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KPMG Tax Alert January 2008

KPMG in India

Direct Tax – Decisions

Lease right in the property is a capital asset, alienation of which by creating a sub-lease should give rise to capital gains (more…)

Compensation received for loss of profit is a capital receipt only if there is complete cessation of business activity or income earning apparatus (more…)

Tax paid on behalf of the employee is ‘pay’ and, therefore, to be included in ‘salary’ for the purpose of determining the value under perquisite valuation (more…)

Income of the foreign branch (PE) is to be included while computing the global income of the resident of India, the tax paid by the PE can be availed of as tax credit while computing the tax payable in India (more…)

In case of Investment company as the whole infrastructure is utilised for earning the income, part of the salary expense have to be attributed to the earning of dividend income (more…)

Mobilisation charges paid on account of transportation of the plant and machinery to be used in India are liable to be taxed under section 44BB of the Act, irrespective of whether the payment is made outside India or within India (more…)

No tax is required to be deducted at source under section 194H on concessional tickets issued to travel agents on a principal to principal basis (more…)

Income derived from shopping malls/business centres is to be assessed as business income and not as income from house property when the activity is carried on continuously in an organised manner with a view to earn profit (more…)

In a slump sale, (before introduction of section 50B) the long term capital gain should be computed by indexing the cost of acquisition (…more)

From AY 2001-02, the entire profits derived from the business of undertaking have to be taken into consideration while computing the eligible deduction under section 10A/10B (more…)

Welcome to Tax Alert, KPMG's Knowledge Management Team’s update on tax, corporateand allied laws. This newsletter updates you with the important and latest notifications/circulars and decisions of Courts and Tribunals. While we are pleased to have you on our mailing list, if for any reason you do not wish toreceive future issues, please let us know. We look forward to receiving your valuable feedback about the newsletter [email protected] and we shall be happy to respond to yourqueries concerning the information provided here.

© 2008 KPMG, an Indian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Capital gains will be deemed to be income of the year in which the transfer took place irrespective of the method of accounting followed (more…)

Recent Bangalore Tribunal decision in respect of allowability of deduction under section 10A on account of transfer pricing adjustment (more…)

Recent Bangalore Tribunal decision in respect of exclusion of telecommunication expenses from the ‘export turnover’ while computing deduction under section 10A of the act (more…)

Amount received on redemption of Stock Appreciation Rights is liable to tax as ‘income from salaries’ even if received from the ultimate parent company (more…)

Recent Delhi Tribunal decision in case of Transfer Pricing (more…)

Direct Tax - Notifications/ Circulars/ Press releases

Extension of due date of filing TDS and TCS Returns (more…) Tax benefits to industrial units set up after 31 March 2006, under the industrial park scheme extended (more…) Clarificatory circular regarding applicability of section 194I to the payments made to the cold storage owners as cooling charges (more…) Explanatory circular on Fringe Benefit Tax arising on allotment or transfer of specified Securities or sweat equity shares (more…)

SEBI/Corporate Law - Notifications/Circulars/ Press Releases

Permission for short selling of Equity Shares by SEBI registered FIIs (more…)

NBFCs to obtain RBI nod to set up Subsidiary / JV / Representative Office abroad (more…)

Further liberalisation of foreign direct investment norms in Real Estate sector (more…)

Draft Guidelines on registration and operations of Mortgage Guarantee Companies (more…) Indirect Tax Service Tax – Decisions Final Order

In a composite contract, VAT cannot be levied on the entire value of the contract, if Service tax has also been paid (more…)

Computation of Service tax where Service tax is not separately collected (more…)

Applicability of Service tax on free after sales service (more…)


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Interim Orders

Credit of Service tax paid on outward freight (more…)

Coverage of Broadcasting Service (more…) Service Tax - Circulars

Ad hoc abatement of 67 percent (more…) Amendments in Master Circular (more…)

Central Excise – Case laws

Constitutionality of Andhra Pradesh Tax on Entry of Goods into the Local Area Act, 2001(more…) Central Excise - Notification

Exemption restricted (more…)

Quarterly returns prescribed for units availing specified exemptions (more…)

Certain IT hardware items brought under the MRP based valuation regime (more…)

Certain IT hardware items included under the Third Schedule of Central Excise Act (more…) VAT/Central Sales tax- Case laws

Refund of entry tax paid after levy of tax declared invalid (more…)

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Direct Tax – Decisions Lease right in the property is a capital asset, alienation of which by creating a sub-lease should give rise to capital gains The taxpayer, an individual took a building from her husband on lease for 99 years which started from 1 June 1986. The taxpayer paid a sum of Rs. 5,000 as premium for obtaining lease and was supposed to pay a monthly rent of Rs. 300. The taxpayer also had a right to create a sub-lease which she created in favour of M/s. BS for a period of 97 years and 5 months starting from 1 January 1998. The taxpayer received a lump sum amount of Rs. 4,30,000 as consideration, which was adjustable against the monthly rent of Rs. 367.83. The Assessing Officer (AO) was of the view that the taxpayer’s lease right to sub-lease in the property was a capital asset on alienation of which she was liable to short term capital gains (as the lease rights were held for a period less of than 36 months). The Commissioner of Income-tax Appeals [(CIT(A)] and the Tribunal upheld the order of the AO. The High Court held that as lease was obtained in 1986 and the building was sub-leased in1988, a short-term capital asset was transferred and the lumpsum amount received was not a payment of monthly rent in advance, but a consideration for granting rights of sub-lease. Therefore, the High Court held that the capital gains arising from sub-leasing of the building was taxable. Mrs. G. Seetha Kamrajj v. CIT [2007] 165 Taxman 117 (AP) Assessment Year: 1988-89

←Back Compensation received for loss of profit is a capital receipt only if there is complete cessation of business activity or income earning apparatus

The taxpayer, a company had taken two cinema halls on lease since 1952. The latest renewal was for six years and three months ending on 28 February 1975. The lease was not of only cinema halls but included stalls, godowns and cinema equipment also. The lessor was initially willing to extend the lease for a further period of 5 years starting from 1 March 1975, however, subsequently it was agreed that the taxpayer would hand over the possession of cinema halls on or before 28 February 1975. As per the agreed terms the lessor would pay the taxpayer a sum of Rs. 1,24,000 in lieu of the loss of business and compensation for handing back the possession of two cinema halls, and would also pay a sum of Rs. 2,00,000 in five equal installments of Rs. 40,000 each ending on 28 February 1980. The taxpayer contended that no part of the sum of Rs. 3,24,000 was chargeable to tax since this constituted compensation received for the loss of the profit or income yielding apparatus and therefore the sum received as compensation for the extinguishment of such right was a capital receipt. The AO taxed the entire amount of Rs. 3,24,000 in the Assessment Year (AY) 1975-76 as revenue receipt. The CIT(A) reversed the order of AO holding the receipts as capital in nature. The Tribunal reversed the order of CIT(A) and included Rs. 1,24,000 in the taxable income of the assessment year 1975-76, as revenue receipt, and also directed the AO to tax the receipts of Rs. 40,000 in the relevant AYs ending with AY 1980-81. The question before the High Court was whether the entire sum of Rs. 3,24,000 was a revenue receipt, taxable in the AY 1975-76.

