Introduction

Issue of notice under Section 148 of Income Tax Act, 1961 (for brevity ‘ITA’) after 31.03.2021 under old provisions has created lot of litigation at various High Courts and currently, the Supreme Court has reserved its judgment on such controversy. For detailed analysis of issue of notice under section 148, read our article here[1].

As the above controversy is settling down, a new issue has been come up for discussion at various High Courts. Earlier, assessments under section 143(3) or reassessments under section 147 are used to be completed in physical mode. However, after the introduction of Faceless Assessment Scheme (for brevity ‘FAS’), the concept of assessment procedure has been changed totally to digital mode. For details of faceless assessment scheme, we recommend reading our Article on FAS here[2].

Read more: Issues relating to ‘Issue of Notice’ through E-mail

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