DTRTI NEWSLETTER Issue No.67/Chennai September 13, 2019

TRAINING NETWORK RELATED NEWS

DR Inspectors during the Industrial visit to Toyota Kirloskar Motors, Bengaluru (above)

and Educational visit to CPC, Bengaluru (below) as part of their course curriculum

CONTENTS

Training network related news

Topic for the week – Aggressive Tax Planning Schemes

Judgement for the week-PCIT vs. Maruti Suzuki India Ltd.

From the Editor’s Desk-1 - Common mistakes in Assessment

From the Editor’s Desk-2 - Case Studies on Penalty u/s.270A

Solution to the last week’s crossword- PGBP – Other Deductions (Section 36)

2

TOPIC FOR THE WEEK Aggressive Tax Planning Schemes

Compiled and provided by Shri M.S. Nethrapal, IRS, Addl.CIT (continued from the last week)

32. Judicial precedents in India have

consistently held that Control and

Management (C&M) of an entity is situated

at the place where the direction,

management and control, “the head and

seat and directing power” of the entity’s

affairs are situated. The following rulings,

in the context of C&M are noteworthy in

this regard:

a. Subbayya Chettaiar (HUF) vs. CIT

(19 ITR 168) (SC): SC relied on the

following principles from English rulings:

The conception of residence in the case of a

fictitious “person”, such as a company, is as

artificial as the company itself, and the

locality of the residence can only be

determined by analogy, by asking where is

the head and seat and directing power of

the affairs of the company. Control and

management signifies in the present

context, the controlling and directive power,

the head and brain as it is sometimes called,

and situated implies the functioning of such

power at a particular place with some

degree of permanence, while wholly would

seem to recognize the possibility of the

seat of such power being divided between

two distinct and separated places. As a

general rule, the control and management

of a business remains in the hand of a

person or a group of persons, and the

question to be asked is where from the

person or group of persons controls or

directs the business. But, mere activity by

the company in a place does not create

residence, with the result that a company

may be ‘residing” in one place and doing a

great deal of business in another.

b. Nandlal Gandalal (40 ITR 1) (SC)

(relying on Chettiar’s case):

The expression “control and management”

signifies controlling and directive power,

“the head and brain” as it is sometimes

called. Furthermore, the expression

“control and management” means de facto

control and management and not merely

the right or power to control and manage.

c. Erin Estate, Galah, Ceylon v CIT

(1958)(34 ITR 1)(SC):

Control and management evidently refers

to the controlling and directing power.

Often enough, this power has been

described in judicial decisions as the “head

and brain”;

d. Narottam & Pereira Ltd.

(23 ITR 454):

“Control and management signifies in the

present context, the controlling and

directive power, the “head and brain” as it is

sometimes called, and situated implies the

functioning of such power at a particular

place with some degree of permanence,

while wholly would seem to recognize the

possibility of the seat of such power being

divided between two distinct and separated

places.”

33. Judicial precedents in UK and other

international courts have also applied the

same principles. In the English case of

Atkinson [2006] STC 732, it was noted,

“C&M carries with it connotations of

continuity because of the use of phrases

such as ‘actually abides’, ‘carries on

business’, ‘keeping house’. It is necessary to

consider the overall pattern of conduct

established over a period of time; residence

does not change on every occasion where

there is short-term change in the location of

board meetings”.

3

..

34. There is a case of Lee & Bunter of

UK which is squarely applicable in this

case - Recently, the UK’s 1st Tier Tribunal,

in the case of Richard Lee & Nigel Bunter v.

the Commissioner for Her Majesty’s

Revenue & Customs, ruled on the POEM of

two Guernsey based trusts having UK

settlors & a Mauritius based trustee at the

time of a transaction of transfer of shares.

The Tribunal after analyzing the facts,

witness statements & evidences ruled that

even though the execution of the

transaction took place in Mauritius by

virtue of the trustee being in Mauritius, the

trustee only acted under instructions of

the settlors who were based in the UK;

thereby resulting in the POEM of the trusts

being in UK & hence resulting in tax being

leviable on the transaction that took place.

