Britannia Industries Ltd v CIT (SC) (October 5, 2005) - Guest-House Expenses Disallowable under Section 37(4) - Not Allowable under Sections 30 to 36

In a judgment delivered on October 5, 2005 in the case of Britannia Industries Ltd v CIT, the Supreme Court of India has given a quietus to the following long-standing controversy in Indian Business Taxation, viz. :

Whether expenditure by way of rent and repairs incurred on the maintenance of, or depreciation allowance relating to, guest-houses are allowable under Sections 30 and 32, respectively, inspite of the provisions of Section 37(4) whereunder all expenditure incurred on such maintenance and depreciation allowance in respect of guest-houses and assets therein are specifically made disallowable ?

The Court (speaking through Altamas Kabir, J) has answered the above question in the negative, i.e., against the taxpayer.

The Pension Fund Regulatory and Development Authority Bill, 2005 - Twenty-First Report of Parliamentary Standing Committee on Finance

[ Although off-topic, I am nonetheless making this post, in view of the importance of its contents ]

The 21st Report ( of the Parliamentary Standing Committee on Finance) on The Pension Fund Regulatory and Development Authority Bill, 2005 has recently been posted on the Net. The Full Text of the Bill is to be found in the "APPENDIX" to the Report.

The National Tax Tribunal Bill, 2004 - Eleventh Report of Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice

          The  11th Report  (of the Department Related Parliamentary Standing Committee on Personnel, Public Grievances, Law and Justice) on  The National Tax Tribunal Bill, 2004  has just been published on the Net.

2.           The Committee has taken note of the strong opposition to the Bill of several witnesses who deposed before the Committee as well as of the members of the Committee. The Committee has not bought the explanation of the Secretary,  Department of Legal Affairs,  Ministry of Law and Justice, Government of India and has proceeded to ".......... place on record reservations regarding the setting up of National Tax Tribunal ..........". Having done so, the Committee states that, ".......... in the event of the Government being very keen to go ahead with this Bill, it should take into consideration the observations/recommendations of the Committe on the clauses of the Bill ..........".

3.           Among the significant recommendations of the Committee on the Bill are the following :

(i)      Clause 6(2)  should be modified so that Chief Commissioners of Income-tax are also entitled to become Members of the National Tax Tribunal. [ This recommendation is founded on the Committee's feeling that these Chief Commissioners ".......... should be given encouragement towards the fag end of their career by giving them an opportunity to become Members ..........". This feeling is, in turn, based on the Committee's having noted that these Chief Commissioners ".......... pass appellate orders while adjudicating upon the assessment orders .........." and ".......... take a lot of risk while conducting search and seize operations against the tax evaders." ]

(ii)      Clause 13(1)  should be modified so as to ensure that ".......... only qualified persons such as Advocates, Company Secretaries, Chartered Accountants, Cost and Works Accountants may be authorised to appear before the National Tax Tribunal.".

Jurisdiction of (Indian) Income-tax Appellate Tribunal to Sit In On — and Pass On — the Validity of Subordinate Legislation or Executive Decisions

Until now,  a controversy has raged as to whether the (Indian) Income-tax Appellate Tribunal is empowered to sit in on — or pass on — the validity of subordinate legislation or executive decisions.

2.          The nearest that the Tribunal has come to holding that it has the power to apply the doctrine of  ultra vires  was in  Amar Dye-Chem Ltd v ITO [1983] 3 SOT 384 (Bom)(SB),  in which a 5-Member Special Bench held that if a statutory provision has been declared to be  ultra vires  by a court of competent jurisdiction (i.e.,  any of the High Courts or the Supreme Court),  the Tribunal has to respect the law so laid down by that court,  with the result that  the statutory provision declared to be  ultra vires  has to be ignored by the Tribunal.  In other words,  the Tribunal stopped short of holding that it had jurisdiction to strike down as being  ultra vires,   any statutory provision.  

