PP–ATLP–June 2009 24

ADVANCED TAX LAWS AND PRACTICE

Time allowed : 3 hours Maximum marks : 100

NOTE : All references to sections mentioned in Part-A of the Question Paper relate to
the Income-tax Act, 1961 and relevant Assessment Year 2009-10, unless stated
otherwise.
PART A
(Answer ANY TWO questions from this part.)
Question 1
(a) Choose the most appropriate answer from the given options in respect of the
following :
(i) The benefit of amortisation of preliminary expenses under section 35D has
been extended to ––
(a) Manufacturing companies
(b) Post-commencement preliminary expenses of service sector units
(c) Non-resident companies
(d) Non-resident individuals.
(ii) No disallowance under section 40(a)(ia) shall be made in the case of a
deductor in respect of expenditure incurred in the month of March, if the
TDS on such expenditure has been paid before —
(a) 31st December
(b) 30th September
(c) Due date for filing of the return
(d) 30 days from the date of tax deduction.
(iii) With effect from assessment year 2009-10, the rate of tax under
sections 111A and 115AD, on short-term capital gains, arising from the
transfer of equity shares in a company or a unit of an equity oriented funds
where such transaction is chargeable to securities transaction tax (STT)
is––
(a) 20%
(b) 15%
(c) 10%
(d) 25%.
(iv) Depreciation on new plant acquired and kept as standby in anticipation of
an order of supply of goods is ––
(a) An allowable expenditure on an asset kept as standby
(b) Not allowable as asset acquired but not put to use
(c) Partly allowable
(d) None of the above.

24
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(v) Lease rental income derived by a foreign company, by leasing its immovable
property situated at Ahmedabad, India, to another foreign company whose
payment in US Dollars has been made outside India as per the agreement
which is also executed outside India is ––
(a) An exempted income in India
(b) Chargeable to income-tax in India as it relates to property situated in
India, and deemed to accrue or arise in India
(c) Subject to DTAA agreement entered into by Indian government with
another country wherein foreign company is located
(d) None of the above. (1 mark each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) Expenditure incurred by a company after its incorporation and after its
business had been set-up, on development of website for conducting its
business partly through website could be considered as ___________
expenditure.

(ii) Interest on borrowed funds utilised for acquisition of an asset as part of

extension of business, could be capitalised till the asset
__________________.

(iii) Subsidy received by a company operating a sugar mill, which could be

utilised only for re-payment of term loans taken by it for setting-up of new
units and extension of existing business would be treated as____________.

(iv) Where there is a failure to deduct tax at source or to deposit the tax deducted
at source by a company, the company and the Principal Officer shall be
deemed to be an _________________ under section 201.

(v) Deduction in respect of contribution given by any person other than company
under section 80GGC of the Income-tax Act, 1961, to a political party
is_______________. (1 mark each)

(c) “All companies are not liable to wealth-tax, even those which are liable have
scope for minimising it.” Comment. (5 marks)
Answer 1(a)
(i) (b) Post-commencement preliminary expenses of service sector units
(ii) (c) Due date for filing of the return
(iii) (b) 15%
(iv) (a) An allowable expenditure on an asset kept as standby
(v) (b) chargeable to income tax in India as it relates to property situated in India,
and deemed to accrue or arise in India
PP–ATLP–June 2009 26
Answer 1(b)
(i) Expenditure incurred by a company after its incorporation and after its business
had been set-up, on development of website for conducting its business partly
through website could be considered as revenue expenditure.

(ii) Interest on borrowed funds utilised for acquisition of an asset as part of extension
of business, could be capitalised till the asset put to use .

(iii) Subsidy received by a company operating a sugar mill, which could be utilised
only for re-payment of term loans taken by it for setting-up of new units and
extension of existing business would be treated as Capital receipt .

(iv) Where there is a failure to deduct tax at source or to deposit the tax deducted at
source by a company, the company and the Principal Officer shall be deemed
to be an assessee in default under section 201.

(v) Deduction in respect of contribution given by any person other than company
under section 80GGC of the Income-tax Act, 1961, to a political party is
allowable.
Answer 1(c)
Only those companies whose net wealth on the corresponding valuation date exceeds
Rs.15,00,000 will be chargeable to Wealth-tax. Non-profit making companies registered
under Section 25 of the Companies Act are exempt from levy of wealth tax. Where the
company is not resident in India, its assets and debts located outside India shall be
excluded from the computation of net wealth.
Companies can minimize their Wealth-tax liability:
(i) By avoiding investment in taxable assets like jewellery, motor cars, other
unproductive assets;
(ii) In unavoidable cases, investment in the said assets could be made out of loans
or debts may be incurred in relation thereto by way of furnishing a security for
the loan, so that such debts could be claimed as deduction in computing net
wealth,
(iii) Likewise, purchase house property ,likely to be used by the Directors /Managers/
Secretary, as their residential accommodation or by any other employee having
substantial interest in the company could be funded out of loan/raising debts
thereon.
Question 2
(a) State, with reasons in brief, whether the following statements are correct or
incorrect:
(i) The cascading effect of dividend distribution tax is minimised in the case of
holding and subsidiary companies.
(ii) The provisions of tax deduction at source do not apply to interest on corporate
securities under certain circumstances.
 27 PP–ATLP–June 2009
(iii) An assessee can be asked to pay interest under section 234A for default in
filing of return in time or for non-filing of return and also under section 234B
for non-payment or short payment of advance tax even though there is
overlapping of some period under the two provisions. (2 marks each)

(b) A new weighted deduction has been introduced recently to encourage outsourcing
of scientific research. Explain briefly its scope, applicability and advantages
from the tax planning point of view. (5 marks)

(c) A company had taken some unsecured loans by way of inter-corporate deposits
(ICDs) from three other companies for use in its business and paid interest on
those ICDs, which were offered for taxation by the recipient companies.

