snk newsletter- april 2011
TRANSCRIPT
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DIRECT TAXESJudicial pronouncements
SNK
Issue 04 April , 2011
NewsletterWebsite : www.snkca.com Email: [email protected]
DIRECT TAXES ... 1 - 9
OTHER LAWS ... 9 - 12
IMPORTANT DUE DATES 12
INDIRECT TAXES . 9
ACIT v. Harshad V. Doshi (ITA No.1367/MDS/2009) [2011]
9 taxmann.com 48
Amounts advanced by a company to its director under a
Board resolution, for specific purpose, would not fall under
mischief of section 2(22)(e).
ACIT v. U.P. Cricket Association (ITA NO.422(LUC.)/2009)
[2011] 9 taxmann.com 102
Transfer of funds by a charitable society to another charitable
institution is application of income as per section 11.
Yatish Trading Co Pvt Ltd vs. ACIT (ITAT Mumbai)(ITANo. 456 /Mum/2009)
No s. 14A disallowance of interest on borrowed funds
used to buy shares for trading purposes
The assessee, engaged in trading and investment of shares,
received tax-free dividend income of Rs. 2.98 crores in AY
2004-05. The AO invoked s. 14A and disallowed the interest
on borrowings, administrative and other expenses on propor-
tionate basis. In appeal, the CIT (A) upheld the disallowance
but directed that it should be computed as per Rule 8D. On
appeal to the Tribunal, HELD:
(a) Rule 8D does not apply prior to AY 2008-09 (Godrej &
Boyce 328 ITR 81 (Bom) followed);
(b) The expression in relation to in s. 14A means dominant
and immediate connection or nexus with the exempt in-
come. In order to disallow expenditure u/s 14A, there
must be a live nexus between the expenditure incurred
and the tax-free income. Disallowance cannot be made
on presumptions and estimation by the AO. Notional ex-
penditure can be apportioned for the purpose of earningincome if there is no actual expenditure incurred in rela-
tion to the tax-free income;
(c) On facts, the business of the assessee predominantly
was trading in shares though it also had investments in
shares. The AO has not disputed the assessees claim
that the dividend had been received on shares pur-
chased for trading purposes. Interest on borrowed funds
used for trading activity is allowable u/s 36(1)(iii) and it
cannot be treated as expenditure for earning dividend
income which is incidental to the trading activity. If the
real purpose was to use borrowed funds for trading pur-
poses and incidentally there is tax-free dividend, it can-
not be said that the interest has been incurred for earn-
ing the dividend income (Wallfort Share & Stock Brokers
326 ITR 1 (SC), Godrej & Boyce 234 DTR 1 (Bom), Em-
raid 284 ITR 586 (Bom), Leena Ramchandranan (Ker) &
Eicher 101 TTJ (Del) 369 followed);
(d) Though, as held in Godrej & Boyce 234 DTR 1 (Bom), it
is implicit within s. 14A that expenditure incurred for an
indivisible purpose has to be apportioned, this principle
of apportionment is applicable only where it is not possi-
ble to determine the actual expenditure incurred in rela-
tion to tax-free income. When it is possible to determine
the actual expenditure in relation to the exempt income
or where no expenditure is incurred in relation to the
exempt income, the principle of apportionment embed-
ded in s 14A has no application;
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SNKDIRECT TAXES
Judicial pronouncements
(a) As regards the disallowance of
administrative expenditure, the
AOs basis of disallowance based
on the ratio of taxable income and
dividend is wrong because the ex-
penditure did not depend on the
profit or loss arising from the busi-
ness activity. If the expenditure is
apportioned on the basis of in-
come, then in the case of no in-
come, no expenditure can be as-
signed. In case of transaction of
purchase and sale of shares, the
reasonable basis for apportion-
ment of administrative expenditureshould be the volume and nature
of the transaction under different
activities. There cannot be an
equal basis for apportionment of
admin expenses between delivery
based transactions and non-
delivery based transactions etc.
Hoshang D Nanavati vs. ACIT (ITAT
Mumbai)(ITA No. 3567/Mum/07)
S. 14A disallowance cannot be
made for depreciation
The assessee, a partner in a firm of
solicitors, received Rs 14 lakhs to-
wards remuneration as a working part-
ner and Rs 46 lakhs towards share of
profit in the partnership. The question
arose whether, given that the remu-
neration was taxable as business prof-
its, disallowance u/s 14A could be
made in respect of (a) depreciation
and (b) deduction u/s 80D in respect of
health insurance premium. HELD by
the Tribunal:
(a) S. 14A permits a disallowance of
expenditure incurred by the as-
sessee and not of allowance ad-
missible to him. There is a distinc-
tion between expenditure and
allowance. The expression
expenditure does not include al-
lowances such as depreciation
allowance. Accordingly, deprecia-
tion cannot be the subject matter
of disallowance u/s 14A (ratio of
Nectar Beverages 314 ITR 314
(SC) followed);
(b) Similarly, the deduction u/s 80D is
not expenditure for earning tax-
free income but is a permissible
deduction from gross total income
under Chapter VIA.
CIT v. Sandan Vikas (India) Ltd. (ITA
No. 348 of 2011)(Delhi HC)
Benefit of weighted deduction on in-
house Research and Development
expenditure is allowed from the year
in which the taxpayer has filed an
application and not when it is ap-
proved by DSIR
The Court held that the taxpayer was
eligible to claim weighted deduction on
in-house Research and Development
(R&D) expenditure from the year inwhich the taxpayer made an applica-
tion to the Department of Scientific and
Industrial Research (DSIR). The High
Court observed that the provisions of
the Income-tax Act, 1961 (the Act)
does not suggest or imply that the cut-
off date mentioned in the certificate
issued by the DSIR will be the cut-off
date for eligibility of weighted deduc-
tion on the expenditure incurred on in-house R&D to avail benefit of Section
35(2AB) of the Act.
