In a case where there is a transfer of shares in a non-resident company from one non-resident to another non-resident, is it possible to infer that the transaction has significant nexus with India to attract the taxability provisions, if it ultimately resulted in transfer of controlling interest in Indian company?
Vodafone International Holdings B.V. v. UOI (2010) 329 ITR 126 (Bom.)
Hutchison Essar Limited (HEL) is an Indian company carrying on the business of providing telecommunication services in India. Hutchison Telecommunication International Limited (HTIL) is a foreign company, registered in Hong Kong. Vodafone International Holdings B.V. (VIH BV), is a Netherlands company controlled by the Vodafone group.
A sale/ purchase agreement was entered in to between VIH BV and HTIL,under which HTIL agreed to procure and transfer to VIH BV, the entire issued share capital of CGP (a foreign company registered in Cayman Islands, Mauritius) free from all encumbrances together with all rights attaching and accruing and together with assignment of loan interest.
VIB HV contended that the transaction represented a transfer of a capital asset, i.e., the share of CGP, and that any gain arising to the transferor or to any other person out of this transfer was not taxable in India because the asset was not situated in India as CGP is a foreign company and also the consideration was paid and received outside India, and hence, there was no sum chargeable to tax in India and the obligation to deduct tax at source byVIH BV under section 195 did not arise.
On the above issue, the Bombay High Court held that, that HTIL had an aggregate of 67% (approx.) of controlling interest in HEL by way of indirect equity shareholding, option agreements, finance agreements, shareholders agreements, etc., through CGP. The transaction between HTIL and VIH BV was structured so as to achieve the object of discontinuing the operations of HTIL in relation to the Indian mobile telecommunication operations by transferring the rights and entitlements of HTIL in HEL to VIH BV. The rights and entitlements included transfer of control premium, use and rights to the Hutch brand in India, a non-compete agreement with the Hutch group, the value of non-voting non-convertible preference shares, various loan obligations and the entitlement representing indirect interest inHEL.
The rights and entitlements of HTIL in HEL constituted capital assets within the meaning of section 2(14) to be covered in the phrase “property of any kind held by an assessee”. The consideration that was paid toHTIL by VIH BV included consideration for acquisition of diversified rights and entitlements.
Therefore, the transaction had a significant nexus with India. The essence of the transaction was a change of controlling interest in HEL which represented a source of income in India.
Is wealth-tax leviable on the value of house under construction, where the construction was still incomplete on the relevant valuation date?
CIT v. Smt. Neena Jain (2011) 330 ITR 157 (P & H)
The Revenue contended that the incomplete house of the assessee fell within the purview of assets in section 2(ea) of the Wealth-tax Act, 1957and it was liable to wealth-tax. Consequently, the value of the plot and investment of assessee’s share in construction of the residential house was added and tax was, accordingly assessed.
The High Court opined that the words “any building” could not be read in isolation and had to be harmoniously construed with the remaining portion of section 2(ea) i.e., whether the building was used for residential or commercial purposes or for the purpose of maintaining a guest house, because an incomplete building could not possibly either be used for residential or commercial purposes or for the purposes of maintaining a guest house. Therefore, the word “building” has to be interpreted to mean a completely built structure having a roof, dwelling place, walls, doors, windows, electric and sanitary fittings etc.
In this case, the assessee was constructing the building after obtaining sanction from the appropriate authorities. Explanation 1(b) under section 2(ea) defining “urban land” for levy of wealth-tax, specifically excludes from its scope, the land occupied by any building which has been constructed with the approval of the appropriate authority. Therefore, the incomplete building of the assessee neither fell within the meaning of a building nor within the purview of “urban land” under section 2(ea). Consequently, the incomplete building is not an asset chargeable to wealth-tax.
Can the Tribunal exercise its power of rectification under section 254(2) to recall its order in entirety?
Lachman Dass Bhatia Hingwala (P) Ltd. v. ACIT (2011) 330 ITR 243 (Delhi)[FB]
In deciding whether the power under section 254(2) can be exercised to recall an order in entirety, it is necessary to understand the true principle laid down in the Apex Court decision. A decision should not be mechanically applied treating the same as a precedent without appreciating the underlying principle contained therein. In this case, the Apex Court decision was applied since prejudice had resulted to the party on account of the mistake of the Tribunal apparent from record.