The income-tax officer contends that the unsecured loans are taxable as deemed
dividends under section 2(22)(e). Can he do so ? Explain. (4 marks)

Answer 2(a)

(i) True : Section 115-O(1A) provides that while determining the tax on dividends
distributed payable by a domestic company, the amount of dividends received
from its subsidiary company will be reduced if the subsidiary company has paid
tax under this section on such dividend and the domestic company itself is not
a subsidiary of another company.

(ii) True : With effect from 1st June, 2008, section 193 has removed the requirements
of deducting tax at source from interest payable to a resident on any security
issued by a company where such security is in dematerialized form and is listed
on a recognized stock exchange in India.

(iii) True : Defaults under section 234A and 234B are independent of each other.
Therefore, interest is payable under both the provisions, despite there being
some overlapping of same period under the two provisions [Roshanlal Jain (AOP)
v. Dy CIT]

Answer 2(b)

As a result of the new Clause (iia) inserted in Section 35, w.e.f. 1.4.2009, an amount
equal to one and one-fourth times (125%) of any sum paid to a company by any assessee,
to be used by the donee company for scientific research, will be allowed as deduction.
The donee company must be a company registered in India with the main object of
scientific research and development and it should be approved by the prescribed authority
for this purpose.

This deduction could be claimed by any person—whether company or not making

payment to the company approved for this purpose. There is no requirement that the
scientific research carried out by the approved donee company should be related to the
business of the donor. This would give scope for tax planning especially by small and
medium sized assessees who are otherwise handicapped for making heavy investment
for building in house scientific facilities. Further, they can continue to claim deduction to
the extent of 100% of the sum spent by them as revenue expenditure. On scientific
research, if any, incurred by them under Section 35(1)(i).
PP–ATLP–June 2009 28
Answer 2(c)
No, The Assessing Officer cannot invoke the provisions of Section 2(22)(e) to treat
the Inter-corporate Deposits as ‘Deemed Dividends’ under Section 2(22)(e).
The requisite condition for invoking Section 2(22)(e) is that the payments must be
made by way of loan or advance. There is a clear distinction between inter-corporate
deposits vis-à-vis loans and advances. The deeming fiction in the provision should not
be given a wider meaning than what it purports to be and the provisions would have to be
accorded strict interpretation and the ambit should not be pressed beyond its true limits.
Bombay Oil Industries Ltd. v. Dy. CIT.
Question 3
(a) When will the ‘book profits’ of a company deemed to be the total income of the
company for the purposes of levy of minimum alternate tax (MAT) under
section 115JB ? (3 marks)
(b) Indicate briefly the points to be taken into account while preparing annual accounts
for the purpose of MAT. (3 marks)
(c) The MAT does not apply to foreign companies operating in India. Do you agree?
Give reasons. (3 marks)
(d) What is ‘reverse mortgage’ ? Whether loan received under the scheme of reverse
mortgage amounts to income in the hands of borrower ? Whether mortgage of
the property under reverse mortgage is treated as transfer so as to attract capital
gains under section 45 ? Whether alienation of the mortgaged property by the
mortgagee for the purpose of recovering the loan would amount to transfer so as
to attract capital gains under section 45 ? (6 marks)
Answer 3(a)
Section 115-JB provides that in the case of a company,
— if the tax payable on the total income,
— as computed under the act in respect of any previous year
— is less than ten per cent of its ‘book profits’,
such book profits shall be deemed to be the total income of the assessee and the tax
payable for the relevant previous year shall be ten percent of such book profits.
Answer 3(b)
Sub-section (2) of section 115JB requires the company to prepare its profit and loss
account for the relevant previous year in accordance with provisions of Parts II and III of
Schedule VI of the Companies Act, 1956. However, while preparing the annual accounts
including profit and loss account:
(a) The accounting policies;
(b) The accounting standards followed for preparing such accounts including profit
and loss accounts; and
(c) The method and rates adopted for calculating the depreciation.
 29 PP–ATLP–June 2009
shall be the same as have been adopted for the purpose of preparing such accounts
including profit and loss account as laid before the company at its annual general meeting
in accordance with the provisions of Section 210 of the Companies Act, 1956. But
where the company has adopted or adopts the financial year which is different from the
previous year under the Income Tax Act, (a), (b) and (c) aforesaid shall correspond to
the accounting policies, accounting standards and the method and rates for calculating
the depreciation which have been adopted for preparing such accounts including profit
and loss account for such financial year or part of such financial year falling within the
relevant previous year.
Answer 3(c)
Incorrect : MAT applies to any company domestic as well as foreign. However,
where a non-resident company’s income is assessed on a presumptive basis under
Section 44B or 44BB or at a flat rate under Section 115A on royalty and technical fees,
