Author Archives: Amit

CBDT raises limits for filing/pursuing appeals

Increase in monetary limits for filing of Appeals – A Double-edged sword

The Central Board of Direct Taxes has increased the limits for filing / pursuing of appeals before various appellate fora, vide Circular No.17/2019. The Department would no longer be interested in taking matters before the Tax Tribunal if the Tax impact of the case is less than INR 50 lacs.  Similarly, the monetary threshold for Appeals before the High Court and the Supreme Court have also been enhanced to INR 100 lacs and INR 200 lacs respectively.

The increase in limits would also apply to pending appeals and all such appeals filed by the Department, which fall below the revised threshold,  by would have to be  withdrawn by October 31, 2019.

Whilst increase in the monetary limits is a welcome step to clear the backlog of tax cases, it does pose a moral hazard and could also have an unintended consequences of greater back-log at higher levels, as the lower level authority, specially at the first level of the Commissioners would now think twice before ruling a case in favor of the tax payer. As for the moral hazard part, this is what an old wise counsel quipped – ‘every increase in the monetary limits for filing appeal is observed to also result in a corresponding increase in monetization efforts of the black sheep in the system!’

 

Mumbai ITAT Rules on LLP conversion

Taxable, but with no Tax Liability

That’s the decision of the Mumbai Tax Tribunal on tax effect of conversion of a company to a Limited Liability Partnership where the transfer of assets was effected at Book Values, but without conforming to the conditions laid down under the Tax law [Section 47(xiiib)] for an ‘exempted transfer’.  The decision was rendered in the case of Celerity Power LLP -Formerly Celerity Power Private Ltd.

The Tax payer sought to contend that its conversion into an LLP should be uneventful for Tax purposes as there was no ‘Transfer’ as per Tax law, but only ‘vesting’ of its assets, liabilities, et al to the LLP. The Tax Tribunal was not impressed with the argument and held that the conversion did result in a Taxable event. However, the Tribunal accepted the argument of the Taxpayer that there are no ‘gains’ accruing to it from the transaction as the transfer happened at Book Values.

Who’s Liable?

The Tax Tribunal agreed in-principle to the Tax payer’s argument that the liability to tax, if at all, rests on the ‘transferor’ or the erstwhile company, but held that since the LLP was the successor to the company, it could be rightfully assessed  as the Company was ‘not to be found’. The decision on the point was however academic, given that no taxable gains were held to arise from the transaction.

No carry forward of Tax losses

The Taxpayer had no luck on this one, with the Tribunal ruling that the Tax losses of the company cannot be claimed as ‘carry forward’ by the successor LLP as the conditions prescribed under the Tax law were admittedly not satisfied.

Tax Breaks u/s. 80-IA to continue

The Tax Tribunal agreed with the Tax payer that Tax breaks available to the erstwhile company u/s. 80IA would continue to be enjoyed by the LLP for the remaining period for which the company was entitled.

Our comment

Conversions to LLP are attractive from a Tax standpoint on account of the fact that LLPs enjoy single-level Taxation benefit with the partners completely exempt – as against dual taxation in the corporate format.

However, the conditions under the Tax law for the LLP conversion to be exempt from capital gains taxation are rather restrictive. The ruling in this case sets the stage on how such conversions would be viewed from a legal standpoint, given that most such transactions would not qualify for exemption.

In our view, the base argument advanced on behalf of the Taxpayer – that there was no Taxable event – required a more detailed and sympathetic consideration given that it takes ‘two to transfer’ – while in conversion, its the same entity operating in a different legal format. Further, the argument that was accepted – that there was ‘no gain’ has a potential pitfall for a Taxpayer – what if Transfer Pricing provisions were also to be invoked..

Cairn faces a INR 10,000 crore Tax spill

The Income-tax Appellate Tribunal has upheld a INR ~10,000 crore (approx USD 1.5 billion) capital gains tax demand on Cairn Energy UK, on a transaction which caused inversion of the group holding structure and resulted in the currently listed Indian entity of the group [Cairn India] becoming the holding company for the group’s oil and gas assets in India. The transaction in question happened before the sale of the group to Vedanta.

