The International Private Leased Circuit (IPLC) is an end-to-end managed dedicated bandwidth connectivity service used to transmit data or voice across geographically dispersed locations. It is generally used to establish virtual connectivity or provide internet services.
The Madras High Court, after evaluating the contractual arrangements and the manner in which the services are rendered, held that payments for IPLC services are for “use of equipment” and hence taxable as ‘royalty’ under domestic law as well as the India-Singapore Tax Treaty. It also held that where such payments are treated as not for use of equipment, it should be considered as for use of process — a deviation in principle from its own earlier judgments.
Interestingly, the Madras High Court held that the definition of ‘royalty’ in domestic law and DTAA are
The Bangalore Tribunal, in a recent case, dealt with the issue of whether the set off of brought forward losses of a demerged undertaking is permitted if the undertaking is hived off as a ‘going concern’, the demerged undertaking itself not being a going concern at the time or on the date of transfer.
According to the definition provided by the Income-tax Act, a demerger under the Act would be satisfied if the undertaking being demerged was hived off ‘as a going concern’, i.e., it should constitute a business activity capable of being run independently in the foreseeable future.
The tribunal held that for a transfer to be regarded as a ‘demerger’ under the Act, the undertaking being demerged should be transferred in a manner similar to the manner in which a ‘going concern’ is transferred and it is not necessary that the demerged undertaking itself should be a ‘going concern’ on the date of transfer.
Even a non-operational undertaking transferred on a going concern basis could fall within the meaning of ‘demerger’. The going concern test applies to the transfer and not to the demerged undertaking. Accordingly, the losses of the demerged undertaking were allowed to be set off by the tax payer.
Works contract or rent?
In a recent ruling, the Kerala High Court held that rentals paid under composite agreement for hire of vehicles, loading and unloading, and transportation of goods would be liable to withholding tax as ‘rent’ under section 194I of the Income Tax Act and not as ‘works contract’ under section 194C.
The tax-payer took on hire the vehicles and the equipment, for which it paid hire charges on the basis of number of hours of use. The ownership and possession of the vehicles remained with the owner. The court held that the machinery does not need to assume the character of immovable property under the Transfer of Property Act, for it to fall within the definition of ‘ren’.
The withholding tax in respect of composite contracts for vehicle hire has been a vexed issue, with the revenue authorities treating the payment to be in the nature of rent liable for tax withholding under section 194I of the Act (at the rate of 10 per cent) and the tax-payer treating the payment to be in the nature of ‘works contract’ under section 194C of the Act (at the rate of 2 per cent. This ruling adds to the confusion of the tax-payer as to under which section that would need to withhold tax in respect of composite contracts.
Litmus test of beneficial shareholding
Section 79 of the Income-tax Act contains restrictions around set off and/or carry forward of past tax losses in the financial year in which there is a change in shareholding of the company.
The issue on whether to consider immediate shareholding or beneficial shareholding for the purposes of section 79 has been dealt with by the Bangalore Tribunal in Amco Power Systems [123 TTJ 238 (Bang)] which held that 51 per cent of the “voting power” be “beneficially held” for losses to be set off.
However, in a recent ruling (Just Lifestyle Private Limited, ITA No. 2638/Mum/2012), the Mumbai Tribunal held that section 79 triggers even if shares representing 51 per cent or more of the voting rights remained within the same group. The assertion is on the settled proposition of law that a company has a distinct legal identity and its identity is separate from the identity of its shareholders. The ruling will have a significant bearing on internal reorganisation.