the book profit becomes immaterial for regular assessment and the presumptive income
tax will prevail.
Answer 3(d)
An individual being the owner of a house property but does not have regular source
of income, can mortgage his property with the Bank and the Bank in consideration of
mortgage, assures to the borrower periodic amount during his lifetime is called Reverse
Mortgage.
Vide Notification No.93/2008 dated 30.9.2008, The Central Government has notified
the “Reverse Mortgage Scheme, 2008”. As per the same, an individual aged 60 years or
above and in the case of a married couple, where either the husband or wife is 60 or
above, will be treated as an eligible reverse mortgagor to avail the above benefits. Any
eligible person may enter a reverse mortgage transaction by applying in writing to the
approved lending institution if the capital asset is a residential house property located in
India, which is mortgaged, is owned by him and is free from any encumbrances.
An approved lending institution being any scheduled bank or housing finance company
may disburse the loan to the reverse mortgager by any one or more of the following
modes namely:
(i) Periodic payments to be decided mutually between the institution and the reverse
mortgagor.
(ii) Lump sum payment in one or more trenches, to the extent that the aggregate of
amount disbursed as lump sum payment does not exceed 50% of the total loan
amount sanctioned.
(iii) The loan under reverse mortgage shall not be granted for a period exceeding
twenty years from the date of signing the agreement by the reverse mortgagor
and the approved lending institution.
No, new Section 10(43) has been inserted to provide that such loan amount is
exempt from Income-tax.
No, a new Clause (xvi) has been inserted in Section 47 to provide that any transfer
of a capital asset in a transaction to a reverse mortgage is not treated as transfer,
therefore, not liable to capital gain tax under Section 45.
PP–ATLP–June 2009 30
Yes, the reserve mortgagor or his legal heirs or estate, shall be liable for repayment
of the principal amount of loan along with interest to the approved lending institution at
the time of foreclosure of loan agreement. Therefore, the alienation of the mortgaged
property by the mortgagee for the purpose of recovering the loan will be treated as
transfer and the borrower (i.e., mortgagor) will be liable to tax on capital gains if any,
arising out of such alienation.
PART B
(Answer Question No. 4 which is compulsory
and any two of the rest from this part.)
Question 4
(a) Choose the most appropriate answer from the given options in respect of the
following :
(i) The exemption notification issued under section 5A of the Central Excise
Act, 1944 is not applicable in respect of DTA clearance, unless specifically
provided in the notification by —
(a) SSI unit
(b) EOU unit
(c) Both (a) and (b)
(d) None of the above.
(ii) Under the central excise law, any article, material or substance, capable of
being bought and sold for a consideration shall be deemed to be —
(a) Goods
(b) Manufactured
(c) Marketable and hence excisable
(d) Produced.
(iii) Questions arising out of orders made by CESTAT are appealable to High
Court except those relating to —
(a) Classification and valuation
(b) Duty drawback
(c) Refund of excise duty
(d) Advance ruling.
(iv) Value of export goods under the Customs Act, 1962 is not determined by—
(a) Transaction value
(b) Residual method
(c) Computed value
(d) Market value.
(v) The term ‘authorised representative’ under section 35Q of the Central Excise
Act, 1944 includes, among others —
(a) All Company Secretaries
(b) Company Secretaries with 10 years post qualification experience
 31 PP–ATLP–June 2009
(c) Company Secretaries with certificate of practice
(d) Physics graduates.
(vi) Under the Customs Act, 1962, an appeal before tribunal against the order of
Commissioner shall be filed within —
(a) 30 Days
(b) 3 Months
(c) 45 Days
(d) None of the above.
(vii) Smuggled goods are liable to confiscation —
(a) Only when they are in the same form
(b) Even when the form has changed or mixed with other goods
(c) Both (a) and (b)
(d) None of the above. (1 mark each)
(b) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(i) In case of fraud, collusion, willful mis-statement and suppression of facts,
or contravention of any provision of the Central Excise Act, 1944 or Rules
with intent to evade payment of duty, demand for duty can be raised
___________.
(ii) Rules made by the Central Government and regulation made by the Central
Board of Excise and Customs (CBE&C) can provide for penalty upto
Rs.________ on any person who violates any provision of rules or regulations.
(iii) Persons claiming refund of excise duty under section 11B have to make an
application within ______________from the ‘relevant date’.
(iv) Under the Customs Act, 1962, duty, interest, penalty or fine to be rounded
off to ______________.
(v) The person from whom documents are seized is entitled to take ______
therefrom in presence of customs officer.
(vi) Under section 46, an importer has to file a ___________ for home
consumption or warehousing.
(vii) Assessees paying duty of Rs.1 crore or more per annum through personal
ledger account (PLA) are required to submit annual financial information
statement for each financial year by 30th November of succeeding year in
prescribed form _____________.
(viii) ___________ can be granted in the case of lost, destroyed or abandoned
goods under section 23 of the Customs Act, 1962. (1 mark each)
(c) Explain briefly the term ‘import manifest’. (5 marks)
