For Legislative competence-

“While Articles 245 and 246 provide for the legislative competence of the Union and the States, Article 265
of the Constitution establishes that no tax shall be collected or levied without the authority of the law. This
strictly prohibits the Centre or the State from doing anything indirectly that they have been prohibited from
doing directly. Art. 366 (28) of the Constitution mentions that ‘taxation’ includes any impost like- fees, cess,
surcharge etc. and hence, the term ‘tax’ under Art. 265 must be given a broader meaning.”

Step 1: Classify as fee/tax/cess. The Union government has the power to levy a cess even on state
matters. Don’t need to see the list classification in case of a cess. Note: a cess is usally for a specific
purpose, in a specific fund being exclusively used for the object (check for an object not just
objective of policy) and is a compulsory extraction. Fee is not a compulsory extraction whereas cess
is.

We must first determine whether the levy was a tax or a fee. As defined in the case of Mathews v. Chicory
Marketing Board, a tax is a compulsory exaction of money by a public authority for a public purpose
enforceable by law which is not for payment of services rendered. It is a part of the common burden and is
based on the ability to pay. However, a fee, as characterized by Commissioner, HRE Madras v.
Lakshmindra Thirtha of Shirur Math, is payment for a specific purpose or benefit rendered. There exists
an element of quid pro quo, with the amount charged being utilised for the specific purpose. This
distinguishes it from a tax. However, as observed in Sreenivasa General Traders v. State of AP, this classical
understanding that there must be some direct benefit has undergone a sea change. The fees also includes
regulatory fees along with compensatory fees, and for the former, the element of quid pro quo is not required
and must not be excessive in nature. If it is excessive, it is classified as a tax.

Moreover, it has been observed by the Supreme Court in the recent 2021 decision in Jalkal Vibhag case that
the distinction between a tax and a fee has become obliterated to the point that it lacks any constitutional and
practical significance. This decision however, is extremely problematic as it blurs the distinction between the
two, giving the Centre the opportunity to levy a fee on any matter that is not included within the taxing
entries under Entry 82-92A of List I. Instead, we must look at whether there exists a broad and casual
connection between the amount charged and the services rendered, as was observed in the Amar Nath v.
State of Punjab case. The amount required for the services need not be the exact equivalent of the fee nor is
there any mathematical precision required as held in Kewal Krishna Puri v. State of Punjab.

We must also look at the primary purpose of the legislation to construe whether it is a tax or a fee. As held in
Secunderabad Hotel Owners Association v. Hyderabad Municipal Corporation, to distinguish between
the fee and a tax, we must look at the primary purpose of the legislation. If the primary purpose of imposing
the levy is for the specific services rendered and is not merely incidental to the augmentation of revenue, it
would be considered a fee. There need not be a direct quid pro quo, and a broad and casual connection
suffices. However, the amount collected through the levy must not be excessive in nature.

In case of cess, we don’t need to see the list classification in case of a cess. Note: a cess is usually for a specific
purpose, in a specific fund being exclusively used for the object (check for an object not just objective of
policy) and is a compulsory extraction. Fee is not a compulsory extraction whereas cess is.

Step 2: IF IT IS A TAX- Determine whether there exists competence to enact it: pith and substance
and aspects theory- so see the object of the tax. If it lies under list II then the state has exclusive
jurisdiction. Otherwise, it falls under the jurisdiction of the Union. Nomenclature does not matter
while determining the validity of the tax. IF IT IS A FEE, THEN DIRECTLY RELATE IT TO
THE GENERAL ENTRY
We must look at the true nature of the levy by applying ‘pith and substance doctrine’. This was observed in
the case of Second Gift Officer v. DH Nazareth, where in the case of a potential overlap between the two
lists, the SC examined the pith and substance of legislation with a view to determining to which entry they can
be substantially related, a slight connection with another entry in another list notwithstanding. We have to
look at the object of the tax entry, and what is exactly being taxed.

As per HS Dhillon v. Union of India- the test to determine whether the Centre has legislative competence
or not, is whether the subject matter is covered within a taxing entry under List II or not. If it is included
then, the Centre has no competence. If not, then, even though it is not included under a taxing entry in List I,
it may be included under Entry 97 r/w 248. This also includes entries where a particular subject matter is
excluded, where in this case it pertained to Entry 86, which stated ‘exclusive of agricultural income’ while
assessing the net assets, and the SC held that such an exclusion does not constitute a positive prohibition. It
can still be levied under the residuary powers listed in Entry 97, as agricultural income is not covered under
List II.

We can also look at the Aspects Doctrine, where a particular transaction may involve two or more taxable
events; but they would have different aspects or purposes for taxation. The fact that there may be some
degree of ‘overlapping’ would not affect this, as the object of the two taxes would be different. The law ‘with
respect to’ a subject may ‘incidentally affect’ another subject in some way, but that does not mean that it is a
tax on the latter subject. In the Federation of Hotels Association v. Union of India, the court made a
distinction between the expenditure tax and a luxury tax, as the purpose for which the two taxes are different.
The object of the former was to discourage expenditure which is considered lavish or outrageous and the
object of the latter is to discourage certain types of living or enjoyment. The aspects doctrine was also used in
All India Federation of Tax Practitioners v. Union of India to uphold the validity of services tax. The SC
upheld the argument that the professional tax and the services tax are imposed for two separate objects and
deal with separate aspects, with the former dealing with the status of the CA, and the latter dealing with the
service rendered.

Step 3: Check for a Part III violation (IF REQUIRED). Hotel association case can be used to say that in
cases of economic matters, the state has very broad powers. Only in very rare cases like the KT Moopil Nair
v. State of Kerala, where the Act obliged every person who held land to pay the tax at the flat rate
prescribed, whether or not he made any income out of the property, or whether or not the property was
capable of yielding any income. Consequently, there was no attempt at classification in the provisions of the
Act and it was one of those cases where the lack of classification created inequality. It was therefore hit by the
prohibition to deny equality before the law contained in Art. 14.

For Residency Requirements

For Individuals: Residential Status of an Individual – Section 6(1)(6)(A)

·
Step 1: Basic Conditions to determine if an individual is “Resident” in India
[sec.6(1)]
a. Stay in India for a period or periods of 182 days or more during the
previous year or
b. Stay in India for a period or periods of 60 days or more during the
previous year; and Stay in India for a period or periods of 365 days or more out of
4 years immediately preceding the previous year
If none of the basic conditions are fulfilled- non-resident. If both or one of the
basic conditions (a) or (b) are fulfilled- resident in India and go to Step 2.
Exceptions: However, the above rules don’t apply for certain kind of people’s-
182 days or 60 days 182 days + 365 days (so essentially just 182 days or more).
- An Indian citizen leaving India in any previous year as a member of the crew of Indian Ship
- An Indian citizen leaving India in any previous year for the purposes of employment outside India.
- An Indian citizen who, being outside India, comes on a visit to India in any previous year
- An individual being a person of Indian origin comes on a visit to India in any previous year. (An
individual is deemed to be of Indian origin if he or either of his parents or any of his grandparents were born
in undivided India [Explanation to Sec. 115C(e)])

The Finance Act 2020 introduced an amendment to the relevant explanations to sec. 6 whereby a citizen of
India or a person of Indian origin, being outside India, comes on a visit to India shall be considered as
RNOR if he fulfils the following conditions cumulatively (this was done because people were strategically
avoiding taxes)
- Total income, other than the foreign income, of more than Rs. 15 Lakhs and;
- Stay in India for a period of 120 days or more but less than 182 days in the previous year and;
- Stay in India for a period of 365 days or more in 4 years preceding the previous year.
· Therefore, we now have three different kind of assesses, each having different condition to be
satisfied.
· Step 2: Additional Conditions to determine if a Resident is RNOR [sec. 6(6)]:
i. Has been a non-resident in India in 9 out of 10 years or
ii. Has been in India for 729 days or less out of 7 years immediately preceding
the relevant previous year
If both or one of the additional (i) or (ii) are fulfilled, such individual is a resident but not ordinarily
resident in India.

For HUF: Step 1: Control & Management of Affairs: The relevant test to determine the residency of an
HUF is via VVRNM Subbaiah Chettiar v. CIT, where the court held that the seat of control and management
of the affairs of the family must be considered, which is the Karta as the Karta is the head and brain of the
HUF.

Step 2: Additional Conditions: Determine whether the Karta has been a non-resident in India in 9 out of 10
years OR has been in India for 729 days or less out of 7 years immediately preceding the relevant previous
year
If both or one of the additional (i) or (ii) are fulfilled, such HUF is a resident but not ordinarily resident in
India.
For Companies (s. 6(3): Earlier, we solely applied the control and management test. This can be seen in the
case of Narottam & Pereira v. CIT, where the SC held that the residence requirement was fulfilled, as
despite having its business in Ceylon, the BoD and meetings of shareholders were held in Bombay. The
controlling and directing functions of the company were carried out in Bombay, and this must be
distinguished from the business of the company. Moreover, such control and management must not be mere
de jure C & M but de facto C & M. Even though the business was done wholly outside India, the real
controlling and directing functions or the seat of head and brain of the company was in India, and was thus,
held taxable. Moreover, in Radha Rani Holdings v. CIT, despite the majority shareholder holding 99% of
the shares being a resident of India and travelling in India at he time, the SC held the control and
management of the company was being carried out in Singapore, the place where the entity was incorporated.
Moreover, even the tax residency certificate had been issued in Singapore, and thus, the assessee was a
non-resident.
We must verify that there is no usurpation of power to the parent company either, as was seen in the Unit
Construction Company v. Bullock case. In this case, the parent company had usurped the function of the
local boards, therefore, the place of meetings of the BoD of the assessee could not be simply relied upon.
Now, via Circular 6 of 1st April, 2017, the POEM test has replaced the C & M. POEM is defined as the place
where the “key management and commercial decisions that are necessary for the conduct of the business of
the entity as a whole, are in substance made”. This definition is taken directly from the OECD model
commentary.
Under the POEM Circular, STEP 1- assess whether there was active business outside India. This must be
determined if passive income (royalty etc) is not more than 50 % of its total income & (I) less than 50 % of its
assets are situated in India, (II) less than 50 % of its employees are situated in or are residents of India and
(III) less than 50% of its payroll expenditure are for employees in India.
STEP 2- If ABOI, and majority of BoD meetings are held outside India, then presumed to be non-resident.
However, this is a rebuttable presumption and can be rebutted if proved that the powers of effective
management are being carried out by holding company or any other person(s) resident in India.
If not ABOI, and AB inside India- then, two stage process to determine POEM.
First stage would be to identify or ascertain the persons taking key managerial and commercial decisions.
Second stage would be determining the place where such decisions are taken.
To support the same, Para 7 of the Circular lays out certain guidelines and the key managerial and commercial
decisions relate to strategic policy decisions and not merely day-to-day business decisions. Moreover, if the
key decisions by the directors are in fact being taken in a place other than the place where the formal
meetings are held then such other place would be relevant for POEM. Further, if the key decisions have been
delegated to directors or shareholders then that place is taken as POEM.