The High Court, held that undoubtedly the taxpayer was exhibiting films at other cinema halls also so there was no permanent cessation of its business, therefore the compensation received for loss of business of Rs. 1,24,000 was a revenue receipt. The High Court observed that the compensation received was not so much for the loss of premises but for the business loss that the taxpayer would have had to suffer as a result of the termination of the lease. The High Court relying on various judgements1 held that here was

1 CIT v. Shaw Wallace & Co. [1932] AIR 138 (PC) CIT v. South India Pictures Ltd. [1956] 29 ITR 910 (SC)


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no complete cessation of the business activity and further it could not be said that any part of the profit-making apparatus of the taxpayer had been extinguished so as to render the amount of compensation received for the said purpose a capital receipt.

The High Court dealt with next question that whether the entire sum of Rs. 3,24,000 became assessable to tax in the AY 1975-76 as contended by the tax Authority or only a sum of Rs. 1,24,000 should be assessed to tax since that was the amount received during the AY. The correspondence between the landlord and the taxpayer unambiguously stated that a sum of Rs. 1,24,000 was paid towards his loss of business. This coupled with the fact that the taxpayer had in fact offered to tax the sum of Rs. 40,000 in every succeeding AY indicated that there was no attempt by the taxpayer to avoid payment of tax in those AYs. If the said sum of Rs. 2,00,000 was brought to tax in the year 1975-76 it will doubtless amount to double taxation of the same amount since admittedly a sum of Rs. 40,000 has been offered to tax by the taxpayer in each of the succeeding AYs as a revenue receipt. Therefore the High Court held that since the initial payment of a sum and five equal installments were towards the future loss of profit and the taxpayer's business had not suffered complete cessation because of the cancellation of the lease, it was held to be a revenue receipt.

CIT v. M/s All India Films Corpn. (Unreported) (Del) Assessment Years: 1975-76 & 1980-81

←Back Tax paid on behalf of the employee is ‘pay’ and, therefore, to be included in ‘salary’ for the purpose of determining the value under perquisite valuation Rules The taxpayer, a company had paid the tax on salaries of its expatriate employees. In appeal before the Tribunal, against the rectification orders passed by the AO, the matter was restored to the file of the AO to compute the tax liability after grossing up the tax with income in cases where tax was borne by the employer. The order was passed on 22 March 2004. Later on it was found by the AO that, in the original orders as well as in the orders giving effect to the Tribunal’s order, the value of perquisites for the employees in respect of rent free accommodation was computed without including tax in the gross salary, therefore, a notice for its rectification was served on the taxpayer. Taxpayer contended that the mistake sought to be rectified was not a mistake apparent from record as it involved determination of the issue whether tax was salary or perquisite for the aforesaid purpose. The AO did not accept this contention and recomputed the income and the demand after including tax in the salary for working out the perquisite in respect of rent free accommodation. The CIT(A) confirmed the order of AO. The taxpayer contended before the Tribunal that the order of the AO had merged into the order of the Tribunal as the Tribunal refused to go into the issue raised by the tax authorities for the first time before it, by pointing out that the Tribunal did not have power to enhance the assessment. The Tribunal did not accept this contention, thus held that the rectification order passed by the AO was within his jurisdiction. The Tribunal noted that the definition of "salary" after 1 April 2001 was specifically amended to include the value of perquisites specified in section 17(2)2 of the Act. The Tribunal observed that the Kerala High Court in the case of C.W. Steel3 had referred to the definition of "salary" and pointed out that tax paid by the employer was in the nature of "pay". The Bombay High Court in the case of H.D.Dennis & Others4 had distinguished the definition under Rule 3 and under section 17 and pointed out that the objective of giving a separate definition in Rule 3 was to exclude certain kinds of payments which were otherwise

CIT, Mysore v. The Canara Bank Ltd. [1966] 63 ITR 328 (SC) 2 Section 17(2) Defines perquisites which includes rent free accommodation, or concessional rent, any benefit or amenity provided free or at concession, or amount paid for employee’s obligation. 3 CIT v. C.W. Steel [1992] 86 ITR 817(Ker) 4 CIT v. H.D. Dennis & Others [1982] 135 ITR 1 (Mum)


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covered by the word "salary". It was also pointed out that the dictionary meaning of the word "pay" includes all periodical payments for services rendered and, therefore, the words "salary" and "pay" would include tax paid by the employer on behalf of the employee within their ambit. Thus, the Tribunal was of the view that tax payment is "pay" and needs to be included in salary for the purpose of determining the value under perquisite valuation Rules. Mitsubishi Corporation v. DCIT (Unreported) (Del) Assessment Years: 1995-96, to 1997-98 Note: The Special Bench of the Delhi Tribunal in the case of RBF Rig Corpn. [2007] 109 ITD 141 (Del) (SB) has held that the tax paid by the employer on behalf of the employee was a perquisite but the same could not be treated as being ‘provided by way of monetary payment to the employee’. Hence, such tax would be excluded from the purview of section 10(10CC) of the Act and will not be subject to multiple grossing up. The Tribunal held that it was not a monetary payment as the money was not paid to the employee when taxes were paid on his behalf.

←Back Income of the foreign branch (PE) is to be included while computing the global income of the Indian resident, the tax paid by the PE can be availed of as tax credit in India The taxpayer, a company resident in India had a branch in USA which was assessed to tax in USA. The taxpayer contended that as per the India-USA Tax Treaty (the Tax Treaty) the profit of the USA branch was not to be taxed in India on the ground that this amount was already taxed in USA. The AO was of the view that the total income of a person resident in India would also include income which accrued or arose outside India and thus included the profit of the branch in the income taxable in India. The CIT(A) reversed the order of the AO. The Tribunal did not accept the taxpayer’s contention that as the branch, permanent establishment (PE) was taxed in USA, the profits of the branch could not be taxed in India. The Tribunal held that Article 7 of the Tax Treaty prescribed only the modes for the computation of profits attributable to a PE and not that such profits should be exempt from tax in India. The Tribunal held that Article 25 5 made it abundantly clear that the amount of tax which the taxpayer paid in the USA would be deducted from the tax computed on a global basis. Thus the Tribunal held that the AO had rightly brought the branch income to tax in India and followed the tax credit method for elimination of double taxation, as provided under Article 25 of the Tax Treaty and accordingly, allowed the tax authorities appeal. ITO v. M/s Data Software Research Co. P Ltd. (Unreported) (Chen) Assessment Year: 2003-04

←Back In case of Investment company, as the whole infrastructure is utilised for earning the income, part of the salary expense have to be attributed to the earning of dividend income The taxpayer, an investment company, received gross dividend of Rs. 2679.29 lakhs, which it claimed as exempt under section 10(33)6 of the Act without allocating any expenditure towards the earning of this income. The taxpayer contended that interest earned during the year being far higher than the interest paid, no interest was attributable towards dividend income and the only expenses relatable to the earning of dividend income were the bank collection charges. The AO disallowed the expenditure in proportion

5 Relief form double taxation 6 Under section 10(33) the income arising on transfer, of certain specified units of UTI, on or after 1 April 2002, is exempt. Please see section 10(34) which exempt dividend income.


