INTENSIVE STUDY GROUP 08/08/2013 CA SANJAY CHOKSHI

CHAMBER OF TAX CONSULTANTS INTENSIVE STUDY GROUP 08/08/2013 CA SANJAY CHOKSHI

CIT V. TEXTOOL CO. LTD. SUPREME COURT QUESTION REFERRED: Whether on the facts and in the circumstances of the case, the Appellate Tribunal is right in allowing the deduction of Rs.55,84,754/- being the payment made by the assessee company directly to Life Insurance Corporation towards Group Gratuity Fund under Section 36 (1)(v) of the Income Tax Act, 1961?

CIT V. TEXTOOL CO. LTD. SUPREME COURT Facts of the Case: A.Y. 1983-84 Total Contribution/Provision made towards approved gratuity fund Rs. 92,06,978/- Breakup Annual premium to LIC Rs.5,84,754/- Initial contribution to LIC Rs. 50,00,000/- Provision for initial contribution Rs 36,22,224/-

CIT V. TEXTOOL CO. LTD. SUPREME COURT Facts of the Case: Textool Gratuity Co. Ltd. Employees Group Gratuity Fund was approved by the CIT w.e.f. 25 th February 1983 Provision for initial contribution of Rs 36,22,224/- was allowed u/s 40A(7) Balance Annual premium to LIC Rs.5,84,754/- and Initial contribution to LIC Rs. 50,00,000/- was disallowed

CIT V. TEXTOOL CO. LTD. SUPREME COURT Facts of the Case: The grounds for disallowance was that the said payment was made directly to LIC and not to an approved gratuity fund as required u/s. 36(1)(v)

Section 36(1)(v): CIT V. TEXTOOL CO. LTD. SUPREME COURT any sum paid by the assessee as an employer by way of contribution towards an approved gratuity fund created by him for the exclusive benefit of his employees under an irrevocable trust

CIT V. TEXTOOL CO. LTD. SUPREME COURT Allowed by CIT (Appeal) on reasons as follows: The said payment had been made to the LIC though directly but on behalf of the approved gratuity fund The said group life insurance scheme was for the exclusive benefit of the employees As per the original master policy the said amount has been credited by LIC in favour of the gratuity fund which is an irrevocable trust and not the assessee In subsequent years the payment has been made through the fund and not directly to LIC Considering above reasons there was no violation of sec. 36(1)(v) A narrow view would strain the language of sec. 36(1)(v)

CIT V. TEXTOOL CO. LTD. SUPREME COURT Allowed by Tribunal and than by High Court on reasons as follows: In our opinion, the Commissioner of Income Tax (Appeals) as well as the Tribunal have correctly held that merely because the payments were made directly to the LIC, the company could not be denied the benefit under Section 36(1)(v) and the amount had to be credited in favour of the assessee. Both the Commissioner (appeals) as well as the Tribunal have correctly read the law and have correctly relied upon the aforementioned Supreme Court judgment. (Janambikai Mills Ltd.) In our opinion, since the finding of fact is that all the payments made were only towards the Group Gratuity Fund, there would be no question of finding otherwise.

CIT V. TEXTOOL CO. LTD. SUPREME COURT Arguments of revenue : Provision of section have to be strictly construed Therefore payment has to be made to the fund and not to LIC Revenue was not able to establish whether the said amount came back to assessee or not

CIT V. TEXTOOL CO. LTD. SUPREME COURT Observations of the Supreme court: Strict construction of the provisions does not rule out the principles of reasonable construction to give effect to the purpose and intention - SHRI SAJJAN MILLS LTD. V. CIT M.P. AND ANR (1985) 156 ITR 585 Intention of the provision is that the employer should not have control over the funds of the irrevocable trust created exclusively for the benefit of the employees. APPEAL OF REVENUE DISMISSED AND HELD IN FAVOUR OF ASSESSEE

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT QUESTION REFERRED: Did the Income Tax Appellate Tribunal (ITAT) fall into error in not holding that the loss of Rs.4,92,71,000/- on account of derivative transaction was a speculative loss, and was entitled to the benefit of Section 73, in view of the Explanation to Section 73 of the Income Tax Act

