Tax Briefly Stay on Top

February 2012

Contents

Snapshot Direct & International Tax Transfer Pricing International Tax Developments Indirect Tax Glossary of terms

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Tax Briefly

Snapshot

Direct & International Tax Profits under PMS construed as business income and not capital gains Interest on funds for acquisition of subsidiary held to be expenditure for business purposes Guarantee commission paid to CMD for personal guarantee given to bankers was mode to divert money and not deductible Concessional rate of 20% not applicable to gains on depreciable asset held for more than 36 months Sale of shares out of India by a non-resident to another non-resident is not liable to tax in India and accordingly the buyer is not subject to Indian withholding tax obligations Carry forward of losses permitted where change in shareholding does not result in change in beneficiaries Payment for shrink-wrapped software constitutes royalty payment Income arising from sale of software regarded as business profit and in absence of PE in India the same is not taxable in India Offshore supply of equipment and supply of software forming integral part of equipment not taxable in India Article 7 of the DTAA gives primacy to the provisions stipulated in the domestic tax legislation for computation of the taxable income Leasing of assets in India by non-resident does not result in PE or business connection in India TPO not bound to disclose the entire process followed for collection of information u/s 133(6)

Indirect Tax Exemption from service tax on services provided in relation to transport of goods by rail extended Constitutional validity of the explanation inserted to the taxable services of Commercial or Industrial Construction Services and Construction of Residential Complex Service and levy of service tax on services in relation to provision of preferential location upheld. Changes in Excise tariff, HSN classification and RSP valuation effective from 1 Jan 2012 Changes in Customs tariff and HSN classification effective from 1 Jan 2012 Goods cleared by debit of duty against SFIS scrip amounts to discharge of duty liability Bill of Entry (Electronic Declaration) Regulations, 2011 and Shipping Bill (Electronic Declaration) Regulations, 2011 notified Amendments to All India Duty Drawback Rates explained Export duty is not applicable on the sales made from a DTA to SEZ Export benefits available in case of sales from DTA to SEZ SIM Cards and other services by telecom companies cannot be subjected to VAT Mere back to back arrangement cannot qualify for exemption as sale in course of import Sale from State of Maharashtra to Mumbai High not a sale in the course of export

Direct & International Tax

Business income Profits under PMS construed as business income and not capital gains The taxpayer invested surplus funds generated from business activities through PMS which was reflected as investments in the balance sheet. The taxpayer claimed exemption under section 10(38) for long term capital gain and applied concessional tax rate under section 111A of the Act for short term capital gains arising from the sale of shares through PMS. The AO considered the gains as business profits, on the ground that the shares were purchased with profit motive. The Tribunal held that the portfolio manager undertook trading in shares to maximize the profits on behalf of the taxpayer and the intention of the taxpayer was to maximize profit out of the investments. Accordingly, the profit arising was taxable as business income. ACIT v. Radials International ITA No. 1368 of 2010 (Delhi - Trib) Commencement of business Participation in tender process construed as business was set up and had commenced The taxpayer was in the business of real estate development and participated in a tender for sale of land. The taxpayer raised interest bearing loans from its holding company and deposited it as earnest money. As the bid did not materialize the taxpayer remitted the money to the holding company with interest. The taxpayer claimed the net interest paid after adjusting with interest received as carry forward business loss. The AO was of the view that the taxpayer had not commenced its business and hence disallowed the interest paid and further treated the interest received as income from other sources. The Tribunal held that the taxpayer being in the development of real estate, the participation in the tender would the commencement of one activity which would enable the taxpayer to acquire the land for development. The actual development of land would be immaterial for construing that the business of the taxpayer was set up and accordingly the net interest expenses has to be assessed as business loss. Dhoomketu Builders & Development (P) Ltd v. Addl.CIT [(2012) 17 taxmann.com 36 (Delhi Trib]

Granting of requisite approvals relevant to determine commencement of business The taxpayer obtained approvals from FIPB for prospecting and mining of diamonds and other minerals in India and from the State Government for mining of diamond. The taxpayer capitalized prospecting expenses but did not claim the deduction as per the provisions of section 35E as actual mining activity did not commence in the relevant year. However, the taxpayer claimed deduction for the non-prospecting expenditure like salaries and other expenses. The AO considered that the business had not commenced and hence disallowed the non-prospecting expenditure. The Tribunal held that the taxpayers business has been already commenced once the required approval

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has been obtained and hence the non-prospecting expenditure is allowable as revenue expenditure even though no income was earned from that activity. De Beers India Prospecting (P) Ltd v. ITO ITA No. 40/ Mum/2006 (Mum -Trib ) Business Expenditure Interest on funds for acquisition of subsidiary held to be expenditure for business purposes The taxpayer had borrowed certain funds which were utilized to subscribe to the equity capital of its subsidiary company. Subsidiary company used the said funds for acquiring a hotel. The interest expenditure incurred by the taxpayer was claimed as a deduction. The HC observed that the taxpayer is in the business of owning, running and managing hotels and for the effective control of new hotel acquired by taxpayer under its management, it had invested in a wholly owned subsidiary. Thus, it held that the taxpayer was entitled to the deduction of interest on the borrowed funds. CIT v. Tulip Star Hotels Ltd. [2011] 338 ITR 74 (Delhi HC) Interest on Deep Discount Bonds is accrued liability and hence deductible The taxpayer company had issued Deep Discount Bonds and had made provision for the interest (discount) payable on the Bonds on annual basis though the same was payable only on redemption. The HC held that once the liability to pay interest accrues every year and the money is utilized by the taxpayer for its business, he is entitled in law to spread over the said liability during the period of the life of those bonds. It further observed that the liability to pay interest is certain, though the payment is postponed it accrues every year and cannot be regarded as a contingent liability. CIT v. Insotex India Ltd [2011-TIOL-879-HC-KAR-IT]

that the loans given by bank were primarily secured against the taxpayers assets and that the assets of the guarantor were very negligible when compared to the amount borrowed on the basis of such guarantee. The AO held that there was no scientific basis for these bank guarantees and it was only an innovative method of diverting income from companies under his management. The HC held that the banks had lent money on the basis of security of the assets of the company, and not on the basis of personal guarantee given and hence the guarantee commission was paid primarily to divert income of the companies under the management of the Chairman & MD. The HC further observed that merely because the banks insist on guarantee and such guarantee was given against the payment of commission, it would not make the guarantee commission as a lawful expenditure to be allowed as a deduction. CIT v. United Breweries Ltd. [(2012) 17 taxmann.com 6 (Kar)] Non-compete fee paid for restrictive covenant for five years is to be treated as capital expenditure The taxpayer acquired a business from KOAL under business transfer agreement. The taxpayer also paid a non-compete fee of Rs 5.94 crores, in addition to the consideration for transfer of business and claimed the same as revenue expenditure. The AO disallowed the deduction stating that non-compete fee was a capital expenditure. The HC held that a five year non-compete period was sufficient to give an enduring benefit to the taxpayer and hence the non-compete expenditure would be capital in nature. However, the HC did not opine on the issue whether non-compete fees is eligible for depreciation under section 32(1)(ii) and sent the case back to lower authorities to determine. Pitney Bowes India Pvt Ltd v. CIT [ITA NO. 784 OF 2011] AO not bound to accept AS not notified for tax purposes The taxpayer was to construct tenements for slum dwellers free of cost as per the scheme of slum rehabilitation. For the purpose of accounting the taxpayer adopted percentage completion method as

Guarantee commission paid to CMD for personal guarantee given to bankers was mode to divert money and not deductible The taxpayer claimed deduction in respect of guarantee commission paid to its Chairman and MD in relation to personal guarantees given by him to various bankers for loans availed by the taxpayer. The AO observed

prescribed by AS-7 relating to construction contracts. Accordingly, the taxpayer recognized revenue on the basis of percentage completion method but also recognized the loss envisaged on the entire project as provided vide Para-13.1 of the same AS-7. The AO disallowed the losses on the projects yet to be completed on the ground that the losses were estimated and contingent in nature. The Tribunal observed that any allowances were to be made on fulfillment of conditions prescribed vide provisions of Chapter-IVD of the Act and mere treatment in books in line with the AS of ICAI was not a requisite. Accordingly, any provision made towards estimated losses of the entire project will not be allowed as deduction and it is not binding on the AO to accept the Accounting Standards which are not notified by the Central Government.. Shivshahi Punarvasan Prakalp Ltd vs. ITO [(2011) 15 taxmann.com 352 (Mumbai - ITAT)] Capital Gains Concessional rate of 20% not applicable to gains on depreciable asset held for more than 36 months The taxpayer sold a non-residential building held for more than thirty six months on which depreciation had been claimed in the previous years. The taxpayer computed the gains on such asset as as short term capital gains but applied tax rate of 20%, as applicable to long term capital gains. Taxpayer contended that any benefit, which was attached to long term capital asset, would continue to apply for depreciable assets, even though the gains are to be construed as short term capital gains. The AO held that the gains should be taxed at the rate as applicable to short term capital gains. The Tribunal observed that section 112(1)(b)(i) and (ii) refers to long term capital gains as against Sec. 74 and Sec. 54EC which refer to capital gains/loss arising from transfer of long term capital assets.It further stated that section 50 deems the income earned from a depreciable asset as short term capital gain and to be tax accordingly. Accordingly, the Tribunal held that

income earned from a depreciable asset would be taxed as short term capital gain which cannot be subject to the tax rate applicable to long term capital gains. SKF Bearings India Ltd v. ACIT ITA No. 720/Mum/06 (Mum - ITAT ) Capital gains arising on the sale of shares in an Indian Company by a Mauritius Company would not be taxable in India in view of India-Mauritius tax treaty The applicant, a Mauritian tax resident, is a wholly owned subsidiary of Ardex Holdings UK Ltd. It planned to sell its entire 50% equity shareholding held in an Indian company, namely, Ardex Endura India Pvt. Ltd. (Ardex India) to another non-resident group company at the fair market value. The applicant sought an advance ruling on whether capital gains arising will be subject to tax in India or whether such gains will be exempt under Article 13(4) of the India-Mauritius DTAA. The AAR observed that the existing ownership pattern was not a sudden arrangement, but had been prevailing for more than 10 years. The AAR held that the proposed sale cannot be categorized as objectionable treaty shopping and, at worst, can be construed as an attempt to take advantage of the India-Mauritius DTAA. The AAR ruled that capital gains arising were not subject to income-tax in India in accordance with Article 13(4) of the India-Mauritius DTAA, and the Applicant could receive the entire sale proceeds without any tax withholding in India. Ardex Investments Mauritius Ltd. In re, A.A.R. NO. 866 OF 2010 No exemption from long term capital gains tax on listed shares converted into stock in trade despite payment of STT at the time of sale The Taxpayer, a non-resident in India had converted investment in shares (a long term capital asset) into stock in trade that were sold through a stock exchange after payment of STT. The taxpayer claimed the gains arising on conversion of share investment into stock in trade as a long term capital gain exempt from income-tax as the taxpayer had paid STT on the sale of the said shares. The AO denied the exemption on the