3.          However,  the Mumbai Bench of the Tribunal had recently,  in the case of  Reliance Industries Ltd v DDI (International Taxation) [2005] 3 SOT 501 (Mum),  occasion to consider this issue.  In that case,  the Government of India in its Ministry of Finance had,  vide  a communication of July 21,  1997,  conveyed to the taxpayer —
(i)     its approval of a loan agreement under which the taxpayer had agreed to borrow moneys from sources outside India and
(ii)     that,  consequent to such approval,  the interest,  commission and fees payable by the taxpayer on the moneys so borrowed by it was exempt from withholding tax under Section 10(15)(iv)(f) of the Income-tax Act,  1961.  
Subsequently,  vide a letter dated April 12,  1999 addressed by the Deputy Director (ECB) of the  Government of India in its  Ministry of Finance to the taxpayer,  the exemption from withholding tax aforesaid was effectively withdrawn,  in the following terms :
     
“
          ……….

2.     Further,  it has been noted that the ECB funds raised above had not been utilized for the specified end uses which is one of the essential terms of the ECB approval for availing relevant exemptions under section 10(15)(iv)(f) of Income-tax Act,  1961.  You are,  therefore,  not entitled to any tax benefit in terms of the above provision of the Income-tax Act,  1961.
……….
”

The issue before the Tribunal was whether the executive was empowered to impose a condition (viz.,  the condition of “end use”) not laid down in the statute.  In what can only be described as a path-breaking ruling,  the Tribunal held as follows :

          “
     17.     ……….  On careful reading of the above decisions it is implicit that the Tribunal does have the power to deal with the validity of such rules or notification and by applying the doctrine of “reading down” can strike down such rules if held to be in contradiction with the provisions of the statute itself.  The gist of all the above decisions is that the rules are made only for the purpose of carrying out the provisions of the Act which cannot be taken away or whittle down the effect conferred by the statute.  With the result we hereby agree with the contentions of ld. A.R. that the ITAT has both,  the power and duty,  to deal with such rules or notification and decide whether the same are in agreement with the main provisions of the statute.  In view of above discussion,  in the present appeal,  now we have to decide the validity of the withdrawal of exemption as has been done by the subordinate competent authority.  ……….
”

4.          Consequent to its above ruling,  the Tribunal proceeded to hold,  inter alia,  that,  “considering the totality of the facts,  circumstances,  conditions of the scheme,  evidences of utility of the funds and the legal matrix of the case;  the withdrawal of the exemption was unwarranted”.

5.          Of course,  it might be argued that the above ruling is  obiter,  at least insofar as subordinate legislation is concerned,  having regard to the fact that the issue before the Tribunal was whether the Tribunal was empowered to strike down as invalid,  an executive decision which was inconsistent with the statutory enactment under which such decision was purportedly made.  However,  even if such an argument is upheld,  the ruling will nonetheless strengthen the hands of a future Bench for holding that the Tribunal is invested with the jurisdiction to strike down as  ultra vires,  even subordinate legislation.

17th Report of Indian Parliamentary Standing Committee on Finance on Demands for Grants of Ministry of Finance for Financial Year 2005-06

The Seventeenth Report of the Standing Committee on Finance of the Parliament of India, which was tabled in both Houses of Parliament on April 20, 2005, has recently been published on the web. While the Report considers - and comments and makes recommendations on - the Demands for Grants of the Ministry of Finance for the Financial Year 2005-06, its most interesting part for me is "ANNEXURE-III" thereto, in which are set out, in extenso, the following Instructions issued by the Central Board of Direct Taxes ("CBDT"), in respect of the monetary limits and other conditions for the filing of Appeals and References by the Revenue :

(i) Instruction No 1979 dated 27th March, 2000

(ii) Instruction 1985 dated 29th June, 2000

(iii) Instruction No 6/2003 dated 17th July, 2003 and

(iv) Instruction No 5/2004 dated 27th May, 2004

The Full Text of the Report can be accessed  here (PDF).

Emirates Fertilizer Trading Co, WLL, In Re — Advance Ruling of Authority for Advance Rulings (Income-tax), India

[ Advance Ruling dated October 27, 2004 in AAR No 628 of 2004
— [2005] 272 ITR 84 (AAR) ]





          By this Advance Ruling, the Authority has, effectively,
ruled that the terms of a Double Taxation Avoidance Agreement
(“Tax Treaty”) have to be given effect to, even if the result of such an exercise is double non-taxation.