For Scope of Total Income

Income received or deemed to be received in India: Here, we apply the case of Raghava Reddi v. CIT.
In this case, due to the inability to pay a non-resident assessee firm that was hired for the export of mica to
Japan in lieu of foreign exchange laws, a bank account was created in the name of the assessee firm in India
via an agreement. The amount due was sent to the bank account, and the character of the money changed
from debt to deposit which could be credited to the bank account of the assessee firm. The SC held that it
constituted income which was received or deemed to be received in India, and was thus, considered taxable.

Income deemed to accrue or arise in India through or from any business connection:
Step 1- 5 (2)(b) determine ‘deemed to accrue or arise in India’- Here, we apply- PILCOM v. India, where the
payments made by the assesse, PILCOM v. CIT created by the Non-Resident Cricket Associations, and for
all payments made in relation to matches held in India, to the Non-Resident CAs, it would be considered
deemed to accrue or arise in India, if there exists a live nexus between the income and the activity in India.

Step 2- Section 9(1) also includes income that accrues or arises from a business connection in India -Business
Connection- As per CIT v. RD Aggarwal- ‘A business connection involves a relation between the yielding of
profits and gains for the company and the activities in India with the latter, contributing directly or indirectly
to the yielding of the profits”. This involves not merely any commercial activity, but must include a principal
role in concluding the contracts. The connection must be real, intimate and continuous in nature, and cannot
merely be a sporadic transaction. The scope of such connections was expanded in Barendra Prasad Ray v.
ITO which extended it to professional services as well.

Further, in Volkswagen Finance v. ITO, the SC included ‘intangible business connections’ as well, and since
the benefits arising out of the event in Dubai was accruing in India, with the target audience, potential
customers and intended benefits being in India. On account of these benefits, the international celebrity
involved was paid for his participation and thus, the income accrued and arose in India due to the ‘business
connection’.

STEP ENDS HERE IF IT IS FTS, ROYALTY ETC. (PASSIVE INCOME)

FOR DIGITAL SERVICES W/ NO PHYSICAL PRESENCE IN INDIA- apply SIGNIFICANT

ECONOMIC PRESENCE (SEP)- S. 9, Explanation 2A- it is based on two factors- revenue linked (2 crores)
and user linked (3 lakhs). RDA can be still used for positively concluding whether there exists a business
connection- there must be a real, intimate and continuous connection, with a live linkage between the profits
generated and the activities in India. (NOTE: IF THERE EXISTS A DTAA, WE STILL NEED TO
ESTABLISH PE)

NOW, IF ACTIVE INCOME, AND THERE EXISTS A DTAA- THEN WE MOVE TO NEXT STEP
AND LOOK AT PE

Step 3- For DTAAs- Business Profit + Permanent Establishment. Considering that there is a DTAA in
existence between India and ________ even if the domestic authority in India finds scope for tax liability
under the Income Tax Act, it cannot be imposed unless the assessee has a PE in India.

PE can be Fixed Place PE or Agency PE.

Fixed Place PE- CIT v. Vishakhapatnam Port Trust- the words ‘PE’ postulate the existence of a sufficient
element of enduring or permanent nature of a foreign entity which can be attributed to the fixed place in that
country. It should amount to a ‘projection of the foreign entity into another country’.

Agency PE- Composition of PE into either dependent or independent agents. Only with former, is there PE.
The test is to see if it is an independent agent is whether the acts are carried out in 1) ordinary course of
business 2) acts of the agent are NOT devoted wholly or almost wholly on behalf of foreign entity and 3)
transactions between agent and foreign entity are at arm’s length. For a PE, it must be a dependent agent,
who habitually possesses the right to conclude contracts, and should not deal with any preparatory/auxiliary
part of the transaction such as facilitating communication, research, training etc. For dependent agents, it
must be shown that the agent has and habitually exercises an authority in India to conclude contracts in the
name of the foreign entity.

The relevant case in this regard is Western Union Financial Services v. ADIT. In this case, it held that the
offices of the banks were not fixed place PE, and nor were the banks acting as dependent agents. The banks
had their own presence and business which they were more concerned with than being a projection of WU
on Indian soil. There was also, no evidence to show that WU can, as a matter of right, enter and make use of
the premises of these agents for its businesses. Thus, no fixed place PE. The Liason Officers were not fixed
place PE either, as they were used for preparatory or auxiliary activities, for the supply of information, for
scientific research or for other such activities including acting as a communication link, and such acts were not
enough to classify as PE, as no trading activity was being carried out. Moreover, even the software was not
considered as a PE.

IF WE DO NOT HAVE PE, THEN WE TAKE REFUGE UNDER EQUALISATION LEVY-

FOR ‘SPECIFIED SERVICES’ SUCH AS ONLINE ADVERTISEMENTS AND PROVISIONS FOR
DIGITAL ADVERTISING SPACE OR ANY OTHER FACILITY FOR ONLINE ADVERTISEMENTS-
APPLY EQUALISATION LEVY OF 6% on income received by non-resident for online advertisement
space not having PE- provided the transaction is more than 1 lakh and its a business-to-business transaction.
FOR Non-Resident E-COMMERCE OPERATOR who owns, operates or manages digital or electronic
facility for online sale of goods or services or both- The scope of the levy was further expanded in Finance
Act, 2020- 2% equalization levy imposed.

TDS ON E-COMMERCE OPERATORS- For sale of goods or provision of services of an e-commerce

participant facilitated by an e-commerce operator through its digital or electronic facility, e-commerce
required to deduct 1% TDS.

Taxability of Income

- Income from Salary

Step 1- Identify Basis of charge under S. 15- The following income shall be chargeable to income-tax under
the head "Salaries”:
- any salary due from an employer or a former employer to an assessee in the previous year,
whether paid or not
- any salary paid or allowed to him in the previous year by or on behalf of an employer or a
former employer though not due or before it became due to him
- any arrears of salary paid or allowed to him in the previous year by or on behalf of an
employer or a former employer, if not charged to income-tax for any earlier previous year
Important case in this regard to see whether the income is arising OUT of the employment. ITC Hotels v.
CIT- tips received by waiters. The SC looked at whether the employment was a proximate cause of the receipt
of tips, but held that it must be from the employer and NOT the customer, and there was no vested right to
receive tips in the employment either.
Step 2- We look at whether there existed an employer-employee relationship.
CHECKLIST for Employer-Employee Relationship:
- Non-exclusivity
- Incidental to profession
- Remuneration paid in form of retainership
- No control and supervision- contract for service/contract of service- told what to do but not how to
do it
- No accrual of benefits
- Hire and fire test
- Intention test

As per Ram Prasad v. CIT- the SC distinguished between contract of service and contract for service. The
former lays out what to do AND how to do the same, but the latter grants a sufficient degree of autonomy.
The former constitutes an employer-employee relationship and the latter does not. There must be control and
supervision by the employer upon the employee.

We can also apply the Hire and Fire test and Exclusivity test- Lakshminarayan Ram Gopal v. Govt of
Hyderabad. Here, it was held that there was no exclusivity in the agreement which is a relevant condition for
employer-employee relationship and it also laid out the Hire and Fire Test.

As per Red Chillies Entertainment v. ACIT, we must look at the substance of the contract to determine
this, and not merely its form. It must be looked at holistically. The non-exclusivity in the contract is not
conclusive of the absence of an employer-employee relationship when the other indicators point to the
contrary. There was hire and fire with termination clauses, leave restrictions, perquisites and C & S with built
in regularity.
Moreover, as per CIT v. Durga Khote, any employment incidental to their profession would not constitute
an employer-employee relationship. There was no exclusivity although there existed some amount of C & S,
but it was considered ‘professional income’ and not income from salary. Moreover, her employment was
incidental to her profession, and there was no intention to continue to work there permanently. This
is the ‘intention test’.

FOR Profits in lieu of salary- Karamchari Union v. Union of India- CCA, DA, HRA reimbursing extra
costs incurred by employees falls within definition of ‘profits’ in the hands of assessee. The plain meaning of
profits includes any gain or advantage, benefit or pecuniary gain accruing to the assessee- equity and hardship
are not a consideration.

CIT v. Pritam Das Narang- If the payment is before joining the employment or for compensation for
denial of employment is not in the nature of profits in lieu of salary, as there was NO employment at all.

Uniform allowance- there must be a ‘uniform’. Dress code is not a uniform (ONGC v. ACIT)

PERQUISITES

FOR ESOPS- right to buy shares at a pre-determined price- as per the CIT v. Infosys case, the Tax must be
calculated at the time such ESOPS are exercised, and not anytime before as the shares cannot be solved until
lock-in period is over anyways. It is calculated on the basis of fair market value on exercise date. Only on the
date the ESOP option is exercised and the shares are allotted, then the way in which the perquisites are to be
calculated on ESOPs will depend on S. 17 (2)(vi).