Tax Briefly

ground that capital gain arose at the time of conversion of investment into stock in trade and in the absence of payment of STT at that time; the long term capital gain was subject to tax @ 20%. The Tribunal affirmed the tax treatment considered by the AO. On the question relating to applicability of concessional tax rate of 10% to the long term capital gain, it held that a non-resident cannot take recourse of this beneficial provision as it applies only to residents. Alka Agarwal v. Asst Dir of IT- ITA No. 80/Del/2011 and Ashok Kumar Agarwal v. Asst Dir of IT- ITA No. 150 / Del /2011 Book Profits Deduction under section 80HHE shall be computed on the basis of adjusted book profit while computing MAT under section 115JA of the Act. The taxpayer, in its return of income, claimed deduction under section 80HHE of the Act against the net profit as per profit and loss account to arrive at the book profit under section 115JA of the Act. As per normal computation there was no profit after the set-off of the brought forward losses of the earlier years. However, the AO contended that the taxpayer was not entitled to deduction under section 80HHE. The SC held that for computing the book profits the deduction under section 80HHE would have to be computed on the basis of the adjusted book profits under section 115JA and not on the basis of profits computed under normal provisions of the Act. CIT v. Bhari Information Technology Systems Private Limited,[ (2012) 17 taxmann.com 62 (SC)] Unabsorbed depreciation adjusted against general reserves cannot be claimed as deduction while computing book profit under section 115J The taxpayer was required to pay MAT under section 115J of the Act on its book profits. In computing the books profits, unabsorbed depreciation (being the lower of unabsorbed loss or unabsorbed depreciation) was deducted as per provisions of section 115J. However, as per the balance sheet of the taxpayer for the relevant AY, there was no unabsorbed depreciation as the

same had been adjusted against general reserve. The A.O. allowed the claim of the taxpayer. However, CIT invoking provision of section 263 of Act disallowed this claim. The HC held that based on factual position, the taxpayer had no unabsorbed loss or unabsorbed depreciation to be carried forward in the year under consideration, and therefore, the CIT had rightly disallowed the claim of the taxpayer in respect of adjustment pertaining to unabsorbed depreciation. CIT v. Madras Fertilisers ltd. (TS-514-HC-2011) Set-off of Losses Carried forward business loss cannot be set-off against long term capital gains The taxpayer sold the land along with building used for the business and set-off long term capital gain arising from such sale against the brought forward business loss. The taxpayer contended that the long term capital gains on transfer of business assets had the character of business income and therefore, business loss brought forward from earlier years can be set off against such income though, it was not computed under the head profits and gains of business or profession. AO held that brought forward business loss cannot be set off against the long term capital gains and the nature of gains was capital gains only. The Tribunal observed that the assets transferred were capital assets and such transfer cannot be considered as the business income for the purpose of setting off the carried forward business losses. Nandi Steels Limited vs. ACIT ITA No. 546/Bang/2008 (Bangalore ITAT) Business deductions FInitial assessment year under section 80IA(5) to mean the first year of claim and not the year of commencement of business The taxpayer did not claim deduction under section 80IA in the first two years of business on account of unabsorbed depreciation and loss from windmill operation which was set off against the profits of its

other business in the respective years. In the first year of deduction (3rd year) the AO notionally carried forward the unabsorbed depreciation of earlier years and set off against the profits of the eligible business and reduced the claim of the taxpayer. The Tribunal observed that from the reading of section 80IA(5) it is clear that the eligible business will be considered as the only source of income during the previous year relevant to initial assessment year and every subsequent years. Accordingly the Tribunal held that the year of commencement need not be the initial year but depending on the facts the year of claim can be considered as initial assessment year. Anil H. Lad v. DCIT ITA No. 1262/Bang/2010 (Bangalore ITAT) Claim under section 80-IB need not necessarily be made in original return and can be made subsequent thereto The taxpayer filed the original return within time claiming additional depreciation on new plant and machinery installed to increase cold storage capacity in its existing plant. Subsequently taxpayer filed a revised return withdrawing the claim of additional depreciation instead made deduction under section 80-IB. AO rejected the claim stating that revised return has not been filed within the time limit prescribed. The Tribunal held that for claiming deduction u/s 80-IB the only condition is that the original return should be filed in time, but the claim need not necessarily be made in the original return, it can be made subsequent thereto. Accordingly it held that the claim of deduction under section 80-IB can be made by the taxpayer before the appellate authorities. Parmeshwar Cold Storage (P) Ltd v. ACIT [(2011) 16 taxmann.com.88 (Ahd Trib)]. Individual taxation Living allowance on deputation is not taxable The taxpayer was an employee of an Indian company and was on deputation to USA for rendering services as an employee of the Indian company. The taxpayer

claimed exemption for living allowance (additional compensation to meet the daily expenses in the USA on food, accommodation, electricity, telephone, laundry etc) considering it as allowance granted on tour to meet the ordinary daily charges incurred by him in USA. The taxpayer also claimed the treaty relief on the tax paid in USA on such living allowance. The AO denied the exemption though he allowed the treaty benefit for tax paid in USA. The Tribunal observed that factors like entitlement to take the family during the deputation, duration of posting and employees consent for deputation cannot be conclusive in deciding whether a person has been sent on tour or transfer. Having regards to the terms of deputation agreement and salary structure during deputation, the Tribunal held that the taxpayer is to be considered as being on tour. Hence, the taxpayer being on tour was eligible to claim exemption under section 10(14)(i) of the Act. The Tribunal further held that unless the specific allowance is disproportionately high compared to the taxpayers salary or unreasonable with reference to the nature of duties it would not be open to the AO to call for the details of expenses incurred by the taxpayer. ITO v. Saptarshi Ghosh [(2011)15 taxmann.com 328 (Kol Trib)] Merger & Acquisitions Sale of shares out of India by a non-resident to another non-resident is not liable to tax in India and accordingly the buyer is not subject to Indian withholding tax obligations In February 2007, Hutchison Telecommunications International Limited, Cayman Islands (HTIL), sold 100% of its indirect holding in CGP Investments, Cayman Islands (CGP), to Vodafone International Holdings BV, Netherlands (Vodafone) for USD 11.2 billion. The Indian tax authorities contended, inter alia, that the underlying asset transferred was a controlling stake in the Indian operating company Hutch Essar Limited (HEL), which was indirectly held by CGP. Accordingly, the revenue authorities proceeded to levy tax on the transaction based on the contention that Vodafone

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was under an obligation to withhold Indian taxes when making payments to the Hutch Group. On appeal, the SC held that the Indian revenue authorities had no jurisdiction to tax the offshore transaction involving the sale of CGP shares because it was a capital asset situated outside India. Thus in the absence of taxability in India, section 195 of the Act which provides for withholding of tax on payments made to non-residents would not be applicable to the facts of the case. Further, section 163 of the Act (pursuant to which the tax authorities alleged that Vodafone is a representative assessee of HTIL in India) would not have application in the facts of the case there is no transfer of capital asset situated in India. In arriving at the non-taxability of the transaction, the SC examined various factual and legal aspects surrounding the transaction as under: The look-at approach There are sound commercial reasons behind creation of corporate structures and developing built-in exit mechanisms when making investments or undertaking overall restructuring. Moreover, Indias laws view special purpose vehicles and holding companies as legitimate entities. In ascertaining the legal nature of a transaction, the transaction must be looked at in its entirety / the whole of the structure and transactions must be looked at (the look at approach) rather than adopting a dissecting approach. Every strategic foreign investment into India should be evaluated

in a holistic manner, keeping in perspective factors, among others, as the duration for which the holding structure exists, the period of business operations in India, participation in investment, the timing of exit and continuity of the business upon exit. Whether section 9 covers indirect transfers? Section 9(1)(i) cannot, by a process of interpretation, be extended to cover indirect transfers of capital assets or property situated in India. The words directly or indirectly appearing in section 9(1)(i) qualify the word income and not transfer of a capital asset if an indirect transfer of a capital asset is read into the section, then capital asset situated in India is rendered nugatory. Similarly, there is no mention of underlying asset. Consequently, section 9(1)(i) is not a look through provision and only covers income arising from a direct transfer of a capital asset situated in India. The effects theory The transaction being examined is a sale of shares and not an itemized sale of assets because the sale was of the entire investment made by HTIL through CGP. HTIL, as a group holding company, had no legal right to direct its downstream companies in the matter of voting, the nomination of directors or management rights. Applying the test of enforceability, influence and persuasion cannot be construed as a right in the legal sense.

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 Applying the entirety (or look at) test without invoking the dissecting approach, the transfer by way of extinguishment of HTILs rights over HEL, if any, was the effect of the transaction and not the transaction itself. Any such extinguishment, therefore, did not qualify as a transfer of a capital asset situated in India. Vodafone International v. UOI [2012] 341 ITR 1(SC) Carry forward of losses permitted where change in shareholding does not result in change in beneficiaries S-Net Freight (India) P Ltd, the taxpayer was a joint venture between two Singaporean companies. The taxpayer was incorporated through Indian nominees and the shares were held beneficially by the Singaporean companies through the nominees. As per FEMA regulation, the approval of FIPB) was required for investment by foreign companies. After obtaining necessary FIPB approval, the nominees transferred shares held in the taxpayer to the Singapore companies. The AO disallowed set off of losses of the taxpayer invoking provisions of Sec. 79. The Tribunal observed that in order to carry on business in India, foreign company need must abide by the provisions of FEMA. The two subscribers to Memorandum acted only as a nominee, to enable smooth passage to the shareholders and beneficial ownership continued with Singaporean companies. Hence, for the purpose of Sec. 79, such transfer of shares was not to be considered as change in shareholding. ITO v. S-Net Freight (India) Pvt. Ltd. (ITA No. 867/ Del/2010) In purchasing a loss making plant, no value can be assigned to goodwill for being reduced from cost of plant to disallow depreciation The taxpayer acquired a loss making cement plant from another company. The AO noticed that though said unit was suffering losses, the taxpayer had the benefit

of using its trade name. On that basis the AO held that 10 per cent of purchase price represented goodwill and accordingly disallowed depreciation. The HC held that since the plant purchased was a loss making unit from its commencement of business and no value was assigned in respect of brand name as well as for goodwill, the AO was not justified in deducting 10 per cent towards estimated value on goodwill from total purchase consideration and disallowing proportionate depreciation. CIT v. India Cements Ltd - [2011] 15 taxmann.com 46 (Madras HC) Royalty & FTS Payment for shrink-wrapped software constitutes royalty payment Samsung Electronics Co. Ltd, the taxpayer was engaged in development of computer software and exported such software to its head office in South Korea for which the taxpayer imported shrink-wrap software from USA, France and Sweden and made payments to the non-residents suppliers without deducting tax at source on the ground that the same did not constitute a payment for royalty. The HC observed that copyright is an umbrella of many rights and license is granted for making use of the copyright in respect of shrink wrapped software/ off-the-shelf software under the respective agreement. The right to make a copy of the software and use it for internal business by making a copy of the same and storing the same on the hard disk and taking a back-up would amount to copyright work under the Copyright Act. Further, as regards the applicability of decision of SC in the case of Tata Consultancy Services, it held that the intent of the legislature in imposing sales tax and income tax are entirely different and therefore, mere finding that the computer software would be included within the term Sales Tax would not preclude from holding that the said payments made by the taxpayer to non-resident would amount to royalty.

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Accordingly, the HC held that the purchase of off-theshelf software/ shrink wrapped software amounted to transfer of the copyright or any part thereof and hence the same was construed as payment for royalty subject to tax withholding. CIT (Intl. Tax) v. Samsung Electronics Co Ltd. [(2011) 16 taxmann.com 141 (Kar HC)] Payment made to a non-resident for obtaining licence to use database maintained by the nonresident regarded as royalty Wipro Ltd, the taxpayer, made certain payment to Gartner, a US company, for subscription to the database maintained by it. The taxpayer did not deduct tax at source while making such payment. The AO held that the payment was in the nature of royalty as well as fees for technical / included services as per provisions of Act and the DTAA between India and USA respectively and the taxpayer was liable to have deducted tax at source. The HC observed that mere fact that in the instant case, the issue did not pertain to shrink wrapped software or off the shelf software, but the access to the database maintained by Gartner was granted online, would not make any difference in the reasoning that such right to access would amount to transfer of right to use the copyright held by Gartner and the payment by the taxpayer is for license to use said database maintained by Gartner. .Accordingly the HC held that such payment was to be considered as royalty and the taxpayer was liable to deduct tax at source. CIT v. Wipro Ltd. [(2011) 16 taxmann.com 275 ( Kar HC)] Income arising from sale of software (without transfer of copyright) regarded as business profit and in absence of PE in India the same is not taxable in India Novel Inc., the taxpayer, a tax resident of USA, was a provider of information solutions. The taxpayer entered into a joint venture with Novell Software (India) Private Limited (Novell India). Novell India acted as distributor for the taxpayer and imported certain software from the taxpayer. Novell India would duplicate and sell or at times resell the same in the Indian subcontinent.

The taxpayer received royalty as per Distribution Agreement towards sales made by Novell India, pursuant to duplicating which was offered by the taxpayer as royalty income. The taxpayer also received payment from Novell India towards sale of software which was subsequently resold by Novell India to its end customers. The taxpayer claimed such amount as business income and in the absence of it having PE in India as per article 5 of India-USA DTAA, the same as not chargeable to tax in India. However, the AO held that the income from the sale proceeds of resale of software also represented royalty income covered under article 12(3) of DTAA between India and USA. The Tribunal observed that the taxpayer had simply transferred its computer software products to Novell India for consideration for the purposes of resale without giving any right to duplicate the same in any manner. The Tribunal held that incorporation of the words for the use, or the right to use, before the words any copyright could be construed as that the payment would be for the use of any copyright for it to be considered as royalty and not otherwise. The requirement is the use of `copyright of work and not that of the product derived from such copyright. Further the definition of royalty in India-USA DTAA unequivocally co-relates the payment for `use of the `right to copy the `work as a pre-condition for falling within the domain of `Royalty and therefore it cannot be held that the payment for the `use of copyrighted article finally drawn from the `work also qualify as royalty. Novell Inc. v. DDIT [(2011) 16 taxmann.com 186 (Mum Trib)] Payment made for live broadcast not taxable as Royalty Neo Sports Broadcast Private Limited, the taxpayer, entered into an agreement with Nimbus Sports International Pte Ltd (Nimbus), a commercial agent of Bangladesh Cricket Board for receiving and broadcasting cricket matches to be played in Bangladesh. The signals to be broadcasted by the taxpayer were for live matches as well as recorded matches. The taxpayer filed an application before the tax authorities seeking permission to make payments without deduction of tax at source from the amounts due to Nimbus towards broadcasting of live matches.

