1.  Yahoo India P. Ltd. Vs. DCIT, ITA No. 506/Mum/2008, Assessment Year: 2004-05, Dated: 24th June 2011, ITAT – Mumbai

The assessee, an Indian company, remitted Rs. 34 lakhs to Yahoo Holdings (Hong Kong) Ltd, a Hong Kong company, for placing banner advertisements on the web portal of Yahoo Hong Kong. The AO & CIT (A) took the view that the payment was “for the use or right to use any industrial, commercial or scientific equipment” (i.e. the server) and had the character of “royalty” under clause (iva) of Expl 2 to s. 9(1)(vi). On appeal by the assessee, HELD allowing the appeal:

(i) The word “use” in relation to equipment occurring in clause (iva) of Expl to s. 9(1)(vi) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions “use” and “right to use” followed by the word “equipment” indicate that there must be some positive act of utilization, application or employment of equipment for the desired purpose. If an advantage was taken from sophisticated equipment installed and provided by another, it could not be said that the recipient/customer “used” the equipment as such. The customer merely made use of the facility, though he did not himself use the equipment. What is contemplated by the word “use” in clause (iva) of Expl 2 to s. 9(1)(vi) is the customer came face to face with the equipment, operated it or controlled its functions in some manner. But if it did nothing to or with the equipment and did not exercise any possessory rights in relation thereto, it only made use of the facility created by the service provider who was the owner of the entire network and related equipment and there was no scope to invoke clause (iva) in such a case because the element of service predominated (ISRO Satellite 307 ITR 59 (AAR), Dell International 305 ITR 37 (AAR) & Asia Satellite 332 ITR 340 (Del) followed; Frontline Soft 12 DTR 131 (Hyd) held not good law);

(ii) On facts, the banner advertisement hosting services did not involve use or right to use by the assessee any industrial, commercial or scientific equipment and no such use was actually granted by Yahoo (Hong Kong) Ltd to the assessee. Uploading and display of banner advertisement on its portal was entirely the responsibility of Yahoo (Hong Kong) and the assessee was only required to provide the banner Ad to Yahoo (Hong Kong) for uploading the same on its portal. The assessee had no right to access the portal of Yahoo (Hong Kong) and there was nothing to show any positive act of utilization or employment of the portal of Yahoo (Hong Kong) by the assessee.

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2.  THE COMMISSIONER OF INCOME TAX & THE JOINT COMMISSIONER OF INCOME TAX, (ASSESSMENT) Vs. M/s MANGALORE GANESH BEEDI WORKS, ITA No.1305/2006, DATED: 23rd December 2010, HIGH COURT OF KARNATAKA

Whether when the firm is dissolved prior to the impugned AY but the returns are filed in individual capacity by the erstwhile partners in view of the directions of the court on a company petition, the sum received through a bid after dissolution is taxable as capital gains u/s 45(1) in the hands of the firm.

It is clear from the material on record that the AO held that the income which was received by accepting the highest bid was paid to the erstwhile 9 partners and highest bid was offered by erstwhile 3 partners. It is also clear that the firm had dissolved on 6.12.1987 itself and it was not in existence thereafter and returns were being filed by the erstwhile partners in view of the direction issued by this court in the Company Petition and the AO had passed an order of protective assessment against the firm represented by its partners. The outgoing partners of the firm are liable for capital gain u/s 45(1) of the Act and not the firm. Thus, the order passed by the ITAT is justified and does not call for interference.