Issues in Corporate Taxation. - jb nagar cpe study circle of wirc of icai

Issues in Corporate Taxation.
Recent Case Laws
Presentation at J. B. Nagar CPE Study Circle
PwC
CA Sanjeev Lalan, Singrodia Goyal & Co.
August, 2011

History of Corporate Taxation in India
• Corporate taxation is governed by the Income Tax Act, 1961
• Levy of tax on corporate has undergone several changes from time to
time
• Includes additional tax on closely held company, distinction of tax
structure between trading company and industrial company and certain
incentives and special deductions such as Sec. 33AC, 35DD, Sec.80-O
among others
• Major developments in Corporate taxation came when the Government
felt that various exemptions that benefits hundreds of corporate are not
falling into the tax net
• Hence, the concept of tax on Book Profit, (known as Minimum Alternate
Tax (MAT)
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
Presentation at JB Nagar CPE Study Circle
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Piercing the Corporate Veil
• One of the fundamentals of corporate taxation is the concept of piercing
the corporate veil
• Company is merely a front in a scheme of tax avoidance
• The Supreme Court has explained this concept in CIT vs. Sri Meenakshi
Mills Ltd. 63 ITR 609 at Page 616. “It is true that from juristic point of
view the company is a legal personality entirely distinct from its
members and the company is capable of enjoying rights and being
subjected to duties which are not same as those enjoyed or borne by its
members. But in certain exceptional cases the Court is entitled to lift the
veil of corporate entity and to pay regard to economic realities behind the
legal façade.
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
Presentation at JB Nagar CPE Study Circle
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Issues in Corporate Taxation
• The concept of disallowance being non-business, personal, being nonverifiable
etc. are the incidence of past
• Current issues pertaining to Amalgamation, Liquidations, Mergers and
De-mergers
• Such items being cases of rare or occasional frequencies are purposely
not dealt with in this presentation.
• Will dwell upon certain important and presently well talked about issues
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
Presentation at JB Nagar CPE Study Circle
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Contents
1. CIT vs Parle Plastics Ltd. (Bombay High Court)
[2011] 196 Taxman 62 (Bom.)
2. Timken Co.,In re
[2010] 193 Taxman 20 (AAR-New Delhi)
3. Dalal Broacha Stock Broking Private Limited
I.T.A. No. 5792/MUM/2009
4. JCIT vs Patni Computer Systems (P) Limited.
[TS-313-ITAT-2011(Pune)]
5. D B Zwirn Mauritius Trading Co. 2 Ltd.
(AAR. 878, 2010)
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
Presentation at JB Nagar CPE Study Circle
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CIT vs Parle Plastics
Limited
(Bombay High Court)
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
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Facts & Background
• Assessee was engaged in business of manufacture of plastic caps for
bottles.
• AMPL was engaged in business of production, sale and distribution of soft
drinks, aerated waters and mineral waters.
• Business of assessee was complimentary with the business of AMPL.
• Assessee had taken unsecured loan from its sister concern, AMPL.
• Majority of share capital of assessee was held by two individuals who were
also majority shareholders of AMPL.
• AMPL was a company in which public was not substantially interested.
• AO’s contentions
(a) The amount which was a loan by AMPL to the assessee company
should be treated as deemed dividend u/s 2(22)(e)
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
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What the provisions of sec. 2(22)(e) exempts
• Any advance or loan made by a company to a shareholder or a
concern in which the shareholder has a substantial interest would
not be regarded as a dividend if the two conditions are satisfied,
namely
(i) that the loan or advance was made by the (lending) company
in the ordinary course of its business and
(ii) lending of money was a substantial part of the business of
the (lending) company.
August, 2011
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Facts & background in reference to Provisions
• Clause(i) of sec 2(22) was satisfied as AMPL was also engaged in the
business of lending money &
• The business of assessee was complimentary with the business to the
business of AMPL & the money was lent in the usual course of business.
• As regards the second condition, on facts, as about 40% of the total
assets of AMPL were deployed by way of loans and advances, and its
interest income was substantial compared to the total income, lending of
money was a “substantial part of its business” and the money given by it
by way of loan / advance was excluded from the definition of “dividend”
under s. 2(22)(ii).