Income from House-Property

Bare letting of property is HP (s. 22)

Bare letting where the services and facilities provided are incidental- HP
Services, facilities are primary purposes of letting- BI

Main concepts- If the bare letting of the property is only INCIDENTAL AND SUBSERVIENT to the main
business of the assessee, then rental income is charged under PGBP (s. 28). If the furniture, factory
equipment etc., are inseparable with the property then IoS (S.56(2)(iii))

The relevant judicial precedents are as follows: In East India Housing v. CIT case, there was a letting out of
some stalls as shops. Here the court found that the primary source of income was the occupation of the stalls,
and therefore, it was a simpliciter letting- thus, HP.

As we move ahead in time, we find that our commercial activities are getting complex and as a result, since it’s
not a simpliciter letting out, our understanding has to change in the context of modern commercial
transactions like service apartments, malls, etc.

In CIT v National Storage the SC held that where income is received from the bare-letting with incidental
services or facilities, it would still constitute property income. However, where the income is derived from a
complex letting-out with additional services then it would categorized as business income. TEST- When
letting is only incidental and subservient to the main business of the assessee, income derived from letting will
not be house property income.

In Manohar Singh v. CIT- where there was a built up land with 13 suites, which were let out, furniture
installed, with blankets, towels etc for guests and the option of meals. The SC relied on CIT v. National
Storage- and held that the assessee is not merely collecting rental income, he is doing something more- It is a
paying guest arrangement where the building is integral, but there are various services also being hired, and
therefore it is business income (BI). The assessees income depended upon the reputation, goodwill and
efficiency of service, which was the characteristic of this type of business. The risks involved, the functions
performed were all taken into consideration.
It was to be understood not from the point of view of the customer but from the assessee and his
involvement.
Karnani Properties v. CIT- flats let out to tenants, with lift services, hot cold water for which equipment
was bought etc. SC finally held it as BI. The Supreme Court emphasized that the focus should be placed on
the manner in which the activities were conducted. In this regard, the court developed a 4-prong test which if
satisfied, would result in the activity being classified as a business activity and the income so derived would be
classified as business income. The four prongs are given as follows:
1. Activity carried out continuously
2. Activity carried out in an organized manner
3. Activity carried out with a set purpose
4. Activity carried out with a view to earn profits
Chennai Properties v. CIT- relied on object of the MoA- which reveals that the object was letting out of
properties. This sole reliance on the object was then questioned in Raj Dadarkar v. CIT- where the SC held
that the object cannot solely be relied upon- there must be other evidenced adduced.
FOR IOS vs. HP
In Sultan Brothers (P.) Ltd. v. CIT (1964, SC), the court held that the activity must be viewed from the point
of view of the businessman to determine whether it was a mere exploitation of the property or whether there
was any intention to carry out a business activity. With respect to other facilities, the court also developed the
3-prong test of inseparability. The 3-prong test is given as follows:
1. Was it intended for the furniture and building to be enjoyed together?
2. Was it intended for the furniture and building to be let out as one and the same in practical terms?
3. Would the lease for one have been accepted without the other?
If the first two points were answered in the affirmative while the third point was answered in the negative,
then the income would lie under the head of income from other sources.
The point of view of the assessee and his involvement must be considered.

POST-MIDSEM
PGBP

Charging Provision S. 28- includes:

i. the profits and gains of any business or profession which was carried on by the assessee at
any time during the previous year
 ii) any compensation or other payment due to or received by any person, by whatever name
called

iii) income derived by a trade, professional or similar association from specific services
performed for its members

iv) the value of any benefit or perquisite, whether convertible into money or not, arising from
business or the exercise of a profession

v) any sum, whether received or receivable, in cash or kind, under an agreement for (a) not
carrying out any activity in relation to any business or profession (b) not sharing any
know-how, patent, copyright, trade-mark, licence, franchise or any other business or
commercial right of similar nature or information or technique likely to assist in the
manufacture or processing of goods or provision for services

Provided that sub-clause (a) shall not apply to- any sum, whether received or receivable, in cash
or kind, on account of transfer of the right to manufacture, produce or process any article or
thing or right to carry on any business or profession, which is chargeable under the head
"Capital gains…..
Questions related to 28 (i)- (i) the profits and gains of any business or profession which was carried
on by the assessee at any time during the previous year
As per S. 2 (31), a business includes any trade, commerce or manufacture or any adventure or concern in the
similar nature of a trade, commerce or manufacture- and has a very wide import to include any activity carried
on systematically, continuously, in an organized manner with the application of any labor or skill with a view
to earn an income. It means some real, substantial, systematic or organized course of activity with a set
purpose. The term ‘profession’ also includes any vocation, which includes income made from hobbies, even
without profit intentions.
FOR VOCATIONAL INCOME:
As per P. Krishna Menon v. CIT for a vocational income- it is not necessary for the vocation to be
organised, or for a business purpose. It is not the motive of the assessee that must be considered but the
effect of the activity on the donee. There must be a causa causans between the receipt of the gift and the
services (teaching Vedantic philosophy in this case) and the receipts may be casual and non-recurring to be
taxable as vocational income.
The case of ITO v. Mrs. Savitridevi Kullar also becomes relevant here. Here, the Bombay ITO held that the
amount gifted to assessee, and the spiritual healing were separate and independent actions, there was no causa
causans. Here, the assessee was specifically prohibited from receiving money by her guru, and she had never
asked for anything with the money being given out of gratitude.
WHETHER INCOME ARISES OUT OF PROFESSION OR BUSINESS
As per Priyanka Chopra v. DCIT, where there was a contract between NDTV and Priyanka Chopra for the
latter to be a Brand Ambassador for NDTV-Toyota Ad campaign- Toyota gifted her a car and despite there
being no contract between donor and donee, the gift of the car was considered to be a perk arising out of the
profession.
As per Shah Rukh Khan v. ACIT- where the assessee attended annual day celebrations of a Dubai-based
company, and the former was gifted a villa by the latter. The villa was gifted 3 years prior to the event, and
AO contended that the fee for attending the event was disguised as a villa. A letter was produced which
declared that there was no professional service engaged, and SRK was there due to his friendship with Sultan.
It was held that there was NO contractual obligation and NO brand endorsement, only some photos were
clicked. Thus, gift was not a benefit/perquisite arising out of profession.
CIT v. KR Honappa- assessee, an MLA, gifted car by people of his constituency as a token of personal
contribution. It was held that it was a mere token of appreciation for his personal qualities, and the perk has
no connection or causa causans with the exercise of his profession.
Questions related to 28 (ii)-any compensation or other payment due to or received by any person, by
whatever name called.
Here, the primary test is laid out in Kettlewell Burn & Co v. CIT. The test applicable to contracts for
termination of agencies is to look at what the assessee has parted with, in lieu of money or money’s worth
received by him. If the compensation is paid for cancellation of contract of agency, which does not affect
trading structure of business of recipient, or involve loss of an enduring asset, leaving assessee free to carry
on trade released from the contract that is canceled- it is a trading receipt (PGBP). If the compensation is
paid for cancellation of a contract of agency, which impairs trading structure or loss of enduring asset, the
amount is capital receipt (Capital asset).
The relevant application of this test is seen in the following cases. In Karam Chand Thapar & Bros v. CIT-
where the assessee was a managing agent for 27 companies, and one of the companies terminated the
contract. The SC upheld ITO’s ruling, as for termination of contract by one agency among multi-agencies
involved has the consequence of a destruction of the source of income of the assessee, as the assessee
received income from the company by way of commission- thus, CAPITAL RECEIPT.
In Oberoi Hotel v. CIT, the assessee-company was operating, managing and administering several hotels,
and agreed to operate Hotel Oberoi for which he would receive management fee. The agreement also gave
the assessee the right to exercise the option of purchasing the hotel, in case the owners of the hotel decide to
transfer it during the agreement period. A supplemental agreement was signed, setting aside this right to first
purchase, in lieu of compensation. The SC held that ordinarily compensation for loss of an office or agency
is regarded as capital receipt, but this rule is subject to an exception that payment received even for
termination of agency agreement would be revenue and not capital in the case where the agency was one of
many which the assessee held and that its termination did not impair the profit-making structure of the
assessee, but was within the framework of the business, it being a necessary incident of the business that
existing agencies may be terminated and fresh agencies may be taken. Since assessee gave up right to first
purchase, (which itself is a capital asset) and/or to operate a hotel- it was a LOSS OF SOURCE OF
INCOME- and thus, a CAPITAL RECEIPT.
In CIT v. Parle Softdrinks, the breach of obligation of right to first refusal was settled by a compensation
amount. The right to first refusal was stated as a substantial right, and a foundational right on which the
assessee could have built its bottling business, which was taken away by breach. Thus, the compensation
received in lieu, was considered CAPITAL RECEIPT.
Questions related to 28(iii)- income derived by a trade, professional or similar association from
specific services performed for its members
The purpose of this provision is to cut behind mutuality principle being relied on to claim an exemption,
when the assessee is deriving income or making profits by rendering business specific services for its
members in a commercial way.
MAIN CASE- As per CIT v. Royal Western India Turf Club Ltd., where assessee-company was
incorporated to carry on business of a race course- members had to pay entrance fee, annual subscription fee
and annual enclosure fee for admission into enclosures, which were also open for public. The SC held that
since there was no mutual dealing b/w members inter se, and no common fund being set up for discharging
common obligation to each other undertaken by contributors for mutual benefit- mutuality does not apply.
Instead, assessee incorporated to carry on ordinary business of race course, and was carrying on its business.
The company gave same or similar amenities to non-members as well (open to public)- and there was a
profit-earning motive and thus, tainted with commerciality.
CIT v. Hill Goods Truck Owners Union- a union, the assessee, was formed, where for payment of Rs. 4,
the truck owner could be registered, and for every payment of Re. 1, the load received by union would be
allocated to the truck driver paying money. This was held to be taxable, as amount paid by its members were
for specific services rendered by the associations. The service was providing business to the truck owner by
the union for every Re. 1 paid by truck driver, who were also members by paying Rs. 4. Thus, assessee was
carrying out trading activity- as assessee was procuring business for its members and were in direct relation
with customers- the members had NO connection with this procurement of business.
Questions related to NON-COMPETE FEES- 28 v) any sum, whether received or receivable, in cash or
kind, under an agreement for (a) not carrying out any activity in relation to any business or profession (b) not
sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial
right of similar nature or information or technique likely to assist in the manufacture or processing of goods
or provision for services

Provided that sub-clause (a) shall not apply to- any sum, whether received or receivable, in cash or kind, on
account of transfer of the right to manufacture, produce or process any article or thing or right to carry on
any business or profession, which is chargeable under the head "Capital gains”

As per proviso, if a capital asset is in the form of a right such as right to carry on business, and the right is
transferred it would be CG. The right must be given up for CG. However, if it is ONLY abstinence- then
PGBP.