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT Facts of the case: The assessee claimed a loss Rs.4,92,71,000/- on account of derivative transaction The assessee claimed that loss on the basis that trading in derivatives was not a speculative loss u/s. 43(5). The AO applied Section 73 wherein even delivery based transactions in shares are treated as speculative transactions for certain categories of company. Assessee was not engaged in the specifically excluded categories of business in the said explanation. The said loss cannot be setoff against other business incomes CIT (APPEAL) REJECTED BUT THE SAME WAS ALLOWED BY TRIBUNAL

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT Section 43(5): Speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purposes of this clause (a). (b). (c). (d) An eligible transaction in respect of trading in derivatives referred to in clause {(ac)} of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange;] shall not be deemed to be a speculative transaction,

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT Section 73: (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business. (2) (3) (4) [Explanation. Where any part of the business of a company [other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources"], or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.]

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT Section 2(ac) of the Securities Contracts (Regulation) Act, 1956 reads as under :- (ac) derivatives include : (A) A security derived from a debit instrument, share, loan whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) A contract which derives its value from the prices or index or prices of underline securities.

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT TRIBUNAL ALLOWED ON THE FOLLOWING GROUNDS: From the definition of term derivative as reproduced above it is clear that derivative is a security derived from debit instrument, share, loan etc or a contract which derives its value from the prices or index or prices of underline securities. Definition of derivative given in Shree Capital Services Ltd. V. DCIT Circle 5, Kolkata 121 ITD 498 Security or value derived from the share is different from the share itself. Derivatives are not for physical purchase or sale of commodities and therefore not Speculative

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT TRIBUNAL ALLOWED ON THE FOLLOWING GROUNDS: Reference to the Memorandum explaining the finance bill 2005. Recent systemic and technological changes introduced by stock markets have resulted in sufficient transparency to prevent generating fictitious losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for an excellent audit trail. Therefore, the present distinction between speculative and non-speculative transactions, particularly relating to derivatives is no more required.

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT TRIBUNAL ALLOWED ON THE FOLLOWING GROUNDS: CITATIONS referred DCIT V. Venketeshwar Inv. And Finance P. Ltd. Special Bench DCIT V. SSKI Investor Services P. Ltd. 113 TTJ 511 (Mumbai) RBK Security P. Ltd. V. ITO 118 TTJ 465 (Mumbai) C. Bharat Kumar V. DCIT 4 SOT 593 (Bangalore) DCIT V. Peterson Securities P. Ltd. 127 ITD 386 (Chennai) Hitesh Satischandra Joshi V. JCIT 140 TTJ 32 (Mumbai) ACIT V. Hiren Jaswant Rai Shah 46 SOT 276 (Ahd)

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT ARGUMENTS OF THE DEPARTMENT: Section 43 is confined to define certain terms for computation of business income i.e. section 28 to 41 Therefore the reliance of section 43(4) is erroneous since it has restricted application and the same cannot be considered for carry forward and set off of losses under section 73 explanation to the provision categorically provides that where any part of the business of the company includes purchase and sale of shares of other company, it shall be deemed to be carrying on speculation business to the extent to which the business consists of that activity. Derivatives of the kind and nature traded by the assessee are relatable to stocks and shares

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT ARGUMENTS OF THE ASSESSEE: No infirmity in the decision of the tribunal. There was no other definition of derivative the definition u/s 43(5) have to be taken and therefore the said transactions are not of sale and purchase of shares. Derivatives depend on underlying assets which are not confined to stocks and shares but can be commodities, metals, energy resources, bonds and foreign currencies etc. Relied on : Rajshree Sugars and Chemicals Ltd V. Axis Bank Ltd AIR 2011 Mad 144 CIT V. Bharat R Ruia (HUF) 2011 337 ITR 452 (Bom)

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT CONSIDERATION BY HIGH COURT: Scope of definition in section 43(5) is confined and restricted for computation of business income i.e. section 28 to 41 Parliamentary intendment that such transactions are also excluded from the mischief of Explanation to Section 73 (4), however, is not borne out. a definition enacted for only a restricted purpose or objective should not be applied to achieve other ends or purposes.

