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03.03.2017 - Voice of CA presents - Updates
Friday, March 3, 2017

I. Headlines Today    

  1. Peak GST rate to be pegged higher at 40%  (Click for detail)
  2. CBDT signs 10 more unilateral APAs with taxpayers  (Click for detail)
  3. Higher tax fears spur capital restructuring in Corporate India  (Click for detail)
  4. Operation Clean Money: Undisclosed Income Of Over Rs. 250 Crore Detected  (Click for detail)
  5. 5,000 Saris, Piles Of Cash Found At Karnataka Tax Officer's Home  (Click for detail)
  6. Is your single premium life insurance policy eligible for tax benefits  (Click for detail)

II. A Useful Presentation:

1.  Practical Tips on Survey, Search & Seizure under Income Tax Act, 1961

(Please click here)

( Contribution by CA. Sanjay K. Agarwal, Founder - Voice of CA )


III.  Direct Taxes Case Laws: 

1.  DIT Vs. A. P. Moller Maersk, Civil Appeal No. 8040 of 2015, Date of Judgment: 17.02.2017, Supreme Court of India

Whether the payments made by the agents to the concerned foreign assessee, for using the facility of Net Communication System, developed by the assessee for smooth functioning of its international shipping business would be classified as fees for technical services and would be chargeable as income under Income Tax Act, 1961?


Brief Facts:
The assessee is a foreign company engaged in the shipping business and is the tax resident of Denmark. While making the assessment, the AO duly provided the benefit of Double Taxation Avoidance Agreement (DTAA) between India and Denmark to the assessee. During the assessment proceedings, the AO observed that the assessee had agents working for it in India who booked cargos and acted as clearing agents for assessee. The assessee was maintaining a global telecommunication facility called Maersk Net System which is a vertically integrated communication system. The assessee said the agents were paying for the telecommunication system on the pro-rata basis. The assessee contended that payments received by the assessee were in the nature of the reimbursement of expenses. But the AO contended that the said amounts paid by the agents are fees for the technical services rendered by the assessee and is therefore taxable in India under Article 13(4) of the DTAA and is assessed @ 20% u/s 115A of the Income Tax Act, 1961. Regarding the same, the appeal filed by the assessee before CIT(A) was dismissed but the assessee’s appeal was allowed by the ITAT. Aggrieved by the order of the ITAT, the Revenue filed an appeal in the High Court of Bombay wherein the order of the ITAT was upheld by the Court stating that the Maersk Net Communication System was an automated software based communication system which did not require the assessee to render any technical services.  It was merely a cost sharing arrangement between the assessee and its agents to efficiently conduct its shipping business. It was also held that the Maersk Net used by the agents of the assessee entailed certain costs reimbursement.  It was part of the shipping business and could not be captured under any other provisions of the Income Tax Act except under DTAA. Aggrieved by which, the Revenue appealed before the Hon’ble Apex Court.

The Hon’ble Supreme Court Upheld the decision of the High Court of Bombay and held that the assessee is having its IT System, which is called the Maersk Net.   As the assessee is in the business of shipping, chartering and related business, it has appointed agents in various countries for booking of cargo and servicing customers in those countries, preparing documentation etc. through these agents. This Net system is a facility which enables the agents to access several information like racking of cargo of a customer, transportation schedule, customer information, documentation system and several other information. Thus, the system is an integral part of the international shipping business of the assessee and runs on a combination of mainframe and non-mainframe servers located in Denmark.  Expenditure which is incurred for running this business is shared by all the agents. It is clearly held that no technical services are provided by the assessee to the agents. Payments made by the agents are in the nature of reimbursement of costs. Also, neither AO nor CIT(A) has stated that there was any profit element embedded in the payments made by the agents to the assessee and therefore, it cannot be chargeable to tax under the Income Tax Act.
Therefore, the appeal of revenue is dismissed.

(Please click here for judgment)


2.  ITO Vs. Shri Vivek Ramrao Parashkar, I.T.A. No.1733/ 2014, Date of Order: 27.02.2017, ITAT - Mumbai

Whether excess expenditure incurred over and above the value of contract can be claimed as revenue expenditure, in case where assessee is following contract completion method?

Held: Yes

Brief Facts:
The assessee is a developer and engaged in the business of construction, running and operation of hotels, dealers in all types of Hero Honda two wheelers and gas agency, etc. During assessment proceedings, AO found that under one of the proprietary concerns of the assessee a net loss was shown. The said proprietary concern was engaged in the business of construction and during the year it undertook a project to construct bus stand and commercial complex. The AO found that the part of the expenses incurred during the year on account of purchases and direct expenses were capitalized to Work-In-Progress and part of expenses were shown as revenue expenditure.

There were no sales during the year and resultantly the assessee suffered loss as current year loss which was set off against the income from other proprietary concerns. The assessee submitted that due to flood which happened in the year 2002, the entire construction done by the assessee had collapsed, and the loss shown during the year was primarily on account of expenses on maintenance of bus stand and commercial shops constructed by the assessee which were not to be reimbursed to the assessee under the MOU and accordingly shown the current year loss. The AO rejected the contentions of the assessee and added the same to the total WIP. Being aggrieved by that the assesse appealed to the CIT(A) and the CIT(A) has allowed the appeal of assessee and delete the additions made by AO. However, against the order of AO, revenue has preferred appeal to ITAT.

The Hon’ble ITAT held that it was an undisputed fact that the construction was badly damaged due to floods and its negative effect and the expenditures incurred to maintain bus stand and commercial complex was not recoverable under BOT and as per AS-7 when the cost of contract is likely to exceed the contract revenue then the loss incurred on the contract should be recognized as revenue expenditure immediately. Considering these facts, it upheld the order of the ld. CIT(A).
Therefore, the appeal of the revenue is dismissed.

(Please click here for judgment)

 Golden Rules:

  "LIFE & TIME are the world's two best teachers..
LIFE teaches us the value of Time...!
& TIME teaches us the value of LIFE"


  Thanks & Regards


Voice of CA 

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