In DCIT v. Mediworld Publications- there was a Specified Asset Transfer Agreement, as per which,
assessee sold all rights, title and interest in specified assets, and also included non-compete clause. (NO
DEDICATED AMOUNT FOR NON-COMPETE FEE). Del HC held that the consideration received was
towards sale of intangible assets and right to carry on business, and thus, CG. Moreover, no consolidated
amount for non-compete paid, and when such non-compete fee becomes part and parcel of agreement,
without any delineation b/w non-compete and other assets- it is taxed as CG.

In CIT v. Saphthagiri Distilleries- assessee entered into MoA with McDowells to manufacture liquor, with
assessee running distillery business and manufacturing- McDowell terminated lease, and as per MoA, assessee
had to transfer running concern to McDowell which also included a non-compete provision to prevent
assessee from carrying on similar business using knowhow, in return for compensation. The SC observed that
compensation received for loss of agency is revenue receipt BUT compensation attributable to
negative/restrictive covenant is capital. In the instant case, compensation paid for loss of source of income
AND non-compete fee- thus, Capital receipt. There was no Cost of Acquisition thus, non taxable Capital
receipt.

In Shiv Raj Gupta v. CIT- The consideration for share sale of IMFL was only 56 lakhs. Another MoU was
signed restrictive covenant to the effect that assessee would not either directly or indirectly carry on any
business or manufacturing activity related to IMFL for 10 years- non-compete fee was whopping 6.6 cr. Here,
AO contended the non-compete fee was façade. Del HC held consideration for transfer of shares was
artificially and deceitfully bifurcated under a sham agreement/documentation, which was unreal and not a
true record of the intention. The consideration of Rs. 6.60 crores was not a fee paid towards non-compete,
but was capital. It would not be exempt.

The court referred to the dichotomy between receipt of compensation by an assessee for the loss of agency
and receipt of compensation attributable to the negative/restrictive covenant, laid out in Gillander’s case. The
compensation received for the loss of agency is a revenue receipt whereas the compensation attributable to a
negative/restrictive covenant is a capital receipt. 6.6 cr is NOT taxable under 28 (iii).

ALLOWABLE DEDUCTION (Expenditures)

Rent, rates, taxes, repairs and insurance for buildings (sec.30): If you run your business from a
particular premise, then the rent or cost of repairs of that premise can be claimed as a deduction. However,
capital expenditures are not allowed as deductions. Since we do not have a definition for what a capital
expenditure is, it’ll depend on facts of a given case and on judicial interpretation.

Repairs and insurance of machinery, plant and furniture (sec. 31).

Building, machinery, plant etc, partly used for business or not exclusively so used (sec.38): Applies if
you are living in one part of the house, and the other is let out or used for commercial purpose. The part
which is for business use can be claimed as a deduction.

Sec.37(1): Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being
in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and
exclusively for the purposes of the business or profession shall be allowed in computing the income
chargeable under the head “Profits and gains of business or profession”.

Step 1: Determining whether capital expenditure or revenue expenditure

As per the classical understanding of the test as laid out in Atherton v. British Insulated & Helsby Cables-
when an expenditure is made, not only once and for all, but with a view to bring into existence an asset or an
advantage for the enduring benefit of trade, there is good reason (in the absence of special circumstances) to
treat such expenditure as attributable to capital not revenue.

Enduring benefit was considered to be a dividing line, as capital expenditure must be to bring long-standing
benefit. ‘Once and for all’ test- one time lump sum payment of huge quantum- later refined to business
necessity and expediency test depending on facts and circumstances. This can be seen in Empire Jute v. CIT,
where court held that even in cases where expenditure is incurred for obtaining advantage of enduring
benefit, the test however, may break down- as the enduring benefit may be for merely the facilitation of the
assessee’s trading operations and to enable the management and conduct of assessee’s business to be carried
on more efficiently and profitably, while leaving fixed capital untouched- the expenditure would be revenue
even in cases where advantage may endure for an indefinite future.

As per Alembic Chemical Works Co Ltd v. CIT- assessee company manufactured antibiotic penicillin, and
with a view to increase yield in their plant entered into agreement with Japanese firm for supply of subculture
for ‘once and for all’ payment. Held: Nothing new coming into existence, only existing lines/means of
production were being enhanced. The financial outlay under agreement was for better conduct and
improvement of existing business and thus, revenue expenditure. ‘Once and for all’ payment test was also
inconclusive- instead, for outlay- look at object and effect in a commonsense way, with regards to business
realities.

For S. 31- repairs, renewal and replacement of machinery

The basic test to find out whether expenditure constitutes ‘current repairs’ is that the expenditure must have
been undertaken in ordinary course to ‘preserve and maintain’ an already existing asset, or to restore it to its
original condition- and object of expenditure must NOT be to bring a new asset into existence or obtain a
new advantage. Need to be viewed from point of view of businessmen. The expression ‘current’ preceding
‘repairs’ used by legislature to restrict such allowance to expenditure incurred for preservation and
maintaining in current state, in contrast to improvement or addition thereto.

CIT v. Saravana Spinning Mills- the balance sheet of assessee indicated expense as purchase of ‘new asset’.
Each machine had an independent role and output of each division was different from the other. It was held
that each machine including the ring frame was an independent and separate machine capable of independent
and separate function and therefore, replacement of old machines would not come under ‘current ‘repairs’ u/
s. 31 (i). Not only repairs, but the entire machine was replaced.

Depreciation S. 32 (1)
The concept of depreciation suggests that tax benefit on account of depreciation legitimately belongs to one
who has invested in capital asset, is utilising the capital asset and losing money gradually due to wear and tear,
and would need to replace the same having lost its value over a period of time. However, the asset must be
used for business or profession and must be owned by assessee.

As per Mysore Minerals Ltd v. CIT- assessee purchased 7 low-income houses for its staff and made part
payments against it- AO rejected depreciation claim as assessee was not owner yet for want of deed of
conveyance. SC held ‘building owned by assessee’ means person acquiring possession over building in his own
right and using it for business or profession, even though a legal title has not been conveyed to him
consistently with the requirements of laws such as ToPA or Reg Act, but nevertheless the assessee is entitled
to hold the property to the exclusion of all others. Depreciation allowed.

As per I.C.D.S Ltd. v. CIT- the vehicles were leased by assessee to customers and SC held as assessee had
the right to retain the legal title of vehicle against the rest of the world, it would be owner in the eyes of law.
The SC rejected AO’s argument that the assessee had not ‘used’ the vehicles. This is because the vehicle was
‘used’ by the assessee in the business of leasing.

Interest on Borrowings

(S. 36(iii))- the amount of interest paid by a going concern in respect of capital borrowed for the purpose of
business or profession would be allowable as a deduction. Proviso: if asset was not put to use within certain
time, then cannot be claimed. Assessee must satisfy 3 conditions:

1) Money must have been borrowed by assessee

2) Must have been borrowed for purposes of business
3) Assessee must have paid interest on said amount and claimed the same for deduction

The term ‘purposes of business’ is wider than ‘for purpose of earning income, gains etc’

Hero Cycles v. CIT: Assessee claimed deduction on interest paid on amount borrowed from bank, using
which it gave interest-free advance to its subsidiary, in lieu of undertaking with bank. SC held that advance to
subsidiary became imperative as a business expediency in light of undertaking given to financial institution.
Once the nexus between ‘expenditure’ and ‘purposes of business’ is established, AO cannot justifiably put
itself in the arm-chair of businessmen or BoD to see whether expenditure is reasonable or not. Deduction
claim was allowed.

S. 37- Residuary provision

Sec.37(1): Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being
in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and
exclusively for the purposes of the business or profession shall be allowed in computing the income
chargeable under the head “Profits and gains of business or profession”.

‘WHOLLY AND EXCLUSIVELY’

CIT v. RKKR Steels: Assessee claimed deduction for expenditure on travel costs and education of director’s
son in the US- he later joined company, although no prior agreement that he would join company, after
completing education. The Mad HC held there was no scheme that assessee company would send people
abroad for training and development- only done for convenience, and was expenditure on personal account,
and NOT wholly and exclusively for the purpose of business.

In CIT v. TS Hajee Moosa, dual purpose test laid down- patient was diabetic and wife sent with him to
business trip to take care of his health. SC held expenditure was for DUAL PURPOSE that is to satisfy
BOTH personal needs and for the purposes of business but not wholly and exclusively for the purpose of
business, thus does not satisfy 37 (1). Deduction not allowed.

Shanthi Bhushan v. CIT- assessee had open-heart surgery and claimed it as deduction, to carry out his
profession. Court rejected deduction- good health is desired by everyone and while it may help you earn
more, it is not connected to business.

