Treatment of share application money-

BL : 23 FEb 2013

Share application money cannot be regarded as an investment.

The Mumbai Income Tax Appellate Tribunal ruled that ‘share application money’ represented the application amount for allotment of shares and cannot be regarded as an investment/ asset yielding tax-free income.

 Therefore, such money should be excluded while computing disallowance under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.

AP High Court breather for Sanofi

The Andhra Pradesh High Court has turned down the ruling of the Authority for Advance Rulings (AAR) in favour of Sanofi Pasteur Holding SA. The matter involved taxability in India of the sale of shares of a French company by one non-resident to another. The French company held about 80 per cent shares in an Indian biotech company.

The Court ruled that as tax on capital gain on the transaction was exclusively allocated to France, and not India, under provisions of the Act read with tax treaty, the appellant was under no obligation to deduct tax on the amount paid for the French company’s shares and, hence, cannot be treated as an assessed in default.

The Court also observed that the French company had commercial substance and was not a tax avoidance device. Further, the retroactive amendments to the Act vide the Finance Act, 2012 have no impact on the interpretation of the tax treaty.

The ruling lays down the required guidance on applicability of tax treaty provisions along with important taxation principles.

Reimbursement and service tax

Under the Service Tax Valuation Rules, reimbursements are a part of the gross amount charged by the service provider. Thus, reimbursements are subject to service tax.

 Though there is a prescribed rule that keeps expenses incurred by a service provider in the capacity of a pure agent out of the service tax net, the conditions are too stringent and practically difficult.

The Delhi High Court in the case of Intercontinental Consultants and Technocrats Pvt Ltd opined that by seeking taxation of every reimbursement not qualifying the criteria for pure agent, the rules have tried to override the provisions of the Finance Act, as there is no such intention to tax every reimbursement.

There is a need to review the rules in accordance with the principles formulated by the Finance Act; it held the rules seeking taxation of reimbursement ultra vires the Finance Act.

 An important aspect to be noticed is that the High Court didn’t refer to other judgments in this regard, which sought to include reimbursements as part of taxable value and, hence, further challenge at the Supreme Court cannot be ruled out.

Grant Thornton