……Be a Step...Clarification regarding capital gains in respect of units of Mutual Funds under...

CNK & Associates, LLP

Direct Tax July 2015

CNK Knowledge Tracker ……Be a Step Ahead

CNK Knowledge Tracker, July 2015 For Private Circulation only Direct Tax

CNK & Associates LLP of 22

Contents Domestic Tax

Notification / Circulars/Orders 3

Recent judicial decisions 6

International Taxation/Transfer Pricing

Notifications 13

Recent judicial decisions 16

Disclaimer and Statutory Notice 22



Domestic Tax

Notifications/Circulars/Orders

Notifications

Transport allowance granted to an employee under Section 10(14) of the

Act.

Notification No.39/ 2015 (F No. 142/02/2015-TPL) dated 13th April 2015

Transport Allowance granted to an employee by employer to meet his expenditure for the

purpose of commuting between the place of residence & the place of duty is exempt to the

extent of Rs. 1,600 per month instead of Rs. 800 per month. In case of an employee, who is

blind or orthopedically handicapped, allowance is exempt to the extent of Rs. 3,200 per

month instead of Rs. 1,600 per month.

This notification is effective for the current financial year and shall accordingly apply to the

Assessment Year 2016-17 and subsequent assessment years.

Credit of tax deducted but not paid.

Instruction No. 275/29/2014-IT-(B) dated 1.6.2015

In terms of the provisions of Section 205 of the Act, an assessee cannot be called upon to

pay the tax to the extent that tax has been deducted from his income. Since the Act itself

puts a bar on direct demand against the assessee, such demand on account of tax credit

mismatch cannot be enforced coercively. The CBDT has asked the AOs not to put the

assessees to any inconvenience on account of the default of deductor

No TDS on Income of Alternative Investment Funds

Notification No 51/2015 (F.No. 275/11/2015-IT(B)) dated 25th June 2015

Tax is not required to be deducted at source on various payments made to an Investment

Fund being income other than Business Income. Investment Fund refers to any fund

established or incorporated in India in the form of a Trust or a Company or an LLP or a

body corporate which has been granted a certificate of registration as a Category I or II

Alternative Investment Fund regulated under SEBI (Alternative Investment Fund)

Regulations, 2012



Circulars

Clarification regarding capital gains in respect of units of Mutual Funds

under the Fixed Maturity Plans (FMPs)

Circular No. 6/2015 (F No 133/39/2014-TPL) dated 09th April 2015

As per the amendment in Section 2(42A) of the Act by the Finance Act, 2014 the period of

holding in case of unlisted shares and units of a mutual fund (other than an equity oriented

fund) in order to qualify as a long term capital asset is changed to 36 months from 12

months. This raised an ambiguity as to whether an option of roll-over of Mutual Funds

under FMPs to a date beyond 36 months from the date of original investment in accordance

with the provisions of the SEBI will amount to transfer under Section 2(47) of the Act.

The CBDT has clarified that the roll-over would not amount to transfer and no capital gains

would arise at the time of exercise of the option by the investor to continue in the same

scheme of mutual fund.

Procedure for online response to outstanding demand by taxpayer via e-

filing website

Circular No.8/ 2015, dated 14th May 2015

A facility has been given to the tax payers to provide an online response to the outstanding

demand which is received or is appearing on the CPC Demand Portalising website

To avail this facility, the tax payers have to log in to the e-filing website

(www.incometaxindiaefiling.gov.in) and log on to their e-filing account. In the e-filing

menu, they have to select the Response to Outstanding Tax Demand. The options available

in respect of each demand year-wise are:

Demand is correct – If that option is selected, the tax payer can either pay it or if any refund

is due, it would be adjusted.

Demand is partly correct – If that option is selected, the tax payer has to mention the

amount of correct demand and the incorrect demand with reasons which could include

rectifications pending, stay petition pending, appeal effects pending, tax credits pending etc.

Disagree with demand – On selecting that option the reasons for disagreement should be

stated.

Once the response is submitted, a transaction ID is generated and there are guidelines for

the AO to take action based on the response for giving tax credits, appeal effect, rectification

application and so on.

http://www.incometaxindiaefiling.gov.in/



A format of the Indemnity Bond is also provided.

It is expected that majority of the grievances of small tax payers can be redressed by

following the prescribed procedure.

Condonation of delay in filing Income-tax returns to claim refund and

carry forward losses.

Circular No.9 /2015 (F No 312/22/2015-OT) dated 09th June 2015

The CBDT has issued a circular containing comprehensive guidelines for condonation of

delay in filing refund claims and claim of carry forward of losses and the procedure to be

followed for deciding such matters. The CBDT has clarified that no condonation application

for claim of refund/loss shall be entertained beyond six years from the end of the

assessment year for which such application/claim is made. In a case where refund claim has

arisen consequent to a Court order, the period for which any such proceedings were pending

before any Court of Law shall be ignored while calculating the said period of six years. In

such case, condonation application should be filed within six months from the end of the

month in which the Court order was issued or the end of financial year whichever is later.