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
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CIT (Appeal)’s observations and decision
• The sum received as loan/advance during the relevant assessment year
could only be treated as income by way of “deemed dividend”
• The carried forward balance could not be treated as deemed dividend.
Tribunal’s observations
• The Tribunal deleted the addition on the ground that the granting of
loans was a substantial part of the business of AMPL and so the loan
could not be treated as ”deemed income” in the hands of the assessee.
August, 2011
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Timken Co.,In re
[2010] 193 Taxman 20
(AAR-New Delhi)
August, 2011
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Facts & Background
• Applicant is an American company and is a global manufacturer of
engineering bearings, alloys and specially steel related components.
• Applicant company does not have a PE in India
• It earned long term capital gains which were exempt u/s 10(38).
• Assessee applied for a ruling on whether it was liable to Minimum
Alternate Tax (MAT) us 115JB on the said gains.
• The relevant provisions of section 10(38) is extracted as under:
In computing the total income of a previous year of any person, any
income falling within any of the following clauses shall not be included:-
(a) The transaction of sale of such equity share or unit is entered into on
or after the date on which Chapter VII of the Finance (No.2)Act,
2004 comes into force; and
(b) Such transaction is chargeable to securities transaction tax under
that Chapter
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
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Arguments
Assessee’s arguments
The assessee submitted that it would
be inappropriate to read only clause
(ii) of section 2(17) without conidering
the opening lines of section 2 for the
purpose of sec. 115JB.
Department’s arguments
There is no demarcation as such
between a “domestic company” and a
“foreign company”. The provisions
applies to foreign company as well.
The obligation in sec. 115JA(2) to
prepare P&L Account in accordance
with Parts II and III of Schedule VI
can apply only to a foreign company
which has a place of business within
India.
Even though it is not obligatory, it is
not that the appellant cannot prepare
its accounts for its operations in
India as per Parts II & III of Schedule
VI of the Companies Act.
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
Presentation at JB Nagar CPE Study Circle
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AAR ruling
The AAR held that s. 115JA (akin to s. 115JB) applied to every “company” to include a
“foreign company”, there was no reason to presume that the legislature did not
intend s. 115JA to apply to a foreign company. This ruling is not applicable because:
(a)
It was rendered in the case of an assessee who was carrying out business and had
a PE in India.
(b) Its income was being assessed under the head “income from business and
profession”.
(c)
It was required to maintain accounts under section 44AA of the IT Act and
prepare accounts under ss. 591 & 594 of the Companies Act;
(d) S. 591 of the Companies Act applies only to foreign companies who have
established a place of business within India and requires the preparation of a
Balance Sheet and P&L A/c as per s. 594.
(e)
The obligation in s. 115JA(2) to prepare P&L Account in accordance with Parts II
and III of Schedule VI can apply only to a foreign company which has a place of
business within India.
August, 2011
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AAR ruling
(f)
(g)
As the applicant does not have a place of business in India, its preparation of P&L
Account in accordance with Parts II & III of Schedule VI cannot be complied;
Introduction of s. 115JA which makes the legislative intent clear that MAT was not
intended to apply to foreign companies;
(h) Income, which does not have a source in India, cannot be made part of the book
profits. The annual accounts, including the P&L Account, cannot be prepared as
per s.115JB(2) in respect of the world income and laid before the Company at its
AGM in accordance with sec. 210 of the Companies Act.
(i)
(j)
The contention of the department that there is no demarcation between a ‘domestic
company’ and a ‘foreign company’ while applying s. 115JB is not acceptable.
As the applicant did not have a place of business in India and was not required to
prepare its accounts under s. 594 r.w.s. 591 of the Companies Act, it could not have
prepared its accounts in accordance with the provisions of Part II and III of
Schedule VI of the Companies Act, 1956.
August, 2011
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AAR ruling’s observations & decision
• S. 115JB is not designed to apply to a foreign
company which has no presence or PE in India.
• No PE in India, MAT not applicable.
