CNK Knowledge Tracker

Transcription

1 CNK Knowledge Tracker Be a Step Ahead July 2014 CNK & Associates, LLP

2 Contents Domestic Tax Notification / Circulars 3 Recent judicial decisions 5 International Taxation/Transfer Pricing 11 Recent judicial decisions Disclaimer and Statutory Notice 22 CNK & Associates LLP Page 2 of 22

3 Domestic Tax Notifications/Circulars Return of Income for AY notified (Notification No. 24/2014 dated 1st April 2014) and (Notification No. 28/2014 dated 30th May 2014) The forms for return of income i.e., Form SAHAJ (ITR -1), ITR-2, ITR-3, SUGAM (ITR- 4S), ITR-5, ITR-6, ITR-7 and ITR-V have been notified by the CBDT. Significant changes as compared to last year are as follows: For Charitable Trusts Form 10, being the notice for accumulation and setting apart income to be filed electronically. For partnership Firms All firms have to file their returns of income electronically (either with a digital signature or submitting the verification of the return in Form ITR-V) irrespective of the requirement of audit under Section 44AB of the Income Tax Act, Additionally, the following entities would also need to file the following forms electronically: Type of Assessee Form to be submitted electronically Units in SEZ claiming exemption under section 10AA Form 56F Foreign company having a permanent establishment in India Form 3CE and earning income by way of royalty or fees for technical services Assessee having income from capital gains from slump sale Form 3CEA under section 50B Shipping company earning income liable to tonnage tax Form 66 Change in Permanent Account Number (PAN) Application forms (Notification No. 26/2014 dated 16th May 2014) Forms 49A and 49AA for application of a PAN have been amended. Under the new forms, the assessee has an option to select either the father s name or the mother s name for being printed on the PAN card. CNK & Associates LLP Page 3 of 22

4 Cost Inflation Index notified (Notification No. 31/2014 dated 11th June 2014) The Cost Inflation Index applicable for Financial Year for computation of indexed cost in computation of capital gains has been notified at Wealth Tax Return notified (Notification No. 32/2014 dated 23rdJune 2014) From Assessment Year onwards, the Return of Net Wealth now needs to be filed in Form BB in electronic form. However, individuals and HUFs not liable for tax audit, can file their wealth tax returns in a physical form. Eligibility of deduction under section 80-IA for the unexpired period (Circular No 10 dated 6th May, 2014) It has been clarified that, where an eligible enterprise or undertaking develops an infrastructure facility, industrial park or SEZ and transfers it to another enterprise or undertaking for operation and maintenance other than by way of amalgamation or demerger, the transferee would be eligible for deduction under section 80-IA for the unexpired period of deduction, if any. Clarification regarding treatment of expenditure incurred for development of roads/highways in BOT agreements under Income-tax Act, 1961 It has come to the notice of the CBDT that disputes have arisen as to whether the expenditure incurred on development and construction of infrastructural facilities like road /highways on Build-Operate-Transfer ('BOT') basis with right to collect toll is entitled for depreciation under section 32(1)(ii) of the Income Tax Act,1961 ('Act') or the same can be amortized by treating it as an allowable business expenditure under the relevant provisions of the Act. The CBDT has clarified that the cost of construction on development of infrastructure facility of roads/highways under BOT projects may be amortized and claimed as allowable business expenditure under the Income Tax Act. This Circular is applicable only to those infrastructure projects for development of road/highways on BOT basis where ownership is not vested with the assessee under the concessionaire agreement. CNK & Associates LLP Page 4 of 22

5 Recent Judicial Decisions Exemptions Assessee not conducting classes but affiliating schools, prescribing syllabus and conducting examinations is an educational institution within the meaning of section 10(23C)(vi) Council for the Indian School Certificate Examinations v. DIT(Exemptions) [2014] 362 ITR 436 (Delhi High Court) The Delhi High Court has held that, even though the assessee did not conduct classes or was not directly engaged in teaching students, but since it affiliated schools, prescribed syllabus and conducted examination of students, it can be termed as an educational institution within the meaning of section 10(23C)(vi). Holding of classes is not mandatory and if the activities undertaken are educational in nature, it would be considered to be an educational institution. Proviso to section 2(15) does not apply to institutions carrying out relief of the poor, education or medical relief but applies only to those carrying out advancement of any other object of general public utility - DIT (Exemptions) v Ahmedabad Management Association (Gujarat High Court) Tax Appeal No 707 of 2013 The Gujarat High Court held on the facts of the case that activities such as Continuing Education Diploma and Certificate Programme, Management Development Programme, Public Talks and Seminars and Workshops and Conferences etc. constituted education. The word education must neither be used in a loose sense so as to include acquisition of all sorts of knowledge nor should it be interpreted in a narrow or pedantic sense. It encompasses systematic dissemination of knowledge and training in specialized subjects. The changing times and the ever widening horizons of knowledge may bring in changes in the methodology of teaching and a shift in the institutional setup. Though the primary method of sitting in a classroom may remain ideal for most of the initial education, it may become necessary to have a different outlook for further education. Since the activity was educational, proviso to section 2(15) was not applicable even if it incidentally involves the carrying on of the commercial activities. Section 14A No disallowance under section 14A read with Rule 8D for investment in shares of Subsidiaries and Joint Ventures - JM Financial Limited vs. ACIT (ITAT Mumbai)ITA No 4521/M/12 The Mumbai Tribunal has accepted the contention of the assessee that no expenditure had been incurred by the assessee for earning the exempt income. In this case (AY ) almost 98% of the investments were in subsidiary companies and joint venture companies CNK & Associates LLP Page 5 of 22