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of the dividend income to the total income by invoking section 14A 7 . The CIT(A) deleted the apportionment of salary expenditure allowing partial relief. The Tribunal held that in case of an investment company, entire infrastructure of the company is utilised for the purpose of carrying out its objects, i.e., investment in other concerns and also earning income on such investments. The Tribunal observed that though, the courts have held that no disallowance can be made on an estimate basis or in relation to any proportion to the receipts shown from various sources, where the sole business activity carried on by the taxpayer, was that of investment the expenses incurred on salary paid to the employees, whose services in turn were utilised for the attainment of its objects, certain part of the salary expenditure was attributable to the earning of dividend income. In this connection the Tribunal relied on the decision of the Chandigarh Special Bench in the case of Punjab State Industrial Development Corporation Ltd.8 wherein it was held that the AO had to make deduction of actual expenses which have been incurred on earning dividend income. Therefore, the Tribunal directed the AO to disallow proportionate salary expenditure on the basis of break up of salary expenditure given by the taxpayer, and in case of failure on the part of taxpayer to provide the details, the AO was directed to estimate the same which was however to be limited to the percentage of dividend income to total income. DCIT v. Tata Investment Corporation Ltd. [2007] 295 ITR 330 (AT) (Mum) Assessment Year: 2000-01

←Back Mobilisation charges paid on account of transportation of the plant and machinery to be used in India are liable to be taxed under section 44BB9 of the Act, irrespective of whether the payment is made outside India or within India The taxpayer, a foreign company, was awarded a contract for charter hire of offshore rig by M/s Enron Oil & Gas India Ltd. The taxpayer was to provide the offshore drilling rig and associated equipment on hire along with necessary manpower to be used at the site. The taxpayer offered and was assessed to tax on income for services rendered in India at 10 percent of gross contractual receipts. The mobilisation charges for transportation and other services of the rig was offered and assessed to tax, at 1 percent of the gross contractual receipts. The CIT revised the assessment using his revisional powers on the ground that the adoption of 1% as deemed profit rate was contrary to the provisions of section 44BB of the Act and the assessment to that extent was erroneous and prejudicial to the interests of the Revenue. The taxpayer challenged the jurisdiction of the CIT to pass the said order before the Tribunal. The Tribunal upheld the jurisdiction of the CIT. The taxpayer thereafter filed a miscellaneous application to the Tribunal on the ground that the impugned order did not deal with the decision of the Third Member in the case of Saipem SPA10 which was equivalent to a Special Bench decision which was brought to the notice of the Bench and that constituted mistake apparent from record requiring rectification. In the case of Saipem SPA it was held that mobilisation charges received outside India, attributable to the transportation of rigs outside territorial waters of India were not chargeable to tax. The taxpayer thus contended that the mobilisation charges were not taxable in India and further since the taxpayer had already been assessed at 1 percent of the gross revenues, the assessment being reasonable could not be regarded as prejudicial to the interests of Revenue.

7 Section 14A was inserted by Finance Act, 2001, with retrospective effect from 1 April, 1962 providing for disallowance of expenditure in relation to income which does not form part of total income. 8 Punjab State Industrial Development Corporation Ltd. v. DCIT [2007] 292 ITR 268 (AT) (Chand) 9 Special provision for computing profits and gains in connection with the business of exploration, etc., of mineral oils. 10 DCIT v. Saipem SPA 88 ITD 213 (Del)


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The Tribunal held that while applying the provision of section 44BB what was to be seen was whether the amount was paid on account of provision of services in India in connection with the supply of plant or machinery. Since the rig was mobilised and demobilised in India and the mobilisation charges were paid on account of transportation of the plant and machinery to be used in India, it was irrelevant whether the payment was made outside India or within India. The Tribunal thus held that there was no mistake apparent from the record. Further, while dismissing the miscellaneous application the Tribunal held that since it was agreed that the receipt for services rendered even outside India were taxable, the CIT was justified in applying the mandatory rate of 10 percent under section 44BB. Reading & Bates Drilling Company v. ACIT (Unreported) (Del) Assessment Year: 1997-98 Note: The Delhi Tribunal in the case of Transocean Offshore Inc.11 has held that Mobilisation/Demobilisation charges relating to the voyage of vessel outside the territorial waters of India are not taxable in India.

←Back No tax is required to be deducted at source under section 194H on concessional tickets issued to travel agents on a principal to principal basis The taxpayer, an international airline was a member of IATA. Tickets were sold by IATA approved agents/sub-agents, on commission basis. The taxpayer had been deducting tax at source from the commission payments made to the agents/sub agents. A survey was carried out at the business premises of the taxpayer. During the survey, it was observed that the taxpayer was issuing concessional tickets to its travel agents. The AO held that the difference between charged fare and normal fare on concessional tickets was additional commission paid to the agents and held the taxpayer as "assessee in default" for not deducting Tax on the difference. The taxpayer contended that it was providing concessional tickets as per norms and regulations of IATA “resolution on reduced fares for accredited passenger sales agents” and the agents were not entitle to claim any commission on such concessional tickets. Therefore, the concessional tickets could not be treated as commission as these tickets were not issued in lieu of commission. The CIT(A) reversed the order of the AO. The Tribunal observed that the tickets issued were not like the tickets issued to the ordinary travelers. The tickets were non-transferable and non-encashable which could not be re-issued or resold by the travel agent. The tickets were issued on principal-to-principal basis rather than in the capacity of principal to agent basis. The Tribunal held that if the airlines issued tickets at its discretion on a principal-to-principal basis, concessionally charging the difference from the travel agent, the difference charged did not partake the character of commission within the meaning of section 194H. The Tribunal noted that a similar view had been taken by the Mumbai Tribunal in the case of Korean Air12. ITO v. Austrian Airlines (Unreported) (Del) Assessment Years: 2001-02 to 2004-05

←Back Income derived from shopping malls/business centres is to be assessed as business income and not as income from house property when the activity is carried on continuously in an organised manner with a view to earn profit The taxpayer company was engaged in the business of construction and management of shopping malls, departmental stores and business centres. The AO completed the assessment of the taxpayer assessing the

