CNK Knowledge Tracker

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1 CNK Knowledge Tracker Be a Step Ahead January 2015 CNK & Associates, LLP

2 Contents Domestic Tax Notification / Circulars 3 Recent judicial decisions 4 International Taxation/Transfer Pricing Notifications 9 Recent judicial decisions 10 Disclaimer and Statutory Notice 18 CNK & Associates LLP Page 2 of 18

3 Domestic Tax Notifications Income Tax (Eleventh amendment) Rules, Amendment in Rule 2C, 2CA, 11Aa, Form 10A, Form 56 and Form 56D: (Notification No. 61/2014, dated 10 th November 2014) Inconformity with the Section 80C amendment, Central Board of es (CBDT) has issued notification increasing the Limit for Investment in Bank Term Deposit for the purposes of Section 80C to Rs Lakhs from the earlier limit of Rs. 1 Lakh. Insertion of Rule 2BBB-Section 10(23C) (iiiab)/(iiiac)-percentage of Government grant-substantially financed by the Government: (Notification No. 79/2014, dated 12 th December 2014) For the purposes of Section 10(23C)(iiiab) and (iiiac), any university or other educational institution, hospital or other institution, shall be considered as being substantially financed by the Government for any previous year, if the Government grant to such university or other educational institution, hospital or other institution exceeds 50% of the total receipts, including any voluntary contributions, of such institution during the relevant previous year. Circulars Clarification regarding allowability of deduction under Section 10A/10AA on transfer of technical manpower in the case of Software Industry (Circular No. 14/2014, dated 8 th October 2014 ) The CBDT had earlier clarified that mere transfer or re-deployment of technical manpower from an existing-unit to a new SEZ unit in the first year of commencement of business will not be construed as splitting up or reconstruction of an existing business, provided the number of technical manpower so transferred does not exceed 20% of the total technical manpower actually engaged in developing software at any point of time in the given year in the new unit. Considering the representations from industry, the CBDT has now increased this threshold from 20% to 50%. CNK & Associates LLP Page 3 of 18

4 Deduction of Tax at Source from Salaries u/s 192 during the Financial Year : (Circular No. 17/2014, dated 10 th December 2014) This circular contains the rates of deduction of income-tax from the payment of income chargeable under the head Salaries during the financial year and explains certain related provisions of the Act and Income-tax Rules, 1962 (hereinafter the Rules). Circular helps employer to correctly deduct TDS on Salary of its employees for Financial year (Assessment Year ). Recent Judicial Decisions Principle of Mutuality Transfer fee received by a co-operative housing society from incoming and outgoing members even in excess of limits is exempt on the ground of mutuality CIT v Darbhanga Mansion CHS Ltd (Bombay High Court) - ITA No 1474 of 2012 dated 18 th December 2014 The Bombay High Court has held that the amount received by a co-operative housing society on account of transfer of flat and garage (even in excess of limits) which was credited to repair fund and general amenities fund was covered by the principles of mutuality and hence exempt from tax. While doing so, the High Court has referred to the underlying principles of a co-operative movement and the relationship between the members and the co-operative housing society which was overlooked by the Revenue. (This High Court decision overrules the view taken by the Mumbai Tribunal in Hatkesh Coop Housing Society Limited v ACIT that transfer fee charged by a society from its members is a commercial transaction and not exempt on the grounds of mutuality) Charitable Trust Charitable purpose and scope of proviso to Section 2(15) inserted by Finance (No.2) Act 2009 with effect from explained Indian Chamber of Commerce v ITO (Kolkata) - 53 taxman.com 52 (Kol) The Kolkata Tribunal has held that the assessee would be entitled to exemption under Section 11 even after the insertion of the proviso to Section 2(15) provided that it does not have any profit motive and that the receipts derived from performing specific services to its members would be treated as business income covered by Section 28(iii). CNK & Associates LLP Page 4 of 18