DCIT vs. Edelweiss Capital Ltd
(ITAT Mumbai)(ITA No. 3971/
Mum/2009)
If not Bad Debt, claim for
Business loss maintainable. Web-
site development expense is not
capital expenditure
The assessee, engaged in investment
activities, advanced Rs. 27.97 lakhs for
development of a website. As the ad-
vance was not recoverable, the as-
sessee wrote off the amount and
claimed it as a bad debt even though
the conditions of s. 36(1)(vii) & 36(2)
were not satisfied. The AO rejected the
claim though the CIT (A) allowed it. On
appeal by the department to the Tribu-
nal, HELD:
(i) Though the claim as a bad debt is
not allowable, the assessee is enti-
tled under Rule 27 to support the
CIT (A)s order on the ground that
the amount should be allowed as a
business loss. The subject-matter
of an appeal should be understood
not in a narrow and unrealistic
manner but should be so compre-
hended as to encompass the en-
tire controversy between the par-
ties which is to be adjudicated
upon by the Tribunal. Such a claim
can be considered provided no
new facts are needed (Edward
Keventer 123 ITR 200 (Del) & Gil-
bert & Barker 111 ITR 529 (Bom)
followed);
(ii) On merits, the departments argu-
ment that the amounts paid for
development of websites cannot
be allowed as business loss be-
cause if the websites had been
successfully put up, the expendi-ture would have been capital ex-
penditure is not acceptable. be-
cause (a) as the expenditure was
abortive, no capital asset has in
fact been acquired and (b) even if
the website had materialized, it
does not result in an advantage of
an enduring nature or in the capital
field as it is only for the day-to-day
running of the business and provi-sion of information.
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Judicial pronouncements
CIT vs. Niraj Amidhar Surti (Gujarat
High Court)(Tax Appeal No. 836 of
2009)
Merely because shares are pur-
chased by taking loan at high inter-
est does not mean gains are taxable
as business profits
The assessee, a CA, offered income
from profession, LTCG, STCG &
speculation profits. He borrowed funds
@ 30% p.a. and bought a large num-
ber of shares of Home Trade Ltd at Rs.
50. The shares were pledged as secu-
rity for the loan. After 14 months, theassessee repaid the loan, obtained the
shares & sold them at Rs. 750 each for
a profit of Rs. 1.73 crores which was
offered as LTCG. The assessee in-
vested in s. 54 EC bonds & claimed
exemption. The AO held that as the
assessee had borrowed at an
exorbitant rate of interest & taken
risk, the transaction was an adventure
in the nature of trade and the profitsassessable as business profits. This
was reversed by the CIT (A) & Tribu-
nal. On appeal by the department,
HELD dismissing the appeal:
(i) The AO held the transaction to be
an adventure in the nature of
trade and not normal investment
on the basis that (a) assessee had
borrowed funds at an exorbitant
rate of 30% and (b) the shares
were held by the lender till the en-
tire loan was paid. However, this
reasoning loses sight of the fact
that merely because the shares
had been purchased from bor-
rowed funds obtained on high rate
of interest would not change the
nature of the transaction from in-
vestment to one in the nature of anadventure in the nature of trade.
Moreover, as the shares were held
for a long-period of 14 months, the
intention of the assessee had al-
ways been that of making invest-
ment in shares and not dealing in
shares. This is also apparent from
the fact that the shares had notbeen treated as stock in trade by
the assessee. The fact that the
shares were in the physical pos-
session of the lender was not rele-
vant because the assessee was
the owner thereof;
(ii) A capital investment and resale
does not lose its capital nature
merely because the resale was
foreseen and contemplated when
the investment was made and the
possibility of enhanced values mo-
tivated the investment {Sutlej Cot-
ton Mills Supply Agency Ltd 100
ITR 706 (SC)} followed.
CIT vs. M/s Sai Metal Works (P&H
High Court)(ITA No. 125 of 2004)
S. 40A(3) Disallowance can be made
in Block Assessment even if GP es-
timated
Pursuant to a search, the AO passed a
block assessment order u/s 158BC in
which he made a disallowance u/s 40A
(3) in respect of cash payments ex-
ceeding Rs. 20,000. The CIT (A) &
Tribunal struck down the disallowance
on the ground that s. 40A(3) could not
be invoked in a case where a block
assessment was by estimate on thebasis of GP rate. On appeal by the
department, HELD reversing the Tribu-
nal:
(i) Though the provisions of block
assessment are special, the argu-
ment that they are a complete
Code and the other provisions
cannot apply is not acceptable. S.40A(3) applies to block proceed-
ings. Suresh Gupta 297 ITR 322
(SC) & M. G. Pictures 185 CTR
(Mad)185 followed; Cargo Clearing
Agency 218 CTR (Guj) 541 not
followed;
(ii) The argument that if income is as-
sessed by estimation on GP rate,
no other disallowance can be
made is not of universal applica-
tion. If expenditure which is legally
not permissible has been taken
into account that can certainly be
disallowed even where income is
estimated.
JSW Steel Ltd. v. ACIT (ITA No.922/
BANG/2009) [2011] 9 taxmann.com
77 (bang. - ITAT)
Conversion of interest liability into
share capital is not hit by Explana-
tion 3C to section 43B.
The loan cannot be equated with Pref-
erence Share and consequently, it
cannot be construed that Explanation
3C to section 43B covers not only
loans and advances but also prefer-
ence shares.
Madhu Rani Mehra vs. CIT (Delhi
High Court)(ITR No. 541/1992)
Capital asset treated as stock-in-
trade of proprietary business has to
be valued at market value
The assessee, a partner of a firm, re-
ceived stock-in-trade on dissolution of
the firm. The stock was used by the
assessee to start a proprietorship busi-
ness. In the assessment of the firm,
the Tribunal held, following ALA Firm
189 ITR 285 (SC), that the option to
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value stock at the lower of cost or mar-
ket was available only to a going con-
cern and as the firm had dissolved, the
stock had to be valued at the market
value. However, in the assessment ofthe assessees proprietorship busi-
ness, it was held that as the proprietor-
ship concern had acquired the stock
from the dissolved firm and continued
the same business, the opening stock
could not be valued at a price higher
than the book value as the assessee
had not paid anything in excess of the
said amount. On appeal to the High
Court, HELD allowing the appeal:
When a partnership firm is dissolved
and the erstwhile partner receives
stock, it is a capital asset in his hands.
