Sunday, September 12, 2010

Depreciation on Stock Exchange Card is allowed :SC

In a major ruling, the Supreme Court has held that the stock exchange membership cards are "intangible assets" and a broker can claim deductions while filing income tax. A bench comprising Chief Justice S H Kapadia and Justices K S Radhakrishnan and Swatanter Kumar has held that membership of stock exchange was "business and commercial rights" for trade, hence it is eligible for depreciation under Section 32 of the Income-Tax Act 1961. Section 32 provides for deduction of allowance being made in respect of depreciation on intangible assets such as know-how, patents, copyrights, trade marks, licences, franchises, etc.

"We hold that the said right of membership is a business or commercial right which gives a non-defaulting continuing member a right to access the Exchange and to participate therein and in that sense it is a licence or akin to licence in terms of Section 32(1)(ii) of the 1961 Act," the court said. The apex court also set aside the orders of the Bombay High Court which had held that stock exchange cards are not an "intangible asset".The apex court further said that the Income Tax Appellate Tribunal had rightly said that stock exchange cards are "intangible asset" under the definition of the Income Tax Act. "Tribunal ( ITAT) was right in holding that depreciation was allowable on the cost of the membership card under Section 32(1)(ii) of the 1961 Act. Accordingly the impugned judgment of the Bombay High Court is set aside and the appeal filed by the nominated non-defaulting continuing member stands allowed with no order as to costs," the bench said further. 

The apex court's direction came over a bunch of petitions filed by the stock brokers challenging the orders of the high court. The dispute started after one Techno Shares and Stock filed its income tax returns for year 1999-2000 disclosing a loss of Rs 10.7 lakh. It had claimed Rs 23.65 lakh depreciation on its BSE membership card. The broking firm claimed that its BSE membership card was a licence with business and commercial right and thus it was an intangible asset eligible for depreciation

All payments made abroad not within ambit of withholding tax, rules SC

The Supreme Court on Thursday rejected the income-tax department’s contention that companies based in India were liable to deduct tax when they make any payment overseas, offering relief to domestic firms and multinational companies based here that would have had to cough up huge amounts as tax on payments made to overseas suppliers.

The apex court rejected the sweeping interpretation of law on withholding tax, or tax deducted from overseas payments. The judgement clears the air on the contentious issue and removes uncertainties faced by companies that have overseas dealing.

Taxation experts and companies welcomed the ruling. “The ruling settles the issue of withholding tax on payments made to non-residents,” said Kaushik Mukherjee, partner at consulting firm PwC.

For GE, Samsung Electronics, Hewlett-Packard, Sonata Software and other firms, which had approached the Supreme Court against a Karnataka High Court decision, the issue is far from over. They will have to approach the high court to decide whether they will have to pay tax on payments made for shrink-wrapped software.

“Had the high court order been upheld, Sonata would have had to pay more than `200 crore to the income-tax department immediately,” said B Ramaswamy, president and managing director, Sonata Software.

Sonata had made a financial disclosure for a contingent liability of Rs 252 crore. “The company’s auditors would now take a call on how to treat it under the accounting standards,” said N Venkatraman, head of strategic finance at Sonata.

The Karnataka High Court ruling had allowed the tax authorities to take a larger interpretation of a provision that any import from a non-resident is an income to the seller, hence the buyer needs to deduct tax. If the buyer does not want to withhold tax, he has to get an approval from a revenue officer, instead of an auditor at present.

In this particular issue the goods concerned were software and buyers of software, the concerned companies, assuming that tax was not to be withheld in India on the payments made to the supplies of software, made the payment without deducting the tax.

However, the tax authorities treated the payments as “royalty” which is taxable here since those software packages had “copyrights”. The income tax department also declared that those who have not withheld taxes were “assessee in default” and hence liable to pay interest, penalty.

Samsung India was among the first batch of companies which had appealed against the I-T department’s decision. The company even got relief from the Income-Tax Appellate Tribunal. But, the Karnataka HC reversed the ITAT judgement and accepted the contention of tax authorities opening a pandora’s box with regard to taxation of overseas payments.

“The judgement has large ramifications not only on the applicability of withholding tax on payments towards packaged software but on cross-border payment towards goods or services,” said Mukesh Butani, partner, BMR Legal.

The Thursday’s judgement given by a bench comprising chief justice of India, justice S H Kapadia, and justice K S Radhakrisnan, has made it clear that withholding tax has to be deducted only if the non-resident’s income was chargeable to tax in India.

Senior advocates including Fali S Nariman, Harish Salve, Atul Chitale and S Ganesh represented the companies while additional solicitor general V Tankha appeared for the income-tax department. Interestingly, the new Direct Taxes Code bill, that seeks to replace the present income tax act, has a provision in line with today’s apex court’s decision.