6 and were for long term purpose. No expenses were incurred for maintaining the investments. The Assessing officer had also not brought out any material on record to show that the assessee had incurred expenditure. Income from Business and Profession and allowability of expenditure No disallowance under section 40(a)(i) for non-deduction of tax under section 195 for commission payment made to non-resident for procuring orders outside India CIT v. Model Exims [2014] 363 ITR 66 ( Allahabad High Court) The Allahabad High Court has held that, disallowance under section 40(a)(i) cannot be made for non-deduction of tax under section 195 for the commission payment made to nonresident not liable for any withholding tax on the ground that the foreign agents appointed for procurement of orders renders functions in the nature of selling agent, designer or technical advisers terming it as fees for technical service covered under section 9(1)(vii). No disallowance under section 40(a)(ia) for failure to deduct tax at source if payee has offered amount to tax amendment is clarificatory and hence operates retrospectively - Rajeev Kumar Agarwal vs. ACIT I.T.A. No.:337/Agra/2013 (ITAT Agra) The Agra Tribunal held that Section 40(a)(ia) is not a penalty for tax withholding lapse but it is compensatory in nature for an income going untaxed due to tax withholding lapse. Accordingly, the insertion of second proviso to Section 40(a)(ia) is clarificatory and curative in nature and therefore it has retrospective effect. The second proviso to Section 40(a)(ia), introduced by the Finance Act 2013 w.e.f , read with Section 201, provides that despite failure to deduct tax at source, disallowance of the expenditure shall not be made if certain conditions are satisfied, namely; the resident payee has (i) furnished his return of income under Section 139, (ii) taken into account such sum for computing income in such ROI, (iii) paid the tax due on the income declared by him in such return of income and (iv) furnished a certificate to this effect from an accountant in the prescribed form. Deemed Dividend and Allowability of Interest CIT, Central-III v Bombay Oil Industries [2014] 222 Taxman 38 (Bombay High Court) The Bombay high Court held that unsecured loans given by one company to another cannot be treated as deemed dividend under Section 2(22)(e) of the Act in the hands of the recipient where neither companies hold any shares of each other and nor do any shareholders in one company hold shares in the other. Having a common director in both the Companies does not attract the provisions of Section 2(22)(e). CNK & Associates LLP Page 6 of 22

7 It was also held that where the Company has sufficient interest-free funds available in order to make investments and at the same time loans have been taken, it can be presumed that investment has been made out of interest-free funds available with the company and not out of the loans taken and hence interest paid on loan is an allowable expense under Section 37(1). Write-off of irrecoverable advances is not a transfer and the loss cannot be claimed as a capital loss under section 45 - Crompton Greaves Limited vs. DCIT ITA NO.1110 Of 2012 (Bombay High Court) The Bombay High Court held that in order to be eligible to carry forward of the capital loss, there should be a capital asset as defined in Section 2(14) and the same should be transferred in the manner as defined in Section 2(47) of the Income Tax Act, An advance given to a party and subsequently written off is not a capital asset nor is there any transfer. The same is a capital loss and should be ignored. Accrual of expenditure - Additional CIT v Nicholas Piramal India Ltd [2014] 147 ITD 675 Mumbai The Mumbai Tribunal held that expenditure claimed by assessee on account of payments made to foreign technicians shall be allowed in the year when the invoice for the services was received and accounted even if the corresponding services were rendered by said foreign technicians in earlier years. Capital Gains Gains arising from PMS transactions are capital gains and not business profits - Radials International vs. ACIT -ITA No.485/2012 (Delhi High Court) The Delhi High Court has held that, the PMS Agreement being an agency agreement cannot by its terms alone be the basis for inferring an intention to make profit or that the transactions are in the nature of trade. It is a settled law that nomenclature of a document is not conclusive of what it seeks to achieve and the court has to consider all parts of it in order to arrive at a finding in regard to its true effect. To evaluate whether the transaction/s are investments or adventure in the nature of trade, various crucial factors must be taken into account, such as, the conduct of the assessee, the circumstances and substantial nature of transactions, frequency, volume, etc. The facts of the case showed that a large volume of the shares purchased were, as reflected from the holding period, intended to be held for a longer period. Moreover, the number of transactions per day, as determined by an average, cannot be used to accurately ascertain the CNK & Associates LLP Page 7 of 22