When that asset is introduced into a
business as stock, it gets converted
into stock-in-trade. The value of this
stock will have to be the market value
on the date of introduction. The Tribu-
nals reasoning that the assessee can-not value the stock introduced in the
business at market value because that
was not the price she paid for it is
flawed because if the assessee on
having received her distributed share
of stock of jewellery from the dissolved
firm had sold it, and thereafter com-
menced her proprietorship business of
jewellery again; within short span; by
buying the jewellery from the marketfrom the proceeds of stock sold on
dissolution of the erstwhile firms, the
stock of the proprietorship concern
would without doubt be valued at mar-
ket value. The same principle would
apply if the assessee used her share
of the stock obtained from the dis-
solved firm in the new business.
Bharat Bijilee Limited vs. ACIT (ITAT
Mumbai)(ITA No. 6410/MUM/2008)
Despite s. 50B, transfer of undertak-
ing for non-money consideration
not taxable if cost of acquisition
not determinable
The assessee transferred its undertak-
ing on a going concern basis pursu-
ant to a scheme of arrangement u/s
391 to 394 of the Companies Act. In
consideration, the transferee allotted
preference shares & bonds to the as-
sessee. The assessee claimed that the
transfer was not liable to tax on capital
gains on the basis that there was no
cost of acquisition of the undertaking.
The AO held that the transaction was a
slump sale as defined in s. 2(42C)
and that the gains had to be computed
u/s 50B. This was upheld by the CIT
(A). On appeal by the assessee to the
Tribunal, HELD allowing the appeal:
(i) In order to constitute a slump
sale u/s 2(42C), the transfer must
be as a result of a sale i.e. for a
money consideration and not by
way of an Exchange. The differ-
ence between a sale and an ex-
change is this that in the formerthe price is paid in money, whilst in
the latter it is paid in goods by way
of barter. The presence of money
consideration is an essential ele-
ment in a transaction of sale. If the
consideration is not money but
some other valuable consideration
it may be an exchange or barter
but not a sale. On facts, as the
undertaking was transferred in
consideration of shares & bonds, it
was a case of exchange and not
sale and so s. 2(42C) and s. 50B
cannot apply;
(ii) As regards taxability u/s 45 & 48,
the capital asset which was
transferred was the entire under-
taking and not individual assets
and liabilities forming part of theundertaking. There was no basis
for apportioning the consideration
amongst the various assets com-
prised in the undertaking nor could
the cost of acquisition of the un-
dertaking be determined. In the
absence of a cost/date of acquisi-
tion, the computation & charging
provisions of s. 45 fail and thetransaction cannot be assessed
(Premier Auto 264 ITR 193 (Bom)
distinguished).
ACIT v. C. Rajini (ITA NO. 1239/
MDS/2008) [2011] 9 taxmann.com
115 (CHENNAI ITAT)
A developer and builder is not required
to be owner of land on record for
claiming a deduction under section 80-
IB(10).
ITO v. Galaxy Saws Pvt. Ltd. (ITA
No. 3747/M/2010)
Revaluation reserve not routed
through Profit and Loss Account
could not be added to net profit
while computing the book profit for
the purpose of MAT
The Tribunal held that revaluation re-
serve not routed through Profit & Loss
Account but directly transferred to bal-
ance sheet could not be added to net
profit while computing the book profit
for the purpose of Minimum Alternate
Tax (MAT). Further, the Tribunal reiter-
ated that principle that once the ac-
counts have been prepared as per the
provisions Schedule VI of the Compa-
nies Act and adopted at the Annual
General Meeting (AGM) of the com-
pany, the net profit disclosed in such
accounts cannot be tinkered with by
the Assessing Officer (AO) while com-
puting the book profit.
DIRECT TAXES
Judicial pronouncements
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Honeywell Automation India Ltd vs.
DCIT (ITAT Pune)(Stay Application
No. 08/PN/2011)
Direct Stay Application to Tribunal
maintainable. Not necessary that
lower authorities must be ap-
proached first
The assessee filed a stay application
before the AO, Addl CIT & CIT but
none of the authorities dealt with it.
The assessee also filed a stay applica-
tion before the Tribunal which was op-
posed by the Department on the
ground that the application was notmaintainable without there first being a
rejection by the lower authorities.
HELD dismissing the departments ob-
jection:
(i) It is settled law that a Direct Stay
Application filed before the Tribu-
nal is maintainable and it is not the
requirement of the law that as-
sessee should necessarily ap-
proach the CIT before approachingthe Tribunal for grant of stay. It
does not make any difference
whether the assessee filed any
application before the Revenue
and not awaited their decisions
before filing application before the
Tribunal or directly approached the
Tribunal without even filing the ap-
plications before the Revenue au-
thorities, when there exists threatof coercive action by the AO;
(ii) In deciding a stay application, the
following aspects have to be con-
sidered: (i) liquidity of the funds of
the assessee to clear the tax ar-
rears out of own funds at the rele-
vant point of time based on the
assessees financial status at the
time of the stay petition hearing; (ii)
creditworthiness of the assessee to
outsource the funds to clear the
departmental dues; (iii) prima facie
views on the likely decision of the
Tribunal on the issues raised in the
appeal; (iv) departmental urgen-
cies in matters of collection and
recovery; (v) guarantees providedby the assessee to safe guard the
interest of the revenue etc.
Tata Communications Ltd vs. ACIT
(ITAT Mumbai Special Bench)(S.A.
Nos.196 to 198/Mum/2009)
Despite Third Proviso to s. 254(2A),
Tribunal has power to extend stay
beyond 365 days if delay not attrib-
utable to assessee
The Third Proviso to s. 254(2A), as
amended w.e.f. 1.10.2008, provides
that if the appeal filed by the assessee
is not disposed off within the period of
stay granted by the Tribunal (which
cannot exceed 365 days), the order of
stay shall stand vacated even if the
delay in disposing of the appeal is not
attributable to the assessee. The as-
sessee filed a stay application request-ing stay of demand for penalty of Rs.