11 Transocean Offshore Inc. v. DCIT (Unreported) (Del) 12 Korean Air v. DCIT (Unreported) (Mum)


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income from mall management and business centre charges, as business income. The CIT was of the view that the assessment was erroneous and prejudicial to the interest of revenue as the mall management and business centre charges were assessed as business income instead of income from house property and a deduction of expenses had been allowed there against. The CIT therefore directed the AO to assess the income as income from house property. The taxpayer relying on the decision in the case of Karnani Properties Ltd.13contended before the Tribunal that, tests laid down by the court to determine whether the services were in the nature of business activities and income generated therefrom assessable as business income or not were fulfilled in this case also. The services were rendered continuously and its activities constituted an organised business venture with a motive to earn profit. The Supreme Court had observed that if the services rendered by the taxpayer were the results of its activities carried on continuously in an organised manner with a set purpose and with a view to earn profits, those activities would constitute business activities and the income arising therefrom would be assessable as business income. The Tribunal examined the relevant provisions of the agreements and observed that the taxpayer, as the owner, had responsibility of providing security, communication and other services and further that it was clearly stated that the users did not have any tenancy rights. The Tribunal accepted the taxpayer’s contention that the tests laid down by the Supreme Court in Karnani Properties Ltd. were satisfied. The Tribunal also examined various other judgments14 for determining the particular head of income and held that mere fact that the income was attached to immovable property could not be the sole criterion for assessment of such income under head house property. It was necessary to find out the primary object of the taxpayer while exploiting the property, if it was letting out the property, the income must be assessed as income from house property, and if exploitation of property was by way of commercial activities then the resultant income must be held as business income. The Tribunal therefore held that as the taxpayer carried on its activities continuously in an organised manner with a set purpose and with a view to earn profit the activities were in the nature of commercial activities and accordingly the income derived from shopping malls/business centres was to be assessed as business income and not as income from house property. PFH Mall & Retail management Ltd. v. ITO [2007] 112 TTJ 523 (Kol) Assessment Years: 2001-02 and 2003-04

←Back In a slump sale, (before introduction of section 50B15) the long term capital gain should be computed by indexing the cost of acquisition The taxpayer, a company had sold its Betalactum Division w.e.f 1 July 1997 on a slump sale basis, for a sale consideration of Rs. 30 crores. The taxpayer contended that it was a slump sale and computed the long term capital loss by reducing the indexed cost of acquisition and improvement from the sale proceeds. The taxpayer submitted that what had been sold was the undertaking and not the depreciable assets per se and that accordingly, the special provisions dealing with the sale in the case of depreciable assets had no application and the taxpayer had never claimed any depreciation on the undertaking. The AO did not accept the taxpayer’s contention, as he was of the view that after the introduction of special

13 Karnani Properties Ltd. v. CIT [1971] 82 ITR 547 (SC) 14 CIT v. National Storage (P) Ltd. [1963] 48 ITR 577 (Mum) Everest Hotels Ltd. v. CIT [1978] 114 ITR 779 (Kol) ACIT v. Saptarshi Services Ltd.[2004] 265 ITR 379 (Guj) CIT v. Kongarar Spinners (P) Ltd. [1994] 208 ITR 645 (Mad) CIT v. Shambhu Investments (P) Ltd. [2001] 249 ITR 47 (Kol) 15 Section 50B-special provision for computation of capital gains in case of slump sale introduced w.e.f. 1 April 2000.


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provisions16 in the capital gains computation relating to the sale of depreciable assets, the application of indexed cost of acquisition was not admissible. The AO further did not accept the contention that it was a slump sale as the intellectual property and technical know-how pertaining to Betalactum Division had been transferred on a later date. The AO reworked the capital gains applying the provisions of sale of depreciable assets and computed a long term capital gain as against a loss returned by the taxpayer. The CIT(A) reversed the order of AO. The Tribunal referred to definition of ‘slump sale’, applicable from 1 April 2000 and held that for a sale to be termed as a ‘slump sale”, it was not essential that all assets and liabilities must be transferred, if some assets and liabilities were retained by the transferor, the sale would not lose the character of being a slump sale, if the transfer was of a going concern and the transferee was able to carry on the business without interruption. The Tribunal observed the MoU which specifically provided that the sale of the Betalactum business was on a ‘going concern’ and ‘as is where is’ basis together with all intangible rights comprising of all licences, permits, registrations etc. except the technical know-how developed and improved by the taxpayer which was to be transferred on 1 July 2000. The Tribunal thus held that it could not be said that Betalactum Division was not transferred as a going concern. Thus it was a slump sale and provisions relating to sale of depreciable assets were not applicable. The method of computing the capital gains in case slump sale prescribed in section 50B also could not be applied as the section was prospective. Therefore, it was held that the long term capital gain should be computed by indexing the cost of acquisition. DCIT v. Max India Ltd. [2007] 112 TTJ 726 (Asr) Assessment Year: 1998-99

←Back From AY 2001-02, the entire profits derived from the business of undertaking have to be taken into consideration while computing the eligible deduction under section 10A/10B17 The taxpayer had outstanding external commercial borrowings (ECB) obtained in earlier years for the business of a Software Technology Park undertaking. It had to repay these borrowings only in accordance with the repayment schedule. The Reserve Bank of India (RBI) had placed restrictions on pre-payment of installments. For pre-payment the taxpayer had to seek prior permission of the Central Government. In the year 1999, the Government had formulated a policy on payment and the policy stated that approval for pre-payment would be granted only to the extent of 10 percent of the outstanding loan. Hence the taxpayer had to temporarily park the funds, until the date of repayment, and at the same time have the maximum possible returns to enable it to mitigate the expense of borrowing as the taxpayer had to ensure that the funds were easily accessible for repayment when due, it took a business decision to place these funds with various sister concerns as intercorporate deposits. The taxpayer claimed that the interest income earned on the intercorporate deposits and deposits in the EEFC account had to be assessed under the head "Business", and was eligible for exemption under section 10A of the Act for AY 1997-98 and 1998-99. For the AY 2001-02, the taxpayer claimed that the provisions of section 10B of the Act having undergone a change, the interest income formed part of profits from the business of the industrial undertaking and thus the taxpayer would be entitled to deduction. The Tribunal held that as the interest in question arose on deposits held in the EEFC account from export profits and as the Government by regulation had stipulated the maximum amount that could be held in the EEFC account and as the taxpayer had advanced amounts to sister concerns from out of monies available with it being prevented by Government regulations from prepaying ECBs, the income in

16 Section 50 and 50A 17 Special provision for deduction form profits in case of export of articles or thing or computer software depending upon the period of inception of operations.