Grants interest relief

The Tribunal however spared the dual interest levies for non-filing of Tax return and non-payment of Taxes in India, in a total sum of further INR 14,000 crore. The Tribunal ruled that interest could not be levied as the Tax demand emanated from retrospective change to the Tax law. The Tribunal also held that there was no obligation for Cairn UK to remit advance tax in India on account of the retrospective change; as also for the reason that in the case of non-resident Taxpayers, the applicable taxes have to be deducted by the payer of income.

Ruling Debrief

The facts of the case

A simplified version of the complex facts of the Transaction is as follows. Cairn Energy Plc, the erstwhile ultimate holding company of the Cairn Group held diverse Oil and Gas assets across the globe – with Indian assets being most significant in value. The complex restructuring exercise leading to divestment of 30% of its Indian assets through an IPO in India was carried out through the following steps:

(i) The Indian holdings [held through various SPVs] of Cairn Plc were first transferred to Cairn Energy UK.

(ii) Cairn Energy UK in-turn hived off the Indian holdings to Cairn India Holdings, an entity based in Jersey.

(iii) Cairn Energy UK then moved its entire stake in Cairn India Holdings, Jersey to another of its subsidiaries in India – Cairn India. Cairn India acquired the Cairn India Holding, Jersey stake from its parent Cairn Energy UK partly by way of issue of shares and partly for cash consideration.

It is this transfer of Cairn India Holding, Jersey by Cairn Energy UK to Cairn India, which was subject to capital gains taxation by Indian Revenue authorities.

(iv) Subsequent to the above acquisition of Cairn India Holdings, Jersey, the Indian entity came-up with an IPO. Part of the IPO proceeds were used to pay Cairn Energy UK for acquisition of its stake in Cairn India Holdings, Jersey

Through the process, close to 30% of the Indian oil and gas assets were monetized / divested by the Cairn group, while retaining the balance 70%.

The Technical challenge to the Tax notice

The Tribunal first dealt with the elaborate filibuster on range of technical objections to the Tax Notice for re-assessment, which formed the basis for the proceeding culminating in the tax demand. The Notice was challenged on following grounds:

  • That the Tax notice was not in prescribed legal format, as it did not clearly state that due approvals have been obtained for issuance of the same
  • That the Tax notice was based on information which was already in possession of the Department as filed by the Indian entity [Cairn India] and not on basis of fresh material, and therefore not in conformity with legal requirements
  • the survey report which formed the basis for the Tax notice was ‘probably’ not in possession of the Tax officer at the time he issued the notice
  • the  communication which contained the “reasons” for issuance of Tax notice was not signed by the Tax officer
  • the authorization for the Tax notice was not from the appropriate officer

The Tribunal however rejected the technical objections and upheld the validity of the Tax notice, after a review of the record presented by the Tax Department to show that applicable legal processes were duly followed.

The core of the case

On merits, the Tax demand was resisted for following reasons:

  • That the transaction was in the nature of internal group re-structuring which did not result in ‘real income’ accruing to the group
  • That the retrospective change in Tax law was not constitutionally valid and Indirect transfers were not taxable in India, as held by the Supreme Court in Vodafone’s case
  • The Domestic Tax law which was prevalent  at the time India entered into Double Taxation Avoidance agreement with United Kingdom had to be applied (Another way of arguing that retro-amendment to the Tax law was not applicable)
  • That in any case, there was no gain arising in the hands of Cairn Energy UK, since Cairn Energy UK had acquired its stake from Cairn Plc and the cost of acquisition was the same as the sale consideration since the transaction of acquisition and disposal happened within a short time-frame

The Tribunal did not agree that the transaction was in the nature of internal group re-organization, not resulting in any ‘real income’ to Cairn Energy UK. Reference was made to the financial statements of Cairn Energy UK wherein the gain was disclosed and further stated to be tax exempt in UK. The Tribunal also did not agree that the law prevailing as on the date of entering into India-UK DTAA was applicable to the case.

The issue of constitutional validity of retro-amendment was not decided on the basis that such an issue can only be decided by a constitutional institution [i.e. a proper Court of law] and not by a Tax Tribunal, which is a creature of the Tax statute.