OR
A manufacturing company has imported certain second-hand machinery for its
use and declared its value on the basis of the ‘transaction value’. Can the
PP–ATLP–June 2009 32
declared value be rejected by the authorities and, if so, when and how ? What
are the details which the importer must submit in support of its claim ?
(5 marks)
Answer 4(a)
(i) (b) EOU unit
(ii) (c) Marketable and hence excisable
(iii) (a) Classification and valuation
(iv) (d) Market value
(v) (c) Company secretaries with certificate of practice
(vi) (b) 3 months
(vii) (b) Even when the form has changed or mixed with other goods.
Answer 4(b)
(i) In case of fraud, collusion, willful mis-statement and suppression of facts, or
contravention of any provision of the Central Excise Act, 1944 or Rules with
intent to evade payment of duty, demand for duty can be raised within 5 years.
(ii) Rules made by the Central Government and regulation made by the Central
Board of Excise and Customs (CBE&C) can provide for penalty upto Rs.50,000
on any person who violates any provision of rules or regulations.
(iii) Persons claiming refund of excise duty under section 11B have to make an
application within one year from the ‘relevant date’.
(iv) Under the Customs Act, 1962, duty, interest, penalty or fine to be rounded off to
Rupee one .
(v) The person from whom documents are seized is entitled to take extract therefrom
in presence of customs officer.
(vi) Under section 46, an importer has to file a Bill of Entry for home consumption
or warehousing.
(vii) Assessees paying duty of Rs.1 crore or more per annum through personal ledger
account (PLA) are required to submit annual financial information statement for
each financial year by 30th November of succeeding year in prescribed form
ER-4 .
(viii) Remission of duty can be granted in the case of lost, destroyed or abandoned
goods under section 23 of the Customs Act, 1962.
Answer 4(c)
‘Import Manifest’ is a record of the goods carried by a vessel, which is furnished by
the carrier-in-charge of the vessel carrying imported goods. Under Section 30(1) of the
Customs Act, the import Manifest is required to be filed before the arrival of the vessel
or aircraft. In the case of a vehicle it is within 12 hours after arrival. The forms of the
Import Manifest are prescribed in the Import Manifest (Vessels) Regulations, 1971 and
 33 PP–ATLP–June 2009
Import Manifest (Aircraft) Regulations, 1976, which have been made under Section 157
of the Customs Act, 1962. Section 30(1) proviso also enables the presentation of
Import Manifest even before the arrival of the steamer/vessel. The Import Manifest is
required to be delivered in duplicate in the Import Department with full particulars in
respect of the following:
(a) General Declaration re-information about the Vessel, its master, crew,
passengers, etc.
(b) Cargo declaration.
(c) List of private property in the possession of master, officers’ crew.
As regards air consignments, the Import Cargo Manifest is presented in Triplicate/
Quadruplicate by the persons concerned immediately on lending of the Aircraft.
Alternate Answer 4(c)
As per the provisions of Section 14, as amended by the Finance Act, 2007, the
value of imports and exports shall be based on the Transaction Value. The Customs
Valuation (Determination of value of Imported Goods) Rules, 2007 also deals with the
Transaction Value and conditions for its applicability. It also deals with transaction
value of identical goods, similar goods and the situations where the above methods
cannot be applied. It also provides for deductive value methods.
Where the proper officer has reason to doubt the truth or accuracy of the value
declared in relation to the goods, he may ask the importer to furnish further information
including documents or other evidence and on a consideration of the information received
should proceed to consider the value declared and even after such consideration decides
to reject the declared value, shall proceed to determine the value by proceeding
sequentially in accordance with Rules 4 to 9.
If the value of identical or similar goods imported at or about the same time in
comparable quantities is significantly higher, or where the sale involves abnormal discount
or reduction from the ordinary competitive price, special discount, misdeclaration of
goods in parameters such as description, quality, quantity, country of origin, year of
manufacture/production, etc. the authorities can raise doubts about the declared value.
Where the declared value is reflected and assessable value is re-determined the
Assessing Officer shall issue detailed speaking order.
Importers may submit, inter alia, a Chartered Engineer’s Certificate or any equivalent
in the country of supply, indicating the price, current CIF value of the new machinery, if
purchased now, year of manufacture, sale price of supplier, present condition of
machinery, nature of conditioning or repairs carried out, if any, the cost thereof and
expected life span. In the absence of proper load port certificate of local Chartered
Engineer’s certificate may be submitted.
[Circular No.4/2008 dated 12.2.2008 deals with valuation practice of second hand
machinery to be adopted by all customs houses/customs commissionerates.]
Question 5
(a) Under section 37B of the Central Excise Act, 1944 and section 151A of the
Customs Act, 1962, the Central Board of Excise and Customs (CBE&C) issues
PP–ATLP–June 2009 34
various orders, instructions and directions to its officers from time to time.
