DTRTI NEWSLETTER Issue No.67/Chennai September 13, 2019
TRAINING NETWORK RELATED NEWS
DR Inspectors during the Industrial visit to Toyota Kirloskar Motors, Bengaluru (above)
and Educational visit to CPC, Bengaluru (below) as part of their course curriculum
CONTENTS
Training network related news
Topic for the week – Aggressive Tax Planning Schemes
Judgement for the week-PCIT vs. Maruti Suzuki India Ltd.
From the Editor’s Desk-1 - Common mistakes in Assessment
From the Editor’s Desk-2 - Case Studies on Penalty u/s.270A
Solution to the last week’s crossword- PGBP – Other Deductions (Section 36)
2
TOPIC FOR THE WEEK Aggressive Tax Planning Schemes
Compiled and provided by Shri M.S. Nethrapal, IRS, Addl.CIT (continued from the last week)
32. Judicial precedents in India have
consistently held that Control and
Management (C&M) of an entity is situated
at the place where the direction,
management and control, “the head and
seat and directing power” of the entity’s
affairs are situated. The following rulings,
in the context of C&M are noteworthy in
this regard:
a. Subbayya Chettaiar (HUF) vs. CIT
(19 ITR 168) (SC): SC relied on the
following principles from English rulings:
The conception of residence in the case of a
fictitious “person”, such as a company, is as
artificial as the company itself, and the
locality of the residence can only be
determined by analogy, by asking where is
the head and seat and directing power of
the affairs of the company. Control and
management signifies in the present
context, the controlling and directive power,
the head and brain as it is sometimes called,
and situated implies the functioning of such
power at a particular place with some
degree of permanence, while wholly would
seem to recognize the possibility of the
seat of such power being divided between
two distinct and separated places. As a
general rule, the control and management
of a business remains in the hand of a
person or a group of persons, and the
question to be asked is where from the
person or group of persons controls or
directs the business. But, mere activity by
the company in a place does not create
residence, with the result that a company
may be ‘residing” in one place and doing a
great deal of business in another.
b. Nandlal Gandalal (40 ITR 1) (SC)
(relying on Chettiar’s case):
The expression “control and management”
signifies controlling and directive power,
“the head and brain” as it is sometimes
called. Furthermore, the expression
“control and management” means de facto
control and management and not merely
the right or power to control and manage.
c. Erin Estate, Galah, Ceylon v CIT
(1958)(34 ITR 1)(SC):
Control and management evidently refers
to the controlling and directing power.
Often enough, this power has been
described in judicial decisions as the “head
and brain”;
d. Narottam & Pereira Ltd.
(23 ITR 454):
“Control and management signifies in the
present context, the controlling and
directive power, the “head and brain” as it is
sometimes called, and situated implies the
functioning of such power at a particular
place with some degree of permanence,
while wholly would seem to recognize the
possibility of the seat of such power being
divided between two distinct and separated
places.”
33. Judicial precedents in UK and other
international courts have also applied the
same principles. In the English case of
Atkinson [2006] STC 732, it was noted,
“C&M carries with it connotations of
continuity because of the use of phrases
such as ‘actually abides’, ‘carries on
business’, ‘keeping house’. It is necessary to
consider the overall pattern of conduct
established over a period of time; residence
does not change on every occasion where
there is short-term change in the location of
board meetings”.
3
..
34. There is a case of Lee & Bunter of
UK which is squarely applicable in this
case - Recently, the UK’s 1st Tier Tribunal,
in the case of Richard Lee & Nigel Bunter v.
the Commissioner for Her Majesty’s
Revenue & Customs, ruled on the POEM of
two Guernsey based trusts having UK
settlors & a Mauritius based trustee at the
time of a transaction of transfer of shares.
The Tribunal after analyzing the facts,
witness statements & evidences ruled that
even though the execution of the
transaction took place in Mauritius by
virtue of the trustee being in Mauritius, the
trustee only acted under instructions of
the settlors who were based in the UK;
thereby resulting in the POEM of the trusts
being in UK & hence resulting in tax being
leviable on the transaction that took place.
