No VAT on duty-free shop sales

The Supreme Court in the case of Hotel Ashoka Vs ACCT (2012 -TMI – 209720) held that VAT is not payable on sale of goods by duty free shops at international airports since such transactions take place beyond/outside the custom frontiers of India.

It is to be noted that Section 5 of Central Sales Tax Act exempts the sale of goods by transfer of document to title to goods before the goods have crossed the customs frontiers of India. The authorities contended that such sales can only be claimed to be VAT exempt, if it is effected by transfer of documents of title to goods and not by giving physical possession of goods to customers. The apex court did not agree to this proposition and held otherwise.

The decision comes as a relief to several such duty free shops as it puts the issue, which was being picked up by several States, to rest.

Will Pranab bring cheer to aam aadmi?

With budget round the corner, there is now increased interest among hacks to predict by how much the income tax slabs will be raised in the upcoming Finance Bill. Their inclination has been to build up expectations.

However, the buzz is that the Finance Minister may not shower a largesse on salaried taxpayers this time. This is despite the crippling inflation and the fact that there has been negligible salary hike for workers in most industries. The official inflation levels have been around 9 per cent for most part of 2011-12.

If past trends are anything to go by, the tax exemption limit (under the income slabs) may go up by a few thousand rupees. The Minister might however look at a significant hike to the deduction limits for investments in savings and insurance instruments besides infrastructure related bonds. On its part, the Standing committee is likely to recommend in its report on DTC a good deal for the booming Indian middle class. All eyes are on the Standing Committee which is expected to finalise its report on March 2. With DTC likely to come into effect only on April 1, 2013, rich tidings will continue for the taxman for one more year!

Thorny issues on setting off business losses

Recently in the case of Nandi Steels Ltd, the Bangalore Tribunal ruled that brought-forward business loss cannot be set off against capital gains arising on sale of assets used for business. The Tribunal rejected the assessee's argument that gains arising from the sale of capital assets used for business purposes should be treated as profits of a business, though it is assessable under the head ‘capital gains'.

The tax department was of the view that merely because there is a nexus between the business carried on by the taxpayer and the assets sold, the gains on the sale of such assets cannot get the character of business income. It should be noted that under Section 72 of the Income-Tax Act, the carried forward business losses can be set off only against profits from the business in the subsequent years. Also, any gains arising on sale of capital assets are taxable under the heading ‘capital gains' irrespective of its purpose or usage.

Adjustment issues on transfer pricing

Economic adjustments are important in eliminating material differences in functions, assets and risks between the taxpayer and comparables to increase comparability.

The Pune Tribunal, in a welcome ruling in the case of Demag Cranes & Components (India) Private Limited (ITA No. 120/PN/2011), permitted such working-capital adjustments to the margins of the comparable uncontrolled transactions to generate credible comparability data while applying the Transactional Net Margin Method, specifically when the difference is likely to materially affect the price/profit margin of relevant transactions in the open market.

The Bangalore Tribunal, in the case of Genisys Integrating Systems (India) Private Limited (2011-TII-96-ITAT-BANG-TP), ruled on certain critical issues and held that TP adjustments should be restricted to the taxpayer's international transactions only; if loss-making companies are excluded as comparables, then companies earning super-normal profit margins should also be excluded.

In addition, it was also held that a turnover range of 10 million to 2,000 million must be applied for better comparability, and the taxpayer should be given a fair opportunity of hearing on any information that is sought to be used against the taxpayer. The Mumbai Tribunal, in an interesting judgment in the case of Phoenix Mecano (India) Limited (ITA No 7646/Mum/2011), in addition to ruling on certain core TP issues, also ruled that merely because a TP adjustment is made, entire books of accounts should not be rejected without pointing out specific defects in accounts.

COMMENT NOW