PROHIBITED BY LAW-

S. 37 Explanation 1- offense or act prohibited by law cannot be claimed as deduction.

As per Haji Aziz & Abdul Shakeer Bros v. CIT- expenses which are permitted as deductions are such as
made for the purposes of business i.e., to enable a person to carry on and earn profits in the business.
Penalties which are incurred by assessee in proceedings launched against him for infarction of law cannot be
called commercial losses for the purpose of running business. Infarction of law is not a normal incidence of
business.

Jamna Auto Industries v. CIT- The phrase “wholly and exclusively” does not mean necessarily- can be
claimed even though there is no commercial necessity. The term ‘wholly’ refers to quantum of expenditure
and ‘exclusively’ refers to the motive, object and purpose of expenditure. The test for allowability of such
expenditure is to judge whether the expense has been incurred with the sole object of furthering trade or
business interest unalloyed or unmixed with any other consideration and that such consideration is justified or
necessitated by commercial expediency. Damages paid by assessee in ordinary course of business due to
failure to fulfill contractual obligation is a normal incident of business, and not opposed to public policy.
However, a penalty imposed by assessee due to conducting business in an unlawful manner is NOT a
commercial loss.

Malwa Vanaspati & Chemical Co v. CIT- We need to look at whether payment is compensatory (damages)
or penal in nature (fines). In case of composite payment, AO must segregate the amounts.

Apex Laboratories Ltd v. DCIT- Apex incurred expenditures towards gifting freebies to medical
practitioners for promoting the drug ‘Zincovit’. IMC Regulations disallowed doctors from accepting freebies
but pharmaceutical company claimed it does not prohibit them from gifting it. Held- pharma companies
gifting freebies is prohibited by law and undermines public policy, as it is a matter of great public importance
and concern, since doctor’s prescription can be manipulated and driven by motives to avail freebies. The ‘cost’
of freebies is not technically free, and cost of supplying such freebies is factored into drug prices, driving
them up and perpetuating injurious cycle.

CAPITAL GAINS

Charging provision S. 45(1)- capital gain is chargeable to income tax if following conditions are satisfied:

1) There is a capital asset

2) Assessee should transfer capital asset
3) Transfer of capital asset should take place during the PY
4) There should be gain or loss on account of such transfer of capital asset

As per 2(14)- capital asset includes asset of any kind whether or not connected with his business or
profession, and any securities held by a FII.

After Vodafone ruling- Explanation added- ‘property’ includes and shall be deemed to have included any
right in or in relation to an Indian company including rights of management or control or any other
rights whatsoever (Finance Act 2012).
IF Question is on Exceptions

Refer to exception to capital asset. One such exception is personal effects- i.e., movable property (including
wearing apparel and furniture), held for personal use by the assessee or any member of his family dependent
on him; but excludes jewellery.

To determine personal effect, court looks at whether it is used for business or profession- then NOT
personal effect. There must be an intimate connection between the effects and person- to render them
‘personal effects’.

As per Smt Shree Kumari Mundra v. CIT- the determining factor for personal effect is not appreciation of
value but intimate connection. Just because one is not using something on a daily basis does not mean it is
NOT a personal effect- depends on the nature of property. The frequency of use of the property must
necessarily depend on the nature of property. Merely owing to nature of property, it can be used for
ceremonial purposes only, it does not mean that property is not for personal use. Moreover, heirloom
jewellery was also meant for personal use, however, not meant for daily use but for only ceremonial occasions.
This does not deprive such jewellery of its character as jewellery meant for personal use.

Wide definition of ‘Capital assets; in CIT v. Siemens Nixdorf GMBH- a debt was sold off by assessee to
another company- and the difference in amount was the amount lent to SNISL and the consideration
received in selling off debt. Bombay HC relied on Vidur Patel case, and held that so far as meaning of
property is considered, it is well settled that it is a term of widest import and subject to any limitation which
the context may require, it signifies every possible interest which a person can hold or enjoy. Loan given to
SNISL was covered under ‘capital asset’ u/s. 2(14).

IF COMPUTATION PROVISION FAILS, THEN CHARGING PROVISION ALSO FAILS

S. 45 is the charging provision and S. 48 is the computation provision. If CG cannot be computed, it is

considered that the legislature did not intend to have the item taxed at all. This is because of the fundamental
principle that revenue receipts will be taxed unless specifically exempt and capital receipts are exempt unless
specifically taxable.

As per CIT v. BC Srinivasa- whether on transfer of ‘goodwill’, there is cost of acquisition. The court held
there is no cost of acquisition, thus computation provision does not apply. This is because various elements
go into composition of good will in different trade and cannot be stipulated- includes reputation, manner of
honoring deals and value may fluctuate- thus, CoA is difficult to arrive at. All transactions encompassed by S.
45 must fall under the governance of its computation provision. A transaction to which computation
provision cannot be applied, must be regarded as never intended by S. 45 to be subject to charge. Thus, the
charging section and computation provision together constitute an integrated unit.

Sri Krishna Dairy and Agriculture Farm: During PY- STCG for sale of calves were not reported- assessee
argued No COA, as calves were incidental to rearing as cattle- no intention to generate capital assets and came
only in the process of maintaining cattle. Held that cattle were capital assets but not calves, as CoA would not
be discernible. Animals in a breeding farm would be taken as ‘stock-in trade’ under PGBP.

CIT v. Ramaswamy Mudaliar- race horse purchased for 15000- sent to stud farm, where horse gave birth
to offspring, and the horse and offspring were sold for 50000. Assesseee contended costs for maintaining
horse at stud farm, and costs incurred on training and maintenance of offspring must be Cost of
Improvement. Held that trained animals fetch greater amounts than untrained animals, and amounts spent
should be included in CG- court conceded that expenditure incurred on horse whilst in stud farm should be
accounted for as value is increased.

TRANSFER- SEC 2(47)

Transfer in relation to capital asset includes

- The sale, exchange or relinquishment of the asset OR

- The extinguishment of any rights therein or
- The compulsory acquistion thereof under any law or
- In a case where the asset is converted by owner thereof into, or is treated by him as stock in trade of
business carried by him, such conversion or treatment or
- The maturity or redemption of zero coupon bond.

After the Vodafone ruling, Explanation 2 added as a clarificatory amendment (applies retrospectively).

“It is hereby clarified that ‘transfer’ includes and shall be deemed to have always included disposing of or
parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever,
directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether
entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been
effected or dependent upon or flowing from transfer of share or shares of company registered or
incorporated outside india”.

With this, we have explanation to 2(14)- property includes and shall be deemed to include any rights
(management, control etc) in relation to India company.

S. 47 lists transactions that are not ‘transfers’. To invoke S.45 (charging provision), there must be a transfer

CIT v. Rasiklal Maneklal- lays out important definitions. An exchange involves a transfer of ownership of
property by one person to another and reciprocally the transfer of another property by that other to the first
person- mutual transfer of ownership of one thing for the ownership of another. A relinquishment takes place
when the owner withdraws himself from the property or abandons his rights thereto. It presumes that
property continues to exist after relinquishment. In an amalgamation, there is neither exchange nor
relinquishment.

CIT v. Vania Silk Mills: Whether insurance money received on account of destruction of asset attracts CG
on account of transfer? SC held that it does not, as expression ‘extinguishment of rights therein’ requires such
extinguishment on account of transfer of asset, and not simply because asset is destroyed. The existence of an
asset at the time of transfer is a precondition and when the asset is destroyed, there is no question of transfer.

To sidestep this, even destruction due to riots, fire, floods etc., were included within S. 45.

The court in CIT v. Grace Collins does not approve of limitation of ‘on account of transfer’. The issue was
whether shares of amalgamated company received in the scheme of amalgamation, and subsequently sold is
transfer? The court held in the affirmative as allotment of shares within the scheme of amalgamation involves
‘ transfer’ within 2(47), being “extinguishment of rights therein” whether or not in account of transfer. SC
held definition of transfer clearly contemplates extinguishment of rights in capital asset DISTINCT AND
INDEPENDENT of and otherwise thereof than on account of transfer. It is not dependent upon ‘on
account of transfer’, as it would render definition ineffective or meaningless. Thus, rights stood extinguished
upon subsequent sale- although the sale was distinct and independent from the receipt of shares from the
scheme of amalgamation, it was held to be taxable.

JOINT DEVELOPMENT AGREEMENT

S. 2(47)(v) any transaction involving the allowing of possession of any immovable property to be taken or
retained in part performance of contract of the nature referred to in S. 53A of ToPA.
S. 53A TOPA- requires a contract in writing, to be registered and transferee must have taken possession of
property, performed or is willing to perform his part of the contract and transferor shall be debarred from
claiming any right in relation to property in possession of transferee.

In such JDAs people own properties or land that is not worthy of development or without wherewithal to
develop it, and such people are approached by builders or developers to develop it- the owner allows
developer to step into property and develop it, with the latter bearing all costs for construction and might
receive house/commercial space in the project.

The contention is regarding when the taxability of capital gains arises- as soon as possession is handed over or
actual development begins.

Possession to develop test: When the possession is handed over to developer under development
agreement, CG tax is chargeable in the year in which agreement is signed and possession is handed over to
developer. The fact that payment of consideration is deferred to future date is irrelevant. This was held in
Chatrubhuj Dawakardas Kapadia v. CIT and Potla Nageshwar Rao v. CIT.

Actual development test- where possession is handed over to developer under development agreement, and
from facts it can be inferred that developer has not performed part of contract, resulting into breach and
break down of development agreement- it does not satisfy S. 53A of ToPA, and thus, does not amount to
transfer. This was held in the Binjusaria Properties case, Vijaya Production v. ACIT and CIT v. Sadia
Sheikh.

For JDAs entered on or before 31.3.2017-

Retention of Control Test- where agreement only permits the development to be carried out by developer
while entire control over property is retained by the owner inasmuch as the license to construct and
occupancy certificate is given in the name of owner, mere execution of agreement would NOT amount to
transfer under S. 2(47)(v)- in the absence of possession as contemplated under S. 53A of TOPA.