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The Tribunal referring to the Copyright Act, on the ground of construing the payment as royalty, held that copyright means exclusive right to use the work in the nature of cinematography. The existence of work is a pre-condition and must precede the granting of exclusive right for doing of such work. Unless the work itself has been created, there cannot be any question of granting copyright of such work. The process of doing or creating the work itself cannot be simultaneous with the use of such work. Accordingly, the Tribunal held that there is no copyright involved in the live events and depicting the same cannot infringe any copyright and therefore cannot be considered as royalty. On the ground of business connection, the Tribunal observed the relevant criteria is carrying out of business operations in India by a non-resident and not the earning of income by any resident from the use of any product acquired from the non-resident. Where the non-resident only allows some resident to exploit certain right vested in it on commercial basis, it cannot be said that the non-resident has carried out any business activity in India. The act of the taxpayer earning revenues from India cannot lead to a business connection of Nimbus in India as the transaction between the taxpayer and Nimbus was confined to receiving broadcasting right for a consideration. ADIT v. Neo Sports Broadcast (P.) Ltd. [(2011) 15 taxmann.com 175 (Mum Trib)] Amounts received from provision of operational and support services to Group companies through cost allocation taxable as FTS under Article 12 of IndiaNetherlands DTAA The applicant, Perfetti Van Melle Holding B.V is a tax resident of Netherlands provides operational and other support services for the benefit of companies of Perfetti group located in various countries, including India through a services agreement and the amount is charged to group companies on cost-to-cost basis without any mark-up. The Perfetti Group, through the applicant and another group company had also entered into a separate Trademark Technology and Know-how License Agreement (Technology Agreement) under which the Indian company had been given a right to

use the proprietary knowledge and processes of the Perfetti Group in the confectionary industry against a royalty payment. The applicant sought a ruling for the taxability of the amounts received pursuant to the services agreement from the Indian company and also on the applicability of withholding taxes on the amounts received. The AAR observed that the support services are not intended to be provided on a stand-alone basis without referring to the technology agreement and held that the services agreement has not brought anything specifically which is not covered under the technology agreement. The AAR held that Services agreement has been entered into by the Indian Company with the applicant to enjoy the rights or information under the technology agreement. Accordingly, the AAR held that both the agreements are inextricably linked to each other or at least complimentary to each other. The services rendered under the services agreement read with technology agreement are taxable as FTS since such services are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 4 of the Article is received and hence the payments would be subject to withholding tax under section 195 of the Act. Perfetti Van Melle Holding B.V. AAR 869 of 2010 Offshore supply of equipment and supply of software forming integral part of equipment not taxable in India The taxpayer is a company incorporated in Sweden undertook projects on turnkey basis with cellular operators in India involving supply of hardware and software, installation and commissioning and after sales services. The issues for consideration were whether the sale of telecommunication equipment to cellular operators in India constituted a business connection under the provisions of the Act and whether payments made for software that was sold as part of the telecommunication equipment was taxable as royalty under the Act and India-Sweden DTAA.

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The HC observed that in a transaction for sale of goods, the determining factor would be as to where the property in goods passes and that the place of negotiation of the contract; or place of signing or formal acceptance thereof; or overall responsibility of the taxpayer are not relevant circumstances. Further, the terms of the contract provide that the acceptance test was not material even for passing of the title and the risk, because even if such a test found out that the system did not confirm to the contractive parameters, the operators could call upon the taxpayer to cure the defect and/or claim damages. However, the operators did not have a right to reject the equipment on failure of the acceptance test. The HC held that since the sale of telecommunication equipment took place outside India; and the title in goods also passed outside India, the taxpayer has not earned any income in India through or from a business connection in India. On the question of royalty on the software supply, the HC observed that where the software is part of the hardware supplied and the software cannot be used independently, the software would be considered as merely facilitating the functioning of the telecommunication equipment, thereby forming a part of it. Accordingly the HC held that the consideration paid by the cellular operators would amount to royalty only if they had obtained all or any copyright rights in such software that is protected in India as literary work and a distinction must be made between the acquisition of a copyright right and a copyrighted article. Thus the payment for the software forming part of the equipment could not be regarded as royalty. DIT v. Ericsson A.B. [(2011) 16 taxmann.com 371 (Delhi)] Payment received by non-resident for rendering services to Indian companies is not taxable as royalty where no economic consideration was paid to use name and logo Harvard Medical International U.S.A., the taxpayer, is a non-resident incorporated in U.S.A. The taxpayer received certain sums from Max India Ltd. (Max) and Wockhardt Hospital Ltd. (WHL) for rendering services in relation to health care.

The AO, after considering the nature of services rendered by the taxpayer, was of the view that 90 per cent of the said payments was in the nature of royalty taxable under Article 12(3) of India-US DTAA and balance 10 per cent was in the nature of FIS taxable under Article 12(4) of India-US DTAA. The Tribunal, held that the consideration received was not a payment for right to use any copyright, trademark or industrial, commercial or scientific experience and hence could not be construed as royalty. On the other hand the payment to the taxpayer was against services provided to WHL and Max on account of advice and assistance in relation to development of overall strategy, quality programs and systems, medical education and training programs, selection of clinical specialists, etc; the taxpayer as such did not make available any

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technical knowledge, experience, skill knowhow or process and hence the consideration received could not be considered as FIS. The Tribunal also observed that no economic consideration for right to use the name or logo was provided by the taxpayer to WHL and accordingly held that the payment cannot be split to treat a part of it as royalty and a part as FIS, if the same has not been specifically agreed.to between the parties. Thus the entire payment received by the taxpayer from WHL and Max was in the nature of business profits and since the taxpayer did not have a PE in India the same cannot be brought to tax in India. JDIT v. Harvard Medical International, USA [(2011) 16 taxmann.com 69 (Mum)]

Permanent Establishment Article 7 of the DTAA gives primacy to the provisions stipulated in the domestic tax legislation for computation of the taxable income The taxpayer, a non-resident company was engaged by its Indian AE to provide services towards evaluation of iron ore quality testing, etc. The taxpayer provided the services through its division in India, which constituted a PE in India and accordingly it offered the income to tax on net basis. However, the AO held that payments were taxable as FTS on gross basis and no deduction for expenses was allowed in view of restriction under section 44D of the Act. The HC held that where the taxpayer has a PE in India, fee for technical services is taxable not under Article 12 of the DTAA relating to taxation of royalty or FTS but under Article 7 of the DTAA relating to taxation of business income. Article 7(3) of the India-Australia DTAA provides that in order to determine the profits of a PE, deduction of expenses shall be allowed in accordance with and subject to limitations in domestic tax law. Accordingly, it has given primacy to the provisions stipulated in the domestic tax legislation in computing the business income of the taxpayer. Therefore, the fee for technical services is taxable on gross basis under section 115A of the Act and in view of the provisions of section 44D of the Act no deduction of expenses is admissible. Rio Tinto Technical Services [(2011) 340 ITR 497 (Delhi)] Where non-resident company had paid commission to its Indian agent at arms length price, no further income of non-resident company in respect of said transaction would be taxable in India The taxpayer, a UK based company, appointed its group company in India (BBC India) as its agent to solicit orders for sale of advertising airtime on the channel at the rates and on the terms and conditions provided by the taxpayer. In consideration for the services provided, BBC India received 15% of the advertisement revenues earned by the taxpayer from Indian advertisers as marketing commission. The taxpayer did not undertake Function, Asset and Risk analysis in the initial years;

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however, BBC India had undertaken the same and the TPO accepted that commission received was at arms length price (ALP). The HC held that once the commission is treated as at ALP in the hands of recipient (i.e. BBC India), a different view could not be taken in the case of taxpayer who had paid the same commission to its agent. BBC Worldwide Ltd [(2011) 203 Taxman 554 (Delhi HC)] Leasing of assets in India by non-resident does not result in PE or business connection in India The taxpayer, an Indian company, entered into an agreement with a foreign company for hiring certain machinery. The taxpayer paid hiring charges to the foreign company without deducting any tax at source. The AO held that the foreign company had a business connection with the taxpayer and consequently disallowed deduction for hiring charges as the taxpayer had failed to deduct tax at source. The Tribunal observed that the foreign company was sole, lawful and absolute owner of the machinery and the machinery was delivered outside India. The agreement with the taxpayer was on principal to principal basis and that it did not create a partnership or joint venture between parties. Further there was no material on record to conclude that the foreign company had any presence in India. Accordingly, the Tribunal held that foreign company did not have a PE or business connection in India; the hiring charges were not chargeable to tax and hence there was no obligation on the taxpayer to deduct any tax at source from such hiring charges. Calcutta Test House Pvt. Ltd. [(ITA No. 1782/Del/2011)] Others Taxpayer is not required to deduct tax on exchange rate fluctuations at the time of remittance The taxpayer entered into research and know-how agreement with a foreign collaborator. It credited entire sum payable to foreign collaborators account in its books of account and paid tax on the amount of such credit. During the relevant year, the taxpayer

claimed deduction of 1/5th of the amount and the loss on account of the fluctuation in exchange rate at the time of remittance of money.. The AO held that the taxpayer deducted tax at source only in respect of original amount and not on the additional amount arising because of exchange fluctuation and accordingly disallowed deduction of foreign exchange fluctuation loss because of non-deduction of tax at source under section 40a(ia) of the Act. The Tribunal observed that under section 195 of the Act, deduction of tax is to be made at one instance i.e. either at the time of credit of such income to the account of the payee or at the time of payment thereof, whichever is earlier and does not envisage deduction of tax at both instances. The amount remitted was only a part of the total obligation and not in addition to the amount credited. In the year, on account of fluctuation in foreign exchange rate, only the cost of remitting the amount to foreign collaborator has increased, but there was no additional amount of Swiss Kroner that was payable to the foreign collaborator other than the amount credited to its account in the earlier year. Accordingly the Tribunal held that since the taxpayer had deducted tax at source at the time of credit, it was not required to deduct tax again, at the time of payment of sum during the relevant year under consideration. and there was no obligation to deduct tax at source on the foreign exchange loss. The Tribunal further observed that even otherwise, disallowance is applicable to non-deduction of tax and not to the short deduction of tax. Accordingly, without prejudice to the first conclusion, the Tribunal held that foreign exchange loss could not be disallowed as it was case of short deduction of tax. Sandvik Asia Ltd [(2012) 18 Taxmann.com 22 (Pune-Trib.)] Procedures AAR cannot admit application for advance ruling where assessment proceedings are in progress The applicant filed an application before the AAR on the issue of taxability of the amounts received/ receivable