What is their binding effect ? Are they binding on all departmental authorities
including quasi judicial authorities like Commissioner (Appeals) ? Are there any
restrictions on such powers ? Can they have retrospective effect ?
(5 marks)
(b) Hetal manufactures hair dye. It is packed in pouches, each pouch containing
3 grams, 3 pouches (sachets) are sold in one packet. The net weight of each
pouch, as also the net weight of the commodity in 3 pouches and the maximum
rate is printed on the pouches. Examine whether the provisions of section 4A
of the Central Excise Act, 1944 will apply for the valuation purpose. (5 marks)
(c) Commissioner of Central Excise can review the order but cannot issue fresh
notice extending period of limitation. Comment. (5 marks)
Answer 5(a)
Under Section 37B of the Central Excise Act and Section 151A of the Customs Act
1962;
The Board may, if it considers it necessary or expedient so to do for the purpose of
uniformity in the classification of goods or with respect to the levy of duty thereon, issue
such orders, instructions and directions to officers of customs as it may deem fit and
such officers of customs and all other persons employed in the execution of this Act
shall observe and follow such orders, instructions and directions of the Board.
Provided that no such orders, instructions or directions shall be issued:
(a) So as to require any such officer of customs to make a particular assessment
or to dispose of a particular case in a particular manner; or
(b) So as to interfere with the discretion of the [Commissioner of Customs (Appeals)
in the exercise of his appellate functions].
Such circulars/instructions etc are binding in law on the authorities under the
respective statutes but they are not binding on quasi-judicial authorities like Commissioner
(Appeals) or judicial authorities like Tribunal, High Court or Supreme Court. Recently the
constitution Bench of the Supreme Court also reaffirmed in CCE v. Ratan Melting &
Wire Industries (2008) 17 STT 103 that they are not binding upon the court. “It is for the
court to declare what a particular provision of statute says and it is not for the executive.
A circular which is contrary to the statutory provision has really no existence in law”
The circulars are effective from the date on which they are issued. No circular can
be made effective retrospectively.
Answer 5(b)
It is beyond any doubt or dispute that the commodity in question is being sold in
‘multi piece package’. Identical quantity of commodity is packed in each sachet. Yet
again admittedly 3 sachet are packed in one packet. The weight of 3 sachet is 9 GMS
i.e., less than the prescribed weight of 10 grams.
The packet describes the commodity in question. It not only discloses the weight
contained in each sachet but also discloses the weight contained in the packet of 3
 35 PP–ATLP–June 2009
sachet. Therefore, the intention of the manufacture to sell the commodity by weight is
explicit.
Rule 17 provides for additional declarations to be made on multi piece packages. It
envisages declaration of the quantity and the sales price thereof on each of the packages
when the quantity is sold in the multiples packages. Section 4A of the Act would apply
only when it is statutorily required to apply the provisions of the Rules.
Rule 34 contains an exemption clause. The exemption clause would apply if the
commodity is sold by weight or measure subject of course to the condition that net
weight of the commodity is 10 grams, or less. This legal requirement in this case also
stands complied with. Once it is held that Rules have no application in respect of the
commodity as marketed and sold by the respondent. Section 4A of the Act will have no
application [Commissioner of Central Excise v. Craftech Product Inc. JT (2008)(4) SC
335].
Answer 5(c)
Correct : It is based on the judgement given by CESTAT in case of Maa
Communications v. CST (2007) 6 ST 53.
The Commissioner of Central Excise can revise the orders passed by adjudicating
authority subordinate to him. The revision order can be passed at any time within two
years of the original order but not afterwards. No revision can be made if appeal against
such order is pending with Commissioner (Appeals) Section 84.
Appeal against the order of Commissioner (after Revision) lies with CESTAT under
Section 86.
Question 6
(a) What are the options available, in the context of CENVAT credit rules, to a
manufacturer manufacturing both exempt and dutiable goods or service-provider
providing taxable as well as exempt services, in respect of inputs/input services
used partly for manufacture of dutiable goods/taxable services and partly for
exempted goods/services ? (5 marks)
(b) Under certain circumstances, the central excise law allows an assessee to
approach the Central Government with a request to revise appellate orders passed
by the departmental authorities. Indicate the circumstances where such a
possibility exists and the powers of the Central Government in this regard.
(5 marks)
(c) Write a note on excise concession on export of excisable goods. (5 marks)
Answer 6(a)
Such manufacturer/service provider has the following options:
(i) Maintain separate inventory and accounts of receipt and use of inputs and input
services for exempted goods/exempted output services (Rule 6(2) of CENVAT
Credit Rules).
(ii) Pay an amount equal to 10% of the value of exempted goods (if he is a
PP–ATLP–June 2009 36
manufacturer) and/or 8% of the value of exempted services (if he is a service
provider) and does not maintain separate inventory and records [Rule 6(3)(i)].