8 frequency of transactions. Thus the Court was of the opinion on the facts of the case that the transactions were not in the nature of income from business or profession. Section 50- Rate of tax on Short term capital gains under section 50 and applicability of section 50C - Smita Conductors Limited v DCIT (ITAT Mumbai) ITA no 4004/M/2011 The Mumbai Tribunal has held in the facts of the case that the provisions of Section 50C are applicable even in respect of depreciable assets in view of the Special Bench decision of the Mumbai Tribunal in the case of United Marine Academy 130 ITD 113. It was further held that the provisions of Section 50 deeming gains on sale of depreciable assets as short term capital gains have to be restricted only to computation of capital gains. For the purpose of other provisions of the Act the capital gains have to be treated as longterm capital gains since the asset was held for more than three years. Hence for the purpose of applicability of tax rate it has to be treated as long-term capital gains. Section 50C- If the stamp duty valuation is higher than the consideration received, the AO is duty bound to refer the valuation to the DVO even if there is no request by the assessee - Sunil Kumar Agarwal vs. CIT ITAT No. 221 of 2013 (Calcutta High Court) The Calcutta High Court has held that the Assessing Officer, discharging a quasi-judicial function, has the duty to act fairly and to give a fair treatment by giving the assessee an option to follow the course provided by law. In this case the price offered by the buyer of Rs. 10 lacs was the highest prevailing price in the market. However the price assessed by the District Sub Registrar was Rs. 35 lacs. Since the assessee could not have claimed more consideration than that agreed upon, the assessed value could not be the Fair Market Value. Hence the Assessing Officer should have given an option to the assessee to have the valuation made by the Departmental Valuation Officer (DVO) to avoid any disputes. Section 2(47)(v): Transfer under a development agreement takes place on handing over possession. Capital gains are chargeable to tax even if no consideration is received by assessee - Potla Nageswara Rao vs. DCIT ITA No. 245 OF 2014 (Andhra Pradesh High Court) The Andhra Pradesh High Court has made reference to Section 53A of the Transfer of Property Act, 1882, which is engrafted in the definition of transfer in Section 2(47) of the Income-tax Act, which does not contemplate any payment of consideration. The element of factual possession and agreement are contemplated as transfer within the meaning of the aforesaid section. It was thus held that, when the transfer is complete, automatically, consideration mentioned in the agreement for sale has to be taken into consideration for the CNK & Associates LLP Page 8 of 22

9 purpose of assessment of income for the assessment year when the agreement was entered into and possession was given. In the facts of the case, it was found that both the aforesaid aspects took place in the previous year relevant to the Assessment Year and hence the assessee was held liable to pay tax on the capital gain for the assessment year. Assessment/ Reassessment Procedures Assessing Officer has to have new tangible material for reason to believe income had escaped assessment NDT Systems and Another v. Income-Tax Officer and Others [2014] 363 ITR 603 (Bombay High Court) ; Commissioner of Income Tax v. Vardhman Industries [2014] 363 ITR 625 (Rajasthan High Court); Commissioner of Income-Tax v. Prima Paper and Engineering Industry [2014] 364 ITR 222 (Bombay High Court) The Bombay High Court held that in the case of reopening of an assessment, the Assessing Officer must have new tangible material for reason to believe that income chargeable to tax has escaped assessment in the past years. The High Court further held that where all material facts necessary for determination of the income have been disclosed to the Assessing Officer by the assessee, the mere fact that the material and primary facts already on record with the Assessing Officer have not been verified by him is not a sufficient reason for reopening the original assessment. The Rajasthan High Court took a similar view and held that once the relevant documents and records have been submitted to the Assessing Officer and impounded subsequently in the course of a survey under Section 133, the Assessing Officer cannot change his opinion and reopen the original assessment. The Bombay High Court in another case held that the mere fact that the Assessing Officer had not discussed evidence provided by the assessee during the course of assessment proceedings was not sufficient for reopening the original assessment. Case reopened under section 148 on the basis of audit objection to assess profit on sale of shares as business income instead of capital gains as assessed during the original scrutiny assessment under section 143(3) invalid. Aroni Commercials Ltd v. Dy CIT [2014] 362 ITR 403 (Bombay High Court) The Bombay High Court has held that the power to reassess cannot be exercised on the basis of mere change of opinion based on audit objection query received. The Court further held on the facts of the case held that the taxability under the head Capital Gains instead of Business Income cannot be changed if the assessing officer during the course of original scrutiny assessment has examined the issue and was satisfied even though the satisfaction of assessing officer is not recorded in the assessment order. CNK & Associates LLP Page 9 of 22