369 crores. On the expiry of 365 days
of stay, the assessee asked for exten-
sion of stay relying on the Tribunals
order in Ronak Industries where, stay
had been granted beyond 365 days
relying on the judgement of the Bom-
bay High Court in Narang Overseas
295 ITR 22 (Bom). As it was felt by the
Tribunal that the reliance in Ronak In-dustries on Narang Overseas was mis-
placed in view of the amendment to the
Third proviso to s. 254(2A) w.e.f.
1.10.2008, the question whether the
Tribunal had jurisdiction to extend stay
beyond 365 days referred to the Spe-
cial Bench. HELD by the Special
Bench:
(i) In Ronak Industries, the Tribunal
held, relying on Narang Industries,
that the Tribunal has the power to
extend stay beyond 365 days. This
decision of the Tribunal was chal-
lenged by the department in the
Bombay High Court by specifically
raising a question as to the appli-
cability of the Third Proviso to s.254(2A) as amended w.e.f
1.10.2008. The High Court, vide
order dated 22.10.2010, dismissed
the departments appeal. As such,
the Tribunals order holding that
there was power to extend stay
even after 365 days stood af-
firmed;
(ii) The departments argument that
the High Courts order in Ronak
Industries should be treated as per
incuriam on the ground that the
amendment made by the FA 2008
was not considered by it is not ac-
ceptable because (a) In Narang
Overseas (rendered prior to the
amendment) a wider view was
taken as regards the power to
grant stay, (b) In the appeal filed
by the department in Ronak Indus-
tries a specific question with regard
to the effect of the Third Proviso
was raised and so it cannot be said
that the High Court had not taken
cognizance of the amendment, (c)
the Tribunal cannot ignore a High
Courts decision on the ground that
a provision of law was not consid-
ered by the High Court and (d) the
fact that there is no discussion in
the High Courts order in Ronak
Industries does not mean that does
not lay down any ratio decidendi;
(iii) However, the recovery of the ar-
rears by the AO on the expiry of
365 days of stay cannot be or-
dered to be refunded because on
the date of recovery the stay had
expired and the application for ex-tension was pending before the
Special Bench. The AOs act was
bona fide and as the recovery was
DIRECT TAXES
Judicial pronouncements
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by adjustment of refunds, it was not a
coercive measure (RPG Enterprises
251 ITR (AT) 20 (Mum) & other cases
holding that the AO must refund taxes
collected during the pendency of a
stay application distinguished).
Synergy Entrepreneur Solutions Pvt
Ltd vs. DCIT (ITAT Mumbai)(ITA No.
3076/Mum/10)
S. 263 Revision order is Invalid, if
for reason not stated in show-cause
notice
The assessee, engaged in share trad-
ing, claimed set-off of trading losses
against trading profits which was ac-
cepted by the AO u/s 143(3). The CIT
issued a show-cause notice u/s 263 in
which he claimed that the share trad-
ing losses were speculation losses u/
s 73 and could not be set off against
other income. Upon the assessee
clarifying that under the Explanation to
s. 73 the trading losses were eligible to
be set-off against the trading profits,
the CIT, without rejecting the claim,
passed an order u/s 263 on the ground
that the AO had not examined the is-
sue. On appeal to the Tribunal, HELD
quashing the s. 263 order:
(i) The reason given for the revision in
the s. 263 order (that the AO has not
verified the issue) is different from the
reason set out in the show-cause no-
tice (that speculation loss cannot beset-off against other income). If a
ground of revision is not mentioned in
the show-cause notice, it cannot be
made the basis of the order for the
reason that the assessee would have
had no opportunity to meet the point
(Maxpack Investments 13 SOT 67
(Del), G.K. Kabra 211 ITR 336 (AP) &
Jagadhri Electric Supply 140 ITR 490
(P&H) followed);
(ii) On merits, the result of the Expla-
nation to s. 73 is that the entire profits
from trading in shares, even from de-
livery based transactions, is deemed to
be speculation profits and so the as-
sessee is entitled to set off the share
trading losses from the share trading
profits (Lokmat Newspapers 322 ITR
43 (Bom) followed).
CIT v. Subhash Kumar Jain (ITA No.
225 of 2003) [2011] 9 taxmann.com
112 (PUNJ. & HAR.)
Penalty for concealment of income -
Section 271(1)(c) r.w.s. 263
Once assessees offer to surrender
certain income subject to no penal ac-
tion under section 271(1)(c) was ac-
cepted by department and assessment
was made accordingly, no penalty pro-
ceedings under section 271(1)(c) could
be initiated against assessee thereaf-
ter.
Judicial Pronouncements - Inter-
national Taxation
Cummins India Limited vs. DCIT
(ITAT Pune)(ITA No. 277 & 1412/
PN/07)
Transfer Pricing: If ALP determined
by arithmetical mean, 5% deduction
allowable
In determining the arms length price
for transfer pricing purposes in respect
of international transactions relating to
procurement Support Services, the
TPO considered 61 comparable prices
and finally relied on 3 prices to arrive
at the arithmetic mean. However, hedid not give a deduction from the arith-
metic mean as required by the first
proviso to s. 92C(2). On appeal to the
Tribunal, HELD:
(i) The First proviso to s.92C(2) (pre
amendment by F (No 2) Act 2009
w.e.f. 1.10.09) which provides that
where more than one price is de-termined by the most appropriate
method, the arms length price
shall be taken to be the arithmeti-
cal mean of such prices or at the
option of the assessee, a price
which may vary from the arithmeti-
cal mean of an amount not ex-
ceeding five per cent of such arith-
metical mean is clear that the as-
sessee has an option when thereis arithmetical mean involved while
computing the arms length price
and it happens only if more than
one price is determined by the
most appropriate method. The
First Proviso becomes operational
where more than one comparable
price is determined. The assessee
at his option can make claim of
deduction out of the arithmeticmean not exceeding 5%.
