How far back will the taxman go?

In a move to quash doubts raised by retrospective amendments concerning re-opening of assessments, the Central Board of Direct Taxes issued a circular on May 29. It clarified that the tax department would not reopen assessments simply on account of retrospective/ clarificatory amendments introduced by the Finance Act, 2012 if the regular assessment proceedings have been completed before April 1 and no notice has been issued for re-assessment before that date.

The interesting point for consideration is how far revenue can enforce these retrospective amendments/ clarifications to Sec 2(14), 2(47), Sec 9 and Sec 195, which have retrospective effect from April 1, 1962 or April 1, 1976 — meaning that these amendments/ clarifications had been part of the Act from that very date with no such extension of time in section 147 /148 for reopening of assessment. In short, the tax authorities can go back to a maximum of seven years from the end of the tax year to reopen past cases.

Tax windfall from transponder leases

Taxability of royalty has been highly litigative ever since it was introduced by Finance Act, 1976 in the Income Tax Act, 1961. The definition of royalty under the Act is much more comprehensive when compared to most DTAAs (Double Taxation Avoidance Agreement), which appear to be just a subset of the former.

In the latest Finance Act, 2012, the Government has widened the latitude of royalty through several retroactive clarifications. One such clarification is that the expression “process” includes transmission by satellite, cable, optic fibre and any other similar technology.

The above amendment poses a setback for satellite operators and is likely to bring the much talked about “transponder lease contracts” under the purview of taxation. Under the contract, satellite operators allow TV channels to use transponder for amplification, down-linking signal (programme), and relaying the amplified programme over the desired footprint area (India included).

The above use of transponders, which the Delhi High Court in 2011 held was not covered under the definition of royalty in the case of Asia Satellite Telecommunications Co Ltd (197 Taxman 263), has now been brought under the scope of royalty.

Twist in the royalty tale

Recently, in the B4U International Holdings Ltd case, the Mumbai Income Tax Appellate Tribunal (ITAT) held that satellite payments would not be taxed as royalty under section 9(1)(vi), snubbing the retrospective amendments by the Finance Act, 2012, and holding that the retrospective amendment will have no bearing as there was no change in the relevant DTAA (between the US and India in the present case) and the beneficial provisions of DTAA will be applicable under section 90(2) of the Act. The verdict has both the taxman and the taxpayer worried.

It would appear that the overenthusiastic taxman forgot about the DTAA, which defines “royalty” similar to the unamended section 9(1)(vi).

Now the question is whether this verdict will prove to be a respite for the assessee, or the Government would make another move. One way would be to amend each of the DTAAs to bring it in line with the amendments made to section 9(1)(vi); the other would be to look at an indirect change in the Indian Copyright Act, which most Courts have relied upon .

So, tighten your belt for yet another retrospective amendment that may nullify the B4U International verdict!

Making sense of a composite contract

Recently, in the case of Alstom Transport SA and Roxar Maximum Reservoir, the Authority for Advance Ruling held that a composite contract cannot be split to exempt profits from offshore supply of goods, and that a joint contract constitutes an Association of Person despite separate responsibility of parties.

Earlier, in the Ishikawajima–Harima 288 ITR 408 (SC), Hyundai Heavy Industries 291 ITR 482 (SC) and Hyosung Corp 341 ITR 18 (AAR), it was held that that a composite contract could be dissected, and that it was open to the assessee to treat parts of the contract separately for its taxability.

However, the AAR ruled that this is no longer feasible in view of the larger (three) bench decision in Vodafone International Holdings, which held that the transaction has to be looked at as a whole, and not by adopting a dissecting approach. The basic principle in interpretation of a contract is to read it as a whole and to construe all its terms in the context of the object sought to be achieved. Reading parts of the contract as imposing distinct obligations is not the right way to understand a composite contract.

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