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by it under the offshore supply contract with an Indian Company. The Revenue authorities raised objection on entertaining the application on the ground that on the date of filing the application, following proceedings were pending before the income tax authorities: AY 2007-08: Re-assessment notice was issued; AY 2008-09 and 2009-10: Assessment notices were issued; AY 2011-12: Order under section 197 of the ITA was subject to revision proceedings. On maintainability of the application, the AAR reiterated its position that mere pendency of a proceeding under section 195 or 197 of the Act or even a final order thereon does not stand in the way of an application for advance ruling being entertained. It further held that where during the course of assessment proceedings, a questionnaire is served on the taxpayer asking some questions, it does not restrict the scope of the enquiry to be made under such proceedings. The assessing officer has to deal with all the claims of the person furnishing the return arising out of the return. Accordingly, it held that pendency of assessment/ reassessment proceedings before the tax authorities creates a bar under the Act to approach the AAR, even if the specific question is not raised in the assessment/ reassessment proceedings by the AO as on the date of the application. SEPCO III Electric Power Construction Corporation [(2011) 340 ITR 225 (AAR)] Circulars & Notifications Protocol with Swiss Federation for amending the DTAA notified The protocol amending the DTAA between India and the Swiss Federation, signed on 30 August 2010, has been notified on 7 October 2011 and shall be effective in India in respect of income arising in any fiscal year beginning on or after 1 April 2012. However, as regards Article 26 relating to exchange of information, the Protocol will be applicable for information that relates to any fiscal year beginning on or after the 1st day of April 2011. The amendments to the DTAA made vide this Protocol include: 1) Amendments regarding tax treatment of the income

in respect of business of operation of ships or aircraft in international traffic; 2) The words directly or indirectly have been deleted from Para 1 of Article 7 Business Profits (If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment.) Corresponding explanation in the Protocol to the DTAA regarding what is understood by directly or indirectly has also been deleted; 3) The existing Article 26 (Exchange of Information) has been replaced by detailed provisions for exchange of information the information that can be exchanged, the rights and obligations of the requestor and provider of information, maintaining secrecy of the information so exchanged etc.; 4) Further, the Protocol to the DTAA has been amended to provide: a) Resident to include recognized pension fund or pension scheme b) The existing MFN clause in the Protocol to the DTAA has been replaced by this Article to now include: i. The relevant provisions of the DTAA not to apply to dividend, interest, royalty, FTS or other income paid under or as a part of conduit arrangement. ii. Rate of taxation of dividends, interest and royalties & FTS to be limited to the rate provided in any treaty with an OECD country entered into after the signature of the amending Protocol (30 Aug 2010). iii. Where the scope in respect of royalties or FTS is restricted by any treaty with an OECD country entered into after the date of signature of the amending Protocol (30 Aug 2010), India and Switzerland would enter into negotiations to provide the same treatment. Notification No. 62/2011[F.No.501/01/1973-FTD-I], dated 27-12-2011

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Agreement between India and the Cayman Islands for the exchange of information with respect to taxes notified India had signed an agreement for the exchange of information with respect to taxes with the Cayman Islands on 21 March 2011. The Agreement has been notified on 8 November 2011. Notification No.61/2011[F.No.503/03/2009-FTD-I], dated 27-12-2011 India signs the Convention on Mutual Administrative Assistance in Tax Matters for promotion of international co-operation India on January 26, 2012 has signed the Convention on Mutual Administrative Assistance in Tax Matters, a multilateral agreement, which promotes international co-operation while respecting the rights of taxpayers. The Convention became open for all countries in June 2011 for developing a broader multilateral approach to improve the effectiveness of exchange of information, co-operation between the countries in the assessment and collection of taxes, with a view to combating tax avoidance and evasion. So far, there are 31 signatories to the Convention. Apart from India, the other signatories are: Argentina, Australia, Belgium, Brazil, Canada, Denmark, Finland, France, Georgia, Germany, Iceland, Indonesia, Ireland, Italy, Japan, Korea, Mexico, Moldova, Netherlands, Norway, Poland, Portugal, Russia, Slovenia, South Africa, Spain, Sweden, Turkey, Ukraine, the United Kingdom, and the United States. Out of the 31 signatories, 12 of them have ratified the convention so far. Salient features of this multilateral convention include: based on international standard of transparency and exchange of information; multilateral and a single legal basis for multi-country co-operation as against the DTAAs/TIEAs which are bilateral. It provides for an extensive network and there will be consistent application of provisions leaving limited scope for deviation; extensive forms of co-operation among the signatories on all taxes; facilitates the exchange of information as well as provides for assistance in the recovery of taxes; simultaneous tax examinations and participation in tax examinations in other countries;

allows tax officials to enter into the territory of the other country to interview individuals and examine records; automatic exchange of information and spontaneous exchange of information; service of documents in other country; exchange of past information in criminal tax matters; information received under the Convention can also be used for other purposes besides those related to tax co-operation, for example to counter money laundering with the approval of the supplying state. PIB release: 27 Jan 2012 DTAA with Georgia notified India had signed an agreement for the avoidance of double taxation and the prevention of fiscal evasion with Georgia on 21 August 2011. The DTAA has been notified on 8 December 2011 and shall be effective in respect of taxes withheld at source, to income paid or credited on or after 1st April 2012 and in respect of other taxes on income, and taxes on capital, to taxes chargeable for any fiscal year beginning on or after 1 April 2012. Notification No.4/2012[F.No.503/05/2006-FTD.I], dated 6-1-2012 Government updates the FAQs on provident fund for International Workers The Government of India [GOI] has updated the FAQs for international workers [IWs] on 20th December, 2011 with the view to address ambiguities related to the provident fund provisions for IWs and provide a status on Indias Social Security Agreements (SSAs). The list of in force SSAs together with their effective dates is tabulated below: Country Name Belgium Germany (Limited) Switzerland Denmark SSA Effective date Country Name September 1, 2009 October 1, 2009 January 29, 2011 May 1, 2011 Luxembourg France Netherlands SSA Effective date June 1, 2011 July 1, 2011 December 1, 2011

Republic of Korea November 1, 2011

All the SSAs provide for detachment subject to conditions. The in force SSAs, with the exception of Germany, also provide for exportability of benefits. Totalization does not find mention in the Germany,

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Switzerland and Netherland SSAs. Besides the eight SSAs indicated above, the GOI has signed agreements with the Czech Republic, Hungary and Norway, though these have not yet been made effective. Further, negotiations are at various stages for concluding SSAs with Canada, Sweden, Finland, Austria, Portugal, Japan, Australia and USA. The GOI is also holding talks with other countries where sizable number of Indian workers are employed. Updates to FAQs posted onto the website www. epfindia.com on 20th December 2011

Verification of High Value Transactions (Investments/Deposits/Expenditure) of persons who are not assessed to Income Tax The Central Board of Direct Taxes has directed the Income Tax department to launch a special drive, from 20th January to 20th March, 2012, for verifying high value transactions(investments/deposits expenditure) from persons who are not assessed to income tax or who have not furnished their PAN while entering into such transactions. The CBDT has also issued proforma for query letters and responses to be issued to the high value investors/depositors/spenders. Press Release No. 402/92/2006-MC (03 OF 2012), Dated 18-1-2012

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Transfer Pricing

Controlled transaction acceptable as comparable in specific circumstances The Tribunal laid down the following principles for determining ALP: In case where the FAR analysis indicates diversion in two activities, then benchmarking should be done on separate basis; Allocation of employee cost and rent on an ad hoc basis is not acceptable and in the absence of any other reasonable basis, the bifurcation of the said expenses in the ratio of turnover is appropriate; Where the taxpayer fails to provide any comparable companies even after getting the opportunity, the TPO is justified in undertaking the exercise of identifying comparable cases (even controlled transaction) on his own for the purpose of making comparison with taxpayers results; and Where it is an admitted position between the taxpayer and the TPO that there is no comparable uncontrolled transaction due to the nature of transaction being such that it is ordinarily between associated enterprises, in such a case, a transaction between two associated enterprises at arms length price, though technically called controlled transaction, would partake of the character of uncontrolled transaction for the purposes of determining the ALP in a later international transaction between two AEs. Bayer Material Science Pvt. Ltd. v. Addl. CIT (ITA No. 7977/Mum/2010) ALP should be determined based on FAR undertaken while discharging the business The Tribunal held that ALP should be a reflection of the functions performed, assets deployed and risks assumed by the AEs whilst discharging the business. The Tribunal rejected the taxpayers method of determining remuneration on cost plus mark-up basis noting that the AE did not have the capacity of executing the sourcing functions carried out by the taxpayer in India. Given the nature of significant functions performed by the taxpayer, the remuneration should be determined

based on percentage of FOB value of exports and apportioned the remuneration in the ratio of 80:20 (80% in favour of the assessee & 20% in respect of AE). The Tribunal also held that amount of transfer pricing adjustments should not exceed the compensation received by the AE. Li & Fung (India) Private Limited v. DCIT, Circle 4 (1), New Delhi TPO not bound to disclose the entire process followed for collection of information u/s 133(6) The Tribunal held that the TPO is entitled to take into consideration contemporaneous data that becomes available after the specified date and may not inform the taxpayer about the process used by him for issuing the notices u/s 133(6) of the Act. However, if any information collated u/s 133(6) is sought to be used by TPO against the taxpayer then such information is required to be furnished to the taxpayer and objections of the taxpayer pertaining to the same to be considered by the TPO. The taxpayer should also be extended an opportunity to cross-examine parties concerned. Further, the Tribunal also upheld the use of turnover filter and standard deduction of +/- 5% under the proviso to section 92C(2) of the Act. Kodiak Networks (India) Private Limited vs. ACIT, Bangalore (ITA No.1413/Bang/2010) Adjustments to be restricted only to international transactions The Tribunal held that the adjustments should be restricted only to the international transactions with the AEs. The Tribunal upheld the standard deduction of +/-5% range benefit under the proviso to section 92C(2) of the Act. Further, it also held that any transfer pricing adjustment should not automatically lead the tax authorities to reject the books of accounts unless specific defects are noted. Phoenix Mecano (India) Ltd v. DCIT, Mumbai (ITA No.7646/Mum/2011)

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International Tax Developments

Netherlands proposes interest limitation on certain debt-funded acquisitions The Dutch Chamber of Deputies on 17 November 2011 passed, with two major amendments, a draft regulation proposed in September by the Ministry of Finance to impose new limits on interest deductions on excessively leveraged acquisitions. The Senate (Upper Chamber) must still pass the regulation, but is not expected to make major changes. The new rules would apply to intercompany and third-party loans (or comparable agreements) and are designed to prevent the deductibility of excess interest expenses against the profits of an acquired Dutch Target by way of a fiscal unity. The new regulation will have potential impact on tax position where an acquisition has been executed but the acquired company has not yet been included in the fiscal unity, as well as for acquisitions under consideration or set in motion but not yet completed. Germany amends anti-treaty shopping rule The German Upper House has adopted the Act for implementation of EU Directive on the recovery of tax Claims on November 25, 2011 which amends the German anti-treaty shopping rule. The act will enter into effect on 1 January 2012. Germany levies a 26.375% withholding tax (including the solidarity surcharge) on dividend distributions made by a German corporation. A lower rate frequently applies on distributions to foreign corporate shareholders that hold directly at least 10% of the capital of the distributing corporation, either because the rate is reduced under an applicable tax treaty or because the distribution qualifies for the application of the EU Parent-Subsidiary Directive. The relief from the withholding tax, however, is subject to Germanys anti-treaty/anti-directive shopping rule in section 50d paragraph 3 of the Income Tax Act. Under the present regime, the anti-treaty shopping test consists of all of the following tests: Business purpose test There are economic or other relevant (i.e. nontax) reasons for the interposition of the foreign company; Gross receipts test The foreign company generates more than 10% of its gross receipts from its genuine business activities; and

Substance test The foreign company has adequate business substance to engage in its trade or business and engages in general commerce (mere administrative functions, outsourced activities or activities carried out by related parties in the same jurisdiction are not taken into account in determining business substance). Under the revised anti-treaty shopping rule, if the foreign company is not owned by shareholders that would have benefited from the same relief had they earned the income directly and if the company did not earn the gross receipts in connection with its genuine own business activities, the company would be entitled to withholding tax relief only if both the Business purpose and Substance test are met. The revised anti treaty shopping rule is an improvement for many non-resident taxpayers investing into Germany as it eliminates the difficult gross receipts test. In all cases where the dividends (or other income subject to withholding tax) are not deemed to be earned from a genuine own business activity, it is unclear how the tax authorities will handle cases in practice and the level of scrutiny they will place on the business purpose test. Russia tax incentives and government support for IT and high-tech companies The Russian government has introduced a number of incentives for IT and high technology companies. The introduction of a variety of tax and non-tax incentives, a willingness to reduce administrative burdens, eliminate barriers and provide financial support to foreign business are significant steps to attracting foreign talent and investment into Russia. The main features of recent initiatives by the Russian Government to attract more investment are Tax incentives for IT companies Subject to certain conditions, IT companies doing business in Russia are eligible for a reduced social contribution rate of 14% (until 2017) on cumulative annual salary of their employees up to USD 17,000 (which provides a considerable savings on the standard tax rate of 30%), plus an additional 10% on annual earnings above USD 17,000. Certain IT companies can obtain an immediate tax write-off for computer hardware.