(ii) All the judicial pronouncements
(SAP Labs 6 ITR (Trib) 81 (Bang),
Sony 315 ITR (AT) 150 (Del), UE
Trade Corp (Del), Essar Steel
(Vizag) & Perot Systems 130 TTJ
685 (Del) are uniform in making
the proposition that where arithme-
tic mean is involved, the assessee
obtains the eligibility for claim of
deduction out of such arithmetic
mean. It is commonsense that the
statistical concept of arithmetic
mean arises only when there ex-
ists more than one price data.
Such concept is irrelevant to the
data with only one variable. In the
assessees case, as there were
three comparable price data, the
assessee was entitled for deduc-
tion not exceeding 5% out of the
arithmetic mean.
DIRECT TAXES
Judicial pronouncements (International Taxation)
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Judicial pronouncements (International Taxation)
TNT India Private Limited vs. ACIT
(ITAT Bangalore)(ITA No.1442
(BNG)/08)
Transfer Pricing: Prior Years data
cannot ordinarily be relied upon to
justify ALP. Non-operating income
& expenditure should be excluded
while comparing
The assessee, a courier company,
paid Rs. 43.46 crores to its holding co
in Netherlands towards the reimburse-
ment of cost in transport of consign-
ments. The TPO & CIT (A) adopted
the TNMM and claimed that as theoperating profit /operating income of
the comparables was higher than that
earned by the assessee, an adjust-
ment had to be made. It was also
claimed that the assessee was not
entitled to rely on the data of earlier
years. On appeal to the Tribunal,
HELD:
(a) In respect of FY 2001-02, the as-
sessee used data pertaining to
AYs 1999-2000 & 2000-01. While
the argument that at the time of
TP study, the data relating to rele-
vant comparable for FY 2001-02
is acceptable, the assessee has
to adopt the data available for the
TP study at the time of filing of the
return. By the time of filing of re-
turn, the data relevant to FY 2001-
02 was available. Further, prior
year data is relevant only if the
assessee is able to prove that the
pricing pattern of the assessee for
the relevant financial year has
been influenced by the market
conditions/business cycle/product
life cycle of the earlier years
(which is not there in the courier
business). The OECD guidelinesare not of binding nature and even
the Proviso to Rule 10B (4) pro-
vides that any subsequent year
data cannot be considered. The
contemporaneous data of relevant
financial year is to be used for
making the comparable analysis
for arriving at the ALP unless it isproved otherwise;
(b) For arriving at the net margin of
operating income, only operating
income and operating expenses
for the relevant business activity
of the assessee has to be taken
into consideration. Other income,
such as dividend income, profit on
sale of assets, donations as well
as non-operating expenses which
are included in the operating in-
comes of other comparable com-
panies should be excluded as it
effects the net margin of the oper-
ating profits of the comparables.
Working capital adjustments also
have to be considered while arriv-
ing at the operating net margins.
(c) The assessee is entitled to a stan-dard deduction of 5% as provided
under proviso to s. 92C (2) before
making adjustments of the trans-
fer price. (Schefenacker Mother-
son 123 TTJ (Del) 509 and SAP
Labs 6 ITR 81 (Bang)(Trib) fol-
lowed)
Marubeni India Private Ltd vs. ACIT
(ITAT Delhi)(ITA No. 809/Del/2009)
Transfer Pricing: For TNMM, inter-
est on surplus & abnormal costs to
be excluded
The assessee, a subsidiary of a Japa-
nese company, received commission
for agency and market research ser-
vices. For Transfer pricing purposes,
the assessee adopted the Transac-
tional Net Margin Method (TNMM)
and chose the Operating Profit Margin
on Operating Cost (OP/OC) as the
PLI and treated itself as the tested
party. As the assessees margins
were higher than that of comparables
(9% vs. 8.37%), the transactions were
claimed to be at arms length. The
TPO & CIT (A) held that in computingthe Operating Profit (a) interest in-
come and (b) abnormal costs had to
be excluded. On appeal to the Tribu-
nal HELD:
(a) Even if interest on surplus funds is
assessed as business income, it
has to be excluded in computing
the operating profits because if it
is included, one is computing the
return on investment which is an
inappropriate profit level indicator
for a service provider. As the PLI
is the Operating Margin on Cost,
neither the interest income nor
interest expenses is a relevant
factor. The essential element is
the cost incurred for the operating
activity which has to be taken into
account;(b) In computing the ALP, abnormal
expenses which are not of a rou-
tine nature as well as those of a
personal nature have to be ex-
cluded;
(c) Compensation for closure of cer-
tain units, though not a regular
phenomena, has a direct link with
the international transaction. The
assessee was receiving certain
charges at cost plus 10%. By
closing down certain branches,
the cost to the AE was reduced
and so such receipts would al-
ways be considered as operating
expenses. The cost of closure
cannot be excluded in computing
the operating expenses;
(d) The current year data should beused for comparison purposes
and not the data of preceding two
years;
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SNKDIRECT TAXES
Judicial pronouncements (International Taxation)/ Circulars / Notification
(e) The argument that as the assessee
did not take any financial risk while
providing agency services and as it
also did not have a patent etc,there must be an adjustment for
the functional and risk level differ-
ence is not acceptable because
no evidence as required by Rule
10D to show the risk born by com-
parables is shown. The assessee
has to demonstrate exact details,
exhibiting the risk born by the com-
parable vis--vis the risk in running
the assessees business (SonyIndia 114 ITD 448 (Del) where a
20% adjustment was permitted
distinguished);
(f) The argument that there is a
general recession in the interna-
tional market and so an adjustment
should be made is not acceptable
because the comparables adopted
by the TPO takes into considera-
tion the general factor available to
the assessee vis--vis to the com-
parable in the market. No ad-hoc
separate adjustment can be made
for the general conditions of the
market at the relevant point of time;
(g) The benefit of +/- 5% adjustment is
not a standard universal deduc-
tion. This option is available only
when assessee is computing theALP and not when the AO/TPO is
computing the ALP.