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question could be considered to have close nexus with the business activity of the taxpayer and thus would be assessable under the head "Income from business". For AYs 1997-98 and 1998-99, the Tribunal following the order of the co-ordinate Bench in the case of Synopsis India (P) Ltd18 held that the taxpayer was not eligible for exemption on interest income under sections 10A and 10B of the Act. For AY 2001-02, section 10B was amended. The Tribunal observed that earlier it was an exemption section and income from undertakings covered by this section did not form part of total income. From this particular year, a deduction from business income from the undertaking was granted by including the special provision. In the section the method of arriving at the export profits of the business of the undertaking is given in a formula. The word "shall" has been used to make it mandatory. Another important feature is that the terminology used is ‘profit of the business’ of the undertaking in contradistinction to the word ‘profits and gains derived by the taxpayer’ from a 100 percent export oriented undertaking. The term "from the business of" is much wider than the term ‘derived from industrial undertaking’. Therefore, the entire profits from the business had to be taken into consideration, while computing the eligible deduction under section 10A/10B of the Act, by applying the mandatory formula. As regards the allowability of interest expenditure on the interest income, the Tribunal held that in computing the interest income under the head ‘Income from business’ the AO had to compute separately income earned by way of interest. To compute the interest income, all connected and related expenditure had to be allowed. Due to the embargo placed by the Government, restricting pre-payment, the taxpayer had to necessarily hold in deposits and advances, funds which would otherwise have been utilised to repay the liability which would have reduced its liability to pay interest. Thus there was a clear nexus between the external commercial borrowings and the funds placed in short-term deposits and other deposits. Thus the relatable expenditure had to be deducted, for the AYs 1997-98 and 1998-99. ACIT v. Motorola India Electronics (P) Ltd. (2007) 112 TTJ 562 (Bang) Assessment Years: 1998-99 & 2001-02

←Back Capital gains will be deemed to be income of the year in which the transfer took place irrespective of the method of accounting followed The taxpayer, a partnership firm was carrying on a business of clearing and forwarding agents. A survey was conducted at the premises of the taxpayer in which one of the partners made a statement that the business was transferred to a company and they would receive Rs. 25 lakhs as amount for goodwill from ‘S’. The taxpayer further disclosed an amount of Rs. 20 lakhs on account of bill receivables. The taxpayer did not include these amounts in the income of the relevant year on the basis that it was following the cash system of accounting and as the same were not received they could not be taxed in the relevant AY. The AO held that the taxpayer had not passed the relevant entries for goodwill in the books of account and accordingly added this amount in the income assessed. The AO also added the amount of Rs. 20 lakhs as the same was declared as additional income during the course of the survey. The CIT(A) deleted the additions made by the AO. The Tribunal held that if the taxpayer was following cash system of accounting then only those receipts which were received during the year were includible as income of the business. The Tribunal held that as the bills receivable were not received from the parties, the amount of Rs. 20 lakhs was held not to be the income of the relevant AY. As regards goodwill, the Tribunal held that the goodwill arising on transfer of business is not taxable as income from business but as ‘income from capital gains’ and the method of

18 Synopsis India (P) Ltd v. ITO (Unreported) (Bang)


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accounting whether mercantile or cash system was not applicable for determining income under the head capital gain. It is clearly provided that capital gains will be deemed to be income of the year in which the transfer took place. The Tribunal therefore held that there was no merit in the argument of the taxpayer that as the monies were not received it was not taxable under the cash system. The Tribunal noted that in the course of the survey one of the partners had admitted that the business had been transferred. If the said transfer had taken place during the relevant AY the income from goodwill would be taxable in that year irrespective of whether the amount was received by the taxpayer during the year or not. However, as the taxpayer contended that the business had not been transferred during the AY, the Tribunal restored the matter back to the AO for determining whether the business of the taxpayer was transferred to the company or not and accordingly tax the amount of Rs. 25 lakhs as goodwill. DCIT v. Samta Marine Kakinada [2007] 18 SOT 135 (Mum) Assessment Years: 1997-98 to 1999-2000

←Back Recent Bangalore Tribunal decision in respect of allowability of deduction under section 10A on account of transfer pricing adjustment Recently, the Bangalore Bench of the Tribunal has delivered a judgment in the case of I Gate Global Solutions Ltd. in respect of allowability of deduction under section 10A of the Act on the adjustment made by the taxpayer to the arm’s length price. For further details please refer to our Flash News of 7 January 2008 available at in.kpmg.com

←Back Recent Bangalore Tribunal decision in respect of exclusion of telecommunication expenses from the ‘export turnover’ while computing deduction under section 10A of the act Recently, the Bangalore Bench of the Tribunal has delivered a judgment in the case of iSeva Systems Private Limited holding exclusion of 50% of Telecommunication expenses from the ‘export turnover’ while computing the deduction under section 10A of the Act. For further details please refer to our Flash News of 8 January 2008 available at in.kpmg.com

←Back Amount received on redemption of Stock Appreciation Rights is liable to tax as ‘income from salaries’ even if received from the ultimate parent company Human talent has been one of the vital constituent for business success. Various types of employee incentive mechanisms are devised to attract, motivate, retain and reward employees. Stock Appreciation Rights (SARs) is one such employee incentive mechanism. Under SAR, employees receive an upside in the value of the underlying asset viz., shares, units, etc on fulfillment of prescribed conditions. However, the provisions relating to taxability of SARs have never been clearly defined. Recently, the Mumbai Special Bench of the Tribunal, in the case of Sumit Bhattacharya19, held that the amount received on redemption of SARs is a revenue receipt liable to tax as ‘income from salaries’ even if received from the ultimate parent company of the employer . The nature of the payment is primarily a deferred wage or bonus payment in cash or otherwise. For further details please refer to our Flash News of 16 January 2008 available at in.kpmg.com

19 Sumit Bhattacharya v. ACIT ITA No.238/ Mum/ 05 (Unreported) (Mum)

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Recent Delhi Tribunal decision in case of Transfer Pricing Further to the Special Bench decision in the case of Aztec Software and the Delhi Tribunal decision in the case of Mentor Graphics, the Delhi Tribunal has passed an order in case of Ranbaxy Laboratories Limited, which relates to transfer pricing issues. The decision deals with (a) revision of an assessment order by the Commissioner of Income-tax (CIT) under section 263 of the Act and (b) certain transfer pricing principles. For further details please refer to our Flash News of 7 February 2008 available at in.kpmg.com

←Back Direct Tax - Notifications/ Circulars/ Press releases Extension of due date of filing TDS and TCS Returns The Central Board of Direct Taxes has extended the due date for filing of quarterly statements of Tax Deducted at Source (TDS) and Tax Collected at Source (TCS) for the quarter ending 30 September 2007 of financial year 2007-08 to 29th February 2008. CBDT order F. No. 275/6/2008-IT(B) dated 28 January 2008

←Back Tax benefits to industrial units set up after 31 March 2006, under the industrial park scheme extended

The Central Board of Direct Taxes has notified the Industrial Park Scheme, 2008 (the scheme), which extends a 100% income tax rebate for 10 years to industrial units set up under the industrial park scheme between 1 April 2006 and 31 March 2009 subject to the prescribed conditions. The undertaking as well as the Industrial Park has to be notified by the Central Government under the Scheme and the undertaking shall continue to fulfill the conditions envisaged in the Scheme. Under the scheme, all such industrial parks need approval from Central Board of Direct taxes (CBDT) before availing of the tax benefits. The criteria for approval are briefly given below: • The date of commencement20 of the Industrial Park should be on or after the 1 April 2006 and not

later than 31 March 2009.