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
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Dalal Broacha Stock
Broking Private Limited
August, 2011
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Facts & Background
• The assessee is in the business of share trading;
• The assessee paid commission to its employee-directors who were also its
only shareholders;
• AO’s contentions
• Payment of commission was in lieu of dividend and used as tax
avoidance tool & not eligible for deduction u/s. 36(1)(ii)
• Disallowed commission under Section 36(1)(ii) of the Act
Legal Provision
• Section 36(1)(ii) (Other deductions) provides that
– “any sum paid to an employee as bonus or commission for services
rendered, where such sum would not have been payable to him as
profits or dividend if it had not been paid as bonus or commission”
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
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Arguments
Assessee’s arguments
Department’s arguments
Insignificant difference in tax rate
(excluding DDT rate) applicable to
assessee (35.75%) and to directors (33%)
– No intention to evade tax
DDT liability
Dividend was not declared since assessee
wanted to improve its net worth to attract
No evidence to support this argument
Directors related to each other – Decision
foreign investor; not to declare dividend in spite of
substantial earnings is not reasonable
Section 36(1)(ii) applies only to
commission paid to non-shareholders
employees
- Legitimate and bona fide expenditure
incurred wholly and exclusively for
purpose of business cannot be disallowed
- Commission allowable u/s 37
It applies to commission paid to all
employees (shareholders or not)
Section 36(1)(ii) being specific provision
for allowance of commission – Section
37(1) not applicable
August, 2011
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Arguments
Assessee’s arguments
Commission paid due to hard work by
directors resulting in substantial profit
No dispute with respect to rendering of
services and reasonableness of payment
Department’s arguments
No evidence of extra services rendered by
directors
No such commission to other employees
Reasonable of amount not a relevant
factor for disallowance under Section
36(1)(ii)
Expression “payable” means that
shareholder should have right to receive
dividend. Payment of dividend is
discretionary and not mandatory
August, 2011
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Tribunal’s observations and decision
• Whether Section 36(1)(ii) applies only to non-shareholder employees
• “Any sum paid to an employee as bonus or commission for services
rendered” – Enabling provision – applies to all employees even if such
payment is made out of profit
• “If the sum so paid is in lieu of profit or dividend” – Disabling provision –
applies only to employee who is shareholder
• Payment of commission to
• employee (shareholder or not) is covered under Section 36(1)(ii);
• Non-employees is covered under Section 37
• Expression ‘payable’ in Section 36(1)(ii) means that dividend would have
been declared by the Company considering the profitability and other
relevant factors;
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
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Tribunal’s observations and decision
• Commission income - No funds required for expansion of its business;
• Net worth would remain the same even if dividend was paid instead of
commission;
• Important criterion is rendering of extra service.
• Adequacy of services or commensurate payment not relevant
• No evidence to substantiate extra services rendered by directors in
addition to services rendered as employee for which salary has been paid;
• Board resolution not an evidence of extra service particularly when Board
constituted by directors to whom payment has been made
• Improvement in performance of assessee was due to improved stock
market conditions and not because of additional efforts by directors
• Commission earning – Income assured whether investor loses or gains
• Good performance in years when there was boom in stock market
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
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JCIT
vs.
Patni Computer
Systems (P) Ltd.
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
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Facts & Background
• Assessee is a company engaged in the business of development and export
of computer software
• Assessee had claimed deduction under section 10A for its three units at
Chinchwad, Akruti and Milennium Business Park in its ROI ;
• Assessing Officer (AO)
• Treated these units as mere expansion of existing units (i.e Software
and Conversion Unit, Sigma Unit and TTC Unit) on the basis of
approval letter received from STPI;
• Profitability of the aforesaid units is to be combined with the
corresponding old units; and
• Concluded that the eligible period for these units would be reckoned
from the first year of the eligibility of the corresponding old units
August, 2011
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CIT (Appeal)’s observations and decision
• All the three units are independent and distinct units
• All the units have their own plant and machinery having substantial
investment, substantial turnover and located in different premises
• Relied upon test laid down the decision of Apex Court of Textile
Machinery corporation for testing the splitting up/ reconstruction
condition – “whether it is identifiable undertaking separate and distinct
from the existing business”
August, 2011
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CIT (Appeal)’s observations and decision
• Three units satisfied the following conditions provided under section
10A(2) of the Act:
• Manufacturing or production of article/ thing
• Not formed by splitting up or reconstruction of business already in
existence
• Not formed by the transfer to a new business or machinery or plant
previously used for any purpose
• Held that deduction to independent and distinct units cannot be denied
merely on the basis of STPI approval letter
August, 2011
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Assessee’s arguments
• All the three units are physically located at different locations and are
independent units with substantial investments
• It is not a case of existing unit but certainly a case of expansion of the
business of the company
• The deduction cannot be denied on the basis of STPI approval/ letter
especially when all the conditions prescribed under section 10A has been
fulfilled
• Relied upon the decision of Jayant Agro Organics Ltd Akhandanad,
Mumbai v Jt.CIT in ITA No 5439/Mum/01 dated 3.3.2006
Department’s arguments
• Approval for setting up of the three units clearly brings out the fact that
new units are mere expansion of the existing units
August, 2011
CA Sanjeev Lalan, Singrodia Goyal &
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Tribunal’s decision
• Relied upon the observation of the CIT(Appeal) and decided the matter in
favour of assessee
• Plea of revenue was rejected by relying upon the decision of Jayant Agro
Organics Ltd Akhandanad, Mumbai v Jt.CIT in ITA No 5439/Mum/01
dated 3.3.2006
August, 2011
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D B Zwirn Mauritius
Trading No. 2 Ltd.
