Dy. Commissioner of Income-tax vs Summit Securities Limited – Mumbai Tax Tribunal
During the relevant tax year, taxpayer received a sale consideration of INR 1.43 billion on transfer of its power transmission business (PTB), as a going concern (as slump sale), to KEC International Limited (KEC). Section 48 of the IT Act provides that capital gains are computed by deducting the (a) cost of acquisition and (b) expenditure incurred wholly and exclusively in connection with such transfer from the 'full value of consideration' received or accruing as a result of transfer of such capital asset. Section 50B of the IT Act provides that 'net worth' of the undertaking will be deemed to be the cost of acquisition and the cost of improvement for the purposes of computing capital gains. IT Act further provides that 'net worth' will be the aggregate value of total assets of the undertaking as reduced by the value of liabilities of such undertaking as appearing in its books of account.
In the instant case, PTB had a negative net worth of INR 1.57 billion. Thus, taxpayer treated the entire sale consideration as long term capital gains while assuming negative net worth to be 'nil'. Tax Officer held that PTB was not sold on arm's length basis and the total sale consideration ought to have been INR 3 billion (by adding 1.43 billion to 1.57 billion i.e. negative net worth of PTB). The first appellate authority rejected the order passed by the Tax Officer and held that 'net worth' as defined under Income-tax Act, 1961 (IT Act) could not be a negative figure.
A Special Bench (SB) was constituted to adjudicate the following two issues (i) whether sale consideration ought to have been taken at INR 3 billion, and (2) whether first appellate authority was justified in ignoring the negative net worth of PTB. In respect of the first issue, SB held that INR 1.43 billion represents the full value of consideration and INR 3 billion, as calculated by the Tax Officer, does not represent the full value of consideration. SB rejected the contention raised by Income-tax authorities that transferor's liabilities have been taken over by the transferee and the value of such liabilities should be treated as consideration received by the transferor. SB further noted that Income-tax authorities cannot object to the value of sale consideration once such value has been approved by the High Court under a Court scheme.
In respect of the second issue, SB rejected the argument raised by the taxpayer that 'net worth' of PTB should be taken at 'nil' as the said value is negative (excess of liabilities over assets). SB held that in case the liabilities of PTB exceed its assets, there will be a negative net worth and such negative net worth has to be 'deducted from' (i.e. 'added to') the full value of sale consideration. Accordingly, the chargeable capital gain is INR 3 billion (INR 1.43 billion – (– INR 1.57 billion)).
ITA no. 4977/Mum/2009. Judgment delivered on March 7, 2012.
Income Tax Officer vs People Interactive (I) P Ltd – Mumbai Tax Tribunal
Taxpayer, an Indian tax resident, is the owner of website www.shaadi.com engaged in providing matrimonial services to Indian residents and non-residents. The taxpayer entered into a service agreement with Rackspace Inc. USA to avail 'advanced dedicated hosting solution services' to host and run its matrimonial website in USA. Under the agreement, Rackspace provided dedicated servers and support services, bandwidth, connectivity, data security, restoration, firewalls etc. in consideration of monthly fees. During relevant tax year, Taxpayer paid such monthly fees to Rackspace but did not withhold income-tax on such payments.
Taxpayer claimed that it has no access or control on the server support system provided by Rackspace and payment for such services do not constitute fee for technical services (FTS). Thus, taxpayer was not liable to withhold income-tax on such payments under 'source rule'. Such payments constitute business income of Rackspace and are not taxable in India in absence of a permanent establishment (PE) in India.
Tax Officer rejected taxpayer's claim and held that as per United Nations Tax model and India-USA DTAA, payments made for hosting of website and use of servers would be taxable as 'royalty' as it amounts to use of industrial, commercial and scientific equipment. Tax Officer also observed that Rackspace has given an exclusive right to use the server along with dedicated support service. However, the first appellate authority ruled in the favour of taxpayer and observed that Rackspace is providing hosting services and has not been given any equipment on hire to the taxpayer.
Tax Tribunal observed that all the equipments and machines relating to services were under the control of Rackspace and situated outside India. Tax Tribunal also noted that the taxpayer could not operate or have physical access to the equipment system. Tribunal noted that taxpayer could not be said to be using the equipments but was only availing the services provided by Rackspace. Relying upon the decision of Asia satellite Telecommunication Co. Ltd vs Director of Income-tax [(2011) 332 ITR 340 (Delhi)], Tribunal upheld the order passed by the first appellate authority and held that payments made for availing Rackspace's services cannot be held to be 'royalty' as taxpayer neither operates, uses nor controls the equipments used for server support system.
ITA no. 2179-2182/Mum/2009. Judgment delivered on February 29, 2012
Originally published May 4, 2012
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