• The area allocated or to be allocated to industrial units shall not be less than ninety per cent of the allocable area.

• There shall be a minimum of thirty industrial units located in an industrial park. • For the purpose of computing the minimum number of industrial units, all units of a person and his

associated enterprises will be treated as a single unit. • The minimum constructed floor area shall not be less than 50,000 square meters. 20 “date of commencement” has been defined as "means the date of obtaining the completion certificate or occupation certificate, as the case may be, from the relevant local authority, certifying thereby that all the required development activities for the project have been completed"


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• No industrial unit, along with the units of an associated enterprise, shall occupy more than twenty five per cent of the allocable area.

• The industrial park should be owned by only one undertaking, and • Industrial units shall undertake only permitted manufacturing activity21 Certain other general conditions as briefly given below have also been specified: • The industrial park shall be construed as developed on the date of commencement. • Tax benefits under the Act will be available to the undertaking only after minimum number of thirty

units is located in the Industrial Park. • The tax benefits under the Act will be available only to the undertaking notified by the Central

Government and not to any other person, who may subsequently develop, develops and operates or maintains and operates the notified industrial park, for any reason.

• The undertaking must keep separate book of accounts for the industrial park and must file its income

tax returns by the due date. • The undertaking shall electronically furnish an annual report to the Central Board of Direct Taxes The Central Government may withdraw the approval given to an undertaking under this Scheme if the undertaking fails to comply with any of the prescribed conditions. CBDT Notification No. 3/2008, dated 8 January 2008

←Back Clarificatory circular regarding payments made to the cold storage owners - Provisions of Section 194C and not 194I to be applicable A clarificatory circular has been issued by the CBDT on the applicability of section 194I22 to the payments made to the cold storage operators. In view of the fact that the main function of the cold storage is to preserve perishable goods by means of a mechanical process, and storage of such goods is only incidental in nature and that the customer is also not given any right to use any demarcated space/place or the machinery of the cold store and the customer does not become a tenant. Therefore, the provisions of section 194I are not applicable to the cooling charges paid by the customers of the cold storage. However, since the arrangements between the customers and cold storage owners are basically contractual in nature, it has been clarified that the provisions relating to deduction of tax at source from the payments made to a contractor will be applicable to the amounts paid as cooling charges by the customers of the cold storage. CBDT Circular No. 1/2008, dated 10 January 2008

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21 As defined in section D of the National Classification, 2004, Code issued by the Central Statistical Organisation, Department of Statistics 22 Any person except individual and HUF responsible for paying rent shall deduct tax at source from the payment


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Explanatory circular on Fringe Benefit Tax arising on allotment or transfer of specified Securities or sweat equity shares The Finance Act, 2007 brought Employee Stock Options (ESOPs) granted to employees under the Fringe Benefit Tax (FBT) provisions. The value of ESOPs for the purpose of levying FBT is determined as, the fair market value (FMV) on the date on which the “option” vests with the employee as reduced by the amount actually paid by or recovered from the employee in respect of such ESOPs. “FMV” means the value determined in accordance with the method prescribed by the Central Board of Direct Taxes (CBDT). The CBDT vide notification dated 23 October 2007, prescribed the valuation rules 23 to determine the FMV for levy of FBT on the ESOPs granted to employees. These valuation rules are applicable for Assessment year 2008-2009. Accordingly, ESOP’s, where the shares/securities are allotted or transferred on or after 01 April 2007, are to be valued as per these rules. Recently, the CBDT vide Circular No 9/2007 has provided some clarifications in respect of FBT on ESOPs

For further details please refer to our Flash News of 24 December, 2007 available at in.kpmg.com ←Back

SEBI/Corporate Law - Notifications/Circulars/ Press Releases Permission for short selling of Equity Shares by SEBI registered FIIs

The Reserve Bank of India (RBI) has decided to allow SEBI registered Foreign Institutional Investors (FIIs)/sub-accounts of FIIs to short sell, lend and borrow equity shares of Indian companies subject to such conditions as may be prescribed by the RBI and the SEBI / other regulatory agencies from time to time.

The above permission is subject to the following conditions:

• The FII participation in short selling as well as borrowing / lending of equity shares will be subject to the current FDI policy and short selling of equity shares by FIIs shall no be not permitted for equity shares which are in the ban list and/or caution list of RBI.

• Borrowing of equity shares by FIIs shall only be for the purpose of delivery into short sale. • The margin / collateral shall be maintained by FIIs only in the form of cash and no interest shall be

paid thereon. The designated custodian banks are required to separately report all the transactions pertaining to short selling and lending and borrowing of equity shares by FIIs in their daily reporting with a suitable remark (short sold / lent / borrowed equity shares) for the purpose of monitoring by the Reserve Bank.

The SEBI has also laid down a broad framework for short selling and securities lending and borrowing, which is briefly given hereunder. Broad framework for short selling • Naked short selling shall not be permitted in the Indian securities market. So all investors are obliged

to honour their obligation of delivering the securities at the time of settlement.

23 Rule 40C of the Income-tax Rules, 1962


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• No institutional investor shall be allowed to do day trading i.e., square-off their transactions intra-day. In other words, all transactions would be grossed for institutional investors at the custodians’ level and the institutions would be required to fulfill their obligations on a gross basis.

• The securities traded in F&O segment shall be eligible for short selling. • The institutional investors shall disclose upfront at the time of placement of order whether the

transaction is a short sale. • The stock exchanges shall frame necessary uniform deterrent provisions and take appropriate action

against the brokers for failure to deliver securities at the time of settlement which shall act as a sufficient deterrent against failure to deliver.

• A scheme for Securities Lending and Borrowing (SLB) shall be put in place to provide the necessary

impetus to short sell. In order to provide a mechanism for borrowing of securities to enable settlement of securities sold short, a full-fledged securities lending and borrowing (SLB) scheme as prescribed above has also been put in place which is briefly given hereunder • To begin with, the securities traded in F&O segment shall be eligible for lending & borrowing under

the scheme. • The tenure of lending/borrowing shall be fixed as standardised contracts. To start with, contracts with

tenure of 7 trading days may be introduced. • The settlement cycle for SLB transactions shall be on T+1 basis. The settlement of lending and

borrowing transactions shall be independent of normal market settlement. • The settlement of the lending and borrowing transactions shall be done on a gross basis at the level of

the clients i.e. no netting of transactions at any level will be permitted. • There shall be no direct agreement between the lender and the borrower. The agreement will be in

two parts: (i) between the Approved Intermediaries and the Clearing Members; and (ii) between the Clearing Members and the clients.