10 Tax Deducted at Source (TDS) and Recovery Provisions Recovery provisions under Section 201(1) can be invoked only when loss to revenue is established; that can only be established when it is demonstrated that the recipient of income had not paid due taxes thereon and the recipient of the income had the liability to tax - Allahabad Bank v. Income Tax Officer (TDS & Survey), Aligarh ITA Nos. 448 to 454 of 2011 (ITAT Agra Bench) The Agra Tribunal relying on the decision of Allahabad High Court in the case of Jagran Prakashan Limited v. DCIT 2012 (21 taxmann.com 489 Allahabad) held that the onus is on the Revenue to demonstrate that the taxes have not been recovered from the person who had the primarily liability to pay tax, and it is only when the primary liability is not discharged, that recovery can be invoked on the tax deductor. Nonpayment of taxes by the recipient is held to be a pre-condition for invoking recovery proceedings under Section 201(1) and holding the deductor as an assessee in default. It was further held that levy of interest under Section 201(1A) is applicable for the period of the date on which tax was required to be deducted till the date when tax was eventually paid. However, in a case where the recipient of income had no tax liability embedded in such payments, there would be no question of delay in realization of taxes and the provisions of Section 201(1A) would not be applicable. Assessee cannot be denied credit for TDS on the ground of discrepancy in Form 26AS filed by the deductor - LSG Sky Chef (India) Pvt. Ltd vs. DCIT (ITA No. 4828/Mum/2012) (ITAT Mumbai) The Mumbai Tribunal held that Form 26AS is a statement generated at the end of the Revenue, hence the assessee cannot be in any manner held responsible for any discrepancy therein or for the non-matching of TDS reflected therein with the assessee s claims. The assessee, by furnishing the TDS certificates bearing the full details of the TDS, credit for which is being claimed, has discharged the primary onus on it toward claiming credit in its respect. He, accordingly, cannot be burdened any further in the matter. A similar view was also taken in Rakesh Kumar Gupta vs. UOI (Allahabad High Court) Interest for non-payment of advance tax not applicable in case of an employee receiving income on which the obligation to deduct tax at source is with the employer Commissioner of Income Tax v. Anil Kumar Nehru [2014] 364 ITR 26 (Bombay High Court) The Bombay High Court held that in the case of stock option granted to and exercised by an employee, the obligation to deduct tax at source on the perquisite was on the employer. The High Court further held that the failure of the employer to deduct tax at source would not entail interest for non-payment of advance tax on the employee CNK & Associates LLP Page 10 of 22

11 International Taxation / Transfer Pricing Recent Judicial Decisions International Tax Transmission of television channels or signals by receiving signals through satellite falls within the meaning of royalty under Explanation 6, to section 9(1)(vi) inserted by Finance Act, However, it was also held that the assessee could not suffer disallowance u/s 40(a)(ia) on the basis of subsequent amendment made with retrospective effect Kerala Vision Ltd v ACIT (46 taxmann.com 50)(Cochin - Trib.) The assessee company received satellite signals from various channel companies which it transmitted to its customers. The AO disallowed the payments made by the assessee to the channel companies on the ground that the payment was royalty and subject to deduction of tax at source. The Tribunal held that receiving signals through satellite falls within the definition of "Process" under Explanation 6, to section 9(1)(vi) which was inserted by the Finance Act, 2012 for removal of doubts. The Tribunal therefore held that "Pay Channel Charges" fell in the category of "royalty" as defined in clause (i) of Explanation 2 to sec. 9(1) of the Act. The assessee alternatively contended that he could not be penalised by way of disallowance u/s 40(a)(ia) of the Act through a retrospective amendment. The Hon'ble Delhi High Court in the case of Asia Satellite Telecommunications Co. Ltd. v. DIT (332 ITR 340) had taken the view that the transmission of television signals through Satellite / transponders would not fall in the category of "royalty" as defined under Explanation 2 to sec. 9(1) of the Act. That Explanation 6, which expanded the scope of the expression "process" has been inserted by the Finance Act, 2012 with retrospective effect, only to nullify the decision rendered by the Hon'ble Delhi High Court. The Tribunal, relying on the above decision of Delhi High Court, held that the assessing officer was not justified in disallowing the claim of pay channel charges by invoking the provisions of sec. 40(a)(ia) of the Act CNK & Associates LLP Page 11 of 22