35. The Tribunal applied the test laid
down by the UK High Court in Smallwood
to determine whether the POEM exists -
where were the important decisions on
governance or management of the
settlement located? The approach and
factual basis of the Tribunal’s findings are
as follows:
a. The Tribunal identified key
decisions relating to the governance /
management of the Trusts. The decision
for disposal of (almost all) assets of the
Trusts, and the pricing of the Transaction
was identified as the fundamental
determinative factor. With respect to the
decision making for disposal of the assets
of the Trusts, the Tribunal examined the
competence of the directors of ‘Trustee-2’
and concluded that the choice of the
directors of ‘Trustee-2’ was not based on
business acumen possessed by them, but
rather only on the location of the ‘Trustee-
2’. Based on the witness statement, the
Tribunal concluded that he did not have an
understanding of critical aspects of the
Transaction i.e. the meaning of a put / call
option, and therefore the decision to
dispose the assets could not have been
based on ‘Trustee-2‘s’ independent
judgment.
b. On the question of management
and independence of ‘Trustee-2’ being able
to take /reject the decision, the Tribunal
dismissed the possibility of non-execution
of Transaction documentation by the
Mauritius directors as a ‘fanciful
proposition’ i.e. it was an unlikely
eventuality that the Mauritius directors of
‘Trustee-2’ would not sign the Transaction
documentation.
c. The Tribunal noted that witness (or any
other director of the ‘Trustee-2’) was not
party to the discussions and negotiations
with Vodafone on the commercials of the
Transaction for accelerating the call option
exercise. The Transaction negotiations
with Vodafone had been concluded almost
wholly by the settlors, who were also
directors , and by their lawyers in UK
before ‘Trustee-2’ was brought on board.
The minutes of the board meeting of
‘Trustee-2’ were materially identical to
this memorandum. This further illustrates
the lack of independent decision making
exercised by ‘Trustee-2’. The Tribunal also
gave due regard to the nature and timing
of the Transaction.
d. Specifically, the fact that ‘Trustee-2’
resigned within days of completion of the
Transaction. The Tribunal also took note
that the reasons for the resignation were
explained as ‘tax planning advice’ in one of
the minutes of the meetings in which the
resignation was considered.
(to be continued)
4
JUDGEMENT FOR THE WEEK
PCIT vs, Maruti Suzuki India Ltd. (Compiled and provided by Smt. Ann Mary Baby, IRS, Addl.CIT)
The Honourable Supreme Court of India in
PCIT vs. M/s.Maruti Suzuki India Ltd in
[2019] 107 taxmann.com 375 (SC) held
that issuance of jurisdictional notice and
assessment order thereafter passed in
name of non-existing company i.e.
amalgamating company having ceased to
exist as a result of approved scheme of
amalgamation, is a substantive illegality
and not a procedural violation of nature
adverted to in section 292B and hence,
being without jurisdiction was to be set
aside.
The significant facts of the case as
observed by the Apex Court are as follows:
1) The income which is sought to be
subjected to the charge of tax for AY
2012-13 is the income of the erstwhile
entity (SPIL) prior to amalgamation.
2) Under the approved scheme of
amalgamation, the transferee has
assumed the liabilities of the transferor
company, including tax liabilities.
3) The consequence of the scheme of
amalgamation approved under Section
394 of the Companies Act 1956 is that
the amalgamating company ceased to
exist.
4) Upon the amalgamating company
ceasing to exist, it cannot be regarded
as a person under Section 2(31) of the
Act 1961 against whom assessment
proceedings can be initiated or an
order of assessment passed.
5) A notice under Section 143 (2) was
issued on 26 September 2013 to the
amalgamating company, SPIL, which
was followed by a notice to it under
Section 142(1).
6) Prior to the date on which the
jurisdictional notice under Section 143
(2) was issued, the scheme of
amalgamation had been approved on
29 January 2013 by the High Court of
Delhi under the Companies Act 1956
with effect from 1 April 2012.
