Shri. S. E. Dastur, eminent Senior Advocate, gave a lecture yesterday (20.3.2012) where he meticulously analyzed the Finance Bill 2012 and provided brilliant insights into its implications.

On the retrospective amendments made to overcome the judgement of the Supreme Court in Vodafone International vs. UOI 341 ITR 1, Mr. Dastur pointed out that while parliament had the power to enact retrospective legislation, there were three aspects to be considered.

Br. Veerabhadrappa, the Officiating President of the Income Tax Appellate Tribunal, Br. Manmohan, Vice-President of the Mumbai Zone, my esteemed erstwhile colleagues, and the newly appointed Members of the Tribunal:

A very good afternoon to all of you. It is a privilege accorded to me very kindly by Bro. Veerabhadrappa to address the newly appointed members of the Tribunal. The Tribunal is close to my heart for several reasons. I spent close to 20 years here and I tell you, those were some of the very best years of my life. Besides giving me a sense of satisfaction so far as the work aspect is concerned, it also gave me an exposure which otherwise I may not have had. I worked in several places of the country and both I and my family could imbibe the various cultural hues and enjoy the pleasure of meeting myriad kinds of our countrymen. The Tribunal was so kind to me. I had the benefit of sitting with several members coming from different social, cultural and career backgrounds. I learnt from every one of them. Every one of them, without exception, was considerate and kind to me and my family. The Tribunal has always been one family and I indulged in the brotherhood prevalent here. I therefore consider it my duty to be able to contribute whatever you think I can, to the institution I served.

Before the advent of East India Company judgement writing was not as important as it is now. The decisions were rendered by Kings or Juries/Panchayats, who need to do no more than sum up, as briefly as possible. Under the common law system all the developed and developing countries are following the precedent based approach and there are hierarchy of courts. In order to enable an appellate court to understand as to why a judgement is rendered in a particular manner, the judge must now prepare the judgement often at considerable length.

Prashant Bhushan, legal crusader, has launched a scathing criticism of the judgement of the Supreme Court in Vodafone International vs. UOI. In an article published in the Hindu, Prashant Bhushan argues that the Supreme Court has again made a wrong call on tax avoidance and set a precedent that jeopardises thousands of crores of potential revenue for the exchequer.

Prashant Bhushan points out that tax avoidance through artificial devices has become a very lucrative industry today and that a large part of the income of the ‘Big 5′ accountancy and consultancy firms is derived from such schemes. McDowell 154 ITR 148 (SC) had put the issue in the correct perspective, though two later decisions (Azadi Bachao Andolan & Wallfort) reverted to calling artificial tax avoidance devices “legitimate tax planning” rues Prashant Bhushan.

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Core Principles of Law laid down by the Supreme Court in Vodafone International Holdings B.V. vs. UOI

(A) Tax planning vs. Tax Evasion:

(1) The cardinal principle is that if a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. A document or a transaction cannot be looked at isolated from the context to which it properly belonged. It is the task of the Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. This is the “Look At” principle. The Revenue cannot start with the question as to whether the transaction was a tax deferment/saving device but that the Revenue should apply the “look at” test to ascertain its true legal nature. Genuine strategic planning had not been abandoned and it cannot be said that all tax planning is illegal/ illegitimate/ impermissible. Tax planning may be legitimate provided it is within the framework of law. However, a colourable device cannot be a part of tax planning. There is no conflict between McDowell 154 ITR 148 (SC) and Azadi Bachao Andolan 263 ITR 706 (SC).

(1)Housing Projects – [S. 80IB(10)]

(i) CBDT Circular F. No. 205/3/2000/ITA II dt. 4-5-2001. CBDT has clarified that “any project which has been approved by a local authority as housing project should be considered as adequate for purpose of Section 80IB(10)”.

(ii) CIT vs. Brahma Associates (2011) 333 ITR 289 (Bom.). Section 80IB(10) allows deduction to the entire project approved by the local authority and not to a part of the project, if the conditions set out in section 80IB(10) are satisfied, then deduction is allowable on the entire project approved by the local authority and there is no question of allowing deduction to a part of the project

The decision of the tribunal (ITAT) in the case of Reuters Limited Construction House involving the issue of dependent PE under Indo-UK treaty – requires reconsideration.

Though the above decision is not yet reported, the relevant facts and the ratio laid down therein have been clearly stated by the Tribunal in its order u/s 254(2) of I T Act 1961 (the Act) which is reported as 48 SOT 246 (Mum).

Slump Sale – Whether breaking up of price permissible:-

1.1 The decision of the Calcutta High Court in the case of Kwality Ice Creams {I} Ltd [2011] 336 ITR 100 {Cal} may provide fodder for interesting appraisal by the readers. In this case, the assessee, an ice cream manufacturer, transferred its marketing undertaking for a price of Rs. 3 crores. There is nothing in the decision to suggest that the price of Rs. 3 crores was a composite price for transfer of individual assets of the marketing undertaking sold. On the contrary, from the facts of the case, it appears that the price was paid for a slump sale of the marketing undertaking as a whole. The decision related to Assessment Year 1996-97 i.e. before the slump sale provisions of section 50B were brought on the statute book.

I. Introduction

The concept of a Company as a business structure is founded on the premise that it has a legal personality that is separate and distinct from that of its owners. Consequently, the legal framework pertaining to a company’s operations and obligations acknowledges separate legal existence as a key feature of the company structure. Lifting or piercing the veil of corporate personality means that the company is no longer viewed as a distinct entity. On the other hand, the company is seen as being no different from the persons who own the shareholding of the company. The initial trend among common law jurisdictions was that the veil of corporate personality should not be lifted under normal circumstances. With the passage of time and the growing complexity of transactions and the laws which govern them, the Courts have become more agreeable to piercing the corporate veil. This trend has been particularly strong in the case of tax matters.

The controversy over the interpretation of the term ‘royalty’ has come to the fore in light of two judgments of the Hon’ble Income Tax Appellate Tribunal in the past year, (1) the common judgment of the Hon’ble Delhi ‘H’ Bench (dated 26th October, 2010) in a set of cases (Gracemac v. ADIT, ITA Nos. 1331-1336/Del/2008, Microsoft Corporation v. ADIT, ITA Nos. 1392/Del/2005, Microsoft Regional Sales Corporation v. ADIT, ITA Nos. 1393-1395/Del/2005, the common judgment is hereinafter referred to as ‘Gracemac’); and (2) the judgment of the Hon’ble Mumbai ‘E’ Bench (dated 26th August, 2011) (ADIT v. TII Team Telecom International, ITA Nos. 3939/Mum/2010, hereinafter referred to as ‘TII Team’). The controversy – brewing now for quite some time – is essentially this: under what circumstances can the payment received for (what is loosely termed as) supply of software/rights in software be taxed as ‘royalty’ under Section 9 of the Income Tax Act, 1961, and under various Double Tax Avoidance Agreements.