The Tribunal also rejected the contention on behalf of Taxpayer that there was no gain in the hands of Cairn Energy UK, since acquisition and transfer of the Indian business had happened over a short time-span; and that the cost of acquisition would be equal to sale consideration. The Tribunal held that since the earlier steps in the transaction were not brought to tax, the entire gain could be taxed in the hands of Cairn UK.

Our View & comments

While most of the arguments presented on behalf of the Taxpayer seem to have been dealt with appropriately, the argument to the effect that cost of acquisition at fair value should be equal to the sale consideration seemed the most attractive one, which may save the day for the Taxpayer at a higher forum. Perhaps a more refined argument would be to admit a certain upside [earned between the time of acquisition and disposal] as the Taxable gain. If such an argument were to be accepted, this would still leave a significant upside [between the time the assets were originally acquired by the group till the same was transferred to Cairn Energy UK pursuant to the re-organization] going un-taxed, which would obviously leave the Revenue dis-satisfied.

Perhaps the need of the hour is to have enabling mechanism in Tax laws to deal with taxation of complex re-organisation transactions which result in part disposal of stakes, while retaining larger control. A pragmatic and fair resolution in such cases would be to proportionately tax the divestment component [for instance, the 30% dilution to public in this case]. Properly used, the General Anti-Avoidance framework which comes into force from 1st April 2017 could well be the tool for equitable taxation of such complex arrangements.

 

CBDT’s message to the Businesman: Go Digital; Take a ‘clean’ break from the past

Supplementing the Government’s efforts in promoting a ‘Digital’ economy, the CBDT has issued a Circular [No.40 of 2016] clarifying that businesses need not be worried about impact of ‘increased turnover’ as a result of accepting digital payments, virtually assuring them that such a Turnover spike would not trigger scrutiny of past years’ Tax filing.

In a rather interestingly worded Circular, the Apex administrative body of Tax Department notes:

“By adopting digital mode of payment, no financial transactions would remain undisclosed and consequently an enhanced turnover of business might get reflected in the books of account.”

The Circular goes on to allay apprehensions that increased turnover in the current year on account of digital payments would not lead to reopening of earlier years’ cases  by the Assessing officer. Mere increase in turnover because of use of digital means of payment or otherwise cannot be a “reason to believe” that income has escaped assessment; the Circular clarifies.

Our Comment:

The Circular is welcome inasmuch as it clarifies that increased turnover on account of digital means of payment being introduced would not lead to past scrutiny. The language employed in the Circular however is prone to being interpreted as providing this assurance to Businesses which have not been accounting their sales properly:

“Take a clean break from the past, bring the cash component of your Business into formal mode by accepting digital payments, don’t worry about its consequences on the past devious behavior – we’ll let bygones be”

The move is a pragmatic one no doubt. Morally correct? why waste our thinking faculties debating this- lets just call it one more amnesty!

Govt moves to tighten Tax law; offer legal alternative to ‘unofficial’ cash conversion

Playing one-up to curb creative Tax planning in the form of availing the ‘loop-hole’ under the existing Tax laws which prescribe a tax rate of 30% [plus surcharge & cess] for unexplained cash and investments under Section 115BBE, the Government has moved to double the rate under the section to 60%. Topping it up further with a 25% surcharge, the effective tax rate for cash and investments from unexplained sources becomes a prohibitive 75%. A further penalty of 10% would take the effective cash outgo to 85%.

The above measure is  also aimed at encouraging cash hoarders to avail immunity under a New scheme to be styled  Pradhan Mantri Garib Kalyan Yojana (Translation – Prime  Minister’s Scheme for Welfare of the poor’ ) . Under the scheme, the combined Tax+Surcharge+Penalty add-up to 50% of unexplained cash. A further 25% gets locked-up in a zero-coupon bond for a four year period, leaving 25% on the table for the depositor who shows up with unexplained cash.

The Scheme offers an alternative to ‘unofficial’ cash conversion which are reported to be widely prevalent at discounts of anywhere between 25-50% of face value of Old currency.