(AAR)
August, 2011
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Facts & Background
• D.B. Zwirn Mauritius Trading No. 2 Ltd. (“the assessee”) is a company
incorporated in and holding tax residency certificate of Mauritius
• The assessee held 61,33,333 equity shares of Quippo Telecom
Infrastructure Limited, an Indian company which were acquired in
September 2007 for a consideration of Rs. 2,453.33 lacs
• In November 2009, the assessee entered into a share purchase
agreement to sell these shares to Geraldton Finance Limited, another
Mauritius based company for consideration of Rs. 6,439.99 lacs
August, 2011
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Issues before the Tribunal
• Whether by virtue of being a Mauritius resident, the assessee is
eligible to the benefits of the India-Mauritius DTAA and hence
not subject to tax in India on the capital gains realized?
• Whether there is any withholding tax liability under section 195
of the Act?
August, 2011
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Contentions of the assessee
• The assessee is holding Tax Residency Certificate issued by
Mauritius Revenue Authority and is eligible to claim benefits under
India-Mauritius DTAA.
• Article 13(4) of the DTAA provides that the profits made by a
resident of a contracting state from the alienation of shares shall be
taxable only in that state.
• The CBDT, in Circular No.789 dated 13 April 2000, has clarified that
under Article 13(4) of the DTAA, a resident of one state shall mean
any person who is liable to tax under the laws of that state.
• In the case of Azadi Bachao Andolan, the Supreme Court has held
that the certificate of residence issued by Mauritius Revenue
Authority constitutes a valid and sufficient evidence of residential
status under India-Mauritius DTAA
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
Presentation at JB Nagar CPE Study Circle
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Contentions of the assessee
• The CBDT in Circular No. 682 dated 30 March 1994 has further clarified
that under the India-Mauritius DTAA, a resident of Mauritius having
income from alienation of shares of Indian company shall be liable to tax
only in Mauritius.
• The AAR in case of E*Trade Mauritius (case no. 862 of 2009) and the
Delhi ITAT in case of Saraswati Holding Corporation have upheld the
above view
Contentions of the department
• The department did not present its case before the AAR.
August, 2011
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Ruling of the AAR
• The AAR accepted the contentions of the assessee.
• It observed the profits arising from transfer of shares of an Indian
company are taxable in India under the Act.
• However, the assessee is entitled in law to seek the benefit under the
India-Mauritius DTAA which provides for taxation of such profits in
Mauritius only per Article 13(4) of the DTAA.
• The AAR relied on the judgment of Supreme Court in the case of Azadi
Bachao Andolan and the Circular no. 682 dated 30 th March 1994 and
Circular No.789 dated 13 April 2000 which provide for taxation of capital
gains, arising to a person resident in Mauritius , in Mauritius only and not
in India.
• AAR ruled that there is no liability of tax in India on capital gains arising
to the assessee.
August, 2011
CA Sanjeev Lalan, Singrodia Goyal & Co.
Presentation at JB Nagar CPE Study Circle
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Questions ??
August, 2011
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Thank You