12 Consortium Agreement for offshore supply, offshore services and onshore services was held as not constituting an AOP. Even where the contract was legally indivisible, for tax purposes it could be divided and only that part of income attributable to operations in India would be deemed to accrue or arise in India. Linde AG, Linde Engineering Division v. DCIT (44 taxmann.com 244) (Delhi) The assessee Linde AG along with Samsung Engineering Company Ltd ( Samsung ) formed a consortium to bid for a contract floated by ONGC Petro Additions Ltd ( OPAL ) for the purposes of carrying activities and services for the design, engineering, procurement, construction, installation, commissioning and handing over of a plant on a lump-sum turnkey project. The responsibilities for the proposed work were distributed amongst the two parties. The AAR ruled that the consortium amounted to an AOP in India and that since the contract was indivisible the income received by the assessee was taxable in India. In the writ filed by the assessee., the High Court considered the essential features of an AOP and observed that the association (a) must have come together for a common purpose, (b) must move by common action, (c) there must be some scheme of common management and (d) the cooperation and association amongst the members must be real and substantial. On facts, the High Court held that there was insufficient degree of joint action between Linde AG and Samsung either in execution or management of the project to constitute an AOP. In relation to the taxability of offshore supplies / services, the High Court observed that the contract was divisible for tax purposes though in legal form it was indivisible and held that only that part of income attributable to operations in India would be deemed to accrue or arise in India. The High Court also observed that, the situs of the object of the Contract would not be as relevant as determining the situs where the income of assessee had accrued or arisen. The fact that the contractual obligations of assessee were not limited to merely supplying equipment, but were for due performance of the entire Contract, would not necessarily imply that the entire income which was relatable to the Contract could be deemed to accrue or arise in India. The High Court also held that if the services were inextricably linked to and formed an integral part of the manufacture and fabrication of supplies then the services would not be liable to be taxed as fees for technical services under the Act. Further if the services are considered as Fees for technical services, the same would be taxed in India even in the CNK & Associates LLP Page 12 of 22

13 absence of a permanent establishment (PE) in India. However, if there is a PE in India, then the same would be taxable in India as business profits under Article 7 of the DTAA, but only to the extent of profits attributable to the permanent establishment in India. Based on the above factual aspects, the High Court remanded the matter back to the AAR, to decide the taxability in India. Assessee, being an Indian Company reimbursed the overseas employer for services of seconded employees, who continued on the payroll of the overseas Company. Held that the amounts reimbursed pursuant to the secondment agreement amounted to 'fee for technical services' liable to tax in India. Centrica India Offshore (P) Ltd v. Commissioner of Income-tax (44 taxmann.com 300) (Delhi) Assessee entered into a secondment agreement with the overseas entities for the back office support functions of the overseas entities, wherein the employees worked under assessee s direct control and supervision. The seconded employees continued to remain on the payroll of the overseas employer and the assessee reimbursed such salary to the overseas employer. The assessee contended that the payment made to the overseas entity is not income that accrues to the overseas entity, but rather, money that it is obligated to pass on to the secondees. Assessee also contended that the money received by the overseas entity is overridden by the obligation to pay the secondees and hence amounted diversion of income by overriding title. It was held that the seconded employees used their technical knowledge and skills while assisting assessee in conducting its business of quality control and management. It was also undisputed that seconded employees were making available their technical expertise and know-how to regular employees of assessee company during initial years of its operation. Based on these facts the High Court held that the, amounts reimbursed by assessee to overseas companies in terms of secondment agreement amounted to 'fee for technical services' liable to tax in India and thus, assessee was required to deduct tax at source while making said payments. The High Court also noted that the overseas entities were not responsible for any errors or omissions of such seconded employees or for their work. Assessee bore all risks in relation to the work of seconded employees, and reaped the benefit from the output. Further, these seconded employees retained their entitlement to participate in the overseas entities' retirement and social security plans and other benefits in terms of its applicable policies, and CNK & Associates LLP Page 13 of 22