• In consultation with SEBI, the Approved Intermediaries will decide the Position limits at the level of

Market, Clearing Members and clients from time to time. To begin with, (i) the market wide position limits for such transactions such be 10% of the free-float capital of the company in terms of number of shares; (ii) no Clearing Member shall have open position of more than 10% of the market wide position limits of INR 500 million (base value), whichever is lower; (iii) For an FII, the position limits shall be the same as that of a Clearing Member; (iv) The client level position limits shall not be more than 1% of the market wide position limits.

• Any borrowing/lending and return of securities would not amount to purchase/disposal/transfer of the

same for the compliance with extant FDI/FII limits and the norms regarding acquisition of shares/disclosure requirements specified under the various regulations of SEBI.

RBI Circular No. 23 AP (DIR) Series 2007-08/219, dated 31 December 2007 and SEBI MRD/DoP/Dep/Cir-14/2007, dated 20 December 2007

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NBFCs to obtain RBI nod to set up Subsidiary/JV/Representative Office abroad Non-banking Financial Companies (NBFC) will now need to also meet additional conditions before they are allowed to set-up subsidiary/JV/representative office abroad or invest abroad. In this regard, the banking regulator, Reserve Bank of India, has issued draft guidelines on 24 January 2008 to be complied by an NBFC besides the extant ones. For further details please refer to our Flash News of 29 January 2008 available at in.kpmg.com

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Further liberalisation of foreign direct investment norms in Real Estate sector The Indian Union Cabinet (Cabinet) issued a Press Release liberalising the prevailing foreign direct investment (FDI) policy. While the Press Release indicates increasing of sectoral caps for FDI in several infrastructure segments, the Cabinet has also indicated that it will provide clarifications in certain segments of real estate sector. For further details please refer to our Flash News of 31 January 2008 available at in.kpmg.com

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Draft Guidelines on registration and operations of Mortgage Guarantee Companies Based on the proposals for the Union Budget 2007-08, the banking regulator, Reserve Bank of India (RBI) had, vide notification dated 15 January 2008, notified a Mortgage Guarantee Company (MGC) as a Non-Banking Financial Company (NBFC). On 23 January 2008, the RBI issued draft guidelines on the registration and operation of a MGC, to be complied by every NBFC carrying on mortgage guarantee business. For further details please refer to our Flash News of 5 February 2008 available at in.kpmg.com

←Back Indirect Tax Service Tax – Decisions Final Order In a composite contract, VAT cannot be levied on the entire value of the, if Service tax has also been paid The Apex court, vide a recent ruling on the issue of whether VAT should be levied on that portion of the composite contract where Service tax has been paid, has held as under: • Payments of Service tax and Sales tax are mutually exclusive. • They should be held to be applicable having regard to the respective parameters of Service tax and

Sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. • Unlike an indivisible contract, a composite contract may consist of different elements attracting

different nature of levy. • Thus, Sales tax should not be payable on the value of the entire contract where the contract also

includes value attributable to the provision of service. Imagic Creative Private Limited vs. Commissioner of Commercial Taxes, 2008-TIOL-04-SC-VAT, dated 9 January 2008

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Computation of Service tax where Service tax is not separately collected The Kolkata Tribunal in a recent ruling has held that, where Service tax has not been separately collected by the service provider from its client, the amount received from the client has to be taken as inclusive of tax thereon. Turret Industrial Security Pvt Ltd Vs CCE & C, Jamshedpur, 2008-TIOL-45-CESTAT-KOL, dated 26 October 2007 In another case on the same issue, the Bangalore Tribunal has taken a view similar to the view taken by Kolkata Tribunal as cited above and has held that cum-duty price benefit has to be given in such cases where tax has not been collected separately by the service provider. M/s Prompt Security Vs Commissioner of Central Excise, Service Tax, Commissionrate Bangalore, 2008-TIOL-97-CESTAT-BANG, dated 3 September 2007

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Applicability of Service tax on free after sales service The Kolkata Tribunal, in a recent ruling has examined the applicability of Service tax on free after sales services provided by authorized vehicle dealers. In the present case, the appellant, as authorized dealers of Tata Motors, sold cars to the customers and also provided free after sales service to the said customers. However, the appellant did not receive any reimbursement from Tata Motors towards service charges. Nevertheless, dealers' margin available to the appellant was adequate to meet the expenses towards free servicing. The Tribunal had held that no Service tax should be levied on servicing activity in this case primarily because of the following reasons: • When the appellants sold the cars and recovered the amount including the dealers' margin, the

dominant intent was to sell the goods, namely, cars and not to provide free after sales service. The provision of free servicing was merely incidental and was intended to promote the sale of the cars.

• Accordingly, the entire amount including the dealers' margin had been rightly taxed to Sales tax representing the value of the cars (The appellant was paying Sales tax on sale price recovered from the customer). .

• Hence, no Service tax can be levied on the amount representing the dealers' margin or any part of it which already has been subjected to Sales tax.

M/s ASL Motors Pvt Ltd Vs Commissioner of Central Excise, Customs & Service Tax, Patna, 2008-TIOL-114-CESTAT-KOL, dated 21 November 2007

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Interim Orders Credit of Service tax paid on outward freight The Delhi Tribunal in a recent stay order has held (on a prima facie basis) that exporter of goods can take credit of Service tax paid on freight charged for outward transportation of goods. The Tribunal, while coming to this prima facie conclusion, has relied on the following: • Ruling given in the case of Kuntal Granites Ltd. V. CCE, wherein, it was held that ‘place of removal’

in respect of export of goods is the place where export documents are presented to the Customs office at Port


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• The Service tax Master Circular (issued on 23 August 2007), wherein, it has been clarified that door

step of the purchaser is the 'place of removal' where the contract, inter alia, provided for delivery of the goods to the purchaser at his door step.

Rajasthan Spg. & Wvg. Mills Ltd v. Commissioner of C. Ex., Jaipur, 2007 (8) STR 575, dated 20 July 2007

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Coverage of Broadcasting Service The Chennai Tribunal while granting stay to the appellants on the on the issue of coverage of ‘Broadcasting Services’ has held that, selling of time slots for advertisement purposes would not attract Service tax under this category as neither the appellant nor the broadcasting company had any office outside India. Vijay Television (P.) Ltd. Vs Commissioner of Service Tax, Chennai, 2007 (11) STT 447, dated 5 September 2007

←Back Service Tax – Notifications / Circulars issued by the Central Board of Excise and Customs ‘the Board’ Ad hoc abatement of 67 percent The Board, vide a recent circular, has clarified that the abatement of 67 percent available under the service category of ‘Erection, Commissioning and Installation Services’ would not be admissible in cases where the amount charged for such service does not include the value of plant, machinery, equipment, structure or parts and any other material which are erected/ commissioned/ supplied. As per this clarification, Service tax in such cases has to be paid on the entire amount charged for such services. F. No. 137/73/07-CX.4, dated November 12, 2007

←Back Amendments in Master Circular The Board, vide a recent circular, while amending the Master Circular which was issued in August 2007 on technical issues, has provided the following clarifications: • Any Service tax paid on construction of immovable property (under the category of ‘Works Contract

Services’ or ‘Commercial or Industrial Construction Services’) shall not be eligible as Cenvat Credit against the Service tax payable on renting of such property. This is because immovable property is neither subject to Excise duty nor Service tax.

