate in any proceedings in respect of not only bail proceedings but also in the proceedings of discharge, release, parole, conviction or sentence of an accused or any connected proceedings or arguments and file written submission on conviction, acquittal or sentencing of a case.

A right is conferred on the victim or his/her dependents to participate in the proceedings initiated under the Sc/ST Act, as enumerated in Section 15-A, as discussed above. Therefore, the first informant/complainant/victim or dependents shall be made as a party in the proceedings and issue necessary notice to the victim or dependents / first informant/ complainant/ victim or dependents and to hear them in any proceedings as envisaged under Sub-section (5) of Section 15-A of the SC/ST Act.

Tags : Bail Entitlement Participation Right

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High Court of Jammu and Kashmir

Charanjit Kour Sudan Vs. Union Territory of JK and Ors.

MANU/JK/0210/2020

20.07.2020

Service

Merely asking an official, who substantively holds a lower post, to discharge the duties of a higher post cannot be treated as a promotion

In present case, the Petitioner is seeking a 'Writ of Mandamus' upon the Respondents directing them to regularize/confirm/promote the Petitioner to the post of Administrative Officer, on which post the Petitioner was made incharge vide order No. 188 of 2018 dated 28th of May, 2018 read with corrigendum issued by the Corporation vide No. 194 of 2018 dated 29th of May, 2018 and to give the effect of such confirmation/regularization/promotion retrospectively. The Petitioner is also seeking a 'Writ of Certiorari' for quashing the order, to the extent it mentions the designation of the Petitioner as Assistant Administrative Officer instead of Incharge Administrative Officer.

Merely asking an officer/official, who substantively holds a lower post, to discharge the duties of a higher post cannot be treated as a promotion. In such a case, the said officer/official does not get the salary of the higher post, but only gets that in-service parlance known as the 'charge allowance'. Such situations are contemplated where exigencies of public service necessitate such arrangements and even consideration of seniority do not enter into it. The concerned officer/official continues to hold her substantive lower post and only discharges the duties of the higher post essentially as a stop-gap arrangement.

Law on this point is now well-settled. Incharge arrangement is not a recognition of right to a higher post. An incharge arrangement is not a recognition of or is necessarily based on seniority and that, therefore, no rights, equities, or expectations could be built upon it asking an officer/official, who substantively holds a lower post, merely to discharge the functions of a higher post cannot be treated as promotion. It is also well settled that when incharge arrangement is made, it has to be, as far as possible, for a short duration; not exceeding six months and such an arrangement does not confer any right whatsoever on the officer/official holding the post on incharge basis, except entitling him/her to the charge allowance.

In the present case, admittedly, the Petitioner is substantively holding the post of Assistant Administrative Officer in the respondents Corporation and merely because the petitioner has been placed as incharge on the post of Administrative Officer, the Petitioner cannot, as a matter of right, claim that she had been regularly promoted on the said post or that on the basis of said services rendered by her, she deserves to be regularized/confirmed/promoted against the said post. This incharge arrangement of the Petitioner can, in no circumstances, be treated as a promotion and it does not give the petitioner any right over the said post. The said post has to be filled up by the respondent Corporation in accordance with the relevant recruitment rules governing the subject as well as the seniority position in vogue and, in the said process, the petitioner, if eligible, has a right of consideration alongwith all other eligible officers working in the Corporation. Petition dismissed.

Tags : Promotion Right Entitlement

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Income Tax Appellate Tribunal

Munka Dall & Oil Mills Pvt. Ltd. Vs. The ITO, Ward-4(2)

MANU/IJ/0110/2020

20.07.2020

Direct Taxation

If the cause of delay as explained by Assessee is found to be factually correct then, laps on part of Assessee cannot be a ground for rejecting condonation of delay

Present appeal by the Assessee is directed against the order of the Commissioner of Income Tax (Appeal) (CIT(A)), Jaipur. There is delay of 349 days in filing the present appeal. The Assessee has filed an application for condonation of delay. It has been pleaded that, when the Assessee has explained a reasonable and bonafide cause for delay in filing the appeal then the same may be condoned so as to decide the appeal of the Assessee on merits.

The Assessee filed the appeal before the CIT(A) on 25th January, 2018 subsequently, the appeal was transferred from the CIT(A)-II, Jaipur to CIT(A), Ajmer vide notification dated 25th September, 2018. In the mean time, the assessee sold the premises and sifted to new address.

After the case was transferred to the jurisdiction of the CIT(A), Ajmer, the Assessee never appeared and attended the proceedings and consequently, the appeal of the Assessee was decided by impugned ex-parte order. The Assessee has explained the reasons for delay in filing the appeal that the assessee has not received the impugned order and came to know about the same only when the order passed under Section 271(1)(c) of the Income Tax Act, 1961 dated 12th March, 2020 was served upon the assessee at the new address through the process server of the Department.

There is no dispute about the fact that, because of the failure on the part of the Assessee to intimate the new address to the CIT(A), the notices issued by the CIT(A) as well as impugned order could not be received by the Assessee. Thus, explanation of non receipt of the impugned order by the Assessee is factually correct however, the reason for such non receipt of the impugned order is the failure on the part of the Assessee to give the fresh address to the CIT(A). Therefore, in these facts and circumstances of the case, when the CIT(A) has decided the appeal of the assessee vide impugned ex-parte order, the delay in filing the appeal is due to mistake on the part of the Assessee which cannot be regarded as a deliberate or willful default on the part of the assessee.

It is settled proposition of law that, if the cause of delay as explained by the assessee is found to be factual correct then laps on the part of the Assessee cannot be a ground for rejecting the condonation of delay. The cause of substantial justice has to be preferred then the technical consideration. Therefore, even if there is lapse or inaction on the part of the Assessee a justice oriented liberal approach has to be taken while considering the condonation of delay. Accordingly, in the facts and circumstances of the case and in the interest of justice, the delay of 349 days is condoned subject to cost.

When notices issued by the CIT(A) at the old address and the assessee has already sifted to the new address then considering the facts and circumstance of the case as well as in the interest of justice, the impugned order of the CIT(A) is set aside and the matter is remitted to the record of the CIT(A) for deciding the same afresh after giving one more opportunity of hearing to the assessee. The appeal of the assessee is allowed for statistical purposes.

Tags : Assessment Delay Condonation

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