14 the salary was payable by the overseas entities, which claimed the money from assessee. There was no purported employment relationship between assessee and the secondees. Based on the above facts the High Court held that the said payment is not in the nature of reimbursement, but rather, payment for services rendered and the assessee was under obligation to withhold the tax. Commission paid to agent outside India for arranging to send artists to India for a performance was not liable to tax in India. Director of Income-tax v Wizcraft International Entertainment Pvt Ltd (45 taxmann.com 24)(Bombay) The assessee, an event management company, had made a payment in the nature of commission, to an agent to bring certain artists to India. The payment was disallowed on the ground that tax was not deducted at source on the said commission payment. It was noted that the assessee had deducted tax at source on the fees paid to the International Artists, who performed in India but not on the commission paid to the agent of the artists. The agent never took part in the event organised and did not exercise any personal activities in India. Their services were entirely rendered outside India. Accordingly it was held that the commission income earned by the agent was not subject to tax in India and was not liable to withholding tax. Acquiring rights in television programmes and exhibiting the same on its television channels from Singapore could not be treated as royalty under section 9(1)(vi) of the Act Director of Income-tax v Set Satellite (Singapore) Pte Ltd (45 taxmann.com 100) The assessee, a company incorporated in Singapore was engaged in the business of acquiring rights in television programmes and exhibiting the same on its television channels from Singapore. The payment was made only for broadcasting operations carried out from Singapore, which had no connection with the marketing activities carried out through alleged Permanent Establishment ('PE') of assessee in India. The payer (i.e. the assessee) was not a resident of India and the liability to pay royalty had not been incurred in connection with and was not borne out by the alleged PE of the payer in India. Thus, there was no economic link between the payments for acquiring broadcasting rights and the PE in India. The payment could not be treated as royalty and was not liable to tax in India. CNK & Associates LLP Page 14 of 22

15 Under the protocol to the Tax Treaty between Indian and France it was provided that if India prescribes a lower rate or a more restricted scope of taxation to any of the OECD countries, then such benefit will automatically extend to the DTAA between India and France. It was held that the benefit of the term make available cannot be read into the DTAA by invoking the protocol. Steria (India) Ltd (AAR - New Delhi) (45 taxmann.281) The French Company, provided management services to its subsidiary in India for the purposes of rationalising and standardising business practices in accordance with the international practices. The services were provided via telephone, fax and and did not involve any of personnel of the French Company visiting India. The Indian company contended that although there was no 'make available' clause in the India-France Treaty, yet, pursuant to protocol signed between India and France, the restricted scope of FTS in the India-UK DTAA would be applicable. The Indian Company, based on the protocol to the Tax Treaty between Indian and France argued that if under any Convention, Agreement or Protocol signed after , between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the scope provided for in the DTAA between India and France then such benefit also needs to be automatically read into the DTAA between India and France. Accordingly it was argued that the make available clause had to be read into the DTAA and as such the services rendered by the French Company would not fall under the definition of technical services. It was held that a Protocol cannot be treated as the treaty itself, though it may be an integral part of the Treaty. Protocol can be made use for interpreting provision of the Treaty. It would not be correct/proper to import words, phrases or clause, that are not available into the Treaties between two Sovereign nations, on the basis of Treaties with another countries. Therefore, in the absence of the make available clause, the payments made by the Indian Company for the services rendered by the French Company would come under the definition of fees for technical services both under the Act and the Treaty and would be liable to tax in India. CNK & Associates LLP Page 15 of 22

16 Transfer Pricing In determination of arm s length price, price quotation and rate-list from organisation whose reliability and authenticity is not disputed should be considered. Commissioner of Income-tax v Adani Wilmar (45 taxmann.com 365) (Gujarat) During the year under review, the assessee purchased edible oil from its associated enterprise. For the purposes of justifying the arm s length price, the assessee used Comparable Uncontrollable Price as the most appropriate method and provided the quotations received from Malaysia Palm Oil Board and Oil World as comparables. The Transfer Pricing officer ( TPO ) rejected the quotation from Oil World as a comparable on the ground that Oil World was not a statutory authority but an independent organisation and had nothing to do with oil prices prevailing in Malaysia. It was held that since the payment to the AE was within the 5 percent limit of the arithmetical mean of the comparables as stipulated under section 92C of the Act, the transaction was at arm s length. It was also held that as long as the transaction is supported with authentic documentation, it would be relevant for determination of arms length price and that the location of the organisation was not of any consequence. Further, the ITAT held that the price quotation received from the Malaysia Palm Oil board was important but that does not undermine the importance of other quotations received. The High Court emphasized that when the CIT (Appeals) as well as the Tribunal have accepted the reliability and authenticity of the organisation and its publication of rate-list such objections of the TPO must be overruled. Merely because a company had been selected as comparable in transfer pricing study, did not ipso facto establish that same was an appropriate comparable. Company following a very different operating model vis-avis the assessee was deemed to be functionally not comparable with the assessee. Techbooks International Pvt. Ltd. v ACIT (45 taxmann.com 517) (Delhi - Trib.) The assessee, a wholly owned subsidiary of a US company used the Transactional Net Margin Method to justify the arm s length price of the international transaction and arrived at 15 comparable companies. Initially company 'V' had been selected by assessee as a comparable, but, while preparing its TP documentation, it was rejected by the assessee. The DRP however included company 'V' as a comparable by observing that functions performed by 'V' were similar to assessee and CNK & Associates LLP Page 16 of 22