35. The Tribunal applied the test laid

down by the UK High Court in Smallwood

to determine whether the POEM exists -

where were the important decisions on

governance or management of the

settlement located? The approach and

factual basis of the Tribunal’s findings are

as follows:

a. The Tribunal identified key

decisions relating to the governance /

management of the Trusts. The decision

for disposal of (almost all) assets of the

Trusts, and the pricing of the Transaction

was identified as the fundamental

determinative factor. With respect to the

decision making for disposal of the assets

of the Trusts, the Tribunal examined the

competence of the directors of ‘Trustee-2’

and concluded that the choice of the

directors of ‘Trustee-2’ was not based on

business acumen possessed by them, but

rather only on the location of the ‘Trustee-

2’. Based on the witness statement, the

Tribunal concluded that he did not have an

understanding of critical aspects of the

Transaction i.e. the meaning of a put / call

option, and therefore the decision to

dispose the assets could not have been

based on ‘Trustee-2‘s’ independent

judgment.

b. On the question of management

and independence of ‘Trustee-2’ being able

to take /reject the decision, the Tribunal

dismissed the possibility of non-execution

of Transaction documentation by the

Mauritius directors as a ‘fanciful

proposition’ i.e. it was an unlikely

eventuality that the Mauritius directors of

‘Trustee-2’ would not sign the Transaction

documentation.

c. The Tribunal noted that witness (or any

other director of the ‘Trustee-2’) was not

party to the discussions and negotiations

with Vodafone on the commercials of the

Transaction for accelerating the call option

exercise. The Transaction negotiations

with Vodafone had been concluded almost

wholly by the settlors, who were also

directors , and by their lawyers in UK

before ‘Trustee-2’ was brought on board.

The minutes of the board meeting of

‘Trustee-2’ were materially identical to

this memorandum. This further illustrates

the lack of independent decision making

exercised by ‘Trustee-2’. The Tribunal also

gave due regard to the nature and timing

of the Transaction.

d. Specifically, the fact that ‘Trustee-2’

resigned within days of completion of the

Transaction. The Tribunal also took note

that the reasons for the resignation were

explained as ‘tax planning advice’ in one of

the minutes of the meetings in which the

resignation was considered.

(to be continued)

4

JUDGEMENT FOR THE WEEK

PCIT vs, Maruti Suzuki India Ltd. (Compiled and provided by Smt. Ann Mary Baby, IRS, Addl.CIT)

The Honourable Supreme Court of India in

PCIT vs. M/s.Maruti Suzuki India Ltd in

[2019] 107 taxmann.com 375 (SC) held

that issuance of jurisdictional notice and

assessment order thereafter passed in

name of non-existing company i.e.

amalgamating company having ceased to

exist as a result of approved scheme of

amalgamation, is a substantive illegality

and not a procedural violation of nature

adverted to in section 292B and hence,

being without jurisdiction was to be set

aside.

The significant facts of the case as

observed by the Apex Court are as follows:

1) The income which is sought to be

subjected to the charge of tax for AY

2012-13 is the income of the erstwhile

entity (SPIL) prior to amalgamation.

2) Under the approved scheme of

amalgamation, the transferee has

assumed the liabilities of the transferor

company, including tax liabilities.

3) The consequence of the scheme of

amalgamation approved under Section

394 of the Companies Act 1956 is that

the amalgamating company ceased to

exist.

4) Upon the amalgamating company

ceasing to exist, it cannot be regarded

as a person under Section 2(31) of the

Act 1961 against whom assessment

proceedings can be initiated or an

order of assessment passed.

5) A notice under Section 143 (2) was

issued on 26 September 2013 to the

amalgamating company, SPIL, which

was followed by a notice to it under

Section 142(1).

6) Prior to the date on which the

jurisdictional notice under Section 143

(2) was issued, the scheme of

amalgamation had been approved on

29 January 2013 by the High Court of

Delhi under the Companies Act 1956

with effect from 1 April 2012.