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT CONSIDERATION BY HIGH COURT: In Rajshree Sugars and Chemicals Ltd. v. Axis Bank Ltd., AIR 2011 Mad 144 the Madras High Court noticed, rather dramatically, that..'derivatives are time bombs and financial weapons of mass destruction' said Warren Buffett, one of the world's greatest investors, who overtook Microsoft Maestro in 2008 to become the richest man in the world and who is known as the 'Sage of Omaha or Oracle of Omaha'. Derivatives, according to him, can push companies on to a spiral that can lead to a corporate melt down. The High Court then, after examining the nature and characteristics of derivatives transactions, observed that:

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT CONSIDERATION BY HIGH COURT: What are these 'derivatives' which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines "derivatives" as follows: A derivative is a financial instrument: (a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying'); (b) that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and (c) that is settled at a future date. Actually, derivatives are assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and foreign currencies.

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT CONSIDERATION BY HIGH COURT: In The Vanguard Fire & General Insurance Co. Ltd., Madras v. M/S. Fraser And Ross & Anr AIR 1960 SC 971 it was held that: It is well settled that all statutory definitions or abbreviations must be read subject to the qualification variously expressed in the definition clauses which created them and it may be that even where the definition is exhaustive inasmuch as the word defined is said to mean a certain thing, it is possible for the word to have a somewhat different meaning in different sections of the Act depending upon the subject or the context. That is why all definitions in statutes generally begin with the qualifying words similar to the words used in the present case, namely, unless there is anything repugnant in the subject or context. Therefore in finding out the meaning of the word " insurer " in various sections of the Act, the meaning to be ordinarily given to it is that given in the definition clause. But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context in which the word has been used and that will be giving effect to the opening sentence in the definition section, namely, unless there is anything repugnant in the subject or context. In view of this qualification, the court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances.

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT CONSIDERATION BY HIGH COURT: In N.K. Jain and Ors. v C.K. Shah and Ors. AIR 1991 SC 1289, it was held that: The subject matter and the context in which a particular word is used are of great importance and it is axiomatic that the object underlying the Act must always be kept in view in construing the context in which a particular word is used

CIT DELHI IV V. DLF COM. DEV. LIMITED DELHI HIGH COURT CONSIDERATION BY HIGH COURT: Objective and tenor of the language is to deny speculative business the benefit of carry forward Derivatives are assets whose values are derived from the value of underlying assets In the present case it is stocks and shares dealing of which is specifically considered as speculative Derivatives would also be considered as speculative especially when the underlying asset itself is considered as speculative

BOSCH LTD. V. ITO BANGALORE ITAT QUESTIONS CONSIDERED: Whether repairs of machinery can be considered FTS? Whether AMC for machinery can be considered FTS? Whether 206AA applicable to Non Resident? What would be the rates applicable for grossing up u/s 195?

BOSCH LTD. V. ITO BANGALORE ITAT FACTS OF THE CASE: Annual maintenance contracts with foreign companies (German Companies) First part of the contract wherein parts or machinery had to be sent to Germany and the same were repaired and sent back to India Second part of the contract was for AMC wherein the preventive maintenance and repairs of machinery was done through telephonic advice. Out of abundant caution the assessee deducted tax at 20 % and paid to the government treasury. The assessee referred and appeal u/s 248 stating that the said payments were in the character of business income and therefore not taxable in India and therefore no withholding tax need to be deducted.

BOSCH LTD. V. ITO BANGALORE ITAT DEFINITION OF FTS U/S 9(1)(vii): For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".

BOSCH LTD. V. ITO BANGALORE ITAT SECTION 139(A)(8)(d): APPLICABILITY OF PAN (8) The Board may make rules providing for (a) (d) class or classes of person to whom the provisions of this section shall not apply; RULE 114C(1)(b): (1) The provisions of section 139A shall not apply to following class or classes of persons, namely: (a) (b) the non-residents referred to in clause (30) of section 2; SECTION 2(30) (30) "non-resident" means a person who is not a "resident [and for the purposes of sections 92, 93 and 168, includes a person who is not ordinarily resident within the meaning of clause (6) of section 6;

BOSCH LTD. V. ITO BANGALORE ITAT SECTION 206AA: (1)Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely: (i) at the rate specified in the relevant provision of this Act; or (ii) at the rate or rates in force; or (iii) at the rate of twenty per cent.

BOSCH LTD. V. ITO BANGALORE ITAT ARGUMENTS FOR THE ASSESSEE AGAINST CIT (APPEAL): The sum received by the Nonresident is their business profit arising in Germany and not liable to tax in India since they do not have a PE in India The amount paid by the assessee is not FTS either as per article 12(4) of the DTAA or u/s 9(1)(vii) of the Income Tax Act.