ABN AMRO Bank NV vs. CIT
(Calcutta High Court)(ITA No. 458 of
2005)
Interest paid by a branch of a For-
eign Bank to its HO is deductible in
the hands of the branch. Such inter-
est is not taxable in the HOs handsThe assessee, a Netherlands Bank,
carried on banking business through a
PE in India. The PE borrowed funds
from its HO on which interest was paid.
The assessee claimed that in the com-
putation of profits of the PE under Arti-
cle 7(3)(b) of the India-Netherlands
DTAA, the interest paid to the HO wasdeductible. The AO & CIT (A) held that
while the interest was deductible in
principle in the hands of the PE, it was
taxable in the hands of the HO and as
there was no TDS u/s 195, the interest
had to be disallowed u/s 40(a)(i). The
result was that the interest paid by the
PE to the HO was disallowed in the
hands of the PE while being assessed
in the hands of the HO. On appeal, theSpecial Bench (98 TTJ Kol 295) held
that the PE and the HO were the same
person and the interest paid was nei-
ther deductible in the hands of the PE
nor assessable in the hands of the HO.
On appeal by the assessee, HELD re-
versing the Special Bench:
(i) As regards deductibility of the inter-
est in the hands of the PE, though
a branch and the HO are the
same person in general law, Arti-
cles 5 & 7 of the DTAA provide that
the PE shall be assessable as a
separate entity. Under Article 7(3)
(b) payment of interest by a banks
PE to its HO is allowed as a deduc-
tion. The result is that the interest
paid by the PE to the HO is de-
ductible in computing the PEs
profits (Betts Hartley Huett 116 ITR
425 (Cal) distinguished);
(ii) As regards taxability in the hands
of the HO & obligation for TDS u/s
195, in accordance with the princi-
ples of apportionment of profits
between the PE & the HO as laid
down in Hyundai Heavy Industries
291 ITR 482 (SC) & Morgan
Stanley 162 TM 165 (SC), only thePE is to be taken as the assessee
and not the HO. As the interest
was not chargeable to tax in the
hands of the HO, the PE was un-
der no obligation to deduct tax u/s
195 and consequently no disallow-
ance u/s 40(a)(i) can be made in
the hands of the branch.
Circulars / Notifications
Notification No. 16/2011 dated 29-3-
2011
Two new information required in
quarterly statement of deduction of
tax from 1st April 2011
CBDT has notified amendment to Rule
31 and inserted tow new information to
be provided by every deductor of tax in
its quarterly statement of tax deduction.
Under Rule 31, every person responsi-
ble for deduction of tax under ChapterXVII-B, are required to submit quarterly
statement of tax. Sub Rule 4 of Rule
31A prescribes what information are
required to be given . Till 31s March
2011 , the Sub Rule 4 was as under
(4) The deductor at the time of prepar-
ing statements of tax deducted shall,-
(i) quote his tax deduction and collec-
tion account number (TAN) in thestatement;
(ii) quote his permanent account num-
ber (PAN) in the statement except
in the case where the deductor is
an office of the Government;
(iii) quote the permanent account num-
ber of all deductees;
(iv) furnish particulars of the tax paid to
the Central Government includingbook identification number or
challan identification number, as
the case may be.
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SNKINDIRECT TAXES / OTHER LAWS
Circular / Notifications
However, from 01/04/2011, two new
clause to sub-rule 4 are being added.
These are
(v) furnish particulars of amount paid
or credited on which tax was not
deducted in view of the issue of
certificate of no deduction of tax
under section 197 by the Assess-
ing Officer of the payee;
(vi) furnish particulars of amount paid
or credited on which tax was not
deducted in view of the compli-
ance of provisions of sub-section
(6) of section 194C by the payee."Please note that Rule 28AA is also
being substituted which provides for
certificate for deduction at lower rates
or no deduction of tax from income
other than dividends.
INDIRECT TAXES
Circulars / Notifications
Circular No. 942/03/2011-CX dated
the 14th March, 2011
Liability of interest where CENVAT
credit was wrongly taken but re-
versed by assessee before utiliza-
tion- Circular No. 942/03/2011-CX
Attention is invited to the Boards Cir-
cular No. 897/17/2009-CX dated
03.09.09, wherein it was clarified that
in light of clear and unambiguous pro-
visions of Rule 14 of the CENVAT
Credit Rules, 2004, the interest shall
be recoverable when credit has been
wrongly taken, even if it has not
been utilized.
2. References have been received to
re-examine the issue in light of
judgment of P&H High Court in
the case of Ind-Swift Labs. V/s
UOI [2009(240)ELT328(P&H)].The said judgment of P&H High
Court held that under provisions
of Rule 14 of CENVAT Credit
Rules, 2004, interest cannot be
claimed from the date of wrong
availment of credit. It is required
to be paid from the date it iswrongly utlilized.
3. The matter has been examined. It
is observed that the issue has
now been conclusively settled by
the Apex Court in the departmen-
tal appeal against the above men-
tioned judgment of P&H High
Court. The Apex Court vide its
judgment dated 21.02.11 in Civil
Appeal No. 1976 of 2011 has set
aside the aforesaid order of
Honble High Court. The Apex
Court has ruled that If the afore-
said provision is read as a whole
we find no reason to read the
word OR in between the expres-
sions taken or utilized wrongly or
has been erroneously refunded
as the word AND. On the hap-
pening of any of the three circum-
stances such credit becomes re-
coverable along with interest. In
effect, therefore, the view taken
by the Board in circular dated
03.09.09 has now been endorsed
by the Apex Court.
4. Immediate action may be taken to
safeguard revenue in light of the
judgment of Apex Court.
OTHER LAWS
COMPANY LAW
General Circular No. 09/2011, dated
31.03.2011
Compulsory Filing of Balance
Sheet and profit and Loss Account
in extensible Business Reporting
Language (XBRL) mode
It has been decided by the Ministry of
Corporate Affairs to mandate certain
class of companies to file balance
sheets and profit and loss account for
the year 2010-11 onwards by using
XBRL taxonomy. The Financial State-
ments required to be filed in XBRLformat would be based upon the Tax-
onomy on XBRL developed for the
existing Schedule VI, as per the exist-
ing, (non converged) Accounting
Standards notified under the Compa-
nies (Accounting Standards) Rules,
2006. The said Taxonomy is being
hosted on the website of the Ministry
at www.mca.gov.in shortly. The Fre-
quently Asked Questions (FAQs)about XBRL have been framed by the
Ministry and they are being annexed
as Annexure I with this circular for the
information and easy understanding
of the stakeholders.