17 that wages to cost ratio could not be adopted to accept/reject comparables. Further the DRP also held that the assessee had itself chosen 'V' in its TP study. It was held that merely because 'V' had been selected as comparable in transfer pricing study, it did not ipso facto establish that same was an appropriate comparable. The Tribunal also accepted that 'V' had a different business model than that of assessee, as it outsourced execution of contracts to external vendors to save cost on employees which was also evident from the fact that employee cost for 'V' was 3 per cent to total cost, whereas in case of assessee, it was 60 per cent to total cost. Accordingly the Tribunal held that company 'V' was following a very different operating model vis-a-vis the assessee and it should be deemed to be functionally not comparable with the assessee. Held that Profit Split method and not Transactional Net Margin Method was the appropriate method to determine the arm s length price where no other company was engaged in similar business and business involved unique intangibles. TP adjustment not justified if there was no case of profit shifting. Hyper Quality India (P.) Ltd. v. Assistant Commissioner of Income-tax (45 taxmann.com 102) (Delhi - Trib.) The assessee company was a captive service provider engaged in providing back office support services to its AE in USA. The assessee worked out the ALP based on Profit Split Method while the TPO adopted TNMM ignoring the justifications provided by the assessee. It was held that, TNMM, which warrants external benchmarking at net profit level, was not an appropriate method, considering the fact that there is no other company in India which is into the line of business of the assessee company. Besides the business involved unique intangibles used by the AE such that independent evaluation of performance was not possible since the service of the assessee and its AE are coined together as a service delivery to end clients. Further the assessee by its submission demonstrated that it bills the AE at total cost plus 11 per cent whereas its AE in US continuously sustained losses.it was held that the TP Adjustments made were not justified as the assessee had earned profit in India while its AE had continuously sustained losses. Thus there was no case of shifting of profits. Further, AE is resident in USA which has a higher tax rate than the rate of tax in India. CNK & Associates LLP Page 17 of 22

18 Assessee generates revenue out of operations that are highly integrated and interrelated and involved more than one organisation to complete. As such Profit Split was accepted as the most appropriate method to determine arm s length price. Global One India (P) Ltd v Assistant Commissioner of Income-tax (44 taxmann.com 100) (Delhi - Trib.) The assessee an Indian company and a subsidiary of EGN BV Netherlands, was engaged in providing internet and related network services to the group's customers in India such as internet direct connections, installation/configuration of routers and fully managed support solutions developed around the basic network services. The assessee had adopted the Profit Split Method as the most appropriate method. The TPO and the DRP rejected the Profit Split method and considered TNMM as the most appropriate method. The Tribunal observed that the functions of the assessee company demonstrate that the transactions carried out are highly integrated and interrelated which involves more than one enterprise to complete. The transaction passes through a number of AEs who make a contribution to the transaction and share revenues in accordance with the contribution made. Each of the entities own assets and employs manpower which further proves that the operations are integrated, interconnected and interdependent. Accordingly the ITAT held that the 'Profit Split Method' (PSM) is the Most Appropriate Method ("MAM") for the reason that the assessee generates revenue out of operations that are highly integrated. The TPO had after a detail enquiry in the earlier assessment years, accepted 'PSM' as the 'MAM'. This being so, rejection of this method on the ground that res judicata does not apply to income tax proceedings is not correct. The TPO has to bring out valid reasons to depart from the earlier view of his predecessor. Under-utilization of production capacity in the initial years is a vital factor which cannot be ignored while determining the Arm s Length Price. Mando India Steering Systems (P) Ltd v Assistant Commissioner of Income-tax (45 taxmann.com 160) (Chennai - Trib.) The assessee had adopted CUP method for the purchase of machinery and reimbursement of expenses and TNM method for purchase of finished goods, raw-material components and consumables, payment of royalty, management fee and development fee. The assessee submitted that the relevant period was the first year of production and since the assessee had utilized only 15% of its production capacity; its overhead costs were more CNK & Associates LLP Page 18 of 22