          Facts

2.      Emirates Fertilizer Trading Co, WLL (“Applicant”),
a partnership firm which was a tax resident of Dubai, United Arab Emirates (“UAE”), held shares in two Indian companies, viz., Indo-Gulf Fertilizers Limited and Hindalco Industries Limited. The Applicant was desirous of selling these shares and their disposal would have resulted in capital gains to the Applicant. Article 13 of the Tax Treaty entered into between India and the UAE ran as follows :



“

Article 13



CAPITAL GAINS



1. Gains derived by a resident of a Contracting State from the alienation of immovable property referred to in paragraph 2 of Article 6 and situated in the other Contracting State may be taxed in that other State.



2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base may be taxed in that other State.



3. Gains from the alienation of any property other than that mentioned in paragraphs 1 and 2 shall be taxable only in the Contracting State of which the alienator is a resident.

”

(emphasis supplied)

Since the property sought to be disposed of by the Applicant was neither immovable property nor movable property forming part of the business property of any permanent establishment in Indian of the Applicant, the proposed sale fell to be considered under Paragraph 3 of Article 13.



          Issue(s)

3.      The Applicant applied to the Authority for an advance ruling on the following effective question (inasmuch as the other two questions would have been required to be answered only if the said effective question was answered against the Applicant) :

“(1) India has a Double Taxation Avoidance Agreement with the UAE. As per article 13(3) of the Double Taxation Avoidance Agreement between India and the UAE, signed in 1993 gains from alienation of shares in an Indian company held by a resident of the UAE will be taxable only in the UAE. So as our client is a resident of the UAE for which necessary tax residency certificate is enclosed. Hence under this tax treaty the assessee would not be liable to capital gain tax in India.

(2) * * * * * * * * * * * * * *

(3) * * * * * * * * * * * * * *

”

          Revenue’s Submission(s)

4.      The Revenue’s only submission was that, inasmuch as the capital gains were not taxable in the UAE, application of Paragraph 3 of Article 13 of the Tax Treaty would lead to a situation of double
non-taxation. The Revenue, therefore, pleaded that the Applicant ought to be taxed in India under the domestic tax law of India laid down in the Income-tax Act, 1961 (“Act”).





          Determination(s) Culminating in Advance Ruling

5.      The Authority made the following determinations in arriving at its ruling :

(i)      Under the India-UAE Tax Treaty, capital gains arising from alienation of shares in Indian companies to a tax resident of the UAE are taxable in the UAE.

(ii)      However, under the Act, “capital gains arising to a non-resident in India, are taxable in India”.

(iii)      “Having regard to section 90(2) of the Act, the terms of the treaty have overriding effect over the provisions of the Act in the event of there being conflict between the treaty and the Act. (Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC) and CIT v. P. V. A. L. Kulandagan Chettiar [2004] 267 ITR 654 (SC)).”.

(iv)      Accordingly, in view of the provisions of Paragraph 3 of Article 13 of the India-UAE Tax Treaty, the capital gains are taxable only in the UAE and not in India, “….. and ….. their taxability under the Act in India does not depend upon whether they are as a fact taxable in the UAE.”. (emphasis supplied)

          Advance Ruling

6.      Consequent to its determinations aforesaid, the Authority delivered the following Advance Ruling :

“(I)t is ruled that gains from the alienation of shares in Indian companies held by the applicant, a resident of UAE, will not be taxable in India.”

Pfizer Corporation, In Re - Ruling of Authority for Advance Rulings (Income-tax), India

     An Advance Ruling was handed down on October 4, 2004 by the Authority for Advance Rulings in the case of   Pfizer Corporation, Panama   (in AAR No 620 of 2003), the particulars of which are as follows.