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These incentive are available only to Russian entities (including Russian subsidiaries of foreign companies), a number of companies currently operating through a Russian branch or representative office are considering restructuring their businesses to obtain the incentives. Technology and Innovation SEZs Russia currently offers four categories of special economic zones (SEZs), covering the technology and innovation, industrial, tourist and port and logistics industries. Companies established within the boundaries of an SEZ benefit from reduced bureaucratic regulation and a free customs zone, but SEZ-related tax benefits have not hitherto stood out as a compelling incentive to invest in the zones. Notably, while there has been an exemption from the 2.2% property tax and a reduction in profit tax from 20% to 15.5% (13.5% regional and 2% federal), many regional authorities have long granted similar tax incentives to investors in their region outside any zone (subject to meeting various investment criteria). As a recent measure, for units located in SEZ from year 2012, the regional authority may grants a reduction in the regional portion (13.5%) of profit tax down to 0%, leaving only the 2% federal portion due by a company located there, with companies in technology (and tourist) zones further exempted from the 2% federal portion. To what extent regional authorities with reduce profit tax in SEZ below 13.5% and based on what criteria remains unclear. Nevertheless prospective investors in Russia should more carefully consider SEZs to determine whether the potential tax benefits render the case for locating within SEZ more persuasive.

Consolidated group rules introduced/investment rules eased by Russia Russia on 16th November 2011 also introduced a new law providing, subject to specified requirements for the concept of consolidation for tax purposes. The consolidation regime represents a step forward in converging Russian tax and accounting standards. The ability to consolidate profits and losses will allow companies to optimize and control tax costs. Although regime will be available to large Russian businesses, it is likely that caps established by the law will be lowered. Hungary Corporate tax changes The Hungarian Parliament approved a series of tax law changes on 21 November 2011, several of which affect multinational companies operating in the country. Changes have been made to the participation exemption, the thin capitalization rules, loss carry forwards and the binding ruling practice, as well as the Accounting Act. In addition, the VAT rate will increase from 25% to 27%. The new rules will apply as from 1 January 2012. In addition, the previously passed provision that would have uniformly lowered the corporate income tax rate to 10% irrespective of the tax base as from 2013 has been scrapped. As a result, the current corporate income tax rates will remain in effect: the generally applicable rate of 19% and the preferential 10% rate applying to up to HUF 500 million of the tax base. U.K. issued draft legislation on CFC reform The draft legislation on CFC reforms was issued on 6 December 2011 outlining significant changes to the U.K.s controlled foreign corporation (CFC) rules. The proposed regime will only target profits that have been artificially diverted from U.K. and should take many groups outside the scope of the CFC rules and ease the associated compliance burden and will increase the attractiveness of the U.K. as a holding jurisdiction.

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The CFC proposals are based on the principle that overseas activities are not taxed in the U.K. unless there is an artificial reduction of the U.K. tax base. Additionally, where a CFC charge applies, it will be proportionate, targeting only profits that have been artificially diverted from the U.K. This is a welcome move away from the current all or nothing approach. In addition to this more refined targeting of the legislation, it is recognized that the associated

compliance burden needs to be kept to a minimum. Groups, therefore, will be able to apply the available exemptions, including a new gateway test, in any order. The new CFC regime will apply to both foreign subsidiaries and exempt foreign branches of U.K. companies. It is expected that the new rules will have effect for accounting periods beginning on or after the date of Royal Assent to Finance Bill 2012, but this is subject to further consultation

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Indirect Tax

Service Tax Notifications / Circulars Extension of benefit of exemption from service tax on services provided in relation to transport of goods by rail CBEC has extended the exemption from levy of service tax on taxable services provided by Government Railways to any person in relation to transport of goods by rail and the abatement provisions in respect of services of transport of goods by rail from 1 January 2011 to 1 April 2011. Notification No. 49, 50 and 51/2011-ST dated 30 December 2011 Introduction of simplified scheme for electronic refund of service tax paid on the specified services used for exported goods Government has introduced a simplified scheme for electronic refund of service tax to exporters of goods, on the lines of duty drawback. According to this new scheme, on input services exporters have two options: To opt for refund which is based on the schedule of rates as specified for goods or their class or; To opt for refund on the basis of documents in respect of specified services subject to certain conditions In respect of refund procedure based on schedule of rates: The Procedure for claiming the refund through the ICES system has been prescribed through a notification. The refund of service tax paid on the specified services shall be calculated as a percentage of the FOB value of the exported goods by applying the rate specified in the Schedule for the said goods.

The service tax refund will be enabled by the Indian Customs EDI System resulting in the amounts getting directly credited into the exporters bank accounts within a few days of confirmation of export without additional export documentation. Circular No. 149/18/2011 ST dated 16 December, 2011 & Notification No. 52/2011-ST dated 30 December 2011 Service tax return filing date for the period April 2011, to September 2011 further extended CBEC has further extended the due date of filling half yearly service tax return for the period April 2011 to September 2011 to 20 January, 2012. Order No. 1/2012-ST dated 9 January 2012 CBEC specifies documents required for registration of Service tax CBEC has specified that, for a new online service tax registration, following attested documents are to be submitted by the applicant along with a printed copy of the online application signed by the authorised signatory of the applicant within a period of 15 days from the date of filing of application for registration: PAN Card; Proof of address; Constitution of applicant at the time of filing an application for registration; Power of attorney in respect of authorized persons. It is also clarified that, the time limit of 7 days from the date of receipt of application for service tax registration, within which the service tax registration is to be granted shall be reckoned from the date the application for registration is complete in all respect. Order No. 2/2011-ST dated 13 December, 2011

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Clarifications on levy of Service tax on distributors / sub-distributors of films and exhibition of movie CBEC has clarified the taxability of profit/revenue sharing arrangement in case of distribution of films and exhibition of movies in the following manner: Type of Arrangement Principal to Principal Basis Movie displayed on whose account Service Tax Implication

the collections made from various airlines for the ground handling services rendered on which service tax was already discharged by Air India Ltd., was not liable to service tax. Commissioner of Central Excise v Cochin International Airport Ltd. [2011 (24) STR 20 (Ker.)] Distribution of CENVAT credit by an Input Service Distributor is allowed subject to the limitations in CENVAT Credit Rules The Karnataka High Court has held that there are only two limitations which are imposed on the distribution of CENVAT credit by an input service distributor. Firstly, the CENVAT credit cannot exceed the amount of service tax paid and secondly, the CENVAT credit of service tax attributable to service used in a unit exclusively engaged in the manufacture of exempted goods or providing of exempted services shall not be distributed. Therefore, once a manufacturer is registered as an input service distributor, there is no prohibition under law on payment of service tax on input service at one unit and availment of CENVAT credit of the same at another unit of the manufacturer. Commissioner of Central Excise, Bangalore v ECOF Industries Pvt. Ltd. [2011-TIOL-770)-HC-Kar-ST] Demand raised after retrospective amendment of provision is not valid It was held that in case a provision is amended with retrospective effect, the department can proceed with the demand only if the matter was kept alive at the time when original provision was in force. In other words, the demand can be raised only if the assessee had been served with demand notice at the time when the original provision which is amended retrospectively, was in force. Else, no action can be initiated afresh after the amendment is introduced validating action taken under the provisions prior to the retrospective amendment. Precot Mills Ltd. v Union of India [2011 (24) STR 283 (Ker.)] Services provided after the appointed date, which is the date of amalgamation, to the amalgamated company does not attract service tax The CESTAT has held that the services provided by the

If the movie is exhibited by Service tax would be levied theatre owner or exhibitor under copyright service on his account by virtue of temporary transfer of copyrights If the movie is exhibited on behalf of distributor or subdistributor or area distributor or producer etc. without transfer of copyrights Service tax would be levied under business support service / renting of immovable property service, as the case may be, depending upon the arrangement whether the theatre owner has merely let out its premises to the distributor or is also involved in giving support services for the business of the distributer

Arrangement under unincorporated partnership/ joint/ collaboration basis

Service provided by each of the person i.e. the new entity/ Theater Owner or Exhibitor / Distributor or Sub-Distributor or Area Distributor or Producer, as the case may be, is liable to service tax under applicable service head based on the nature of transaction Circular No. 148/17/2011 ST dated 13 December, 2011 Clarifications on Service tax on IPLC charges CBEC has clarified that the IPLC services rendered by a person located outside India to a person located in India, is neither taxable under the category of Telecommunication Services, nor taxable under the category of Business Support Services and rescinded its earlier view of applicability of service tax under the category of Business Support Services provided through letter F.No 137/21/2011 ST dated 15 July, 2011. Letter F.No. 137/21/2011 ST dated 19 December, 2011 Case Laws Royalty paid for ground handling services at airport is not subject to service tax The Kerala High Court has held that the royalty paid by Air India Ltd. to Cochin International Airport Ltd. out of

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transferor company to the transferee company after the appointed date as presented in the scheme of amalgamation would not be liable to service tax. Commissioner of Service Tax, Delhi I v ITC Hotels Ltd [2011-TIOL-1453-CESTAT-Del] Service provided to Principal situated outside India to market products in India, whether constitutes export of service Some of the points of difference in views of members that have been referred to third member for decision are: Whether the Business Auxiliary Service of promotion of market in India for foreign principal amounts to export of service. Whether such services for promotion of market in India for foreign principal were delivered outside India and used there at. Microsoft Corporation (I) (P) Ltd. v Commissioner of Service Tax, New Delhi [2011-TIOL-1508-CESTAT-Del] Services provided to Principal situated outside India to market products in India, whether constitutes export of service Some of the points of difference in views of members that have been placed before the President of CESTAT for appropriate orders are: Are the provisions of Export of Services Rules, 2005 and circulars issued by CBEC clarifying the scope of the said Rules in conflict with the meaning of the term export given by Article 286 (1)(b) of the Constitution of India and the decisions of the Apex Courts. Are the provisions of Export of Services Rules, 2005 and circulars issued by CBEC clarifying the scope of the said Rules in conflict with the theory of equivalence in respect of laws as applicable to taxes on goods and taxes on services Whether the issue as to what constitutes export of service is to be determined with reference to provisions in Export of Services Rules, 2005 only? Which is the service to be considered for deciding the factum of export whether that provided to the principal abroad or that provided to the person enjoying the service in India who does not pay any consideration for the services. Paul Merchants Ltd. v CCE Chandigarh [2011-TIOL-1448CESTAT Del]

Charges collected for restructuring and prepayment of loans are subject to Service tax It was held that in respect of charges collected for prepayment of loans and resetting of interest there is an element of service. Accordingly, it was held that such charges collected by the Appellant are towards value added services and hence are subject to service tax notwithstanding the fact that accounting treatment given to these items as additional interest has been accepted by the Income tax department. In so far as the reliance was placed on the decisions of European Court of justice holding that cancellation charges cannot be considered as having any direct connection with supply of service, the Tribunal held that without comparing statutory provisions it will not be appropriate to rely upon the decisions of European Courts. Housing & Development Corporation Ltd. (HUDCO) v CST Ahmedabad [2011-TIOL-1606-CESTAT-AHM] Refund of service tax paid on the input services prior to registration It was held that the refund of service tax paid on input services used for the provision of output services which are exported cannot be denied on the ground that there is delay in obtaining service tax registration and the input services pertain to pre-registration period. Wipro BPO Solutions Ltd. v CST, Delhi [2011-TIOL1592-CESTAT-Del] and Textech International (P) Ltd. v Commissioner of Service Tax, Chennai [2011] 33 STT 233 CESTAT Affiliated companies holding separate service tax registrations to be treated as distinct entities It was held that show cause notice cannot be issued to a company for recovery of service tax from its affiliated company, without lifting the corporate veil to prove that the affiliated company is a sham. The affiliated companies who are granted separate service tax registrations by the department are to be treated as distinct entities. Sai Computer Consultancy v Commissioner of Central Excise [2011 (24) STR 624] [CESTAT]

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Constitutional validity of the explanation inserted to the taxable services of Commercial or Industrial Construction Services and Construction of Residential Complex Service and levy of service tax on services in relation to provision of preferential location upheld. Writ petition was filed in the High Court of Mumbai challenging the constitutional validity of: Insertion of the explanation to clauses (zzq) Commercial or Industrial Construction Services and (zzzh) Construction of Residential Complex Service of section 65(105) of the Finance Act, providing that the construction of a new building and complex respectively under the taxable categories which are intended for sale by the builder shall be deemed to be service provided by the builder to the buyer except in the cases where no part of the consideration for sale is received before the grant of completion certificate by competent authority. Levy of service tax on services in relation to provision of preferential location by insertion of clause (zzzzu) in section 65(105) of the Finance Act. The writ petition was dismissed upholding the constitutional validity of the amendments. Maharashtra Chamber Of Housing Industry and Others v UOI [2012-TIOL-78-HC-MUM-ST] Excise Notifications / Circulars Changes in Excise tariff effective from 1 Jan 2012 The World Customs Organisation has brought out the new version of the HSN effective from 1 Jan 2012. In line with this, India has amended its excise tariff schedules with effect from 1 Jan 2012 to incorporate the changes in classification. Pursuant to the same, various notifications have been brought out to amend the earlier notification to bring them in line with the change in classifications which have come into force with effect from 1 Jan 2012. Notifications No. 42/2011-CX to Notification No. 45/2011-CX, all dated 30 December 2011