An application for claim of additional amount of refund after completion of assessment can

also be admitted for condonation. However, no interest will be admissible on belated claim

of refunds. Further the refund should have arisen as a result of excess tax

deducted/collected at source and/or excess advance tax payment and/or excess payment of

self-assessment tax.

This Circular will cover all such applications/claims for condonation of delay under Section

119(2)(b) which are pending as on the date of issue of the Circular.

Orders

Section 119 of the Act - Extension of due date of filing the Return of

Income

Order No (F.No.225/154/2015/1TA.II) dated 10th June 2015

The CBDT has extended the due date of filing the Return of Income for the AY 2015-16 to

31st August 2015 in respect of assessees who were required to file their returns by 31st July

2015 covered by clause (c) in terms of Explanation 2 to Section 139(1) .



Recent Judicial Decisions

Charitable Trusts and Institutions

Exempt income under section 10 is not to be considered for exemption under Section

11

DIT(E) v. M/s Jasubhai Foundation - (374 ITR 315)(Bom HC)

The assessee earned income which was exempt under Section 10(33) and 10(38). This

income formed part of income earned from property held under trust. The revenue’s

contention was that since the trust was entitled to exemption under Section11, it would not

be entitled to claim exemption under Section10.

The Bombay High Court held that Section10 deals with income not included in total income

and Section 11 deals with income from property held for charitable or religious purpose. The

language of the statute being clear, it was held that while computing the income exempt

under Section 11, income exempt under Section 10 has to be excluded. The High Court

therefore concluded that the requirement in Section 11 with regard to application of income

for charitable purposes does cannot apply to income exempt under Section 10.

Note: The Income Tax Act has now been amended to provide that effective from AY 2015-

16 exemptions under Section 10 [except for Section 10(1) and Section 10(23C)] cannot be

claimed by a trust which registered under Section 12A/12AA.

Salary Income

No exemption under Section 10(14) in the form of uniform allowance if there is no

dress code

Facets Polishing Works (P.) Ltd. v. ITO (58 taxmann.com 373) (Ahmedabad Trib)

The assessee had paid uniform allowance to its employees. It claimed that such allowance

was exempt under Section 10(14) and therefore tax was not to be deducted at source on

such sum.

The tribunal held that since there was no dress code and the employees were free to wear

any dress, the condition under Section 10(14) that the ‘allowance should be given to meet

the expenses wholly, necessarily and exclusively in the performance of duties of an office’

was not satisfied and therefore the sum paid was not eligible for exemption under Section

10(14). Hence tax was required to be withheld under Section 192 from such allowance.



Disallowance under Section 14A

Section 14A disallowance applies to strategic investments also.

Coal India Ltd. v ACIT – ITA No 1238/Kol/2012 dated 13.5.2015

Assessee was a Public Sector Company. The assessee received funds from Government of

India for making investments into its subsidiaries to the tune of Rs.6,31,637 lakhs. During

the year it earned dividend of Rs.2,62,908 lakhs. Assessee contended that investment was

made for the purpose of holding controlling stake in the group concerns and not for the

purpose of earning dividend and that no expenses were incurred to earn the dividend

income. However, AO did not accept the contention and disallowed expenditure under

Section 14A worked out in accordance with Rule 8D (2)(ii) & (iii).

The CIT(A) deleted the addition made under Rule 8D(2)(ii) since no borrowed funds were

utilised for investing.

The Tribunal was not convinced that the assessee had earned dividend income of

Rs.2,62,908 lakhs without incurring any expenses. It held that making investments in

subsidiaries is highly strategic in nature and such decisions are required to be made by highly

qualified and experienced professionals. The same would also require market research and

analysis. The assessee company, by acquiring controlling interest in the subsidiary

companies, would also be required to attend board meetings and make policy decisions with

regard to the aforesaid huge amount of investments made. Accordingly Tribunal held that

disallowance under Section 14A would apply to strategic investments also. However it has

directed that investments in subsidiaries from which no dividend have been received should

be excluded for computation of disallowance under Rule 8D(iii).

Income from Business and Profession

Rental income received to be taxed as Business Income if renting of property is the

main object under the Memorandum of Association of the company.

Chennai Properties and Investments Ltd. v CIT – 373 ITR 673 (SC)

The Supreme Court, after discussing the principle laid down by Constitution Bench of the

Supreme Court in Sultan Brothers P. Ltd. 51 ITR 353, held that since letting out of

properties was the main object of the taxpayer which could be seen from the Memorandum

of Association and there were no other business activities carried on, its income would be

chargeable to tax under the head ‘Profits and Gains of Business or Profession’ as opposed to

‘Income from House Property.’



Entire amount of discounted interest for 5 years to be allowed as deduction in the

year of payment itself.

Taparia Tools Ltd v. JCIT - 372 ITR 605 (SC)

The assessee had made a debenture issue and provided two payment options periodical and

upfront. In its books of accounts, it considered the upfront interest as deferred revenue

expenditure; however for tax purposes it claimed the entire amount in the first year itself.