On this issue, the Delhi High Court observed that the justification of an order passed by the Tribunal recalling its own order is required to be tested on the basis of the law laid down by the Apex Court in Honda Siel Power Products Ltd. v. CIT (2007) 295 ITR 466, dealing with the Tribunal’s power under section 254(2) to recall its order where prejudice has resulted to a party due to an apparent omission, mistake or error committed by the Tribunal while passing the order. Such recalling of order for correcting an apparent mistake committed by the Tribunal has nothing to do with the doctrine or concept of inherent power of review. It is a well settled provision of law that the Tribunal has no inherent power to review its own judgment or order on merits or reappreciate the correctness of its earlier decision on merits. However, the power to recall has to be distinguished from the power to review. While the Tribunal does not have the inherent power to review its order on merits, it can recall its order for the purpose of correcting a mistake apparent from the record.
The Apex Court, while dealing with the power of the Tribunal undersection 254(2) in Honda Siel Power Products Ltd., observed that one of the important reasons for giving the power of rectification to the Tribunal is to see that no prejudice is caused to either of the parties appearing before it by its decision based on a mistake apparent from the record. When prejudice results from an order attributable to the Tribunal’s mistake, error or omission, then it is the duty of the Tribunal to set it right. In that case,the Tribunal had not considered the material which was already on record while passing the judgment. The Apex Court took note of the fact that the Tribunal committed a mistake in not considering material which was already on record and the Tribunal acknowledged its mistake and accordingly, rectified its order.
The above decision of the Apex Court is an authority for the proposition that the Tribunal, in certain circumstances can recall its own order andsection 254(2) does not totally prohibit so. In view of the law laid down bythe Apex Court in that case, the decisions rendered by the High Courts in certain cases to the effect that the Tribunal under no circumstances can recall its order in entirety do not lay down the correct statement of law.
Applying the above-mentioned decision of the Apex Court to this case, the Delhi High Court observed that the Tribunal, while exercising the power of rectification under section 254(2), can recall its order in entirety if it is satisfied that prejudice has resulted to the party which is attributable to the Tribunal’s mistake, error or omission and the error committed is apparent.
Is disallowance under section 40(a)(i) for non deduction of tax at source attracted in respect of payment for purchase of software from a non-resident, by treating the same as royalty in case where the purchase is for subsequent resale in the Indian market?
CIT v. Dynamic Vertical Software India P. Ltd. (2011) 332 ITR 0222 (Delhi)
In this case, the Delhi High Court held that since the assessee had purchased the software from Microsoft and subsequently sold the same in the Indian market, he had acted as a dealer and therefore the payment to the non-resident, Microsoft, cannot be termed as royalty. Therefore,section 40(a)(i) would have no application in this case and the payment made to the non-resident cannot be disallowed under section 40(a)(i) on the ground that no tax was deducted at source.
Can penalty under section 271(1)(c) for concealment of income be imposed in a case where the assessee has raised a debatable issue?
CIT v. Indersons Leather P. Ltd. (2010) 328 ITR 167 (P&H)
The assessee company, after discontinuing its manufacturing business, leased out its shed along with fittings and disclosed the income as income from business, whereas the Revenue contended that the same be assessed as “Income from house property. The issue under consideration is whether penalty under section 271(1)(c) can be imposed in such a case.
On this issue, the High Court observed that, mere raising of a debatable issue would not amount to concealment of income or furnishing inaccurate particulars and therefore, penalty under section 271(1)(c) cannot be imposed.
Disclaimer
In this note, we have attempted to summarise some of the significant aspects to be kept in mind by readers to ensure compliance of Income tax laws and regulations. Readers should ensure to verify specific provisions as applicable to each case before taking any business decisions. It would be pertinent to note that some changes are being made to the Income tax laws and rules and regulations on a continuous basis by way of notifications, clarifications etc issued by the department based on their practical experience in implementing the legislation.
It may be noted that nothing contained in this note should be regarded as our opinion. Professional advice should be sought for applicability of legal provisions based on specific facts. Though reasonable efforts have been taken to avoid errors or omissions in this note we are not responsible for any liability arising to readers directly or indirectly due to any mis-statements or error contained in this note. It must be noted that the views expressed in the note are based on our understanding of the law and regulations as published by the Government authorities and we may or may not agree or subscribe to such views/ interpretations.
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