(iii) Pay an ‘amount’ equal to proportionate CENVAT Credit attributable to exempted
final product/exempted output services.
The assessee cannot utilize CENVAT Credit in respect of inputs/input services
utilized exclusively for manufacture of exempted final products/exempted taxable
services.
Answer 6(b)
Under Section 35EE of the Central Excise Act, if the Appealable order are passed
by the Commissioner (Appeals) in cases of:
(i) Loss of goods;
(ii) Rebate of duty of excise on goods exported;
(iii) Export under bond without payment of duty.
a revision application can be filed before the Central Government. The Central
Government has the discretion to refuse such application where the amount of duty, fine
penalty does not exceed Rs.5,000, under section 35EE(1A) or where the
Commissioner of C.E. is of the opinion that an order passed by Commissioner (Appeals)
under Section 35A is not legal or proper, he may direct the proper officer to make an
application on his behalf to Central Government for revision of such an order.
On receipt of such an application, it will be examined in the Ministry of Finance,
after obtaining the relevant records and giving opportunity for personal hearing. Decision
will be taken at the level of Joint Secretary to the Government of India.
The Central Government has powers to increase the penalty or demand duty or
increase confiscation. In all such cases, the concerned party will be given opportunity
for hearing as well as defence.
Answer 6(c)
Exporter of Excisable Goods is entitled to several benefits. Under the schemes
available in Excise Law, the Exporter of Excisable Goods can avail following facilities:
(a) To export excisable goods on payment of excise duty and to claim refund of
such duties subsequent to the export.
(b) To export the goods without paying excise duty but on the basis of a bond being
executed to fulfill the obligation to export.
(c) To claim rebate of duty paid on excisable goods used as input in the manufacture
of goods which are exported.
(d) To process excisable goods required as inputs for manufacture of goods to be
exported, without paying duty on such inputs.
Besides, the CENVAT Scheme also contains in built provisions to Act as a major
incentive for export, which the exporter can make use of.
 37 PP–ATLP–June 2009
Question 7
(a) Pranav and Parul, the petitioners, were engaged in the business of import in
trading of textiles and some other consumable goods. During search, the
statements of both the petitioners were recorded and the petitioners were arrested
for the offence under sections 132 and 135 of the Customs Act, 1962 on account
of alleged false declaration, false documents and evasion of customs duty.
Simultaneously, adjudication proceedings were also initiated under the Act. The
accused persons were exonerated by the competent authority/tribunal in the
adjudication proceedings. Criminal proceedings were carried on simultaneously
and petitioners were alleged to have committed offences punishable under
sections 132 and 135(1)(b). Whether the criminal prosecution can be permitted
to continue against both when the adjudication proceedings are in favour of
them ? Discuss. (5 marks)
(b) Eva Offshore Ltd. is engaged in drilling operations for exploration of offshore oil,
gas and other related activities under contracts. The drilling operations are
carried out at oil rigs/vessels which are situated outside the territorial waters of
India.
Until around November, 1993, the company was permitted to transship stores
to the oil rigs without levy of any customs duty regardless of the fact whether oil
rigs were operating within a designated area or non-designated area.
Whether oil rigs engaged in operations in the exclusive economic zone/continental
shelf of India, falling outside the territorial waters of India, are ‘foreign going
vessels’ as defined by section 2(21) of the Customs Act, 1962, and are entitled
to consume imported stores thereon without payment of customs duty in terms
of section 87 of the Customs Act 1962 ? (5 marks)
(c) Arpit Alloys Ltd. imported a consignment of metal bars during July, 2008 by
sea, weighing 5,300 tons from U.K. A bill of entry for home consumption was
filed and an order for clearance was passed by the Assistant Commissioner.
The company paid the applicable duty. Thereafter, delivery was taken and on
examination by the company’s representatives; it was found that only 5,000
tons of metal bars were available at the dock though duty was paid for the entire
lot of 5,300 tons. Since there was no short landing of the cargo, the short
delivery of 300 tons was also supported by the weightment certificate issued to
the company by the port trust authorities. The company made a representation
to the customs department for appropriate relief under the Customs Act, 1962.
Examine. (5 marks)
Answer 7(a)
The petitioners were engaged in the business of import in trading of textiles and
some other consumable goods. During search, the statements of both the petitioners
were recorded and the petitioners were arrested for the offences under Sections 132 and
135 of the Customs Act, 1962 on account of alleged false declaration, false documents
and evasion of customs duty. Simultaneously, adjudication proceedings were also
initiated under the act. The accused persons were exonerated by the competent authority/
tribunal in the adjudication proceedings. Criminal proceedings were carried on
PP–ATLP–June 2009 38
simultaneously and petitioner were alleged to have committed offences punishable under
the Sections 132 and 135(1)(b).

