The recent judgment of Honourable Mumbai Tribunal in the matter of Balaji Trust[1] is a quite interesting and special one. In this article, we shall deal with the pivotal issue of the entire matter, the taxation of transfer of brand ‘Essar’ by Essar Investments Limited (for brevity ‘EIL’) to the Balaji Trust (for brevity ‘trust’). The revenue tried to tax in different ways in different stages in the hands of the trust but ultimately failed, at least at this level. No doubt, considering the stakes involved, an appeal would be preferred by the Revenue before the High Court in due course of time. Though there are multiple issues in this appeal, this article is only about the taxation of the transfer of brand to the trust.

The facts of the matter are that, the trust is a private discretionary trust which was settled on 29^th March 2012 by the settlor, Shashikanth Ruia with an initial settlement of Rs 10,000. The trust was created for sole and exclusive benefit of the beneficiaries being the members of Ruia family. EIL was holding the brand ‘Essar’ including all the registered and unregistered trademarks, copyrights, service marks, certification marks, design, trade names relating to the logo and slogans used in relation thereto along with the getups incorporating the logo (for brevity ‘brand’) from 1996. On 29^th March 2012, EIL has contributed the brand ‘Essar’ to the corpus of the trust as voluntary gift and accordingly the ‘Essar’ brand was settled without consideration. Since no amounts were paid by the trust to EIL for obtaining the brand ‘Essar’, the trust has not shown the same in the financial statements. Post receipt of such brand, the trust has entered non-exclusive licensing agreements with operative Essar group entities. The said exploitation has resulted in earning of license fees by the trust. The said license fee was offered to tax by the trust by adopting the cash system of accounting in accordance with the provisions of Income Tax Act (for brevity ‘ITA’)

Read more: Taxation of Gift of Brand ‘Essar’ – Mumbai Tribunal in Balaji Trust

Introduction

In order to tackle the issues arising from undisclosed foreign income and assets, Central Government has enacted special Act ‘Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015’ (for brevity ‘BMA’) with effective from 01.07.2015.

Charge of Tax:

Section 3 of BMA states that a tax of 30 percent shall be levied on every assessee in respect of his total undisclosed foreign income and assets.

Scope of BMA, as stated in section4, is applicable in respect of any income from a source outside India which is not disclosed in the income tax return (ITR) filed under section 139 of Income Ta Act, 1961 (ITA) or any income from a source outside India in respect of which no ITR is filed under section 139 of ITA, or any undisclosed asset located outside India.

In order to attract provisions of section 3 of BMA, it needs to establish that the person is an assessee, and such assessee has undisclosed income or assets.

Read more: Penalties under Black Money Act - ‘must‘ or ‘may’?

The taxation of services provided in situations where two or more people come together to do a business is always a tricky one, both for the tax authorities and the assessee. The revenue intends that there was a provision of service by constituent member to the joint venture and there would be tax on the said transaction. The assessee on the other hand would argue that the relation with the other co-venturer is on principal to principal basis and cannot be said to be of contractor-contractee to bring into the ambit of service tax law. Before getting into the crux of the article, an important trip to the ancient wisdom on the subject issue is mandatory and accordingly we picked up certain important judgments of Supreme Court in the matter of association of persons and joint ventures.

The Supreme Court in the matter of G Murugesan and Brothers[1] has held that for forming an ‘association of persons’, the members of association must join together for the purpose of producing income. An ‘association of persons’ can be formed only when two or more individuals voluntarily combine together for a certain purpose. Hence, the Court held that volition on the part of the member of the association is an essential ingredient. The mere fact that the members jointly own one or more assets and share the income does not show that they acted as an ‘association of persons’.

Read more: Taxation of Services – Joint Ventures/Joint Operation Agreements/Revenue Sharing Arrangements

In this 93^rd edition of ours, we bring you an important ruling of Mumbai ITAT in the matter of Balaji Trust which dealt with taxation of brand ‘Essar’ received as gift. The Tribunal opined that the receipt of brand ‘Essar’ is on a capital account and cannot be included in ‘income’ as per Section 2(24) to bring the same to tax under Section 56(1) of Income Tax Act. The Tribunal also ruled out the possibility of taxing such receipt under old Section 56(2)(vii), stating that brand ‘Essar’ is not an artwork. Though there are other important aspects in the Tribunal judgment, our attention was given only to the taxation part. I urge everyone to read the entire judgment along with our article.

The next article is on another important ruling in the context of penalties under Black Money Act. The Assessing Officer tried to levy penalty under Section 43 of Black Money Act on assessee, since she has failed to disclose that she was a second signatory to a foreign bank account. The assesse pleaded on bonafides and requested to set aside the penalty. The Tribunal stated that the stringent provisions of Black Money Act cannot be attributed unless there is a malafide and no penalties should be slapped for genuine bonafide issues.

The final article is on the taxation of revenue sharing arrangements under Indirect Tax laws. One of the grey areas in indirect taxation is to how the revenue sharing arrangements would be taxable. The demands were being proposed only based on Circulars issued by CBIC without going into the facts whether there exists a service provider – service receiver relationship. The said task is left to the courts and tribunals, which have come to rescue of the assessees and stated that all such transactions are on principal to principal and does not attract tax. The said aspects would catch more fire in the GST era and the CBIC has to step in to provide a detailed guidance to avoid unnecessary litigation.

I hope that you will have good time reading this edition and please do share your feedback. I will also urge clients to mail us topics or issues on which you want us to deliberate in our future editions, so that we can contribute to the same.

Read more: SBS Wiki E Journal April 2022