India: Taxation (October 2016 - December 2016)

Ahmadabad ITAT holds that MFN clause in India Switzerland Tax Treaty is not operative automatically without re-negotiations

The Ahmadabad Bench of the Income-tax Appellate Tribunal in the case of Torrent Pharmaceuticals Ltd. v ITO: ITA No. 624/ Ahd/ 2012 has held that benefits provided by the Most Favoured Nation clause ('MFN') provided in the India Switzerland Tax Treaty are not applicable at present automatically without re-negotiations between both the States activating operation thereof.

In the above case, the taxpayer had remitted certain payments towards professional and consultancy services to tax residents of Switzerland, without withholding any taxes in India, for the reason that, due to presence of MFN clause in India Switzerland Tax Treaty, the restrictive definition of 'fees for technical services' provided in India Portugal Tax Treaty, containing condition of 'make available' therein, would be applicable.

The assessing officer and CIT(A) rejected the aforesaid contention of the taxpayer. On further appeal, the ITAT confirmed the order of CIT(A) by holding that, since, the condition of 'make available' is not present in India Switzerland Tax Treaty, the same cannot be borrowed from Indian Portugal Tax Treaty on account of MFN clause, as the said clause is not automatic and operation of the same would be activated after re-negotiations of the existing Tax Treaty between India and Switzerland.

It may be noted that with effect from April 1st 2012, the Protocol to the Indo-Swiss treaty has been amended which now states that re-negotiation of the treaty is no longer needed for availing the lower tax rate owing to the MFN clause. However, re-negotiation is required to avail the benefit of a restricted scope of definition of FTS under the Treaty.

Madras High Court holds that VAT is not applicable on inter-state sale of goods by Flipkart

The Madras High Court, recently, in the case of WS Retail Services Private Limited v Union of India & Ors.: W.P. No. 3442 of 2016, has held that, online sale of mobile phones, computer spare parts, cameras etc., by the taxpayer via the online portal Flipkart, through warehouses located in various cities, is an inter-state sale, not liable for VAT under the Puducherry VAT laws. However, the said sale is liable for Central Sales Tax.

The taxpayer had consigned the goods from its various warehouses to the courier delivery hub in Puducherry. Accordingly, it was held that the said movement of goods is an inter-state sale and the delivery to the end customer is the first sale within the Territory of Puducherry (delivery to courier delivery hub in Puducherry is not a sale).

Supreme Court holds section 10A/ 10B of the Income-tax Act, 1961 to be a deduction provision and not an exemption provision

The Supreme Court of India, recently, in the case of CIT vs Yokogawa India Ltd.: Civil Appeal no.8498/ 2013 held that tax holiday provisions provided by sections 10A and 10B of the Income-tax Act, 1961 are deduction provisions and not exemption provisions.

Accordingly, the deductions by sections 10A and 10B of the Income-tax Act, 1961 would be available while computing gross total income of the taxpayer under chapter – IV of the Income-tax Act, 1961 and not at the stage of computing the total income under chapter – VI of the said Act.

The above decision of the Hon'ble Supreme Court is based on the premises that, the term 'deduction' used in section 10A clarifies the intention of the legislature of allowing the said tax holiday as deduction and not as an exemption.

In addition, the deduction under section 10A is available to an eligible undertaking on an independent basis without any connection/ concern with other eligible or non-eligible units. Therefore, the deduction under section 10A and section 10B has to be provided to the eligible undertaking and not the assessee, at the stage of computing the gross total income and not the total taxable income.

In view of the above decision, the tax payers can set off losses of eligible undertaking with other eligible/ non-eligible units.

Payment for Non-Compete right is eligible for depreciation

The Bangalore Bench of the Income-tax Appellate Tribunal in the case of Sangeetha Mobiles Pvt. Ltd. vs. Addl. CIT: ITA No.1185/ Bang/ 2016, has held that payment made by the taxpayer towards non-compete right constitutes acquiring of intangible asset, which is eligible for depreciation.

In the above case, the taxpayer had acquired various tangible and intangible assets through an asset purchase agreement and claimed depreciation on payment for non-compete fees. The assessing officer, however, disallowed the said claim on the basis that, since the non-compete rights were not transferable; the same did not constitute an intangible asset in the hands of the taxpayer.

On appeal, the Tribunal held that the rights acquired by the taxpayer on account of payment for non-compete right were transferable and, accordingly, the taxpayer was eligible to claim depreciation thereon.

The Tribunal, while pronouncing the above decision, duly considered the decision of the Delhi High Court in the case of Sharp Business System (India) Ltd. vs. DCIT: 254 CTR 233 and Karnataka High Court in the case of CIT vs Ingersoll Rand International: 48 taxmann.com 349. Both the said decisions are contrary on availability of depreciation in respect of payment for non-compete right.

The Bangalore Bench of the Income-tax Appellate Tribunal in the present case followed the decision of jurisdictional Karnataka High Court and held that non-compete rights acquired by the taxpayer were transferable and therefore, taxpayer was eligible to claim depreciation on the same.

It is important to point out here that the Delhi High Court in the case of Sharp Business System (India) Ltd. vs. DCIT: 254 CTR 233 had held that depreciation would not be available in respect of non-compete right if the same is non-transferable.

Delhi High Court holds that VAT credit is allowable in respect of retail invoice issued inadvertently in place of a tax invoice

The Delhi High Court, recently, in the case of Commissioner of VAT vs. M/S J C Decaux Advertising India Private Limited: VAT Appeal 1/2017, has dismissed the appeal filed by Delhi VAT Department against the decision of the VAT Tribunal, wherein, the VAT Tribunal had held that, the taxpayer is eligible to claim VAT credit on the basis of a retail invoice issued inadvertently by the vendor in place of a tax invoice.

The taxpayer had purchased printer banners from Jumbo Digital Prints in order to resell the same to their end customers. The vendor had charged VAT on said sale and deposited the same with the Government treasury. However, the vendor, inadvertently, owing to usage of some old stationary, issued retail invoice to the taxpayer instead of a tax invoice.

The tax credit claimed by taxpayer on the basis of above mentioned retail invoice was disallowed by the VAT officer and the VAT Commissioner. On further appeal, the Delhi VAT Tribunal held that input tax credit cannot be denied to the taxpayer merely because of irregularity on the part of the selling dealer.

The Delhi VAT Tribunal also observed that, the selling dealer had issued a certificate to taxpayer that the VAT collected from the taxpayer was duly deposited with the Government treasury and issuance of retail invoice was an inadvertent mistake.

The Delhi VAT Department's appeal against the decision of the Delhi VAT Tribunal has been dismissed by the Delhi High Court on the basis that no substantial question of law arises from the decision of the Delhi VAT Tribunal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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