5 The objects for which the Chamber (a Section 25 Company) was established i.e. the advancement and development of trade and commerce and industry in India were charitable within the meaning of Section 2(15). The Chamber was carrying out certain activities which were incidental to the main objects and which were conducted only for the purpose of fulfilling the main objects. The income arising was only incidental and ancillary to the dominant object for the welfare and common good of the country s trade, commerce and industry and there was no profit motive. The profits earned were utilized only for the purpose of feeding its dominant object and no part of such profit was distributed amongst its members. In the cases of many institutions / associations whose main activity is not business the connected incidental or ancillary activities of sales carried out in furtherance of and to accomplish their main objects would not, normally, amount to business, unless an independent intention to conduct business in these connected, incidental or ancillary activities is established by the revenue. Provisions of Section 50C do not override the provisions of Section 11/ 12A. ACIT v The Upper India Chamber of Commerce (Lucknow) ITA 601/LKW/2011 The Lucknow Tribunal has held that Section 11(1A) lays down a complete system of taxability of capital gains in respect of an institution registered under Section 12A and is a code by itself. Hence the deeming provisions of Section 50C will not apply to such an entity. As per Section 11(1A) of the Act, if the net consideration for transfer of capital asset of a charitable trust is utilized for acquiring new capital asset, then the whole of the capital gain is exempt. Disallowance under Section 14A No disallowance in the absence of exempt income. Holcim India P. Ltd - Delhi High Court (ITA no. 486/2014 & 299/2014) The Delhi High Court has held that there can be no disallowance under Section 14A if there is no exempt income earned or if there is a possibility of the gains being taxable. Similar views have been taken in the past by Punjab & Haryana, Allahabad & Gujarat High Courts. Income from House Property Rental income earned from letting out of commercial complex is Income from House Property and not Business Income. Keyaram Hotels (P) Ltd. v Deputy Commissioner of Income tax (Madras High Court) 52 taxmann.com 469 The Madras High Court has reiterated that where the transaction was only by way of exploitation of the property by the assessee and not by way of carrying out of any business CNK & Associates LLP Page 5 of 18

6 activity, it was to be considered as Income from House Property and not Income from Business. Income from Business or Profession and allowability of expenses Delayed payment of employee PF dues Section 2(24)(x) read with Section 36(1)(va) CIT v Ghatge Patil Transports Ltd (Bombay High Court) - ITA No & 1034 of 2012 The Bombay High Court, after considering the principles laid down by the Supreme Court of India in Alom Extrusions Ltd. (185 Taxman 416) and the amendment to Section 43B by the Finance Act 2003 with effect from 1 st April 2004 extending the due date for payment of contributions to various employee welfare funds, held that even employees contributions to PF, ESIC etc. are allowable if they are deposited before the due date of filing the Return of Income. Allowability of Consent Fees paid to SEBI under the residuary provision of Section 37(1) ITO v Reliance Share & Stock Brokers (P.)Ltd. (Mumbai) - 51 taxmann.com 215 The Mumbai Tribunal held that the consent fees paid to SEBI for settlement of dispute, legal expenses and other administration charges wherein the purpose of paying the consent fees was to settle the dispute on commercial expediency and business interest. The Consent fee was paid without admitting or denying the guilt and hence the expenditure was not hit by the Explanation to Section 37(1). It was therefore allowable as deduction. Non-Compete fee paid to Ex- Managing Director for a period of three years is revenue expenditure. M/s Clariant Chemicals (I) Ltd.( Mumbai) - ITA No.7428/Mum/2011 The Mumbai Tribunal held that the non-compete fee paid to its Ex-Managing Director amounting to Rs lakhs, which was a compensation to restrict him to join any company or share any expertise with companies having same business for a period of three years. The same did not result in an enduring benefit and therefore was considered to be of revenue nature being incurred to protect the existing business. Forfeiture of share application money considered to be a capital receipt Graviss Hospitality Ltd. v Deputy Commissioner of Income Tax (Mumbai) - 53 taxmann.com 63 The Mumbai Tribunal held that since the amount of forfeited share application money was a capital receipt, it could not be taxed as income of the assessee, either under Section 28(iv) or CNK & Associates LLP Page 6 of 18