Coverage in Phase I
2. The following class of companies
have to file the Financial State-
ments in XBRL Form only fromthe year 2010-2011:-
(i) All companies listed in India and
their subsidiaries, including over-
seas subsidiaries;
(ii) All companies having a paid up
capital of Rs. 5 Crore and above
or a Turnover of Rs. 100 crore or
above .
Additional Fee Exemption
3. All companies falling in Phase -I
are permitted to file upto 30-09-
2011 without any additional fil-
ing fee.
Training Requirement
4. Stakeholders desir-
ous to have train-
ing on the XBRL or on taxon-
omy related issues, may contact
the persons as mentioned in An-
nexure II.
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SNK
Company Law : Companies (Name
Availability) Rules, 2011
In exercise of the power conferred by
clause (a) of sub-section (1) of section
642 read with sections 20 and 21 of
the Companies Act, 1956 (1 of 1956),
the Central Government hereby
makes the following Rules:
1. (i) These Rules may be called
Companies (Name Availability)
Rules, 2011;
(ii) It shall come into force on such
date as the Central Government
may, by notification in the OfficialGazette, appoint.
2. As per provisions contained in
section 20 of the Companies Act,
1956, no company is to be regis-
tered with undesirable name. A
proposed name is considered to
be undesirable if it is identical with
or too nearly resembling with:
(i) Name of a company in exis-tence; or
(ii) A registered trade-mark or a
trade mark which is subject of an
application for registration, of any
other person under the Trade
Marks Act, 1999.
3. After notification of these Rules,
while applying for a name in the
prescribed e-form-1A, using Digi-tal Signature Certificate (DSC),
the applicant shall be required to
furnish a declaration to the effect
that:
(i) he has used the search facili-
ties available on the portal of
the Ministry of Corporate Af-
fairs (MCA) i.e.,
www.mca.gov.in/MCA21 for
checking the resemblance of
the proposed name(s) with the
companies and Limited Liability
Partnerships (LLPs) already
registered or the names al-
ready approved.
(ii) the proposed name(s) is/are
not infringing the registered
trademarks or a trademark
which is subject of an applica-
tion for registration, of any
other person under the Trade
Marks Act, 1999;
(iii) the proposed name(s) is/are
not in violation of the provisions
of Emblems and Names
(Prevention of Improper Use)Act, 1950 as amended from
time to time;
(iv) The proposed name is not of-
fensive to any section of peo-
ple, e.g., proposed name does
not contain profanity or words
or phrases that are generally
considered a slur against an
ethnic group, religion, gender
or heredity;
(v) he has gone through all the
prescribed guidelines, given in
these Rules, understood the
meaning thereof and the pro-
posed name(s) is/are in confor-
mity thereof;
(vi) he undertakes to be fully re-
sponsible for the conse-
quences, in case the name is
subsequently found to be in
contravention of the prescribed
guidelines.
4. Where, the proposed name is
containing more than one word,
there will be an option in the e-
form 1A for certification by the
practicing Chartered Account-ants, Company Secretaries and
Cost Accountants, who will cer-
tify that he has used the search
facilities available on the portal
of the Ministry of Corporate
Affairs (MCA) i.e.,
www.mca.gov.in/MCA21 for
checking the resemblance of
the proposed name(s) with the
companies and Limited LiabilityPartnerships (LLPs) already
registered or the names al-
ready approved and the search
report is attached with the ap-
plication form. The professional
will also certify that the pro-
posed name is not an undesir-
able name under the provisions
of section 20 of the Companies
Act, 1956 and also is in confor-mity with Companies (Name
Availability) Rules, 2011 and
Guidelines made therein.
5. (i). Where e-form 1A has been
certified by the professional in the
manner stated at 4 above, the
name will be made available by
the system online to the applicant
without backend processing by the
Registrar of Companies (ROC).
This facility is not available for ap-
plications for change of name of
existing companies.
(ii) Where a name has been made
available online on the basis of
certification of practicing pro-
fessional in the manner stated
above, if it is found later on that
the name ought not to havebeen allowed under provisions
of section 20 of the Companies
Act read with these Rules, the
OTHER LAWS
Company Law
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SNK
professional shall also be liable for
penal action under provisions of the
Companies Act, 1956 in addition to
the penal action under Regulations
of respective professional Insti-tutes.
Where e-form 1A has not been
certified by the professional, the
proposed name will be processed
at the back end office of ROC and
availability or non-availability of
name will be communicated to the
applicant.
6. The name if made available, is li-able to be withdrawn anytime be-
fore registration of the company, if
it is found later on that the name
ought not to have been allowed.
However, ROC will pass an spe-
cific order giving reasons for with-
drawal of name, with an opportu-
nity to the applicant of being heard,
before withdrawal of such name.
7. The name if made available to the
applicant, shall be reserved for
sixty days from the date of ap-
proval and further extension of
thirty days with revalidation appli-
cation and fees. If, the proposed
company has not been incorpo-
rated within such period, the name
shall be lapsed and will be avail-
able for other applicants.
8. Even after incorporation of the
company, the Central Government
has the power to direct the com-
pany to change the name under
section 22 of the Companies Act,
1956, if it comes to his notice or is
brought to his notice through an
application that the name too
nearly resembles that of another
existing company or a registeredtrademark.
9. In determining whether a proposed
name is identical with another, the
following shall be disregarded:
(i) The words Private, Pvt, Pvt., (P),
Limited, Ltd, Ltd., LLP, Limited Li-
ability Partnership;
(ii) The words appearing at the end of
the names company, and com-
pany, co., co, corporation, corp,
corpn, corp.;
(iii) The plural version of any of the
words appearing in the name;
(iv) The type and case of letters, spac-
ing between letters and punctua-
tion marks;
(v) Joining words together or separat-
ing the words does not make a
name distinguishable from a name
that uses the similar, separated or
joined words;
(vi) The use of a different tense or
number of the same word does not
distinguish one name from another;
(vii) Using different phonetic spellings
or spelling variations does not dis-
tinguish one name from another.