19 due to under-utilization of resources resulting in a loss. The TPO brushed aside the contention of the assessee and made substantial addition. The Tribunal held that under-utilization of production capacity in the initial years is a vital factor which has been ignored by the authorities below while determining the ALP cost. The TPO should have made allowance for the higher overhead expenditure during the initial period of production. Thus, the ITAT remitted this issue back to the Assessing Officer with a direction to consider the claim of the assessee with respect to idle capacity adjustment during the relevant period while determining the ALP. Without rejecting the bench marking of the assessee, the TPO was not within his jurisdiction to re-determine the ALP of the international transaction. Further when the services have been received, the cost of such benefit received cannot be taken as nil. DCIT vs. Diebold Software Services P. Ltd. (TS-174-ITAT-2014) (Mum Trib) Assessee was engaged in the business of software development and had made payment for availing IT support services from its AE. The assessee had benchmarked its international transactions at Arm s Length Price applying TNMM. The assessee was required by the TPO to provide necessary details along with allocation keys and basis of calculation of payment made for I.T. support services. According to the TPO, the assessee, failed to comply with these requirements and the ALP of the relevant transactions therefore was determined by the TPO at nil thereby making an addition of the entire amount of IT support services paid by the assessee to its AE. It was observed that through its activities, the AE, which is the group holding company had not earned any margin and had recovered only its costs for providing support services. TPO did not dispute the TNM method applied by the assessee. The conclusion of the TPO was not supported by any fact of the kind that the assessee had not received such services. It was held that without rejecting the bench marking of the assessee, the TPO was not within his jurisdiction to re-determine the ALP of the international transaction. Further when the services have been received, the cost of such benefit received cannot be Nil. Accordingly, the additions made by the TPO were deleted. CNK & Associates LLP Page 19 of 22

20 Share application money could not be treated as international transactions of loan given by the assessee to its AE merely because there was a delay in allotment of shares. Allcargo Global Logistics Ltd. vs. ACIT (TS-176-ITAT-2014) (Mum Trib) The assessee paid share application money in May & June, 2006 and share were allotment by AE was made in June, The AO relying on Delhi ITAT ruling in Perot Systems TSI [TS-5-ITAT-2009(DEL)-TP], held that amount lying unutilized for a long duration (beyond a period of 60 days) must be treated as a loan. The assessee contented that the delay in allotment of shares by its AE against the share application money was for genuine and unavoidable reasons. However, the AO and TPO rejected the contentions of the assessee. On appeal, the ITAT relied on Delhi ITAT ruling in Bharti Airtel Ltd. vs. ACIT [TS-76- ITAT-2014(DEL)- TP] wherein it was held that transactions involving payment of share application money could not be treated as international transactions of loan given by the assessee to its AE merely because there was a delay in allotment of shares. The additions made were deleted. For the purpose of determining arm s length price, the profit of each of the STP units of the assessee company cannot be evaluated independently of one another. The result of each STP unit cannot be considered on a standalone basis, but should be evaluated by adopting a combined transaction approach. DCIT v. Birla Soft India Ltd. (46 taxmann.com 29) (Delhi - Trib.) The assessee company was an Indian company which provides software development and related services to its AEs located in USA and UK. The assessee was also rendering services to independent parties in India. The company rendered services from three separate STP units and had benchmarked its international transactions using internal TNMM as the most appropriate method by aggregating the margin from all its units at entity level. The TPO observed that the international transactions of the assessee were emanating from three STP units, which had distinct identity and were easily distinguishable, both, in the form of functions and financials. The TPO accordingly compared the margin of unrelated transaction with the related party transactions of each unit separately and held that out of the 3 units, the margin of 1 unit was not at arm s length. CNK & Associates LLP Page 20 of 22

21 On appeal the ITAT observed that the terms and conditions for rendering such services by each of STP unit were governed by one single agreement. It was also observed that there was common management and interlacing of the funds between the three units. Thus, independent FAR analysis of each unit with existing comparables was practically not possible. In the earlier years the ITAT had accepted the assessee's stand that the services are of the same or similar nature amongst all three of its STP units and they should be combined and evaluated by adopting a combined transaction approach, rather than employing the unit wise approach, as adopted by the TPO. It was held that the assessee was right in contending that the profit of each of the STP units cannot be evaluated separately and independently of one another. They cannot be segregated and the approach of the TPO in considering the result of each STP unit, on a standalone basis, for the purpose of determining the ALP relating to the assessee's international transactions, was incorrect. CNK & Associates LLP Page 21 of 22

22 DISCLAIMER AND STATUTORY NOTICE This e-publication is published by CNK & Associates LLP, Chartered Accountants, India, solely for the purposes of providing necessary information to employees, clients and other business associates. This publication summarises the important statutory and regulatory developments. Whilst every care has been taken in the preparation of this publication, it may contain inadvertent errors for which we shall not be held responsible. The information given in this publication provides a bird s eye view on the recent important select developments and should not be relied solely for the purpose of economic or financial decision. Each such decision would call for specific reference of the relevant statutes and consultation of an expert. This document is a proprietary material created and compiled by CNK & Associates LLP. All rights reserved. This newsletter or any portion thereof may not be reproduced or sold in any manner whatsoever without the consent of the publisher. This publication is not intended for advertisement and/or for solicitation of work. CNK & Associates LLP Page 22 of 22