7 under Section 41(1). The monies did not arise out of the trading activity and hence it cannot be considered as trading receipt liable to tax. S. 41(1): Payment of Net Present Value of sales-tax deferral loan does not constitute a taxable "benefit" CIT v Sulzer India Limited v ACIT (Bombay High Court)- ITA No 450 & 762 of 2013 The Bombay High Court has held that the difference between the Net Present Value of sales-tax deferral loan discharged by the assessee and its future liability is not chargeable to tax under Section 41(1). Premature discharge of liability at present value does not result in remission of liability Capital Gains Subsequent purchase from co-owner -whether eligible for exemption under Section 54. Narinder Kaur Bhatia (Mumbai) - ITA no.1791/mum/2011 The Mumbai Tribunal has held that the term purchase has to be given a common meaning, and hence the purchase of undivided interest from a co-owner is a valid purchase which is eligible for exemption under Section 54. Gains on sale of TDR received as additional FSI as per the D. C. Regulations has no cost of acquisition and is not chargeable to capital gains CIT v Sambhajinagar Co-operative Housing Society Limited (Bombay High Court) ITA No 1356 of 2012 The Bombay High Court has reiterated that only an asset which is capable of acquisition at a cost would be included within the provisions pertaining to the head Capital gains as opposed to assets in the acquisition of which no cost at all can be conceived. Since the FSI/TDR was generated by the plot itself on account of amendment in the DC Regulations, there was no cost of acquisition and hence the gains arising on its transfer could not be assessed as capital gains. TDS Lease Premium and additional FSI charges paid is not Rent for TDS purpose. ACIT v Oil and Natural Gas Corporation Ltd. (Mumbai) - ITA no.5808/mum/2012 The Mumbai Tribunal has held that Lease Premium and Additional Floor Space Index charges paid by Assessee Company to MMRDA towards leasehold land are for acquisition of lease hold rights and additional FSI. The transaction being for transfer of property, which CNK & Associates LLP Page 7 of 18

8 includes right of possession, exploitation and long term enjoyment, is thereby outside the purview of rent for the purpose of Section 194I. Hence no TDS is required in respect of the same. Penalty under Section 271(1)(c) Penalty leviable if the AO demonstrates that the assessee's explanation or conduct is not reasonable, or that it violated settled legal positions CIT v Rucha Engineers Pvt Ltd. (Mumbai High Court) - ITA No 16 of 2011 (Bench at Aurangabad) The Bombay High Court has held that if the explanation of the assessee is not baseless or unacceptable, penalty cannot be levied for furnishing inaccurate particulars of income. The assessees basis of making a claim of a receipt being in the nature of capital receipt by duly disclosing the basis and particulars by way of notes to the computation of income cannot be considered as furnishing inaccurate particulars merely because the claim was rejected by the AO. In the absence of a clear-cut finding by the AO as to whether it is a case of 'concealment' or 'furnishing inaccurate particulars', penalty cannot be levied. Mitsu Industries Ltd v DCIT (Gujarat High Court) - ITA No 216 of 2004 The Gujarat High Court has held that it is incumbent upon the AO to come to a positive finding as to whether there was concealment of income by the assessee or whether any inaccurate particulars of such income have been furnished by the assessee, in the absence of which penalty cannot be levied CNK & Associates LLP Page 8 of 18