Changes in HSN Classification and corresponding changes in RSP based valuation Pursuant to various changes in the HSN classification, the tariff heading of the products like napkins, diapers and tampons have been changed. Accordingly, in the notification No. 49/2008-Central Excise (N.T.) which specifies the abatement for various goods falling under RSP assessment, certain entries have been deleted and new entries have been added to give effect to such classification change of napkins and tampons and the said products continue to have the same 35 percent abatement as at present. Notification No. 30/2011-CE (N.T), dated 30 December 2011 Export Benefits extended to exports made to Nepal Pursuant to Revised Treaty of Trade between Government of India and Government of Nepal, the benefits / concessions available to an exporter for exporting of goods to other countries will now be available to exporters for exports to Nepal with effect from 1 March 2012. In this regard, six notifications have been issued which abolish the existing DRP for exports to Nepal and puts export to Nepal at par with exports to other countries (except Bhutan) Notification No 24/2011-CE (N.T) to 29/2011-CE (N.T) dated 5 December 2011; Circular No. 958/1/2012-CX, dated 13 January 2012 Exemption to Specific Steel tubes and pipes fabricated at construction site The Central government has provided for excise duty exemption to certain specified steel structures and steel tubes and pipes, if fabricated at the site of construction. Notification 41/2011-CE, dated 18 November 2011 Amendment in power of adjudication of Central Excise Officers The monetary limits for adjudicating cases (both extended period and others) for the Additional Commissioner was earlier fixed as cases involving duty above Rs 20 lakhs and upto Rs. 50 lakhs. The same has now been amended and fixed as cases involving duty above Rs 5 lakhs and upto Rs. 50 lakhs, which is same as the monetary limit prescribed for the Joint Commissioners. Circular No. 957/18/2011-CX-3, dated 25 October 2011

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Case Laws Debit of duty on goods cleared against SFIS scrip amounts to discharge of duty liability It has been held by the Tribunal that debit of duty on goods cleared against SFIS scrip amounts to discharge of duty liability and does not amount to availment of exemption from duty. Voltamp Transformers Ltd v. CCE, Vadodara [2011-TIOL-1708-CESTAT-AHM] Cenvat Credit cannot be denied once duty on final products has been accepted even if the activity does not amount to manufacture The assessee is in the business of undertaking the activity of de-coiling and cutting & slitting of coils and subjecting the same to pickling and oiling which activity has been clarified as not amounting to manufacture by CBEC in the year 2010 and the adjudicating authorities denied Cenvat Credit on the same grounds. The Honble Tribunal allowing the appeal of the assessee held that once duty on final products has been accepted by the department Cenvat credit cannot be denied even if the activity does not amount to manufacture. Ajinkya Enterprises v. CCE, Pune-III [2011-TIOL-1333-CESTAT-MUM] Delay in reversal of Cenvat Credit would not attract interest The issue involved in the case pertained to reversal of Cenvat Credit lying in the books of the assessee on the date of coming into force of the exemption Notification No.30/2004-CE dated 09/07/2004. It was held by the Honble Tribunal that it is a case of delay in reversal of Credit and not duty liability and as the revenue did not suffer any loss due to the same, interest would not be payable. CCE, Bangalore v. Aravind Brands Ltd [2011 (273) ELT 239 (Kar)] The metal scrap and waste generated while repairing worn out machinery does not amount to manufacture and thus not excisable The Apex Court held that, repairing activity in any possible manner cannot be called as a part of manufacturing activity and thus the process of repair and maintenance of the machinery of cement

manufacturing plant, in which M.S. scrap and iron scrap arise, has no contribution or effect on the process of manufacturing of the cement, which is the excisable end product. The SC in holding so set aside the decision of the Rajasthan HC in the case of UOI vs M/s Grasim Industries Limited & Anr. Grasim Industries Limited v UOI (2011-TIOL-100-SC- CX) Writ petition is convertible to an appeal It was held by the HC that the writ petition against dismissal of the appeal by CESTAT is not maintainable in view of the alternative remedy of appeal. However, it was laid down that since appeal in the case is to be made to the HC, conversion of the writ petition to an appeal is allowed as the writ was filed within the time period prescribed for an appeal. Vijay Plas Fabs Pvt Ltd v. CESTAT, Chennai [2011 (273) ELT 183 (Mad)] Each non-attendance against summons is a separate offence The HC in this case rejecting the petition of the appellant held that applicants non-appearance in response to the first three summons constitutes separate offence committed on each date of non-appearance, calling for three charges on those three counts. It was further clarified that this would not to mean that the applicant is to be held guilty of those charges but it only means that he is liable to be tried for each of the three charges. Vinod Kumar Jain v. Union of India [2011-TIOL-754-HC-MP-CX] No interest on goods cleared from the OEMs premises on payment of differntial duty It was held that a supplier of goods clearing the goods on payment of differential duty from the premises of the OEM themselves, does not create an interest liability as per the provision of the Central Excise Act, 1944. It was further held that even though section 11AB does not contemplate any time limit for issue of notice for recovery of interest, when there is no specific time limit for issuing demands, such action needs to be initiated within a reasonable period of one year. CEAT Ltd v. CCE, Mumbai [2011-TIOL-1669-CESTAT-MUM]

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Encashment of bank guarentee amounts to duty payment It was held by the HC that encashment of bank guarentee furnished as security for provisional assessment amounted to duty payment and assessee would be entitled to interest for its refund after three months after application for the same. Pace Marketing Specialities v. CCE[2011 (274) ELT 13 (All)] Customs Notifications / Circulars Changes in Customs tariff effective from 1 Jan 2012 The World Customs Organisation has brought out the new version of the HSN effective from 1 Jan 2012. In line with this, India has amended its customs tariff schedules with effect from 1 Jan 2012 to incorporate the changes in classification. Pursuant to the same, various notifications have been brought out to amend the earlier notification to bring them in line with the change in classifications which have come into force with effect from 1 Jan 2012. Notifications No. 116/2011-Customs to Notifications No. 119/2011-Customs, all dated 29 December 2011; Notifications No. 120/2011-Customs to Notifications No. 128/2011-Customs all dated 30 December 2011; Notification no. 87/2011-Customs(N.T), dated 15 December 2011;; Notification no. 115/2011- Customs, dated 28 December 2011; Notification no. 112/2011Customs, dated 20 December 2011 Exemption from SAD The Central government has provided for exemption from payment of 4% SAD on all goods exempted under Notification No 104/2010-Customs dated 1 October 2010 when imported from Nepal, which inter alia includes agricultural, horticultural, forest produce; minerals which have not undergone any processing; rice, pulses, flour, atta, bran and husk; all manufactured goods except the specified ones; specified copper products and zinc oxide etc. Notification No 107/2011- Customs, dated 5 December 2011

Bill of Entry (Electronic Declaration) Regulations, 2011 and Shipping Bill (Electronic Declaration) Regulations, 2011 notified The Central Government has issued Bill of Entry (Electronic Declaration) Regulations, 2011 for import of goods and the Shipping Bill (Electronic Declaration) Regulations, 2011 for export of goods through all custom stations where the Indian Customs Electronic Data Interchange System is in operation. Some of the salient features of the Regulations are mentioned below: The importer / exporter or customs broker may enter the declaration for import or export of goods in the ICEGATE by himself or by way of data entry through the service centre by furnishing the particulars; The bill of entry / shipping will be treated to have been filed and the self-assessment of duty will be deemed to be completed when the bill of entry number is generated by the ICEGATE; After the completion of assessment, the importer / exporter or customs broker will present the original bill of entry (customs copy) or the checklist for exports or for loading goods for exportation and the duty-paid challan to the proper officer of customs for an order permitting clearance. Notification No 79/2011(NT) - Customs and 80/2011(NT) Customs, both dated 25 November 2011 Issuance of instructions regarding exports under Duty Drawback scheme The Central government has issued the following instructions to the Customs Authorities based on the recommendations of the Comptroller and Auditor General of India (Indirect Taxes) on the Duty Drawback Scheme: The Assistant/Deputy Commissioner of Customs must pass a speaking order, detailing the reasons regarding the identity of the goods under reexport while granting Duty Drawback. Such speaking order following principles of natural justice needs to be issued in both cases i.e., where drawback is sanctioned or Deficiencies noticed in the claim shall be communicated to the exporter in the period of 10days from the date of filing of the claim. Drawback claims shall be disbursed within the prescribed timelines;

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 Periodic sample checks and verification shall be carried out with regard to export declarations, classification, weight, value of the export goods, availing of credit and realization of export proceeds. Circular No 46/2011, dated 20 October 2011 Exemption for panels of LCD TV The customs duty exemption for LCD panels for TV has been restricted to panels of 20 inches or more, and the actual user condition has been removed. Notification 101/2011-Customs, dated 17 November 2011 SAD refunds: Cost accountant certificate will be accepted For the refund of SAD, CBEC had prescribed for certification by a chartered accountant of the fact that the imported goods are sold on payment of VAT and that the incidence of SAD had not been passed on to the buyer. The same has now been allowed to be done by a cost accountant also. Circular 1/2012-Customs, dated 5 January 2012 Credit Scrips like SFIS, VKGUY for Clearances from Customs Bonded Warehouses The clearance of goods from Custom Bonded warehouses was earlier specifically allowable by utilizing only DEPB credit scrips as per the prescribed procedure. The CBEC has now clarified that the duty credit scrips issued under the Chapter 3 schemes of the FTP namely SFIS, VKGUY, FMS, FPS and SHIS are allowed for clearance of goods from Custom Bonded warehouses under the same procedure as prescribed for DEPB scrips and subject to the conditions and limitations mentioned in FTP (2009-14). CBEC Circular No. 50/2011-Customs, dated 9 November 2011 Clarification with regard to Classification of TV Tuners In light of the divergent practices followed regarding classification of TV tuners, CBEC has issued a clarification that TV tuners, both internal and external are most appropriately classifiable in Harmonised Customs Tariff in tariff item 85287100. CBEC Circular No. 52/2011-Customs, dated 11 November 2011

Exemption to goods imported from SAARC Countries The Central government has issued a notification exempting all goods other than those falling under Chapters 2203 to 2206, 220710, 2208 and 24 from the whole of Customs duty, when imported from the following SAARC Countries viz., Bangladesh, Nepal, Bhutan, Maldives and Afghanistan. Notification No. 99/2011-Customs, dated 9 November 2011 Clarification on the assessment of construction equipment under Project Imports Regulations CBEC has clarified that the scope of the items eligible for import under the Project Import Regulations, 1986, shall also cover construction equipments as auxiliary equipment if essentially required for initial setting up or substantial expansion of registered projects. Further, to ensure proper utilization of such goods imported, it has been clarified that the details of construction equipments imported and used for the project shall also be incorporated in the PSVC required to be submitted for finalization of project. CBEC Circular No. 49/2011-Customs, dated 4 November 2011 Amendment of Courier Imports and Exports (Clearance) Regulations, 1998 The Courier Imports and Exports (Clearance) Regulations, 1998, are now also applicable to goods imported or exported from Calicut airport. Notification No. 84/2011 Customs (NT), dated 29 November 2011 Customs Duty exemption to Ministry of Defense in relation to Goods for use in MR-SAM project The Central Government has exempted machinery, equipment, instruments, components, spares, jigs, fixtures, dies, tools, accessories, computer software, computer hardware, castings, forgings piping, tubing, chemicals, bio-chemicals, refrigerants, raw materials and consumables, ammunition and ground support equipments required for the MR-SAM Programme of Ministry of Defense. Such an exemption would be valid till 21 August 2016. Notification No. 102/2011-Customs, dated 18 November 2011