Facts
2. Pfizer Corporation, a company incorporated in — and a tax resident of — Panama, was the owner of technical know-how for the manufacture of nutritional food supplement products which were manufactured and sold in India by Pfizer India, a group company, under the "Protinex" and "Dumex" trademarks (both trademarks having been registerd in India). Pfizer India had been using the technical know-how for the manufacture of the aforesaid products free of any royalty, under an arrangement entered into with Pfizer Panama.

3. In November 2003, the technical know-how (inter alia) was sold by Pfizer Panama to EAC Nutrition Limited, Denmark, for US$ 5 million. (Under a separate agreement entered into between EAC Denmark and Pfizer India, the licence granted to Pfizer India by Pfizer Panama was terminated prematurely in consideration of payment by EAC Denmark to Pfizer India of a sum of US$ 7 million). In terms of the agreement entered into between Pfizer Panama and EAC Denmark, the technical know-how was handed over, in Bangkok, Thailand, by Pfizer India to EAC Denmark, in the form of a dossier. While making payment to Pfizer Panama, of the consideration of US$ 5 million, EAC Denmark had withheld therefrom, tax at the rate of 21%, which amount EAC Denmark had deposited with the Government of India.

Issue(s)
4. Pfizer Panama, feeling aggrieved by the withholding of tax by EAC Denmark, applied to the Authority for a ruling on the following question :
"

Whether the receipt by the applicant, a company incorporated in and the tax resident of Panama, from the transfer of documents containing know-how and technical information, outside India, to EAC Nutrition Ltd. A/S, a corporation incorporated under the laws of Denmark, under th Sale and Purchase of Technology Agreement dated November 30, 2002 would be taxable in India having regard to the provisions of the Income-tax Act, 1961 ?

”

Determinations Culminating in Advance Ruling
5. In arriving at its ruling, the Authority made the following determinations :

(i) Since there is no Double Taxation Avoidance Agreement between India and Panama, the taxability of the transaction has to be considered only under the domestic law of India. Further, since the transfer of a capital asset situated outside India does not attract any tax liability under the domestic law, the questions for consideration are :

(a) What is the nature of the property which is the subject-matter (viz., the technical know-how in the form of a dossier) of the transfer and

(b) if such subject-matter is a capital asset, what was its situs at the time of its transfer.

(ii) The answers to the two questions at (i) above were as follows :

(a) It was undisputed that the technical know-how was -

(I) owned by Pfizer Panama,

(II) used for a very long time in India, almost exclusively and, therefore,

(III) "..... available in India, both in the form of a dossier as well as in intangible form.".
(emphasis supplied).

Accordingly, having regard to the judgments of the Supreme Court in Scientific Engg House (P) Ltd v CIT [1986] 157 ITR 86 (SC) and Associated Cement Cos Ltd v Commissioner of Customs [2001] (42)RLT 937, the technical know-how in the form of a dossier was a capital asset and the transfer of such technical-know-how "was transfer of a capital asset.".

(b) Once Pfizer India entered into the agreement aforesaid wih EAC Denmark, "..... the technical know-how reverted back to the owner and there was extinguishment of right to manufacture for which consideration has been paid to the Indian company. As a result no asset related to technical know-how was located in India either in tangible or intangible form after termination of the licence granted to Indian company. The subsequent agreements between EAC Trading Private Limited, an Indian affiliate of EAC Denmark and Pfizer India to have business support during the initial period of EAC Trading's operations in India do not affect the situs of asset which is subject-matter of transfer.". The situs of the capital asset, viz., the technical know-how in the form of a dossier, was therefore not in India in any form after the termination of the licence granted to Pfizer India.

(iii) Consequently, the receipt (viz., the consideration of US$ 5 million aforesaid) is not chargeable to tax, either under Section 5(2)(ii) or under Section 9(1)(i) of the (Indian) Income-tax Act, 1961.

Advance Ruling
6. Consequent to its determinations aforesaid, the Authority's
Advance Ruling was as follows :

"Having regard to the provisions of the Income-tax Act, receipt by the applicant from the transfer of know-how and technical information in the form of a dossier under the sale and purchase of Technology agreement dated November 30, 2002 would not be chargeable to tax in India."

{ Reported in  [2004] 141 Taxman 642 (AAR - New Delhi)  }