7) The assessing officer assumed
jurisdiction to make an assessment in
pursuance of the notice under Section
143 (2). The notice was issued in the
name of the amalgamating company in
spite of the fact that on 2 April 2013,
the amalgamated company MSIL had
addressed a communication to the
assessing officer intimating the fact of
amalgamation.
In the above conspectus of the facts,
the initiation of assessment
proceedings against an entity which
had ceased to exist was void ab initio.
The Court observed that in the present
case, despite the fact that the assessing
officer was informed of the amalgamating
company having ceased to exist as a result
of the approved scheme of amalgamation,
the jurisdictional notice was issued only in
its name. The basis on which jurisdiction
was invoked was fundamentally at odds
with the legal principle that the
amalgamating entity ceases to exist upon
the approved scheme of amalgamation.
Participation in the proceedings by the
appellant in the circumstances cannot
operate as an estoppel against law.
5
FROM THE EDITOR’S DESK-1 Common mistakes in Assessment
(Compiled and provided by Shri M. Veerabhagu, ITO-1, DTRTI)
Based on the audit conducted in 2017-18
in respect of assesses engaged in
entertainment sector such as radio,
television, music, event management, film,
animation and visual effects, broadcasting,
sports and amusement, etc., a report was
prepared by office of the C & AG for
submission before the President of India.
The report has pointed out mistakes
noticed in the assessment orders passed
by officers in various regions and has
raised objections on the same. It has also
made several observations. Some of the
objections raised and observations made
are listed out here:
1. Not using the information
shared: In one of the cases assessed at
Mumbai, despite the information from
Kolkata investigation that the assessee
was one of the penny stock companies, the
AO had not taken any cognizance of the
information and completed the
assessment without taking any action on
the same.
2. Not sharing of information
within the department:
(i) During the audit of a assessee company
assessed at Mumbai, it is noticed that
the assessee company had obtained
two business undertakings from
another assessee company through
slump sale (to be considered for
taxation under capital gain u/s.50B).
The latter had not offered any capital
gains in the return of income filed. The
information was also not passed on to
the AO of the former. Thus, the
consideration paid by the company
(issued equity) of Rs.38.84 crores was
omitted to be brought to tax.
(ii) In one of the cases assessed at
Chennai, a survey was conducted and
during the survey the assessee had
admitted to have received Rs.2.45
crores in cash from another assessee.
However, this information was not
passed on to the AO having
jurisdiction over the case of the payer
and hence there was a possible
leakage of revenue.
3. Not sharing of information with
other departments:
(i) The assessee, engaged in business of
multiplex cinemas, had offered income
of Rs.127.95 crores (exclusive of
entertainment tax) as per the P & L
Accounts for the period from 2010-11
to 2013-14. Whereas, as per the
information provided by the
Entertainment Tax Department, Delhi,
the assessee had deposited
entertainment tax of Rs.46.01 crores
during the above period. Considering
the rate of entertainment tax (which
was at 20% in this period), the
corresponding income should have
been Rs.230.06 crores. As cross-
verification with the department
concerned was not done, there was a
loss to the exchequer.
(ii) In another case, again assessed at
Delhi, the difference in (under-
reporting of) income for the same
period works out to Rs. 57.08 crores.
(iii) Similar cases were reported in
multiplexes assessed at Karnataka and
Maharashtra also. (to be continued)
6
FROM THE EDITOR’S DESK-2
Case Studies on Penalty u/s.270A
(Compiled and provided by Shri T.V. Vamsidhar, IRS, DCIT, DTRTI)
(continued from last week)
Case Study-6
Under Reported Income- On Reassessment of MAT Income Sec 271(2)(f)
The amount of deemed total income Reassessed as per the provisions of section 115JB
or section 115JC, as the case may be, is greater than the deemed total income assessed
or reassessed immediately before such reassessment-Reassessed u/s 147
The amount of under reported will be determined as under
URI = The Deemed Total Income Reassessed (-) minus The Deemed Total Income
Previously Assessed
Tax on URI = {(URI (+) (the Reassessed Deemed Total Income)} (-) minus
Tax on the previously Deemed Assessed Total Income
Penalty on under reported income
50% on the tax on under reported income – In case of under reporting
200% on the tax on under reported income – In case of Mis-Reporting
Under Reporting on MAT Reassessment Company,
Firm etc.