 

 

 

 

 

 

Amendment to S.50C providing relief to Taxpayer is retrospective: ITAT

A single member ruling by the Ahmedabad Bench of the Tribunal has held that the amendment by the Finance Act 2016 to rigour of the valuation mechanism under section 50C is retrospective in nature. The ruling was rendered in the case of Mr.Dharamshibai Sonani.

The Amendment to S.50C by Finance Act, 2016

Section 50C of the Income-tax Act provides that where the sale value of immovable property is less than the guideline value adopted for stamp duty purposes, then the guideline value would be deemed to be the sale value for the purpose of levying Capital gains tax.

This created hardship for Taxpayers in those cases where the sale consideration was fixed through an “agreement to sell” while the actual registration of the sale deed happened at a later date. In such cases, the Tax authorities adopted the stamp valuation as per the sale deed which was often higher than that prevalent at the time of agreement to sale, when the consideration was fixed.

The above hardship faced by Taxpayers was recognized by The committee for simplification of Taxation provisions headed by Justice RV Easwar. Based on recommendation of the committee, Finance Act introduced an amendment to Section 50C to provide that where the sale consideration has been fixed vide an agreement to sell and atleast a part of the consideration has also been paid through banking channels, then the stamp duty valuation as on the date of agreement for sale may be applied.

The Ruling

The Tribunal noted that the amendment by Finance Act 2016 was to correct an incongruity in law which was causing hardship to Taxpayers, and held that the amendment is retrospective in nature. The Tribunal relied on principles laid down by the Delhi High Court in the case of CIT Vs. Ansal Landmark Township Pvt Ltd. [377 ITR 635] and SC verdict in the case of CIT Vs. Alom Extrusions [319 ITR 306] in support of its rationale.

The Tribunal also took note of the possibility that in a scenario of declining real estate values, adopting a valuation prevalent as on earlier date could even be prejudicial to the Taxpayer and went on to hold that the application of the proviso is optional – although the said issue did not arise in the appeal decided. This was perhaps to buttress the point that the amendments were to be interpreted in the light of the underlying intent of providing relief to Taxpayer, as also the fact that the language used by legislature in the amendment was “may” and not “shall”.

 

 

No escape from Tax law: SC revives an Assessment order passed in 1984

The Supreme Court has recently decided [vide order dated 2nd May 2016] that an assessment order passed in the case of Saurashtra Cements on 1st September 1984 was a valid one and not time-barred, as held by lower appellate forums. The assessment order related to Fiscal year 1980-81. The Gujarat High Court and Ahmedabad Tax Tribunal had earlier ruled in favour of the Taxpayer and decided that the assessment was time-barred (consequently invalid).

The decision related to a technical point on how the limitation period for assessments had to be determined under an old assessment (‘audit’) procedure where the Income-tax officer was required to forward the draft assessment order to a superior officer – designated at the Inspecting Assistant Commissioner – for his review.

The Taxpayer contended that the time taken by Inspecting Assistant Commissioner could not be excluded to determine the limitation period for assessment since the Inspecting Assistant Commissioner was having a ‘concurrent jurisdiction’ over its case. Consequently, the assessment order passed was time-barred,  it was contended. The argument did not find favor with the Supreme Court and the assessment order was held to be passed within the statutory time-lines and valid in law.

Our Comment

While the decision is of little practical relevance today as the assessment (‘audit’) procedures applicable now are very different and the practice of forwarding draft assessment orders to Inspecting Assistant Commissioner has been long gone. The decision nevertheless highlights that there would always be unforeseen risks when a Taxpayer decides to litigate a matter purely on technical grounds. The lesson for Taxpayers: If you bank on Technical nuances to save you Taxes – you may later find yourself breaking the bank to pay your taxes.

 

CBDT says Bye to Bad debts litigation

In a circular issued recently [Circular no.12/2016],  the CBDT has called for truce with Taxpayers on litigation involving claim for Tax deduction on Bad-debts which have been written off by Taxpayers in their books as irrecoverable. In deference to the decision of the Honorable Supreme Court in the case of TRF Ltd., the CBDT has decided that no further appeal will be filed by the Department on this issue henceforth and all pending appeals on the issue would also not be pressed by the Department.

