Direct Tax Amicus: November 2018

Privity of contract and locus with a source of income – A test of diversion by overriding title
By Prachi Goel & Saurav Sood
Deduction of allocation of distributable surplus as expenditure under the provisions of the Income-tax Act, 1961 was denied by the Karnataka High Court in a recent case involving manufacture and sale of liquor [Pr. CIT v. Chamundi Winery and Distillery]. The High Court referred to the contract, where one of the clauses provided the assessee with access to IP rights including blending recipes being a key step in the manufacturing of liquor. It noted that the contract nowhere provided for any payment of consideration towards IP rights nor was it a contract of partnership or joint venture. Observing that had these payments been in the nature of royalty, finance charges, etc., they could have been naturally allowed as business expenditure, but in the instant case it is more of a device for tax avoidance rather than diversion of income by overriding title at source. One can say that the person having locus with the source of income and privity of contract with the buyer will be the person in whose hands such income will be taxable....

Notification

• Amended forms for appeal to ITAT notified
• Rule prescribed for persons entering into certain financial transactions, to obtain PAN

Ratio decidendi

• Deduction under Section 80IA(4)(iii) allowed upon completion of 30 Units in industrial park
• Assesse can opt for treaty benefit for one source out of multiple sources of income
• Compounding fee under Section 276C is 100% of the ‘tax’ sought to be evaded and not income
• ‘Sum payable’ for purposes of TDS obligation can include payment in kind: property in goods must pass
• Difference between the MRP and discounted price paid by the distributors is not a commission under Section 194H
• Depreciation under Section 32 also allowed to ‘Deemed User’ of the asset

News Nuggets

• CBDT issues guidelines for scrutiny of service charges collected by hotels and restaurants
• India and China sign protocol moving closer to the minimum standards under BEPS