9 International Pricing Taxation/Transfer Notifications International Tax Extension of applicability of Section 194LC of the Income Tax Act, 1961 for lower withholding tax rate at 5%. Notification number 15 / 2014 dated 17 th October 2014 Prior to the said notification, the benefit of lower withholding tax at 5% was applicable only to a Long term infrastructure bond and loan agreements upto 1st July 2015 under section 194LC on satisfaction of the conditions as provided in CBDT Circular no. 7/2012. The erstwhile circular has now been substituted with effect from October 1, 2014 so as to now include any bonds and loan agreements as long as the borrowings are made on or after October 1, Further the period of lower withholding tax at 5% has also been extended to borrowings made under any loan agreement or by issue of any bonds including long term infrastructure bonds up to 1st July 2017 in place of earlier date of 1st July Amendment to Rule 28AA for obtaining certificate of non-deduction or lower deduction of tax under Section 197 of the Income Tax Act, 1961 Notification No. 46 /2014 dated September 24, 2014 As per the erstwhile rule 28AA the certificate for no deduction and deduction of tax at lower rate was valid only with regard to person responsible for deducting the tax and named therein. The certificate was to be issued directly to the person responsible for deducting the tax. Rule 28AA has been amended whereby the same position continues for a certificate for no deduction of tax, but the certificate for deduction of tax at lower rate shall be issued to the person who made an application for issue of such certificate, authorizing him to receive income or sum after deduction of tax at lower rate. This provides relief to an assessee claiming lower deduction of tax as the names of various deductors are now not required to be mentioned on the certificate, as required on the certificate for no deduction. CNK & Associates LLP Page 9 of 18

10 Recent Judicial Decisions International Tax Provision of marketing activities by the liason office would amount to a PE Brown and Sharpe Inc. v CIT 51 taxmann.com 327 (Allahabad HC) The assessee, a US company, established a Liaison office ( LO ) in India. Besides the fixed remuneration, it had a sales incentive plan under which employees were entitled to receive upto 25% of their annual remuneration as an incentive. The AO held that the activities of the assessee involved marketing activities in India and that the assessee was, in fact, carrying on business activities. On this basis, the AO computed taxable profits from business activities carried on in India. The High Court observed that the activities of the assessee were not restricted only to providing a channel of communication between the buyers of the products sold by the parent company but the activities were, it was found, extended to searching for prospective buyers, providing required information and persuading them of the worth of the brand of the assessee in the US. The Assessing officer found that the activities of the liaison office included: (i) explaining the products to buyers in India; (ii) Furnishing intimation in accordance with the requirements of the buyers; and, (iii) a discussion of commercial issues pertaining to the contract through the technical representative, after which an order was placed by the buyer directly. The performance of the personnel in India was also judged by the number of direct orders that the assessee received and by the extent of awareness of the assessee that was generated in India. The Court observed that whether or not any incentive was paid to an employee during the year in question, was not material. What was relevant was that the nature of the incentive plan clearly indicated that the purpose of the liaison office in India was not merely to advertise the products of the assessee or to act as a link of communication between the assessee and a prospective buyer but involved activities which traversed the actual marketing of the products of the assessee in India, because it was on the basis of the orders generated that an incentive was envisaged for the employees. Accordingly, the High Court held the LO was a permanent establishment in India and the income attributable to the LO had to be taxed in India. CNK & Associates LLP Page 10 of 18

11 Transfer Pricing Turnover of comparable companies of more than Rs. 200 crores could not be compared with company whose turnover was less than Rs. 20 crores. Companies engaged in product design and development and animation services are functionally not comparable to a company providing software development services. Actiance India Pvt. Ltd v ITO 52 taxmann.com 14 (Bangalore - Trib.) The assessee, a wholly owned subsidiary of M/s Face Time, USA, was in the business of rendering software development research and development services to its holding company. The assessee was remunerated on a cost plus 10 percent mark-up for services rendered to its holding company. Applying the PLI of operating profits to operating cost the margin of assessee was worked out at 11.37%.The TPO passed the order after considering various comparable and arrived at the margin of 20.68% resulting in an addition of Rs.68,91,931. The Tribunal, relying on the decision of Genesis Integrating Systems (India) Pvt. Ltd ITA No.1231/Bang/2010 as well as the OECD commentary, held that while applying the turnover filter, it is pertinent to apply an upper limit along with the lower limit. Since the turnover of the assessee was less than 20 crores, the ITAT held that the appropriate range of turnover would be Rs.1 crore and 200 crore. Further the Tribunal excluded Accel Transmatic Ltd on the ground of functionality. The tribunal held that the assessee, being a pure software development company, cannot be compared to Accel Transmatic Ltd whose business activities comprise of developing software product, ACCEL IT and ACCEL animation services for 2D and 3D animation. Accordingly, based on the functional profile of Accel Transmatic Ltd. and relying on the decision of Capgemini Pvt. Ltd v Additional CIT 12 Taxman.com 51, wherein Accel Transmatic Ltd was eliminated on functionality, the Tribunal excluded the said company CNK & Associates LLP Page 11 of 18