• Since the taxable value in case of a ‘Works Contract Services’ does not include the value of goods, Excise duty paid on such goods cannot be claimed as Cenvat credit.

• Service providers who have already paid tax on works contracts prior to the introduction of new category of ‘Works Contract Services’ from 1 June 2007 under different taxable categories (e.g. erection, commissioning or installation services) would not be entitled to switch over to the new category and pay tax under composition scheme.

Circular No. 98/1/2008-ST dated 4 January 2008

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Central Excise – Case laws Constitutionality of Andhra Pradesh Tax on Entry of Goods into the Local Area Act, 2001 The petitioners challenged the validity of the Andhra Pradesh Tax on Entry of Goods into the Local Area Act, 2001 before the High Court of Andhra Pradesh. The Act was challenged on the ground that it was not ‘compensatory’ in nature and therefore unconstitutional. The High Court relied upon the Supreme Court judgment in the case of Atibari Tea Company to shed light on the issue of when a tax could be said to be compensatory in nature (as against a normal tax). It was observed as under: • Compensatory tax is based on the principle of ‘pay for the value’. It is a sub-class of ‘a fee’. From the

point of view of the Government, a compensatory tax is a charge for offering trading facilities. It adds to the value of trade and commerce which does not happen in the case of a (normal) tax as such.

• For a tax to be compensatory there must be some link between the quantum of tax and the facility/ services

• For one to justify, a particular tax levied to be compensatory in nature, it is essential that there should be a direct nexus between the tax collected and special features provided by the State Government to cater to the specific needs of the people engaged in trade or commerce

The State Government contended that the levy of Entry tax was compensatory in nature and produced evidence of distribution of Entry tax collected to the Municipalities and Panchayat Raj institutions for maintenance and creation of infrastructure facilities like roads etc, to substantiate their argument. However, the High Court observed that the State government was merely fulfilling its fundamental obligations and not performing any special features specific to cater to the needs of the people indulging in trade or commerce. Furthermore, it was noted by the Court that essential link between the infrastructures or facility or service, which is directly or even indirectly held to promote the cause of trade or commerce, was missing in the activities of the State government. Consequently, the High Court declared the impugned levy as unconstitutional. Indian Aluminium Company Ltd Vs the Secy to Govt., Law Dept & Others, 2008-TIOL-32-HC-AP-ENTRY

←Back Central Excise – Notifications Exemption restricted Notification number 1/ 2008 Central Excise dated 18 January 2008 has denied the exemption with effect from 25 January 2008, available under notification No. 49/2003 or 50/ 2003 -Central Excise (specified units in the States of Uttarakhand or Himachal Pradesh) to goods which have been subjected to only specified processes (preservation during storage, cleaning operations, packing or repacking, labeling or, sorting, declaration or alteration of retail sale price etc.) and have not been subjected to any other process or processes amounting to manufacture in the State. Notification 1/ 2008 Central Excise dated 18 January 2008

←Back Quarterly returns prescribed for units availing specified exemptions Notification number 3/ 2008 Central Excise (NT) dated 18 January 2008 has inserted a new proviso to Rule 12(1) of Central Excise Rules, 2002.


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As per the proviso, where an assessee is availing the exemption notification No. 49/2003 or 50/ 2003 -Central Excise, dated the 10th June, 2003 he shall file a quarterly return with the Jurisdictional Commissioner of Central Excise, in the prescribed form within 20 days after the close of the quarter to which the return relates. In case of goods produced and removed during the quarter ending on the 31st day of December, 2007, such return shall be submitted by the 20th February, 2008. Notification number 4/ 2008 Central Excise (NT) dated 18 January 2008, prescribes that the above return would in ‘Form A’ to be used in duplicate. Notification 3/ 2008 and 4/ 2008 Central Excise (NT) dated 18 January 2008

←Back Certain IT hardware items brought under the MRP based valuation regime Notification number 5/ 2008 Central Excise (NT) dated 18 January 2008 has further amended the notification No. 2/2006 Central Excise (N.T.), dated the 1st March 2006 bringing certain IT hardware items (e.g. personal computers, printers, monitors, modems, set top boxes for gaining access to internet/ television sets) under the MRP based valuation. Abatement ranging from 22.5% to 25% has been prescribed depending upon the nature of the goods. Notification 5/ 2008 Central Excise (NT) dated 18 January 2008

←Back Certain IT hardware items included under the Third Schedule of Central Excise Act Notification number 6/ 2008 Central Excise (NT) dated 18 January 2008 has included the above IT hardware items (e.g. personal computers, printers, monitors, modems, set top boxes for gaining access to internet/ television sets) with effect from 25 January 2008, under the Third Schedule of Central Excise Act. Specified activities (packing/ repacking/ labeling/ re labeling/ declaration or alteration of retail sale price etc.) in relation to goods specified in the Third Schedule is deemed to be ‘manufacture’ for the purpose of levy of Excise duty. Notification 6/ 2008 Central Excise (NT) dated 18 January 2008

←Back VAT/Central Sales tax - Case laws Refund of entry tax paid after levy of tax declared invalid The petitioners challenged the levy of the Bihar Tax on Entry of Goods into Local Areas for Consumption, Use or Sale therein Act, 1993 (‘the Act’) as adopted in the State of Jharkhand by way of a writ petition. The Division Bench of the Jharkhand High Court (‘the High Court) held the levy under the Act to be ultra vires the Constitution. Pursuant to the above, the petitioners filed for refund of Entry tax with the State Government, which was denied. Consequently, the petitioners filed the writ petition before the High Court. The State Government filed a counter-affidavit stating that: • The Division Bench order declaring the provisions of the Act to be ultra vires shall have prospective

effect.


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• The amount deposited by petitioners is hit by the principles of unjust enrichment. The High Court while passing the judgement observed that refund of Entry tax along with interest should be granted to the petitioners on the grounds that: • Entry tax was neither collected by the petitioner from its consumers on the sale of finished goods nor

has it passed on the burden of the tax amount in any manner whatsoever upon anybody, and, • In the counter-affidavit filed by the State Government, non-collection of Entry tax by petitioner or

passing of Entry tax burden has not been argued. KIC Metaliks Ltd v State of Jharkhand and others [2007] 10 VST 579 (Jharkhand)

←Back Disclaimer The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.


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For further information about KPMG in India and our services, please contact:

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