It may be noted that despite the ruling of the Apex Court, Tax officers have often been found taking the stand that write-off in the books of account does not automatically entitle a Taxpayer to claim deduction for Bad debts and that there exists a further onus on the Taxpayer to prove  that the debt has infact become ‘bad’ or irrecoverable. Tax officers have also gone to the extent of asking Taxpayers to furnish evidence that the Taxpayers have taken necessary steps for recovery of the debt and only on failure of all such efforts, the Taxpayer has has take a write-off.

Our Comment

The Circular is a continuation of similar decisions in the recent past not to perpetrate futile litigation where the Department’s case is on weak footing and judicial forums have decided the issue in favor of Taxpayers.While the decision of the Supreme Court in TRF’s case was rendered way back in 2010, the decision of the CBDT, though belated is a welcome move.

It is hoped that the circular issued by CBDT would not only serve to bury the hatchet on outstanding litigation on this issue, but also pre-empt any future litigation on this front, going forward.

 

 

Direct Tax Dispute Resolution Scheme comes into force; to be effective till 31st December,2016

The Direct Tax Dispute resolution scheme has become operational from 1st June, 2016. The Government has notified [vide Notification No.34/2016] 31st December,2016  as the last date by which a Taxpayer can make a declaration to settle Direct Tax disputes.

The procedure and format for making a declaration under the Scheme is also notified vide Notification No.35/206.  The Scheme, which was announced in the Budget for the year 2016-17 covers disputes in the following two categories:

(A) Disputes arising out of retrospective amendment to Tax law and pending before any appellate or artibration  forum

(B) All other disputes pending before the Commissioner of Income-tax (Appeals)

All disputes which were pending as on the date of presentation of Union Budget [i.e.February 29, 2016] qualify for settlement. While disputes under category (A) can be settled by payment of Tax component alone, in respect of Disputes falling under category (B), interest till date of assessment and 25% of minimum leviable penalty would also have to be paid. No penalty is payable where the Tax component is less than Rs. 10 lacs.

The brief procedure for filing a declaration under the scheme is set-out below:

(i) The declarant has to furnish the details of the Taxes and income under dispute in Form 1 alongwith an undertaking in Form 2 to forego all remedies available to declarant to agitate the dispute. The Tax authority designated to receive the declaration would furnish an acknowledgement with respect to every declaration received.

(ii)  The designated Tax authority would issue a certificate in Form 3, setting-out the payment to be made by the declarant pursuant to the filing of declaration under the Scheme. The said payment has to be made within a period of 30 days of receipt of the Form.

(iii) After effecting the payment, intimation of the same has to be filed by the declarant in     Form 4

(iv) Upon receipt of intimation of payment in Form 4, the designated Tax authority would issue a certificate of settlement of dispute either in Form 5 [for category (B) disputes] or in Form 6 [Category  (A) disputes].

A declarant under the scheme is granted immunity from prosecution and penalty in relation to the dispute which is settled under the Scheme.

 

 

‘Transaction charges’ paid to Stock Exchange cannot be treated as FTS : SC

The Supreme Court has ruled that Transaction charges paid by stock brokers to the Stock Exchange for use of the trading platform provided by the Exchange cannot be characterized as ‘Fees for Technical services’. The Department’s argument was that the payments are for Technical services and cannot be allowed as a deduction as the Stock brokers had not deducted tax at source while making such payments.The ruling was rendered in a batch of cases where identical issue had arisen, with Kotak Securities as the lead case.

The Apex Court noted that such services are being rendered on a fully automated basis to all the members to facilitate trading transactions and there was no specialized /exclusive service which was rendered by the Stock Exchange. Pointing out the distinction between ‘Technical services’ and Technologically enabled service, the SC observed:

“Technical services, like managerial and consultancy services would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same  available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former”

Our Comment

The principle laid down in the ruling would apply to many such similar instances (eg. Testing charges) where tech-enabled services are rendered as a standard facility, and not as a specialized service.