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Customs (Provisional Duty Assessment) Regulations, 2011 notified The new Customs (Provisional Duty Assessment) Regulations, 2011 have been notified thereby replacing the old Customs (Provisional Duty Assessment) Regulations, 1963. As per the new regulations, provisional assessment may be ordered if the importer or exporter is unable to make self-assessment or the proper officer is not able to verify the self-assessment or make reassessment of the imported goods or export goods. Further, the importer/exporter would be required to execute a bond which may be required to be with such surety or security, or both. These regulations also prescribe a penalty for contravention of its provisions which may extend to fifty thousand rupees. Notification No. 81/2011 Customs (NT.), dated 25 November 2011 All India Rates of Drawback - Board explains amendments All Industry Rates (AIR) of Duty Drawback 2011-12 were notified vide Notification No. 68/2011-Cus. (N.T.) dated 22.09.2011. These rates have come into effect on 01.10.2011. Subsequently, the Ministry has received representations on the Drawback Schedule 2011-12 from Export Promotion Councils, Trade associations and individual segments of industry. The representations broadly relate to doubts on classification of items (mainly erstwhile DEPB items) in the Schedule, duty drawback rates, value caps and other miscellaneous matters. The representations have been duly examined and certain amendments/ changes, wherever required, have since been carried out vide Notification No. 75/ 2011-Cus. (N.T.), dated 28.10.2011. Some of the major changes / amendments carried out in the notification of All Industry Rates (AIR) of Duty Drawback 2011-12 are: Parts and components made of iron, steel or aluminium through casting or forging process which were earlier covered under various serial numbers of product group 61 (Engineering) of DEPB scheme were incorporated in Chapter 73 or 76, as the case may be, in the Drawback Schedule. These entries

are now appropriately replicated under headings 8487, 8548 and 8708 to enable exporters to claim drawback on such parts or components, irrespective of classification of such goods at any other four digit level in the Chapter 84 or 85 or 87 of the Schedule. It has been decided to replicate the existing entry/ entries appropriately under the tariff heading as has been sought by exporters. However, while replicating these entry/entries, the existing entry/entries in the Schedule have been retained so as to avoid any disputes. Further, in all such cases where existing entries have been replicated, due care has been taken to ensure that the rates of duty drawback / value caps (wherever assigned) are the same for both the existing entries as well as the replicated entries. All changes/amendments as have been carried out through the amending notification No.75/2011-Cus. (N.T.), dated 28 October 2011, came into effect retrospectively from 1 October 2011. In all such cases, wherever it is required, the exporters shall be allowed to file supplementary drawback claims and these claims shall be processed accordingly. CBEC Circular No. 48/2011-Customs, dated 31 October 2011 Case Laws Design and Engineering charges imported under a separate agreement other than that for supply of prototype held to be included in the assessable value of imports The assessee in this case, imported the designs/ engineering drawings and the prototype for the goods to be manufactured by them in India under separate agreements and did not include the design and engineering charges while ascertaining the assessable value of imports. However, the Honble CESTAT held that such charges shall have to be added to arrive at the transaction value of the goods imported by the assessee, in terms of provisions of Rule 9 (1) (b) (ii) and Rule 9 (1) (b) (iv) read with Rule 4 of Customs Valuation Rules, 1988, and section 14 Of the Customs Act, 1962. Mahindra & Mahindra Ltd v.Commissioner of Customs (Import) Mumbai, CESTAT - Appeal No.C/96, 97 & 432/07

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Export duty is not applicable on the sales made from a DTA to SEZ The Andhra Pradesh HC held that since both the SEZ unit and the DTA units are located within territorial waters of India, such supplies would not be liable to Customs duty, which is imposable on goods imported into or exported beyond territorial waters of India. It was further elaborated that the legal fiction created under the SEZ law deeming it to be foreign territory is for a specified and limited purpose and an interpretation to the contrary shall render all Indian laws including the SEZ Act inapplicable to an SEZ. In the absence of any provision for levy or collection of customs duty on goods supplied from DTA to SEZ, no export duty could be levied on such supplies. Tirupati Udyog Ltd v Union of India [2011 (272) ELT 209 (Andhra Pradesh High Court)] Refund claim in contrary to assessment order not maintainable without challenging assessment order The Tribunal in this case following the ratio of the decision of the Apex Court in the case of Priya Blue Industries Ltd, held that a refund claim contrary to the assessment order is not maintainable without challenging, modifying or amending the assessment order. CCE, Mumbai v.Emerson Project Management India Pvt Ltd [2011 (272) ELT 418 (Tri-Mum)] Additional Duty of customs on multifunctional devices and printers and products for display/demo etc. It was held that multifunctional devices and printers used for internal use of the applicant, free samples and free replacement under warranty would be assessable to additional duty of Customs on the basis of transaction value as per the provisions of Customs Act, 1962 and no exemption would be available to such goods under Notification No. 29/2010-Cus dated 27-2-2010. It was further clarified that imported products intended for sale to Government Departments, large customers etc., and products intended for display and demonstration will be assessed to additional duty of Customs on the basis of retail sale price based valuation. Advance Authority Ruling in the case of Xerox India Ltd - 2011 (272) ELT 623 (AAR)

Supplies to SEZ units and developers from DTA are exports It was held that: The supplies made from DTA units to SEZ units are to be treated as exports for extending export benefits; The definition of the term export under the SEZ Act shall prevail over the denition of term export under the Customs Act, 1962 and The exemption provided under Rule 6(6) of the Cenvat Credit Rules, 2004 would be applicable to supply of exempted goods both to SEZ units and SEZ developers/promoters. Sujana Metal Products Ltd v.CCE, Hyderabad [2011 (273) E.L.T. 112 (Tri. - Bang.)] Assessee cannot by his own act of waiving issuance of show cause notice confer jurisdiction upon Settlement Commission The High Court held that waiver of show cause notice by applicant cannot obviate jurisdictional requirement of notice imposed by provisions of the Customs Act, 1962 and any contrary view would defeat Parliamentary intent. Union Of India v. K. Amishkumar Trading Pvt. Ltd [2011 (273) E.L.T. 49 (Bom.)] Penalty leviable even in absence of malafide intention The Tribunal in this case relied upon the Madras HC decision in Bansal Industries and held that the goods that were inadvertently loaded and taken out of India without permission of the proper officer due to mistake of clearing consignment that was not cleared by customs are liable for confiscation and consequently penalty is imposable even if there is no malafide penalty imposable. LCL Logistics (India) Pvt Ltd v. CC, Nhava Sheva [2011 (273) ELT 571 (Tri- Mum)] Technical know-how fees not includible in the value of imported goods It was held by the Tribunal in this case that technical know-how fees would not be includible in the value of imported goods in the absence of any direct or indirect link between such technical know-how and the capital goods imported and that the lump-sum fees paid by the

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appellants to the parent company are not includible in the value of capital goods. Keihin Fie Pvt Ltd v. Commissioner of Customs (Import), Mumbai [2011 (274) ELT 515 (Tri-Mum)] Condonation of Delay The HC in this case condoned the delay of 22 days in claiming drawback after the statutorily allowed six months and ordered refund of the customs duty paid by the assessee. It was observed that the delay was due to reasons beyond the control of the assessee and further ordered revenue to refund the customs duty paid along with payment of interest at applicable rates. SKB Overseas Corporation v. Joint Secretary (Drawback) M/O[ W.P.(C) 13335/2005 in the Delhi HC] Demand of duty under sec 28(1) and imposition of penalties for violation of conditions of Notification No 13/81-Cus is justified Once a benefit is extended to assessee under a notification for discharge of nil duty and if the conditions therein were violated, it would amount to short levy which requires to be demanded only under section 28(1) of Customs Act, 1962. The Honble Tribunal upheld the duty demand confirmed along with the penalty imposed by the lower authority holding that it was a case for demand duty foregone on diversion of duty free imported goods to DTA and hence does not required interference on the above principle. Eastern Silk Industries Limited v. CC, Bangalore [2011-TIOL-1618-CESTAT-Bang] FTP Notifications / Circulars On-Line message exchange of DFIA between DGFT and Customs DFIA issued on or after 13.10.2011 will be transmitted by DGFT on-line to Customs. The existing system of on-line filing of application for issue of DFIA would continue without any procedural change. However, certain other authorizations i.e. Annual Advance Authorization, Annual EPCG, SHIS, restricted/SCOMET import/export authorization, Chapter 3 Reward Schemes are yet not covered under message exchange with customs. Therefore, it has been clarified that

these authorizations would need to be registered / operated by customs on production of physical copy of authorization only with no on-line verification. DGFT Policy Circular No. 46/(RE-2010)/2009-14, dated 8 November 2011; DGFT Policy Circular No. 41(RE2010)/2009-2014, dated 13 October 2011 Implementation of Bar Coding on Export Consignments of Drugs and pharmaceuticals Incorporation of barcodes (1 D) encoding unique product identification code (GTIN), Batch Number, Expiry Date and Unique Serial Number had been stipulated on export consignments of pharmaceuticals and drugs vide Public Notice No. 59 (RE-2010)/2009-14 dated 30 June 2011, with effect from 1 October 2011. Following clarifications have been brought out in this regard: The said bar-coding requirement is applicable only in respect of finished pharmaceutical products i.e. medical formulations and not Bulk drugs/APIs/ Intermediates. Implementation of the said barcoding has been deferred and the same would come into force from 1 July 2012 and 1 January 2013 for Secondary level and Primary level packaging respectively. DGFT Policy Circular No. 48/ (RE-2010)/2009-14, dated 28 November 2011; DGFT Public Notice No. 87/ (RE-2010)/2009-14, dated 22 December 2011 Clarification with regard to deemed Export Benefit for Power Projects DGFT has clarified the following points in this regard: For claiming the benefit of deemed export, the bill of entry for the importation of the goods should be in the name of contractor or sub-contractor i.e. EPC Contractor in the case of Power project and not in the name of Project owner. Otherwise, the benefit of deemed exports will not be admissible. In case any imported capital goods are supplied directly to the Project Owner by the main contractor or the sub-contractor, as such, then the customs duty so paid on such imports will not be refunded back as deemed export duty drawback. Benefit of deemed exports is available to a manufacturer supplier only if the goods so supplied are manufactured in India. Thus, in the case of non-mega power projects, if capital goods such as boilers, turbines, generators (BTGs) are being

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supplied to project owner, then deemed export benefits are admissible only if such BTGs are manufactured in India. In case these are imported and supplied as such, then such supplies do not amount to deemed exports, and hence deemed export benefits will not be admissible. DGFT Policy Circular No. 50/2009-2014 (RE 2010), dated 28 December 2011 Export of SCOMET Items Amendments have been made in the Appendix 3 to Schedule 2 of ITC (HS) Classifications of Export and Import Items, 2009-14 to stipulate inter alia the following with regard to the supply of SCOMET Items from DTA to SEZ: No export permission is required for supply of SCOMET items from DTA to SEZ. However, all supplies of SCOMET items from DTA to SEZ will be reported to the Development Commissioner of the respective SEZ by the supplier in the prescribed proforma within one week of the supplies getting effected. Export permission will continue to be required for export of SCOMET items outside the country both from SEZ and DTA (including EOUs). DGFT Notification No. 93/ (RE-2010)/2009-2014, dated 6 January 2012 VAT / CST Tax on MRP on Specific goods in West Bengal State of West Bengal has made changes in rate at which VAT shall be paid on MRP in the following manner: West Bengal Notification No. 1612 Dated 2 November 2011 Exemption from Entry Tax for initial setting up of Solar Photovoltaic Power Plant in the state of Rajasthan State of Rajasthan has granted exemption to specified capital goods from Entry Tax payable under section 9 of Rajasthan Tax on Entry of Goods in to Local Areas Act, 1999 brought in the state of Rajasthan for Initial

setting up of Solar Photovoltaic Power Plant. Rajasthan Notification No.61 Dated 25 October 2011 Transit pass/ Way Bills State of Tamil Nadu has effected changes relating to issue of Transit Pass. Sr. No. Name of goods Where the MRP is inclusive of tax 3.84% 3.84% 11.89% 11.89% 3.84% Where the MRP is exclusive of tax 4.00% 4.00% 13.50% 13.50% 4.00%

1. 2. 3. 4. 5.

Drugs and medicines Chemical fertilizers Aerated water and beverages Mineral water LPG used for industrial or domestic purpose LPG used for other purposes Lubricants

6. 7. 8.