Unregistered Agreement Test- where agreement has not been registered as per S. 53A ToPA- not transfer
under 2(47)(v)

IMP CASE- CIT v. Balbir Singh Maini (2017) - tripartite JDA- assessee, a society entered into JDA and
developer- the land was registered in the name of society, and developers were developing at their own cost,
after obtaining necessary approvals- and the third installment must only be paid upon grant of necessary
approvals. On whether S. 2(47)(v) applies? The SC held that on the reading of JDA, the owner continued to
be owner of property throughout development of property, and had at no stage sought to transfer rights
similar to ownership to developer. At most, only possession was given under argument and that too, for the
specific purpose of developing the property, as envisaged by the parties. Thus, 2(47)(v) will not apply.
Moreover, the JDA was never registered, and had no efficacy in the eyes of the law either.

On 2(47)(vi) (any transaction which has effect of transferring, or enabling enjoyment of, any immovable
property)- court held that object of 2(47(vi) is to bring within tax net a de facto transfer of any immovable
property and to tax transaction where title may not be transferred in law, but in substance, it is a transfer of
title in fact. Even this was not met.

On whether there is an accrual of income- there must be some ‘real income’ that must ‘arise’ on the
assumption that there is a transfer of capital assets, and this income must have ‘accrued’ or received u/ s. 48
as a result of transfer of capital asset- court considered ED Sassoon v. CIT- as per which, there must be a
right to receive income later on it being ascertained, and income may accrue to assessee even without actual
receipt of the same. There must be a debt owed to the assessee by somebody, and income must be ‘realizable’
and not hypothetical. The court held that the income from the transaction is hypothetical and not ‘realizable’-
as there was no debt owed to the assessee, and no right to receive income either.
Seshasayee Steels v. CIT: Assessee, entered into agreement to sell property to developers- pursuant to this,
Power of Attorney executed in favour of developer to present documents to competent authority to enable
sale. In this, assessee GAVE PERMISSION to developer to advertise, sell, construction on land. A memo of
compromise entered into by parties for payment of balance amount by post-dated cheques. Is it possible to
effect such transfer via compromise deed u/s. 2(47).

Here, SC held by ‘giving permission’ to the developer, a license was given to the developer upon the land for
the purpose of developing land into flats and selling the same. Such ‘license’ cannot be ‘possession’ in terms
of s. 53A, which denotes control over land and not actual physical occupation of land. Thus, 53A TOPA does
not apply and hence, 2(47)(v) does not apply. On whether 2(47)(vi) applies, the court relied on Balbir Singh
Maini, and referred to the object of the provision to bring u/ tax net- a de facto transfer of immovable
property and tax transactions where in substance, title is transferred. On the date of agreement to sell,
however, owner’s rights were completely intact- as to ownership and to possession even de facto- and thus, S.
2(47)(vi) not attracted.

On 2(47)(II)- SC held assessee’s rights in immovable property were extinguished on receipt of last cheque out
of compromise deed, and such a deed could be stated to be transaction effecting transfer of immovable
property in question.

VODAFONE CASE AND PROPOSED AMENDMENTS-

On ‘transfer’ of capital asset S. 2(47)- Bombay HC applied ‘nature and character of transaction’ test and
concluded that intrinsic to the transaction was a transfer of ‘other rights and entitlements’ which constituted
capital asset. The SC viewed the transaction from a commercial and realistic perspective- held it to be genuine
transfer with regards to holding structure as Cayman island company (CGP) was not a sham company. The
case was about ‘share sale’ and not ‘asset sale’.

On S. 9(1)- heart of controversy as it allows for income ‘directly or indirectly; but does not refer to indirect
transfer. Bombay HC held income from sale of CGP shares fell within ambit of S.9 as it provides for ‘look
through’ approach, as transaction between Vodafone and Hutch has been transacted overseas, and underlying
assets/business of HEL is in India and gains from transfer should be subjected to CG tax in India. However,
SC held S. 9 cannot be extended to cover indirect transfer of CG, as it was not the law at the period of time,
and ‘indirect transfers’ not within ambit of S. 9(1)(i). The language of the provision is clear and unambiguous-
and for the situs, it is the place of incorporation and not location of the underlying assets. There must be
three elements- 1) transfer 2) existence of capital asset and 3) location of such assets in India should exist to
conclude income accrued or deemed to accrue or arise in India under S. 9. The ‘look at’ approach needs to be
adopted other than ‘look through’.

To sidestep this decision- clarificatory explanations were brought in via amendments which apply
retrospectively (not looked at favorably in a tax statute). It undoes SC ruling in Vodafone. As per this, even
when capital asset is a share of a non-resident company that is deriving its value directly or indirectly
substantially from assets located in India- it is deemed to be located in India. This undoes the ‘situs of sale’
decision of SC. Explanations 4, 5, 6 added. ‘Income derived substantially from assets (whether tangible or
intangible) located in India, if on specified date- it exceeds amount of 10 cr, represents at least 50 perc of
value of all assets owned by company or entity; the value of asset shall be FMV as on specified date without
reduction of liabilities. Explanation 7 also added.

Then, Taxation (Amendment) Act, 2021- revoked retroactive application of ‘indirect’ transfer provision-
would not apply prior to 28 May, 2012.

EXEMPTIONS

S. 54- Exemptions in respect of transfer of residential house-

that is gain that an assessee (individuals or HUF) may have made for the transfer of residential house and this
gain is invested in another residential house. Certain conditions must be fulfilled:

- Assessee being individual or HUF transfer of LTCA- being buildings or land appurtenant thereto;
and being a residential house.
- Utilized the amount of LTCA for purpose of purchase of house within 1 yr before or 2 yrs after date
of transfer or
- Constructed a house and construction is completed within a period of 3 years.
- LTGC would be allowed to be exempt to the amount of utilization.

Disqualifications- 54F- owns more than one residential house, purchases any residential house other than new
asset within 1 year of transfer of original asset- constructs any new residential house other than new asset
within 3 years.

CIT v. Gita Duggal: Assessee built house with separate and independent units and since statute allows for
one house so AO claimed assessee has virtually constructed two houses with separate entrances and thus,
cannot claim exemption. Delhi HC held that S. 54/54F uses the expression ‘residential house’ and not
‘residential unit’. S.54 requires assessee to acquire residential house and as long as assessee acquires building
which may be constructed for sake of convenience, in such manner as to consist several units which can, if
need arises, be conveniently and independently used as an independent residence, the requirement of the
provision is satisfied. Nothing in section to require residential house to be constructed in a particular manner-
ONLY requirement is must be for residential use and NOT commercial use. Thus, physical structuring of
new residential house, does not come in the way of considering building as ‘residential house’. House
consisting of independent units does not act as an impediment to allow deduction u/ 54/54F.

Clubbing Provision- S. 60-64

Transfer of income without transfer of assets (s. 60)

S. 60 applicable where the actual owner of assets transfers income of such asset to reduce its liabilities-
transferred income is clubbed back with income of the actual owner and meaning of transfer: for the
purpose of section 60, 61 and 62, transfer includes any settlement, trust, covenant, agreement or arrangement.

S. 61- revocable transfer of assets- When an individual is assessable in respect of remuneration of spouse (s.
64 (1)(ii))

- in computing the total income of any individual, there shall be included all such income as arises
directly or indirectly

- to the spouse of such Individual by way of salary, commission, fees or any other form of
remuneration whether in cash or in kind from a concern in which such individual has a substantial
interest.

- Provided that nothing in this clause shall apply in relation to any income arising to the spouse where
the spouse possesses technical or professional qualifications and the income is solely attributable to
the application of his or her technical or professional knowledge and experience

The term ‘technical or professional qualifications’ is not defined. However, the proviso contemplates 2
conditions- spouse MUST POSSESS technical or professional qualifications AND income derived by him or
her must be SOLELY ATTRIBUTABLE to the professional or technical qualification. Such qualification
must relate to the post she occupies AND salary or fee must be attributable to the application of his or her
professional or technical qualification.
JM Monakshi v. CIT- assessee employed wife as receptionist cum accountant and paid salary- she had only
completed first year of BA. The court held that the two conditions mentioned in the proviso are
CUMULATIVE and not alternative. They both deal with two different aspects- one deals with eligibility of
spouse to claim benefit of proviso and the other deals with income which would qualify for exclusion from
clubbing- BOTH relevant and important. In this case, both are not fulfilled.

Yashwant Chhajta v. DCIT- mere possession of professional or technical qualification cannot provide
exception under clubbing provision, if evidence of application of such technical or professional
knowledge and experience is absent. The evidence with regards to the fulfillment of both these conditions
must be produced.

CIT v. CM Kothari- Here, the firms had debited certain amounts in their bank account. At one instance it
was observed that the son had given some money to the mother on her birthday and the father-in-law gave
some money for Diwali. The mother and the daughter-in-law then used this money to purchase the house.
Here, we see that they are not only opting for an indirect route, but it is transpiring into a tax avoidance
mechanism. The court is unraveling such a transaction, to bring it under the clubbing provision.

The court held that it is true that the section says that the assets must be those of the husband, but it does not
mean that the same assets should reach the wife. It may be that the assets in the course of being transferred,
may be changed deliberately into assets of a like value of another person, as has happened in the present case.
A chain of transfers, if not comprehended by the word "Indirectly' would easily defeat the object of the law
which is to tax the income of the wife in the hands of the husband, if the income of the wife arises to her
from assets transferred by the husband. The present case is an admirable instance of how indirect transfers
can be made by substituting the assets of another person who has benefited to the same or nearly the same
extent from assets transferred to him by the husband.

Clubbing of income of minor child (S. 64(1A))- Refer to exceptions

CIT v. Smt. Pelleti Srideramma- assessee made cash gift to minor son which was immediately utilized for
purchasing house- used for business and later sold off. The court held it was only a case of substitution of
one form of property by another form of property, and CG arising out of the transaction was assessable in
the hands of assessee.