For example, J.K. Industries limited
is existing then J and K Industries
or Jay Kay Industries or J n K In-
dustries or J & K Industries will not
be allowed. Similarly if a name con-
tains numeric character like 3, re-
semblance shall be checked with
Three also;
(viii)Misspelled words, whether inten-
tionally misspelled or not, do not
conflict with the similar, properly
spelled words;
(ix) The addition of an internet related
designation, such as .COM, .NET,
.EDU, .GOV, .ORG, .IN does not
make a name distinguishable from
another, even where (.) is written
as dot;
(x) The addition of words like New,
Modern, Nav, Shri, Sri, Shree,
Sree, Om, Jai, Sai, The, etc. does
not make a name distinguishable
from an existing name such as
New Bata Shoe Company, NavBharat Electronic etc. Similarly, if it
is different from the name of the
existing company only to the extent
of adding the name of the place,
the same shall not be allowed. For
example, Unique Marbles Delhi
Limited cannot be allowed if
Unique Marbles Limited is already
existing;
Such names may be allowed only if
no objection from the existing com-
pany by way of Board resolution is
produced/ submitted;
(xi) Different combination of the same
words does not make a name dis-
tinguishable from an existing name,
e.g., if there is a company in exis-
tence by the name of Builders and
Contractors Limited, the nameContractors and Builders Limited
should not be allowed;
(xii) If the proposed name is an exact
Hindi translation of the name of an
existing company in English espe-
cially an existing company with a
reputation, e.g., Hindustan Steel
Industries Ltd. will not be allowed if
there exists a company with name
Hindustan Ispat Udyog Limited;
OTHER LAWS
Company Law
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SNK
The Queen vs. General Electric
Capital Canada Inc (Court of Ap-
peal, Canada)(2010 FCA 344)
Transfer Pricing: Despite Implicit
support by holding company, sub-
sidiary entitled to pay holding com-
pany at arms length for explicit
support
The assessee, a wholly-owned sub-
sidiary of General Electric Capital US
(GECUS), was in the business of pro-
viding financial services and took
loans for this purpose in the form of
commercial paper and unsecured de-bentures. Between 1988 and 1995,
GECUS provided to the assessee, at
no cost, an explicit guarantee for its
debt issuances. From 1996, GECUS
began charging a fee equal to 1% of
the face amount of the assessees
debt issuances for that same guaran-
tee which amounted to about $135.4
million. The assessees claim for de-
duction of the fee was denied by thetax department u/s 69(2)/247(2)
(transfer pricing provisions) on the
ground that as there was implicit sup-
port by GECUS to the assessee, the
payment of the guarantee fee was
superfluous and not at arms length.
This was reversed by the Tax Court
on the basis that by the explicit guar-
antee from the holding company, the
assessee had a better rating and hadto pay lower interest and received a
benefit which was valued at 1.83%.
As the fee paid for the benefit was
only 1%, it was at arms length. On
appeal by the department, HELD dis-
missing the appeal:
(i) In determining the arms length
price, all economically relevant
factors (including the implicit sup-
port that the subsidiary enjoys
from the holding company) have
to be considered. The explicit
guarantee by the holding com-
pany also has a value to the sub-
sidiary (Para 1.6 of the OECD
Commentary on Transfer Pricing
Guidelines for Multinational Enter-
prises and Tax Administrations
referred). The question is how
much an arms length party, bene-
fiting from the implicit guarantee
would be willing to pay for the ex-
plicit guarantee;
(ii) The yield method can be
adopted which requires a com-
parison between the credit ratingwhich an arms length party, in the
same circumstances as the as-
sessee, would have obtained and
the credit rating which would have
been obtained without the explicit
guarantee. On facts, it was shown
that the assessee would have en-
joyed a lower credit rating without
the explicit guarantee from the
holding company and would havehad to pay a higher interest than it
did with the explicit guarantee.
The incremental cost that the as-
sessee would have had to pay if it
did not have the explicit guarantee
was valued at 1.83% and so the
guarantee fee was at arms length.
M/s. Hyderabad Engineering v.
State Of A.P. (Civil Appeal No. 3781
of 2003)(SC)
Goods transported to out-of-state
depots otherwise than as a result
of direct sale which would attract
tax under Section 6 of the Central
Sales Tax Act
The SC dismissed the appeal ruling
that the transactions between several
cities constituted inter-state sales, as
contemplated under Section 3(a) of
the Central Sales Tax Act. The com-
pany was part of Jay Engineering
Works with head office in Delhi. It has
other related companies with different
names in different states. The com-
pany claimed exemption on a turnover
of Rs 8,87,75,643 towards goods
transported to out-of-state depots oth-
erwise than as a result of direct sale
which would attract tax under Section
6 of the Central Act. It argued, the
transactions on which exemptions
claimed cannot be regarded as sales
in the course of inter-state trade,
chargeable to tax under the Central
Act. This contention of the assessee
was rejected by the high court and the
SC.
OTHER LAWS
Others
Due Dates of key compliances pertaining to the month of April 2011:
The information contained in this newsletter is of a general nature and it is not intended to address specific facts, merits and circumstances of any indi-vidual or entity. We have tried to provide accurate and timely information in a condensed form however, no one should act upon the information pre-sented herein, before seeking detailed professional advice and thorough examination of specific facts and merits of the case while formulating businessdecisions. This newsletter is prepared exclusively for the information of clients, staff, professional colleagues and friends of SNK.
10th
April Excise Return ER1 / ER2 /ER615th April PF Contribution for March
20th
April Excise return ER3 for quarter ended March21stApril ESIC Payment for March25th April Half yearly return of service tax30
thApril TDS payment for March (whether amount credit on 31st March or not)