11.89% 11.89%

13.50% 13.50% 13.50%

Dietary supplements 11.89% including nutritional supplements, protein supplements and health food manufactured by pharmaceutical industries

Tamil Nadu Notification No. GO126 Dated 12 October; Karnataka CIRCULAR No: 37/2011-12 Dated 30 November 2011 Changes effected in Bihar VAT New form of quarterly return in Form RT1 has been introduced in Bihar VAT Rules, 2005. Audit and Re-assessment procedure has been provided under the Bihar VAT Rules, 2005. The Commissioner would select

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such number of dealers as may be deemed fit for audit. A list of such dealers would be posted on the web site of Commercial Taxes Department within 15 days of such selection along with the criteria of selection of dealers. Bihar Notification No. S.O.385, Dated 24 October 2011 Changes effected in Chhattisgarh Sales Tax (Rules), 1957 State of Chhattisgarh has amended Chhattisgarh Sales Tax (Rules), 1957 to provide for issuance of Form C electronically. States Tamil Nadu Changes Effected With effect from 1 November 2011, owners or other persons in charge of a vehicle carrying goods specifies in Schedule VI shall make an application for obtaining Transit Pass in Form LL or the seller, consignor or transferor of such goods to the officer in charge of the first check point / barrier or to the Head of Assessment Circle from where such goods are sold, consigned or transferred. Such applications can be made electronically. State of Karnataka has introduced e-SUVEGA facility for online application and procurement of Transit Passes. The transporters can request for Transit Pass form of Karnataka and download it from the system for faster clearances. Government of Karnataka, vide a circular, has identified certain commodities which require compulsory uploading of details of taxable goods being transported. These goods mainly include Automobile & accessories thereof, electrical goods & appliances, cement, edible oil, oil seed, iron & steel, glass, rubber sheets, readymade garments, etc.

application for review of order of Tribunal under section 35 of Haryana VAT Act, 2003 has been reduced to 180 days; Provisions relating to appeal to HC have been replaced by a new provision by State of Haryana. Under the old provision, the appellant was required to make an application to the tribunal for referring the case to the HC. However, the new provision allows appellant to directly make an appeal to the HC. If the HC is satisfied that the case involve a substantial question of Law, it may allow the same. Haryana Notification 22 Dated 29 September 2011 Changes effected in Karnataka VAT With effect from 2 November 2011, electronic payment of tax or any other liability has been made compulsory for dealers paying an amount of Rs. 1 Lakh or more as tax or any other amount due under Karnataka VAT Act, 2003 or Rules made thereunder. Karnataka Notification No. EGI.CR. 33/2011-12 Dated 19 October 2011 Changes effected in Kerala VAT The State of Kerala has made it mandatory to declare all inter-state consignments crossing commercial tax check posts in Form 8F, electronically with effect from 1 December 2011. Kerala Circular No. 22/2011 dated 28 October 2011 Changes effected in Madhya Pradesh CST State of Madhya Pradesh has made it mandatory for dealers having annual Turnover of Rs. 5 Crores, to make online application for the purpose of obtaining declarations in Form C under with effect from 16 November 2011. Madhya Pradesh Notification No. 79 Dated 16 November 2011 Changes effected in Orissa VAT Effective from 1 November 2011, all dealers having annual gross turnover of Rs. 20 Lakhs or more during any preceding 3 years, in the state of Orissa, would be required to make electronic payment of tax. Orissa Notification No. 992/2011 Dated 16 November, 2011 Changes effected in Punjab VAT Provisions relation to reversal of ITC covered under Rule 21 (2A) of Punjab Value Added Tax Rules, 2005 are no more applicable to specified Oil companies where

Karnataka

Chhattisgarh Notification No. 48/2011 Dated 11 October 2011 Changes effected in Haryana VAT Act, 2003 State of Haryana has amended the Haryana VAT Act to the following effect: Time limit of one year for the purpose of making

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such sales have been made at a price lower than the purchase price in pursuance of the administered prices of the oil companies. Punjab Notification No. S.70/Amd.(39)2011 Dated 21 November 2011 Changes effected in Rajasthan VAT State of Rajasthan has amended the Schedule II of Rajasthan VAT Act to add Dealers manufacturing industrial gasses in the state in the class of specified persons exempted from payment of tax. However, the state has provided exemption to the extent of 75% of tax payable on the sales or purchases of goods, subject to the following conditions: Such dealer shall not collect tax in excess of 25% of the prevailing rate of VAT. Such dealer shall fulfill the eligibility criteria under RIPS-2010. Such dealer shall set up a unit for manufacturing of industrial gases in the State with a minimum investment, as defined in RIPS-2010, of Rupees Fifty Crores or more and commences commercial production during the operative period of RIPS-2010. Rajasthan Notification No. 65/2011 Dated 4 November 2011; Rajasthan Notification No 66/2011 Dated 4 November 2011 Changes effected in Tamil Nadu Sales Tax The Tamil Nadu Government has announced a Samadhan scheme, as a conciliatory measure, to settle disputes in relation to arrears of sales tax. State of Tamil Nadu has also enacted Tamil Nadu Sales Tax (settlement of arrears) Act, 2011 with effect from 1 November 2011. The Act would enable traders to settle arrears of tax, penalty or interest under the Tamil Nadu General Sales Tax Act and the Central Sales Tax Act relating to assessment years up to 2006-07 for which demands have been raised before August 1, 2011. Tamil Nadu Notification No. 130 dated 29 October 2011; Tamil Nadu Notification No. 131 dated 29 October 2011. Changes in Uttrakhand VAT State of Uttrakhand has announced a rebate in tax from total tax payable by the seller of Motor Sprit (Petrol) at the rate of Forty Five paise per litre on sale of such

Motor Spirit (petrol) on the condition that the amount of rebate is passed on to the purchaser. Uttrakhand Notification No. 1115/2011 Dated 11 November 2011 Case Laws High Court Judgements SIM Cards and other services by telecom companies cannot be subjected to VAT The HC held that SIM Cards (pre-paid and post-paid), recharge coupons, value added services, mobile telephone rentals and sharing of infrastructure are not liable to VAT as sale or deemed sale. If the telephone instruments, mobile handsets and modems are supplied to the subscribers for use, such a transaction would amount to a transfer of right to use. State of Andhra Pradesh v. Bharat Sanchar Nigam Limited & Ors [2011) VIL 49 (AP) Tax erroneously collected and refunded cannot be forfeited The HC held that revenue cannot forfeit the tax amount which had been collected under mistake of law and subsequently refunded to the customers. Themis Chemicals Ltd v. State of Maharashtra and Ors [2011] 45 VST 64 (Bom) Liability cannot be fastened upon the purchasing dealer for non payment of tax by the selling dealer In this case, the petitioners made certain intra-state purchase of goods and claimed input tax credit of the same based on the tax invoice and declarations obtained from the sellers. The revenue denied credit to such dealers on the contention that tax has not been paid by the selling dealers. The HC held that no liability be fastened on the purchasing dealer with respect to non payment of tax by the selling dealer unless it is a case of fraud, connivance or collusion. Gheru Lal Bal Chand v. State of Haryana and Anr [2011] 45 VST 195 (P&H) Unauthorised collection of tax liable to be forfeited The Respondent in this case was liable to pay purchase tax on purchase of goods, however could not collect tax

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on sale of goods. The Respondent collected tax on sale and the issue before the HC was liability to pay such tax collected in contravention of law. The HC held that such unauthorized collection of tax is liable to forfeiture. State of Karnataka v. S.L.N. Coffee Curing Works [2011] 46 VST 19 (Karn.) Tax on entry of goods in UP is valid law The writ petitioners challenged the validity of the UPTEGLA on the grounds of lack of legislative competence. The HC upheld the constitutional validity of the impugned Act imposing entry tax on the entry of scheduled goods into the local areas for consumption, use or sale thereunder. ITC Limited v. State of UP & Ors 2011-VIL-57-ALH Mere back to back arrangement cannot qualify for exemption as sale in course of import It was held that mere back to back arrangement for sale of imported goods cannot substantiate that the sale is in the course of import qualifying for exemption under section 5(2) of the CST Act. The Court observed that in order to claim benefit of exemption under section 5(2) of the CST Act, there should be a direct nexus between the import and sale transaction. A privity of contract is required between the buyer and exporter in order to claim exemption under impugned section. In the facts of the case, the Appellant was not the agent of the supplier in Germany. The buyer in India did not have privity of contract with the supplier. The goods could have been diverted to another third person without violation/ default of the contract between the importer and the buyer. Giesccke & Debrient India Pvt Ltd v. Commissioner of Sales Tax, Delhi 2012-VIL-04-DEL Proof of export of goods or sale for purpose of exports not required at the time of mere issuance of Form H It was held that proof of actual export shall be required to be produced only at the time of assessment and not at the time of supply or issue of Form H by the authorities. LMJ International Limited v. Commercial Tax Officer, Visakhapatnam & Anr [2011] 46 VST 499 (AP)

Hiring out of transit mixers for exclusive use in transport of ready mix concrete manufactured by hirer to their customer for a definite period amounts to transfer of right to use leviable to sales tax The Petitioners had given on hire a fleet of transit mixers for use in transport of ready mix concrete. Under the arrangement, Petitioners were required to provide transit mixtures with operating staff to their customer on an exclusive basis. The Petitioners treated the arrangement as a service contract whereas the Commercial Tax Authorities demanded sales tax on the said transaction. The HC observed that the vehicles are maintained by the petitioners and licenses, insurance and permits are in the name of petitioners. The entire use in the property in goods is exclusively for the customer for stipulated period of contract. The existence of goods was identified and the goods were operated and used for the business of customer. Accordingly it was held that there was a transfer of right to use goods by the petitioners and transaction is subject to sales tax. G.S.Lamba & Sons v State of Andhra Pradesh 2012-TIOL-49-HC-AP-CT Exemption not available under CII Scheme if production not started during the exemption qualifying period Under the CII Scheme, the Respondent could avail benefit of deferment of sales tax on fulfillment of certain conditions including start of commercial production within stipulated timelines. The Respondent could not commence the commercial production within the given timelines and contended that the reasons for the same were beyond its control. The Court relying on other Apex Court decisions held that a person invoking an exception or an exemption provision to relieve him of the tax liability must establish clearly that he is covered by the said provision and in case of doubt or ambiguity, benefit of it must go to the State. Accordingly, it was held that benefit of exemption cannot be claimed by the assessee. State of Gujarat & Ors v. Essar Oil Ltd & Anr 2012-VIL-1-SC

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Sale occasioned by movement of goods from the State of Maharashtra to Mumbai High not a sale in the course of export The question of law before the HC was to decide whether Mumbai High is a foreign destination for the purpose of levy of tax on sale and whether sale to vendee located in Mumbai High from Maharashtra is a sale in the course of export under section 5(1) of

the CST Act. The HC held that export for the purpose of Article 286 (1) means sending goods from one country to another and movement of goods to Mumbai High does not meet this description. Accordingly sale occasioning movement of goods from Maharashtra to Mumbai High was not sale in course of export. The Commissioner of Sales Tax, Maharashtra State, Mumbai v. Pure Helium (India) Ltd 2012-VIL-11-BOM

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Glossary of terms

AAR Act AO AS CBEC CESTAT CII Scheme

Authority for Advance Ruling Income-tax Act, 1961 Assessing Officer Accounting Standard Central Board of Excise and Customs Central Excise and Service Tax Appellate Tribunal Capital Investment Incentive to Premier/ Prestigious Unit Scheme, 1995-2000 (Gujarat) Commissioner of Income-tax Central Sales Tax Act, 1956 Duty Entitlement Pass Book Duty Free Import Authorizations Director General of Foreign Trade Duty refund procedure Domestic Tariff Area Double Taxation Avoidance Agreement Electronic Data Interchange Export Oriented Unit Erection, Procurement and Construction Export Promotion Capital Goods Foreign Investment Promotion Board Finance Act, 1994: Finance Act

ICEGATE ICES IPLC ITC LCD MRP MR-SAM N.T. OEM PLG PMS PSVC RAs RIPS -2010 RSP SAARC SAD SC SCOMET SEZ SFIS SHIS STT Tribunal UOI UP UPTEGLA VAT VKGUY

Indian Customs Electronic Data Interchange Gateway System Indian Custom EDI System International Private Leased Circuit Input Tax Credit Liquid crystal display Maximum retail Price Medium Range Surface to Air Missile Non-Tariff Original Equipment Manufacturer Liquefied Petroleum Gas; Portfolio Management Scheme Plant Site Verification Certificate Regional Authorities Rajasthan Investment Promotion Scheme-2010 Retail Sales Price South Asian Association for Regional Cooperation Special Additional Duty The Supreme Court of India Special Chemicals, Organisms, Materials, Equipment and Technologies Special Economic Zone Served from India Scheme Status Holders Incentive Scrip Securities Transaction Tax Income Tax Appellate Tribunal Union of India Uttar Pradesh U.P. Tax on Entry of Goods into Local Areas Act, 2007 Value Added Tax Vishesh Krishi Gram Udyog Yojana

CIT CST Act DEPB DFIA DGFT DRP DTA DTAA EDI EOU EPC EPCG FIPB

FMS FOB FPS FTP HC HSN ICC

Focus Market Scheme Freight on Board Focus Product Scheme Foreign Trade Policy High Court Harmonized System of Nomenclature Information Collection Centre;

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Notes

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