7) The assessing officer assumed

jurisdiction to make an assessment in

pursuance of the notice under Section

143 (2). The notice was issued in the

name of the amalgamating company in

spite of the fact that on 2 April 2013,

the amalgamated company MSIL had

addressed a communication to the

assessing officer intimating the fact of

amalgamation.

In the above conspectus of the facts,

the initiation of assessment

proceedings against an entity which

had ceased to exist was void ab initio.

The Court observed that in the present

case, despite the fact that the assessing

officer was informed of the amalgamating

company having ceased to exist as a result

of the approved scheme of amalgamation,

the jurisdictional notice was issued only in

its name. The basis on which jurisdiction

was invoked was fundamentally at odds

with the legal principle that the

amalgamating entity ceases to exist upon

the approved scheme of amalgamation.

Participation in the proceedings by the

appellant in the circumstances cannot

operate as an estoppel against law.

5

FROM THE EDITOR’S DESK-1 Common mistakes in Assessment

(Compiled and provided by Shri M. Veerabhagu, ITO-1, DTRTI)

Based on the audit conducted in 2017-18

in respect of assesses engaged in

entertainment sector such as radio,

television, music, event management, film,

animation and visual effects, broadcasting,

sports and amusement, etc., a report was

prepared by office of the C & AG for

submission before the President of India.

The report has pointed out mistakes

noticed in the assessment orders passed

by officers in various regions and has

raised objections on the same. It has also

made several observations. Some of the

objections raised and observations made

are listed out here:

1. Not using the information

shared: In one of the cases assessed at

Mumbai, despite the information from

Kolkata investigation that the assessee

was one of the penny stock companies, the

AO had not taken any cognizance of the

information and completed the

assessment without taking any action on

the same.

2. Not sharing of information

within the department:

(i) During the audit of a assessee company

assessed at Mumbai, it is noticed that

the assessee company had obtained

two business undertakings from

another assessee company through

slump sale (to be considered for

taxation under capital gain u/s.50B).

The latter had not offered any capital

gains in the return of income filed. The

information was also not passed on to

the AO of the former. Thus, the

consideration paid by the company

(issued equity) of Rs.38.84 crores was

omitted to be brought to tax.

(ii) In one of the cases assessed at

Chennai, a survey was conducted and

during the survey the assessee had

admitted to have received Rs.2.45

crores in cash from another assessee.

However, this information was not

passed on to the AO having

jurisdiction over the case of the payer

and hence there was a possible

leakage of revenue.

3. Not sharing of information with

other departments:

(i) The assessee, engaged in business of

multiplex cinemas, had offered income

of Rs.127.95 crores (exclusive of

entertainment tax) as per the P & L

Accounts for the period from 2010-11

to 2013-14. Whereas, as per the

information provided by the

Entertainment Tax Department, Delhi,

the assessee had deposited

entertainment tax of Rs.46.01 crores

during the above period. Considering

the rate of entertainment tax (which

was at 20% in this period), the

corresponding income should have

been Rs.230.06 crores. As cross-

verification with the department

concerned was not done, there was a

loss to the exchequer.

(ii) In another case, again assessed at

Delhi, the difference in (under-

reporting of) income for the same

period works out to Rs. 57.08 crores.

(iii) Similar cases were reported in

multiplexes assessed at Karnataka and

Maharashtra also. (to be continued)

6

FROM THE EDITOR’S DESK-2

Case Studies on Penalty u/s.270A

(Compiled and provided by Shri T.V. Vamsidhar, IRS, DCIT, DTRTI)

(continued from last week)

Case Study-6

Under Reported Income- On Reassessment of MAT Income Sec 271(2)(f)

The amount of deemed total income Reassessed as per the provisions of section 115JB

or section 115JC, as the case may be, is greater than the deemed total income assessed

or reassessed immediately before such reassessment-Reassessed u/s 147

The amount of under reported will be determined as under

URI = The Deemed Total Income Reassessed (-) minus The Deemed Total Income

Previously Assessed

Tax on URI = {(URI (+) (the Reassessed Deemed Total Income)} (-) minus

Tax on the previously Deemed Assessed Total Income

Penalty on under reported income

50% on the tax on under reported income – In case of under reporting

200% on the tax on under reported income – In case of Mis-Reporting

Under Reporting on MAT Reassessment Company,

Firm etc.