12 Sales promotion expenses incurred by AE under instructions and on behalf of the Assessee, reimbursed to AE without any mark up, cannot be considered as having zero value for arm s length price. Apollo International Ltd v Additional Commissioner of Income-tax 50 taxmann.com 321 (Delhi Trib.) The assessee had reimbursed the Associated Enterprise ( AE ) for sales promotion expenses incurred on behalf of the assessee without any mark-up. The expenses were supported by bills representing cost of gifts and business promotion material. The TPO was of the view that the assessee was not under any contractual obligation to perform the marketing functioning and therefore no reimbursement would have been made in arm s length situation and determined the arm s length price at zero. TPO did not dispute that the assessee may have benefited from this exercise. However he was of the view that such a benefit was only incidental and such incidental benefits cannot be regarded as giving rise to an arm's length transaction. The TPO held that the payment was not for intra group services and was purely for incidental benefit. The Tribunal held that since the AE was acting only as an intermediary in the provision of services and incurred costs on behalf of the assessee, which would have been incurred by the assessee directly in any case, and therefore it was appropriate for the AE to pass on the cost without a mark-up. It was further held that as the expenses were incurred under instructions from and on behalf of the assessee, the arm s length price could not be taken as zero. With regard to the incidental benefit, the Tribunal held that the issue would arise only when the expenses are incurred by the AE in its own right though for the common benefit of group as a whole. Accordingly, the Tribunal held that the reimbursement expenses paid without any mark-up were at arm s length price. As long as services are rendered, the Arm s Length Principle (ALP) for payment of management fees cannot be taken as Nil. All that the TPO can see is at what price similar services are actually rendered in the uncontrolled conditions. So long as agreement was not found to be a sham agreement, the value of the services cannot be taken as 'nil' on the ground that these services were not actually required by the assessee AWB India Pvt. Ltd. v Deputy Commissioner of Income-tax 50 taxmann.com 323 (Delhi Trib.) The assessee was engaged in the business of trading in food grains. The assessee entered into an international transaction with its AEs towards management services. The TPO was of the view that the benefit derived was not commensurate with the payment made and that CNK & Associates LLP Page 12 of 18

13 TNMM used by the assessee was not an appropriate method and that the CUP method is the most appropriate method and accordingly took the arm s length price at Nil. The Tribunal held that the application of CUP is dependent on the market value of the arrangements under which the present payments have been made and that unless the TPO can identify a comparable uncontrolled case in which such services, howsoever token or irrelevant as he may consider these services to be, are rendered and find out consideration for the same, the CUP method cannot have any application. The Tribunal held that it was not the job of the TPO to decide whether a business enterprise should have incurred a particular expense or not. A business enterprise incurs the expenditure on the basis of what is commercially expedient and what is not commercially expedient. The Tribunal referred to the decision of the Delhi High Court in the case of CIT v. EKL Appliances Limited (345 ITR 241), "Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same". The tribunal observed that there was no dispute that the payments were made under an arrangement with the AE to provide certain services. The payment for management fees is a call taken by the assessee whether the services are commercially expedient or not and all that the TPO can see is at what price similar services, whatever be the worth of such services, are actually rendered in the uncontrolled conditions. The tribunal concluded that as long as agreement was not found to be a sham agreement, the value of the services covered under the agreement cannot be taken as 'nil' just because in the opinion of the TPO these services were not actually required by the assessee. TPO cannot question business expediency of the royalty payment and cannot disallow it completely if it is having a nexus with the business and is incurred for business purposes. Further, RBI approval rate is itself to be considered to be ALP. Deputy Commissioner of Income-tax v Owens Corning Industries (India) Pvt Ltd 51 taxmann.com 276 (Hyderabad Trib.) The assessee was engaged in the business of manufacturing and trading of glass fiber products and was in receipt of technical assistance service through a royalty agreement entered into with its AEs. The TPO was of the view that the royalty payment was excessive and made a transfer pricing adjustment for the same by arriving at an arm s length price of 2 percent as opposed to the 4 and 5 percent paid by the assessee. The Tribunal, relying on CIT v EKL Appliances Ltd 345 ITR 241and that of Ericsson India Pvt. Ltd v DCIT 25 taxmann.com 472 held that the TPO was incorrect in going into CNK & Associates LLP Page 13 of 18