The High Court observed that the charges cannot be framed and criminal prosecution
cannot be permitted to continue against the petitioner once adjudication proceedings on
merits have been found in favour of the petitioners.

The High Court observed that the Department had failed in adjudicatory process
against petitioner and yet continued to contend that criminal proceedings must go on.
The High Court observed that the legal system by which we are governed is adversarial
in nature. But there is a special responsibility on Government and public authorities to
act reasonably and in fair manner. The High Court opined that the already over-burdened
legal system could not be further burdened by unnecessary cases.

The above contention is as per judgement in case of Anil Mahajan and Another v.
UOI and another (Del) 5 February, 2008.

Answer 7(b)

The appellants are engaged in drilling operations for exploration of offshore oil, gas
and other related activities under contract. The drilling operations are carried on at Oil
Rigs/Vessels, which are situated outside the territorial waters of India. Until around
November, 1993 the appellant and all other similarly situated companies which were
engaged in oil and gas exploration and exploitation were permitted to transship stores to
the oil rigs without levy of any customs duty regardless of the fact whether oil rigs were
operating within a designated area or non-designated area.

The Supreme Court observed that the principle underlying under section 86 and 87
is that the stores are consumed on board by a foreign going vessel. If the so called
foreign going vessel is located within territory over which the coastal state have complete
control and has sovereign right to extend its fiscal laws to such an area with or without
modifications and the stores were consumed in area to which the Customs Act has been
extended. Reference or reliance to the vessel being a foreign going vessel shall be of no
consequences and the customs duty would be leviable as the goods are consumed
within the territory to which the Customs Act has been extended as per the Maritime
Zones Act, 1976 and the International Conventions ‘UNCLOS, 1982.

The Court further observed that the stores are unloaded and consumed within the
maritime boundary or within the limit of Customs Act, Section 12 will be attracted as it
would be construed that there would have been an import within the territory of India to
which Customs Act applies.

The above contentions are as per judgement in the case of Aban Loyd Chiles Offshore
Ltd. v. UOI (SC) 11 April, 2008.

Answer 7(c)