Sec 115JB

Individual,

Firm etc

Sec 115 JC

1 Deemed Total Income – Assessed 100.00 150.00

(+) Provision for DDT 10.00 0.00

(+) Expenses disallowed 30.00 30.00

(-) Amount of Revaluation Reserve (if Credired) 10.00 0.00

2 Deemed Total Income – Reassessed 130.00 180.00

3 Underreported Income 30.00 30.00

4 Underreported Income for Tax purposes 160.00 210.00

5 Tax on under reported income @18.5% as Reassessed On (4)

29.60 38.90

6 Tax on under reported income @18.5% as Assessed On (1)

24.10 33.30

7 Tax on under-reported income (5-6) 5.50 5.60

8 Penalty @ 50% on under reported income 2.80 2.80

7

Case Study-7

(g) The income assessed or reassessed has the effect of reducing the loss or

converting such loss into income.

The amount of under reported income will be determined as under

1) The difference between the loss determined u/s 143(1)(a) and the assessed loss

whereby the amount of loss is reduced.

2) The difference between the loss determined u/s 143(1)(a) and the assessed loss

where by the amount of loss is converted in to Income

The tax on under reported income will be

Tax on URI as if the URI is the Total Income

Penalty on under reported income

50% on the tax on under reported income – In case of under reporting

200% on the tax on under reported income – In case of mis-Reporting

Assessed Income has the effect of reducing the loss or converting such loss into

income.

1 Loss as per return (50.00)

(+) Expenses disallowable as per Tax Audit Report 5.00

2 Income processed u/s 143(1)(a) (45.00)

3 (+) Hawala Purchases 30.00

(+) Undisclosed Income 50.00

4 Income u/s 143(3) 80.00

5 Underreported Income- to be treated as Total income 125.00

6 Tax on under reported income 37.50

7 Penalty u/s.270A = 200% of the tax on under reported tax –

being mis-reported Income

75.00

(concluded)

னசாபா மநயி ககுந னசாபா

ணபிசசா ா பகதது - கு 194

ன, ணபுந இாத ச ாகள

ஒருவ பிடமுந ச ாா அ

ச ாகள அவள தியுட ள பாந

குணஙகிலிருது ககிவிடுந.

Vain words spoken without dignity to a group are ungainly, unrighteous

and yield no gains.

8

इस

Correspondence पतर-व‍यवहहरर

Even number समसखयक

–

Please provide copies of all correspondence in

this matter urgently. कपयर‍इस‍मरमल‍म‍सभी‍पतर-व‍यवहहरर‍की‍परतियरा‍

िरि‍उपलब‍ध‍कररए‍l

Please refer to this office letter even number

dated 09.06.2019 on the above subject. कपयर‍उपयकत‍तवहषय‍पर‍इस‍करयरलय‍क‍

समसखयक‍पतर‍दिनरक‍09.06.2019 कर‍सिभ‍ल‍l

SOLUTION TO THE LAST WEEK’S CROSSWORD

PGBP – OTHER DEDUCTIONS (SECTION 36)

F1 E D2 E R A L B3 O N A F I4 D E

I R

D5 V P6 R O R A T A7

A8 C Q U I S I T I O N E P

M D C P

A R9 E D E M P T I O N O R

G N M10 V O

E D11 E D U C T I B L E A E V

D12 N R E

U U A D

P13 E N S14 I O N S C H E M E F B

D P H15 E A L T H

A E16 X P E C T E D C E U17

T C T S

E I18 N T E R E S T E19 Q U A L E

F R L

W2

0 R I T T E N O F F E E

I21 R R E V O C A B L E S

D A22 D V A N C E S

..

Published by: TEAM DTRTI