Sec 115JB
Individual,
Firm etc
Sec 115 JC
1 Deemed Total Income – Assessed 100.00 150.00
(+) Provision for DDT 10.00 0.00
(+) Expenses disallowed 30.00 30.00
(-) Amount of Revaluation Reserve (if Credired) 10.00 0.00
2 Deemed Total Income – Reassessed 130.00 180.00
3 Underreported Income 30.00 30.00
4 Underreported Income for Tax purposes 160.00 210.00
5 Tax on under reported income @18.5% as Reassessed On (4)
29.60 38.90
6 Tax on under reported income @18.5% as Assessed On (1)
24.10 33.30
7 Tax on under-reported income (5-6) 5.50 5.60
8 Penalty @ 50% on under reported income 2.80 2.80
7
Case Study-7
(g) The income assessed or reassessed has the effect of reducing the loss or
converting such loss into income.
The amount of under reported income will be determined as under
1) The difference between the loss determined u/s 143(1)(a) and the assessed loss
whereby the amount of loss is reduced.
2) The difference between the loss determined u/s 143(1)(a) and the assessed loss
where by the amount of loss is converted in to Income
The tax on under reported income will be
Tax on URI as if the URI is the Total Income
Penalty on under reported income
50% on the tax on under reported income – In case of under reporting
200% on the tax on under reported income – In case of mis-Reporting
Assessed Income has the effect of reducing the loss or converting such loss into
income.
1 Loss as per return (50.00)
(+) Expenses disallowable as per Tax Audit Report 5.00
2 Income processed u/s 143(1)(a) (45.00)
3 (+) Hawala Purchases 30.00
(+) Undisclosed Income 50.00
4 Income u/s 143(3) 80.00
5 Underreported Income- to be treated as Total income 125.00
6 Tax on under reported income 37.50
7 Penalty u/s.270A = 200% of the tax on under reported tax –
being mis-reported Income
75.00
(concluded)
னசாபா மநயி ககுந னசாபா
ணபிசசா ா பகதது - கு 194
ன, ணபுந இாத ச ாகள
ஒருவ பிடமுந ச ாா அ
ச ாகள அவள தியுட ள பாந
குணஙகிலிருது ககிவிடுந.
Vain words spoken without dignity to a group are ungainly, unrighteous
and yield no gains.
8
इस
Correspondence पतर-वयवहहरर
Even number समसखयक
–
Please provide copies of all correspondence in
this matter urgently. कपयरइसमरमलमसभीपतर-वयवहहररकीपरतियरा
िरिउपलबधकररएl
Please refer to this office letter even number
dated 09.06.2019 on the above subject. कपयरउपयकततवहषयपरइसकरयरलयक
समसखयकपतरदिनरक09.06.2019 करसिभलl
SOLUTION TO THE LAST WEEK’S CROSSWORD
PGBP – OTHER DEDUCTIONS (SECTION 36)
F1 E D2 E R A L B3 O N A F I4 D E
I R
D5 V P6 R O R A T A7
A8 C Q U I S I T I O N E P
M D C P
A R9 E D E M P T I O N O R
G N M10 V O
E D11 E D U C T I B L E A E V
D12 N R E
U U A D
P13 E N S14 I O N S C H E M E F B
D P H15 E A L T H
A E16 X P E C T E D C E U17
T C T S
E I18 N T E R E S T E19 Q U A L E
F R L
W2
0 R I T T E N O F F E E
I21 R R E V O C A B L E S
D A22 D V A N C E S
..
Published by: TEAM DTRTI
Top Related