14 business expediency of the payment. Further reliance was placed on the decision of KHS Machinery Pvt. Ltd v ITO (53 SOT 100) which states that the issue of disallowance made by the TPO is not covered under the provisions of Section 92.There was no reason to hold that the expenses should not be allowed under Section 37(1) as the expense was a business expense having direct nexus with the business of the assessee. Further, the Tribunal also held that once the RBI approval of royalty rate was obtained the royalty payment was to be considered to be at arm s length.. Transfer pricing provisions not applicable on alleged undervaluation of shares issued to the foreign parent company as no income arising there from. Chapter X, does not contain any charging provision but is a machinery provision to arrive at ALP of a transaction between Associated Enterprises Vodafone India Services Pvt. Ltd v Union of India (50 taxmann.com 300) (Bombay) The assessee was a wholly owned subsidiary of a non-resident company, (the holding company).during the year, the assessee issued shares of the face value of Rs. 10 each at a premium of Rs. 8,509 per share to its holding company. The fair market value of the issue of equity shares at Rs. 8,519 per share was determined by the assessee in accordance with the Capital Issues (Control) Act, However, according to AO and TPO, the assessee ought to have valued each equity share at Rs. 53,775 as per Net Asset Value and on that basis shortfall in premium to the extent of Rs. 45,256 per share resulted into total shortfall of Rs. 1, crores. Both the AO and the TPO held that this shortfall in premium was covered by the provisions of chapter X and was income in the hands of the assessee. Further, the TPO held that the shortfall was required to be treated as deemed loan given by the assessee to its holding company and periodical interest thereon was to be charged to tax as interest income. On appeal the High Court held that: Chapter X was introduced to ensure that qua International Transaction between AEs, the profits are not understated nor losses overstated by abuse of either showing lesser consideration or higher expenses between AEs than would be the consideration between two independent entities, uninfluenced by relationship. It did not replace the concept of income or expenditure as normally understood in the Act for the purposes of Chapter X. CNK & Associates LLP Page 14 of 18

15 The definition of income does not include within its scope capital receipts arising out of capital account transaction unless so specified in Section 2(24) as income. The amounts received on issue of share capital (including the premium) are undoubtedly on capital account. There is no charge in the Act to tax amounts received and/or arising on account of issue of shares by an Indian entity to a non-resident entity as it arises out of Capital Account transaction and, therefore, is not income; The transaction on capital account or on account of restructuring would become taxable to the extent it impacts income i.e. under reporting of interest or over reporting of interest paid or claiming of depreciation etc. It is that income which is to be adjusted to the ALP price. It is not a tax on the capital receipts. HC also dismissed Revenue s contentions that under valuation of shares had an impact on assessee s potential income, as the shortfall in premium could have been invested by the assessee and assessee could have earned income on the same. The HC held that this was a mere surmise/assumption and cannot be the basis of taxation. In any case, the entire exercise of charging to tax the amounts allegedly not received as share premium fails, as no tax was being charged on the amount received as share premium. Chapter X of the Act does not contain any charging provision but is a machinery provision to arrive at ALP of a transaction between Associated Enterprises; Chapter X of the Act does not change the character of the receipts but only permits recomputation of income uninfluenced by the relationship between the Associated Enterprises. The Court further observed that Share premium had been made taxable by a legal fiction under Section 56(2)(viib) and was enumerated as income in Section 2(24)(xvi). However, what was brought into the ambit of income was the premium received from a resident in excess of the fair market value of the shares, not shortfall in capital received from a nonresident. Therefore, in the absence of express legislation, amount received, accrued or arising on capital account transaction from a non-resident cannot be subjected to tax as income. Accordingly, the High Court held that the Transfer pricing provisions would not be applicable on alleged undervaluation of shares issued to the foreign parent company as there was no income arising therefrom. A similar view was taken by the Bombay High Court in the case of Shell India Markets Pvt. Ltd v ACIT 51 taxmann.com 519 (Bombay). CNK & Associates LLP Page 15 of 18