BOSCH LTD. V. ITO BANGALORE ITAT ARGUMENTS FOR THE ASSESSEE AGAINST CIT (APPEAL): As regards the rate of taxes is concerned, the assessee argued that 206AA is not applicable since the recipient being Non resident are not required to procure PAN With respect to grossing up u/s 195A, the assessee contended that the words used are RATES IN FORCE which is either 10.5575% as per the Act or 10% as per the DTAA and not 20% as applicable u/s 206AA

BOSCH LTD. V. ITO BANGALORE ITAT ARGUMENTS FOR THE ASSESSEE AGAINST CIT (APPEAL): As regards the rate of taxes is concerned, the assessee argued that 206AA is not applicable since the recipient being Non resident are not required to procure PAN With respect to grossing up u/s 195A, the assessee contended that the words used are RATES IN FORCE which is either 10.5575% as per the Act or 10% as per the DTAA and not 20% as applicable u/s 206AA

BOSCH LTD. V. ITO BANGALORE ITAT ARGUMENTS FOR THE ASSESSEE IN TRIBUNAL: In case of business income the same is taxable in India if the Non resident has a PE in India and not otherwise. The services are in the nature of repairs only and not technical. All repairs require certain technical skills but the same cannot be called technical services. ADIT (International Taxation) V. BHEL- GE-GAS TURBINE SERVICING (P) LTD. 2012 77 DTR 29 (HYD)

BOSCH LTD. V. ITO BANGALORE ITAT ARGUMENTS FOR THE ASSESSEE IN TRIBUNAL: With respect to application of 206AA, the assessee argued that the same is applicable only when the recipients are required under law to obtain a PAN. SMT. KOWSALYABAI & ORS V. UNION OF INDIA 2012 251 CTR (KAR) 150. As regards the grossing up the arguments were on similar lines as those against CIT (Appeal)

BOSCH LTD. V. ITO BANGALORE ITAT ARGUMENTS BY THE DEPARTMENT IN TRIBUNAL: The form 15CB filed by the auditor of the company mentions that the said payment is FTS. With respect to requirement of PAN they said that the said case law cited by the assessee is not applicable since in that particular case the recipient was resident and her income was below taxable limits and therefore she was not liable to obtain PAN. In the present case the assessee is a non resident where tax is deductible and therefore the recipient is liable to procure and provide PAN

BOSCH LTD. V. ITO BANGALORE ITAT ARGUMENTS FOR THE ASSESSEE IN TRIBUNAL AS REJOINDER: Form 15CB is prepared by CA of the company and cannot be treated as admission of the assessee. The assessee had the right to deny his liability.

BOSCH LTD. V. ITO BANGALORE ITAT OBSERVATION OF THE TRIBUNAL: Form 15CB issued by the CA is not binding on the assessee. Every transaction has to be considered in its own right and its nature is to be decided in accordance with the intention of the parties and law.

BOSCH LTD. V. ITO BANGALORE ITAT OBSERVATION OF THE TRIBUNAL: With reference to payment for repairs to be done on parts sent to Germany the tribunal accepted the contentions of the assessee and said that the same is not taxable in India. LUFTUNZA CARGO INDIA (P) LTD V. CIT 2005 92 TTJ DEL 827 Payment for service of repairs which includes assistance in analysing and solving technical problem and disfunctions by providing telephonic advice analysis and assistance to the operater for preventive maintenance are FTS liable to Tax in India.

BOSCH LTD. V. ITO BANGALORE ITAT OBSERVATION OF THE TRIBUNAL: With respect to applicability of 206AA, the tribunal is of the view that it overrides the other provisions of the act. This is a provision to ensure that there is no evasion of tax by non resident. The recipient being non resident and its income liable to tax are under obligation to obtain PAN. Withholding tax to be deducted at 20%.

BOSCH LTD. V. ITO BANGALORE ITAT OBSERVATION OF THE TRIBUNAL: With respect grossing up u/s 195A the tribunal agreed with the explanation of the assessee that the words used are rates applicable in force and not 20% as applicable u/s 206AA. The rates applicable is 10.5575 and not 20%.

THANK YOU CA SANJAY CHOKSHI