As per Section 23, where the imported goods have been lost without pilferage or
destroyed at any time before clearance for home consumption, duty on such goods
would be remitted. Here ‘loss’ means that the loss is forever and there is no possibility
of tracing it or recovering it.
 39 PP–ATLP–June 2009
In the given case 300 metric tons of metal bars have been lost in the custody of port
trust after the order for clearance was passed and duty payment was made. The
weightment certificate issued by Port Trust Authorities also substantiates the same.
The company is therefore entitled to remission of the duty on the lost goods i.e., 300
tons, under Section 23 of the Customs Act.
PART C
Question 8
Attempt any four of the following :
(i) Re-write the following sentences after filling-in the blank spaces with appropriate
word(s)/figure(s) :
(a) Countries that employ explicit policies designed to attract international trade
oriented activities by minimisation of taxes and reduction or elimination of
other restrictions on business operations are described as _____________.
(b) The authority for advance ruling will not allow consideration of any question
involving determination of ______________ of any property.
(c) The ruling given by the authority for advance rulings will be binding on
______________.
(d) Indian income-tax law does not provide any exemption in case of
amalgamation of an Indian company with a foreign company wherein the
resultant amalgamated company is a ___________.
(e) ___________ means any area outside India which may be notified as such
by the Central Government for the purpose under section 90A of the Income-
tax Act, 1961. (1 mark each)
(ii) If a tax payer has legitimately reduced his tax burden by taking advantage of
treaty, the benefit cannot be denied to him on the ground of loss of revenue.
Explain in the context of decided case law. (5 marks)
(iii) A resident of India has paid tax in a foreign country in respect of his income
which accrued in that country. India has no double taxation avoidance agreement
with that country. Such income is also taxable in India. Is there any relief
available to him in respect of the tax paid by him ? Explain. (5 marks)
(iv) Distinguish between ‘international transactions’ and ‘cross border transactions’.
(5 marks)
(v) Can a public sector undertaking which has undertaken a transaction with a non-
resident, seek an advance ruling in respect of tax liability of the non-resident
and also its own liability ? Indicate the scope of applicability of such advance
rulings. (5 marks)
(vi) “Under the special provisions of the Income-tax Act, 1961, any income arising
from an international transaction shall be computed having regard to the arm’s
length price.” In this context, briefly indicate when the provisions of arm’s
length price will apply and when it will not apply and also state its scope.
(5 marks)
PP–ATLP–June 2009 40
Answer 8(i)
(a) Countries that employ explicit policies designed to attract international trade
oriented activities by minimisation of taxes and reduction or elimination of other
restrictions on business operations are described as Tax Havens .
(b) The authority for advance ruling will not allow consideration of any question
involving determination of fair market value of any property.
(c) The ruling given by the authority for advance rulings will be binding on both
parties before it.
(d) Indian income-tax law does not provide any exemption in case of amalgamation
of an Indian company with a foreign company wherein the resultant amalgamated
company is a foreign company .
(e) Permanent establishment means any area outside India which may be notified
as such by the Central Government for the purpose under section 90A of the
Income-tax Act, 1961.
Answer 8(ii)
The need for agreement of Double Tax Avoidance (DTAA) arises because of Rules
in two different countries regarding chargeability of income based on receipt and accrual,
residential status etc. As there is no clear definition of income and taxability thereof,
which is accepted internationally, an income may become liable to tax in two countries.
In such a case, the possibilities are as under:
The two countries have an agreement for Double Tax Avoidance in which case
possibilities are:
(i) The income is taxed only in one country.
(ii) The income is exempt in both countries.
(iii) The income is taxed in both countries, but credit for tax paid in one country is
given against tax payable in the other country.
If the two countries do not have an agreement for Double Tax Avoidance between
them. In such a case the domestic law of the country will apply. In the case of India, the
provisions of Section 91 of the Income Tax Act will apply. The Central Board of Direct
Taxes has clarified vide circular No.333 dated 2nd April, 1982 that in case of conflict in
the provisions of the agreement for tax avoidance of double taxation and the Income
Tax Act, the provisions contained in the agreement for Double Tax Avoidance will prevail.
The Government of India has entered into numerous tax treaties as well as trade
agreements with various foreign countries to provide stability and certainty to the tax
laws and commercial relationship between parties in India and abroad. The large number
of judicial pronouncements including Advance Rulings in the recent years under the Tax
Laws, both Direct and Indirect, have added to the confidence of non-residents being
inspired with Indian Fiscal and Judicial Systems. The wealth of judicial decisions from
Supreme Court as well as High Court and the Tribunal in deciding numerous tax disputes
help to remove the uncertainties and ambiguities in the tax system and administration.
The tax treaties have helped both the collaborators from abroad and the Indian enterprises
 41 PP–ATLP–June 2009
in the private and public sectors to know precisely the nature extent and scope of tax
liability as also the country in which tax is payable.
In the case of Union of India v. Azadi Bachao Andolan (2003 132 Taxmann 373
SC). Supreme Court clearly laid down that the benefit of DTAA can not be denied even
if it leads to loss of revenue.
Answer 8(iii)
Yes, he can claim the unilateral relief provided under Section 91 of the Income Tax
Act, 1961.
If any person who is resident in India in any previous year proves that, in respect of
his income which accrued or arose during that previous year outside India (and which is
not deemed to accrue or arise in India), he has paid in any country with which there is no
agreement under section 90 for the relief or avoidance of double taxation, income-tax,
by deduction or otherwise, under the law in force in that country, he shall be entitled to
the deduction from the Indian income-tax payable by him of a sum calculated on such
doubly taxed income at the Indian rate of tax or the rate of tax of the said country,
whichever is the lower, or at the Indian rate of tax if both the rates are equal.
Hence, he will be entitled to a deduction from the Indian Income Tax payable by him
of a sum calculated on such doubly taxed income so included in his total income, at the
Indian rate of tax or the rate of tax of the said country, whichever is lower or at the Indian
rate of tax, if both rates are equal.
Answer 8(iv)
A transaction will be considered as international Transaction if it satisfies the following
two conditions cumulatively:
(a) It must be a transaction between two associated enterprises; and
(b) At least one of the two enterprises must be a non-resident.
A transaction is considered to be a cross-border transaction if it originates in one
country and gets concluded in another country.
A cross-border transaction may or may not be an international transaction within the
meaning of Chapter X. Similarly a transaction which is not a cross border transaction
may still be an international transaction for the purposes of Chapter X if it falls within the
ambit of the definition of international transaction.
Answer 8(v)
A public sector undertaking, being a resident, has been notified by central government
vide notification No. 725(E) dated 03-08-2000 in exercise of power conferred by sub-
clause (iii) of clause (b) of section 245N as applicant for the purpose of advance ruling
and if it has undertaken a transaction with a Non-resident and it can seek an Advance
Ruling in respect of tax liability of non-resident as per Section 245N(i)(ii).
The fact that such resident is a public sector undertaking (PSU) notified under
Section 245N(b)(iii) should not make any difference. It cannot, however, seek any ruling
in respect of its own tax liability. (In re Airport Authority of India (2008) 168 Taxmann
158 AAR, New Delhi).
PP–ATLP–June 2009 42
The ruling pronounced by the authority is binding on both parties before it. It will be
binding:
(i) On the applicant who had sought it;
(ii) In respect of the transactions in relation to which the ruling had been sought;
and
(iii) On the Commissioner and the income Tax Authorities subordinate to him, in
respect of the applicant and the said transaction.
Answer 8(vi)
Under the provisions of Section 92(1) of the Income Tax Act, 1962 any income
arising from an International Transaction shall be computed having regard to the ‘arms
length price’. When the international transaction comprises of only an outgoing, the
allowance for any expense or interest arising from the international transaction shall
also be determined having regard to the arm’s length price.
Thus the provisions of ‘arms length price’ shall apply not only to income generating
transactions (e.g. sale of goods, royalty, fees for technical services, know-how, etc. for
providing services) but also to transactions resulting into expenditure (purchases, interest
on loan, etc.)
The provisions will not apply if their application results in decrease in the overall
incidence of tax in India in respect of the parties involved in the international transactions.
Where the computation of income or determination of the allowance for any expenses or
interest or any cost or expense allocated or apportioned, as the case may be, computed
under section 92(2) has the effect of reducing the income chargeable to tax or increasing
the loss computed on the basis of entries made in the books of account in respect of
previous year in which the international transaction was entered into, the provisions will
not apply [Section 92(3)].
‘Arms length price’ means a price which is applied or proposed to be applied in a
transaction between persons other than associated enterprises, in controlled conditions.
It is the price that would have existed between enterprises not associated or related with
each other [Section 92F(ii)].