HC: S. 37(1) - Paid for an out-of-court settlement

1. ITO(IT)-TDS vs M/s. Bajaj Hindustan Ltd (ITAT)

     Dated: 12^th Aug 2011

S. 9(1)(vii), 195, 201(1), 201(1A)- Whether fees for technical services paid to KPMG (Non-resident company ) in relation to assistance for proposed expansion of the assessee business outside India, would be taxable under the Income Tax Act. 

Whether the exceptions mentioned in clause (b) to S. 9(1)(vii) of the Act would apply so that it can be said that the fees in the nature of FTS has not accrued or arisen to KPMG in India.

The Assessee wanted to acquire sugar mills/distillery plants in Brazil. For that purpose, the Assessee had availed the services of KPMG. The services were to be rendered in Brazil and that services are connected with the acquisition of sugar mills/distilleries in Brazil. The words used in Sec.9(1)(vii) clause (b) second exception was “ for the purposes of earning any income from any source outside India."

The services rendered by M/s. KPMG was utilized by the Assessee for the purpose of earning income from a source outside India and therefore the payment by the Assessee of fees for technical services rendered by M/s. KPMG was outside the scope of Sec. 9(1)(vii) of the Income Tax Act. Hence it cannot be considered as income deemed to have accrued in India and not chargeable to tax in India and hence the Assessee is not liable to deduct tax u/s. 195 of Income Tax Act. The demand raised for tax and interest u/s.201(1) and 201(1A) of the Act was deleted.

 

 

2. M/s. Rajah Sir Annamalai vs Director of income-tax (Exemptions) (ITAT)

    Dated: 20th June 2011

S. 12AA - Charitable purpose - Whether DIT (Exemptions) was erred in rejecting registration on the ground that the probable fees to be collected from the students is having a component for the future expansion of the institutions and this component is in the nature of profit and therefore, the objects of the trust will also include profit motive, as found in clause 11 of the trust deed. Held, Yes The concept of charitable purpose may be manifested in different forms like relief of the poor, education, medical relief etc; but a charitable purpose should always take care of the welfare and interest of the public and especially the poor section of the public. Running schools by collecting huge amounts of fees with five star facilities cannot be treated as a charitable activity only on the ground that the business carried on by such institutions is the business of education.

The principle that the institutions run by the charitable societies may collect fees and service charges does not mean that the institutions can charge fees etc. at commercial rates from all the people without giving any element of charity to needy people. Charity always means helping the needy, supporting the poor, working with compassion and dedication for the society. Running of an institution without any of the above virtues cannot be considered as a charitable institution. The object of the assessee-trust is to establish a number of educational institutions in a brand name and run it on commercial lines. This cannot be a charitable activity.

 

 

3. CIT vs Desiccant Rotors International Pvt. Ltd (HC)

     Dated: 11^th July 2011

Explanation 1 to Section 37 - Whether an amount paid for an out-of-court settlement of patent infringement dispute is allowable as deduction expenditure. Held, Yes 

The payment under settlement with SEMCO does not fall within the meaning and scope of expression “offence and prohibited by law” used in Explanation to Section 37(1) of the Act.

Even if it is presumed that the payment was made for infringement of patent, that entails only civil damages, which are compensatory in nature and it cannot be said that the payment made was in the nature of penalty.

The settlement agreement contains a specific recital to this effect inasmuch as it records “whereas, in order to avoid the expenses or uncertainty or further litigation, the parties desired to settle and adjust all differences and controversies among themselves subject to the terms of this Agreement.” No doubt in the Agreement, the assessee accepted the patent of SEMCO. That by itself would not mean that the assessee also accepted that it was infringing the said patent. Secondly, payment is made by the assessee to SEMCO for “loss of goodwill and damages to its capital and for terminating of case US Courts” as is clearly mentioned in Clause (3) of the Agreement. No finding is given by any Court that the assessee had violated the patent right of SEMCO.