INCOME FROM OTHER SOURCES

Charging Provision- Sec. 56(1): Such income is not chargeable to tax under any first four head viz., Income
from Salaries, Income from House Property, Profit and Gain of Business and Profession and Capital Gains. It
is therefore, a residuary head of income.

Winnings from Lotteries, Crossword Puzzles, Races including horse races, Card Games, Gambling or Betting
[Sec. 56(2)(iv)]: Section 115BB (inserted by the Finance Act, 1986) provides that winnings shall be taxed at
30%. Games of skill and chance also have differentiation.

CIT v. KR Kartikeyan- assessee participated in a motor rally, and won it, the prize money was included by
ITO as ‘income’. SC held that the words “other games of any sort” in s. 2(24)(ix) are of a wide amplitude.
Their meaning is not confined to games of a gambling nature, also includes games of a non-gambling nature.
The motor rally was not a race but a contest- and the assessee entered the contest to win it, and to win the
first prize, was in ‘return’ for his skill and endurance. Even if receipt does not fall under any of the sub-clauses
u/s. 2(24), it might still be income. The idea behind an inclusive definition in S. 2(24), is not to limit its
meaning but to widen its net. The word ‘income’ is of widest amplitude, and it must be given its natural and
grammatical meaning. Thus, receipt in this case, was income.

Dr. K.R Lakshmanan v. State of Tamil Nadu- Gambling is the payment of price for a chance to win a
prize. Games may be of chance, or of skill or of skill and chance combined. A game of chance is determined
entirely or in part by a lot by mere luck. The throw of the dice, turning of the wheel, shuffling of cards are all
modes of chance- wholly uncertain and doubtful. No human mind knows or can know what it will be until
the dice is thrown, wheel stops etc. A game of skill on the other hand- although an element of chance cannot
necessarily be eliminated- depends principally upon the superior knowledge, training, attention, experience
and adroitness of the player. Golf, chess and even rummy are games of skill. There are few games, which
consist purely of chance or skill and as such a game of chance is one in which element of chance
predominates over element of skill, and a game of skill is one in which element of skill predominates over
element of chance. It is the ‘dominant element’- skill or chance which determines the character of the game.

DIVIDEND

Dividend- sum paid to or received by a shareholder proportionate to his shareholding in a company out of
the total sum distributed. The burden is now on shareholders and NOT the companies. Even though
company is a separate legal entity from its shareholders, it is the natural person that ultimately bears the tax
on accumulated profits. DDT (abolished by Finance Act, 2020) was argued to be an instance of double
taxation by some scholars, because companies were subject to corporate tax and then, shareholders would be
subject to DDT. An argument can also be made along the lines of administrative convenience, a canon of
taxation, which entails that it is far easier to collect tax from companies, as opposed to shareholders who
would be distributed all over the place. The earlier version of DDT was imposed on the companies and the
burden could not be passed on to the shareholders. It was noted that High Net-worth Individuals who were
earning passive income through dividends were paying lower amounts of tax than other counterparts.

S. 2(24)(iii) defines ‘income’ and includes ‘dividend’. S. 2(22) defines ‘dividend’ in an inclusive manner- S. 8
fixes year in which dividend income is taxable.

In CIT v. Nalin Behari Lall Singha, SC held that distribution of dividend by a company being a share out
of the profits declared as distributable by shareholders, shall NOT be impressed with the character of the
profits from which it reaches the shareholders. If a company is raising the profit through agriculture, the
dividend would no longer retain the character of income from agriculture and thus, tax benefits cannot be
availed.

Bacha S. Guzdar v. CIT: Once any income is thrown into the common stock of profits from which
dividends are distributed, it loses its character based on the source from which it is derived.

On Advance or Loan

S. 2 (22)(e)- Conditions for application: • The company making the payment is one in which public are not
substantially interested le if a company is a closely held company

• Money should be paid by the company to a shareholder holding not less than 10 per cent of the voting
power of the said company. It would make no difference if the payment was out of the assets of the company
or otherwise

° The money should be paid either by way of an advance or loan or it may be 'any payment which the
company may make on behalf of or for the individual benefit of any shareholder or also to any concern in
which such shareholder is a member or a partner and in which he is substantially interested

• these payments must be to the extent of accumulated profits, possessed by such a company. accumulated
profits represent the profits as at the beginning of the year and does not include the current profits

The two exceptions to the aforementioned regime of Section 2(22)(e)- Loan made by a company in ordinary
course of business AND money lending is a substantial part of the company’s business.
When we are referring to the term ‘loan’, it refers to a positive act of lending, with interest payments.
‘Advances’ is the money paid in advance, in anticipation for a service or product which we will eventually
receive. Keeping in conjunction with the section- the word ‘advances’ must be read in conjunction with ‘loan’-
as ‘loan advances’. Loan advances mean something which is due to a person but which is paid to him ahead
of the time when it is due to be paid (CIT v. Srinivasan K). Usually loan involves positive act of lending
coupled with acceptance by other side of money as loan- carries an interest with obligation of repayment. The
term ‘advance’ may or may not include an obligation of repayment- if it does, then it would be a loan.

Courts have taken a strict view in interpreting the provision. Even when there is a an obligation of repayment
in the future- the year in which deemed dividend was received will see attraction of tax liability.

MP Jindal v. CIT- ‘Advance in kind’: The assessee was MD of a pvt ltd co., carrying on business in iron
materials. His wife was the other director. Assessee purchased 2 adjacent plots in name of himself, his wife
and his 2 minor sons. As assessee was contemplating selling flats in future, the couple entered into agreement
with company to sell 6 flats at 3.95 lakhs., to the company. Company gave iron rods worth 1.80 lakhs, in order
to facilitate them to construct the building.

Held: Company was carrying on business in iron materials. Iron rods were given to the assessee and his wife
who controlled the company for the construction of the house which again belonged to the assessee, his wife
and his 2 minor children. Assessee received value of the minerals, and the sum was thus, paid by company as
ADVANCE- S. 2(22)(e) makes it clear that any payment by any company of any sum representing a part of
the assets by way of advance would come within the mischief of this section. Moreover, by debiting the sum
in an account titled ‘Purchase of flats Account’ and not in any account of the assessee or his wife- REAL
INTENTION behind the transaction cannot be concealed.

CIT v. PK Abubucker- Company required premises as godown and gave 10 lakhs in advance for
construction of the building. AO- loan and deemed dividend. Assessee argued NOT deemed dividend since
rent would be adjustable and an element of repayment was present. Held- Loan or advance may
ULTIMATELY have been repaid or adjusted, but that will not alter the fact that assessee had received
dividend from company during the relevant accounting period.

The question now turns on interest-free or subsidized loans given to employees / directors to retain them.
One will have to furnish evidence that the company has this kind of scheme or does so in its ordinary course
of business. We should take into account trade advances and the jurisprudence which says that inter-corporate
loans should be considered as deemed dividend.

CIT v. Creative Dyeing & Printing Ltd- ‘Trade Advances do not amount to deemed dividend’- S. 2(22)(e)
can be applied to ‘Loans’ or ‘Advances’ simpliciter and NOT to transactions carried out in course of business
as such. In the course of carrying on business transaction between company and shareholder, the company
may be required to give advance in mutual interest- NO legal bar on such transactions. The ‘PURPOSE’ of
the advance must be ascertained. If the advance is given as an advance simpliciter or as such per se without
any further obligation behind receiving such advances, may be treated as ‘deemed dividend’, but if otherwise,
the amount given cannot be branded as deemed dividend u/s. 2(22)(e). If it is for business purposes, then it
would not be ‘deemed dividend’.

If there is an obligation or business strategy that is appended to the transaction, it cannot be considered as a
deemed dividend. It will be treated as a trade advance instead. A careful factual analysis is warranted in each
of these cases and this a difficult question to which a straightforward answer is not available. Essentially, if it is
a genuine commercial transaction having a commercial purpose of its own, it would be a trade advance.

CIT v. Atul Engineering Udyog [2015] 228 Taxman 295 (Allahabad)- deals with treatment of
inter-corporate deposits: There is a difference between loan and deposit. The word "loan" means anything
lent, especially money on interest. In the case of a loan, it is the borrower at whose instance and for whose
needs the money is advanced. The borrowing is primarily for the benefit of the borrower although the
person, who lends the money, may also stand to gain by earning interest on the amount lent. On the other
hand, "deposit" means something which is deposited or put down, namely, a sum of money paid to secure an
article, service, etc. The delivery of money is usually at the instance of the giver and it is for the benefit of the
person who deposits the money. The benefit normally being earning of interest from the party who accepts
the deposit. The deposit could also be for safe keeping or as a security for the performance of an obligation
undertaken by the depositor. Another distinction is the obligation to return the money so received. In the
case of a deposit, the deposit becomes payable when a demand is made and, in the case of the "loan", the
obligation to repay the amount arises immediately on receipt of the loan. The deposit made by the sister
concern was a business transaction arising in the normal course of business between the two concerns- thus,
not deemed dividend.

Tax Avoidance

Royalty Income

S. 9 (1)(vi)- a) By government
b) Under section 9(1)(vi) of Income Tax Act, royalty payable by a person , who is a resident in
India, to a non-resident , shall be deemed to accrue or arise in India , unless it falls under the following two
exceptions : –
● Where it is payable for the transfer of any right or the use of any property or information or for
the utilization of services for the purposes of a business or profession carried on by such person
outside India.
● Where it is payable for the purposes of making or earning any income from any source outside
India.

c) Royalty payable by a one non-resident to another non-resident shall be deemed to accrue or arise
in India only when any of the following conditions are satisfied : –

● Royalty is payable in respect of any right, property or information used for purposes of a
business or profession carried on in India or
● Royalty is payable in respect of services utilized for purposes of a business or profession carried
on in India; or
● Royalty is payable for the purposes of making or earning any income from any source in India.