16 Reference to TPO made when there were no pending assessment proceedings before the AO, cannot be a basis for initiating reassessment proceedings. XL India Business Services Pvt. Ltd v ACIT 51 taxmann.com 549 (Delhi Trib.) The assessee had filed the return of income of 29 th October 2007, and that the time limit for issuance of notice, under Section 143(2), selecting the case for scrutiny assessment expired on 30 th September It was only on 24 th December 2009 that the AO made a reference, undersection92ca(3), to the TPO for determination of arm's length price ofthe international transactions entered into by the assessee with its associated enterprises. The reference to the TPO, and the resultant proceedings before him, culminated in the order dated 15 th October 2010 proposing an arm's length price adjustment of Rs 2,80,91,619/-. As there were no proceedings pending before the AO, the AO reopened the assessment u/s 147, and made the addition based on the TPO order. The Tribunal quashed the reassessment proceedings by placing reliance on the decision of CWT v Sona Properties wherein it was held that "a report called by an authority having no jurisdiction would be a nullity at law and consequently proceedings based solely on such report would be illegal and will have to be quashed" The Tribunal held that a reference to the TPO, in the absence of any proceedings pending before the AO, was unsustainable in law. Thus any reassessment made on basis of such a TPO report is not sustainable in law. To apply the "Cost plus Method", there must be a comparable uncontrolled transaction. The fact that the same product is sold by the assessee to its AEs as well as to third parties does not mean that the two sets of transactions are comparable if the business model, marketing, sales promotion etc. are different. Wrigley India Pvt. Ltd v ACIT (ITA Nos 5648, 5649, 5650 / Del / 2012; ITA No 5987, 5988, 5989 / Del / 2012 & ITA No 5224 / Del /2010) Delhi Tribunal Assessee was a wholly owned Indian subsidiary engaged in the process of manufacturing and selling of confectionary products. The assessee manufactured and sold the products to its associated enterprises as well as independent enterprises in India. The assessee did not carry out any marketing support or sales promotion for the manufacture and sale of confectionaries to its associated enterprises whereas it did perform the said activities for its domestic sales transactions therefore resulting in two different business models. CNK & Associates LLP Page 16 of 18

17 The assessee adopted the TNMM method as the most appropriate method. The TPO was of the view that the Cost Plus method was the most appropriate method and used the margin earned by the assessee on the transactions with independent parties in India as a comparable. The Tribunal observed that as per the OECD Transfer Pricing Guidelines, to be comparable none of the differences (if any) should materially affect the condition being examined or the difference should be such that reasonable accurate adjustments can be made to eliminate their effect. Accordingly, the Tribunal held that the two situations, i.e. (i) sale of product to an overseas AE without any marketing and sales promotion, and (ii) sale of a FMCG product to a domestic independent enterprises with full responsibilities for marketing and sales promotion, were not comparable transactions. It was not only in the marketing and sales promotion that caused a difference, but it extended to the fundamental business model itself, particularly as the sale was not to an end user. The tribunal further held that the product was the same but the FAR profile was materially different and it was this FAR profile which governed the profitability. When profitability levels were expected to be different in two business situations, due to significant differences in FAR profiles, such transactions cannot be considered as comparable. The preference for a Cost Plus Method over TNMM would come into play only when appropriate comparable uncontrolled transactions can be identified and analysed accordingly. Since that was not done in the present case, there was no reason to disturb the TNMM method adopted by the assessee. CNK & Associates LLP Page 17 of 18

18 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 18 of 18