Imp- Explanation 2 to sec.9(1) (vi)- the use of any patent, invention, model, design, secret formula or process
or trade mark or similar property

Imp Case:

Asia Satellite Telecommunication v. DIT (Delhi HC)- Assessee, HK company carried on business of
private satellite communications and broadcasting facilities- satellites launched by assessee and placed in orbits
(not over India)- ONLY link with India was the footprint area (area of the earth’s surface over which the
signals are relayed from the satellite)- covered Indian territory. Assessee entered into agreement with TV
channels who wished to use transponder capacity on its satellite to amplify their signals and relay it down to
cable TV networks. The only Indian connect was Indian viewers. AO contended that for these payments
made within the footprint area in India- broadcasting capacities should be assessed in India. CIT decided that
assessee had NO AGREEMENT with any Indian Company and was not rendering any service to any Indian
company, thus NO BUSINESS CONNECTION IN INDIA. The mere fact that the assessee put in place a
satellite that downlinked signals that were received in Indian territory did not result in interference in
assessee’s business operations in India. Thus, no business income out of 9(1).
On a secret process- CIT held customers were using a secret process put in place in the transponder and the
payments were being made for that purpose and not merely the use of a physical asset. Thus, taxable as
royalty u/ Expl. 2 of S. 9(1)(vi)- and the term ‘process’ need not necessarily be a secret process, as ‘secret’
only qualifies ‘formula’. Del HC- Held- NO use of ‘PROCESS’ by the TV channel, and no purported use
took place in india. The telecast companies/customers were outside India and so was assesseee- even
agreement was executed abroad under which services were provided. Merely because footprint area included
India and ultimate consumers/viewers were watching in India- even in cases where the signals were relayed
and uplinked outside India- it does not mean that assessee carried out business operations in India. The
characterisation of the income was merely ‘use of transponder facility for service’ and footprint is not enough,
as there is no ‘process’.

Following this, an Explanation 6 was brought in with the Amendment (Finance Act 2012):
Explanation 6. For the removal of doubts, it is hereby clarified that the expression "process" includes and
shall be deemed to have always included transmission by satellite (including up-linking, amplification,
conversion for down-linking of any signal), cable, optic fiber or by any other similar technology, whether or
not such process is secret.
Even if it is not ‘secret’, as long as it is a process it can be taxed.
AMENDMENTS VIS-A-VIS DTAA- The taxability of this income rests purely on the interpretation of the
DTAA.

CIT v. New Skies Satellite, assessee incorporated in Netherlands- engages in providing digital broadcasting
services, and derives income from “lease of transponders” of its satellites. This lease is for relaying signals of
customers of both resident and NR TV channels. Due to the footprint area of the satellites over India, they
were sought to be taxed. Revenue contended that due to the 2012 amendment, Asia Satellite ruling was
undone, and amendment being clarificatory applies to all transactions past and present. Assessee argued that
it is not possible for one nation, by way of unilateral amendment to tax income which is otherwise not subject
to tax u/India-Netherlands DTAA.

Assessee argued clarificatory amendment was used to impose retrospective taxability- and when clarificatory
amendments in its true nature seek to expand scope of the section and introduce new principles, upon which
liabilities may arise, cannot be applied retrospectively. In the guise of ‘clarificatory’, they are in fact
‘transformative’ substantive amendments. The Delhi HC did not rule on this, and left it undecided.

On reading Amendment-vis-a-vis DTAA- the court upheld the assessee's contention that no amendment,
whether retrospective or prospective, can be read in a manner to extend the operation of the DTAA. Treaties
create a bifurcation b/w terms defined by it, and those that are undefined: When there exists NO definition
of a word within DTAA itself, regard is to be had to the laws in force in the jurisdiction of the State
interpreting the word. When there exists a definition of a term within DTAA- there is no need to refer to the
laws in force in the Contracting States, to deduce the meaning of the definition under the DTAA, and the
taxability of the income- the DTAA is enough.

Delhi HC held that a treaty is a carefully negotiated bargain between two states, and NO one party can amend
the treaty by employing domestic law and annul the economic bargain. The principle is reciprocal. Unless
DTAA is amended jointly by the parties to incorporate income from data transmission services as royalty, or
amend definition of income- Explanation 4,5,6 to S. 9(1)(vi)- via Finance Act would not affect meaning of
royalty u/ Art. 12 of India-Thailand DTAA.

On the missing comma- DTAA- ‘secret formula, and process’ & Income Tax Act- ‘secret formula and
process’. While punctuation aids in arriving at correct construction, yet it cannot control clear meaning of
statutory provision. The test to determine whether the statute is carefully (consciously) punctuated or not
would be to see what the consequence would be, if punctuated otherwise. Instead of the ‘grammatical sense,
we have to look at ‘legal consequences’ of the punctuation and whether the lack of a comma gives rise to a
diametrically opposite consequence or large variation in taxing powers.

Software- Copyright or Copyrighted Article

Software may be described as a program, or series of programs, containing instructions for a computer
required either for the operational processes of the computer itself or for the accomplishment of other tasks.
It can be transferred through a variety of media- CD-rom, disk etc. ‘Computer software’- commonly used to
describe both the platform-in which the IPR subsist and the medium on which it is embodied. Characterising
it as ‘royalty’ removes requjirement of PE. The nature of the rights that transferee acquires under the
arrangement regarding use and exploitation of software programme determines the character of payment
received for transfer of software. Transfer of rights in relation to software occurs in many different ways such
as alienation of the entire rights in the copyright in a program, or sale of a product subject to the restrictions
put forth. The End-User License Agreement- non-exclusive, non-transferable right to use the software. It
is the copyrighted article and not the copyright itself. It is a non-exclusive, non-transferable software license
without the right to sub-license. This is used by assessee to contend that there is no license or copyright, only
licensed/ copyrighted article- thus no need to pay ‘royalty’, and thus, only ‘business income’. Revenue
authorities contend that a license to use the software is being granted, and in its absence, one cannot exploit
software and thus, it is a copyright that is transferred- royalty payment.

Karnataka HC- difference between copyright or copyrighted article is IRRELEVANT in the light of ITA
provisions and thus, construe as royalty income. CIT v. Samsung Electronics

Del HC- read Copyright Act w/ITA- sale of copyrighted article not amounting to royalty- Motorola v.
DCIT.

Engineering Analysis Centre for Excellence v. CIT: Copyright means ‘exclusive right’ u/s. 14 of the
Copyright Act to do or authorize doing of certain acts in respect of work including computer programme,
and provides exclusive right to reproduce a computer programme to exploit it by way of sale, transfer, license.
The Act allows assignment of the right, and if the assessee becomes owner of right, then royalty becomes
payable. A DISTRIBUTION AGREEMENT only provides a non-exclusive, non-transferable right to resell
computer software, it being expressly stipulated that no copyright in the computer programme is transferred
either to distributor or to ultimate end-user. Apart from the right to use the computer programme by the
end-user himself, there is no right to sub-license or transfer. There is no right to reverse-engineer, modify,
reproduce the software otherwise than permitted to the extent of license.

Thus, the license granted under EULA- owner does not part with rights under Copyright Act but only puts
restrictions upon the end user on use of the software. Thus, based on Copyright Act and EULA terms- held
that copy/use/distribution of software NOT royalty under DTAA.

Fair Technical Services

Sec.9(1)(vii) FTS income would be taxable in India if payable to the nonresident by the following:
a) the Government or
b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or
profession carried on by such person outside India or for the purposes of making or earning any income
from any source outside India Or
c) a person who is a non-resident, where the fees are payable in respect of services utilized in a business or
profession carried on by such person in India or for the purposes of making or earning any income from any
source in India;
Step 1- Characterise whether service falls within Definition- FTS defn- Explanation 2 to s. 9(1)(vi)- FTS
means consideration (including lump sum consideration) for rendering any managerial, technical, or
consultancy services (including provision of services of technical or other personnel), but does not include
consideration for any construction, assembly etc under ‘Salaries’. Imp elements to be ‘read into’ the definition
includes- mere use of sophisticated equipment and technology does not mean that what was provided was
technical service, there must be human intervention and NOT automated. FTS is special and exclusive to the
seeker of such service, and standardized services, something done for all is not a service. In Kotak Securities
case, SC held that “managerial and consultancy services” and “technical services” involve services rendered
by human efforts.
To distinguish between FTS and ‘business income’, we have to apply business connection test- systemic,
continuous, organized manner with a profit motive- then, there must be a PE. If there is no such PE, then
can use FTS- utilization of service in India is sufficient to tax.
Step 2- FTA u/DTAA- Look at the definition of FTS in DTAA- some DTAAs come with a ‘make available
clause’. The make-available clause means that by ‘making available’ the skill or knowledge must be imparted to
the client that even after one left, the client should be able to make use of the skil or knowledge. The payer of
service should derive an enduring benefit in the future, and utilize knowledge or know-how on its own
without the aid of the service provider. The technical knowledge or skill of the provider should be
IMPARTED to and ABSORBED by the receiver so that the receiver can deploy similar technology or
techniques in the future, without depending upon the provider.
Here, CIT v. De Beers India Minerals Pvt Ltd., becomes relevant. For the assessee to carry out mining
and procure geophysical surveys, a company based in Netherlands, Fugro provided services of conducting air
borne survey for high quality, high resolution, geophysical data suitable for identifying targets. SC held-
technology will be considered ‘made available’ when the person who received service is enabled to apply the
technology. To attract tax liability, that technical knowledge, experience, skill, know how or process which is
used by service provider to render service should also be made available to the recipient- so that recipient also
acquires technical knowledge, experience,skill, know how or processes so as to render technical services.
However, if technology is not made available along with technical services and ONLY technical services is
being rendered with technical knowledge being withheld, then such service falls outside definition of FTS u/
Art/ 12 of India-Netherlands DTAA.