The books of accounts were maintained as per mercantile system of accounting. AO allowed

only proportionate deduction treating it as deferred revenue expenditure.

The Supreme Court upheld the contention of the assessee. The Court explained that under

Section 36(1)(iii) any amount of interest paid would become admissible if it was paid for

capital borrowed and the borrowing was for the purpose of the business. The Court further

held since the option of receiving interest upfront was exercised by the debenture holder, the

liability to pay arose and hence if the same was claimed as deduction, the same could not be

denied. Merely because a different treatment was given in books of accounts, the assessee

could not be deprived of claiming deduction under the income tax law. Accordingly the

Supreme Court allowed the entire deduction.

Award for excellence in journalism received by an editor being a capital receipt is not

taxable.

Aroon Purie v. CIT 56 taxmann.com 80 (Delhi HC)

The assessee being an editor in chief for an English Magazine India Today received an award

for excellence in journalism by B.D.Goenka Trust. The revenue authorities contended it to

be taxable as the same was not covered by exemption under Section 10(17A).

The High Court held that the amount received by the assessee was a capital receipt as it was

in the nature of testimonial. The Court explained that the receipt was not related to vocation

but was linked with personal achievements. The High Court explained that it was a payment

of a personal nature and in absence of element of quid pro quo, the same was capital in

nature and thereby not liable to tax.

Note: In view of the provisions of Section 56(2)(vii), the ratio of the above decision may not be applicable

with effect from AY 2007-08

Reserve arising on merger is not taxable under Section 28(iv)

CIT v. STADS Ltd. – 373 ITR 313 (Mad HC)

There was amalgamation of four companies. Prior to amalgamation the combined share

capital of the companies was Rs.3,04,48,600. After merger the share capital of the



amalgamated company stood at Rs.87,60,380. The difference of Rs.2,16,88,220 was shown

under Reserves & Surplus. The Assessing officer contended the same to be taxable under

Section 28(iv).

The High Court stated that amalgamation reserve cannot be said to arise out of normal

business transaction and thereby cannot be taxed under the provisions of Section 28(iv). The

High Court held that the nature of receipt which arose on amalgamation of companies was

capital in nature and thereby not taxable.

Subsidy given for promotion of industry to be capital in nature

CIT v. Bougainvillea Multiplex Entertainment Centre Pvt. Ltd. - 373 ITR 14 (Delhi

HC)

To promote development and operation of multiplexes, the UP State Government granted

exemption from payment of entertainment tax to the assessee.

The assessee claimed the entertainment tax collected as capital receipt which was disallowed

by the AO. The High Court relying on the judgment of Supreme Court in the case of CIT v.

Ponni Sugars and Chemicals 306 ITR 392, wherein it was held that the basic test to be

applied in judging the character of the subsidy was the purpose for which the subsidy was

given, held that the receipt was a capital receipt and thereby not chargeable to tax.

Note: The amendment brought in by Finance Act 2015 by insertion of clause (xviii) to

Section 2(24) brings subsidy into the scope of income. Also, ICDS VII – Government

Grants provides for taxation of subsidies not given for acquisition of specific assets.

Unabsorbed depreciation needs to be claimed with current year depreciation.

Seshasayee Paper and Boards Ltd. v. DCIT – 58 taxmann.com 185 (SC)

The assessee had unabsorbed investment allowance of previous years as well as unabsorbed

depreciation. The assessee claimed depreciation for the current year and the unabsorbed

investment allowance and filed NIL return of Income. The question which arose before the

Supreme Court was whether the assessee could claim current year depreciation without

claiming unabsorbed depreciation.

The Supreme Court explained that the unabsorbed brought forward depreciation becomes a

part of the depreciation of the current year and thereby it is not open to the assessee to

bifurcate the two and exercise its choice to claim the depreciation of the current year under

Section 32(1), without claiming unabsorbed depreciation of the previous years.



Additions based on AIR information alone are not permissible

M/s Kroner investments Ltd. v. DCIT – ITA No. 5125/M/2013 dated 10.4.2015

AO made addition on account of interest received by assessee based on AIR information.

The assessee denied the receipt.

The Tribunal held that additions made solely on the basis of AIR information and without

any corroborative evidence is bad in law. There were no enquiries made by revenue to find

out whether the AIR information is correct or not. It was further held that if assessee denies

having received the income, it is for the Assessing Officer to prove that assessee has

received the income.

Only credits received during the year can be assessed as unexplained cash credits.

Rita Stephen Pinto v. ITO- ITA No. 1219/Mum/2013

Assessee had received unsecured loans in earlier year which were duly shown in the balance

sheet of earlier years. The Assessing Officer made addition under Section 68 on the ground

that the identity and creditworthiness of the creditors were not established.

The tribunal held that Section 68 can only be invoked only if the loan has been taken or the

sums have been credited in the books in the relevant previous year for which assessment is

being made and not for earlier years.

Capital Gains

Gift of house to spouse for availing exemption under Section 54F is valid.

Smt. Maya A. Ajwani v. ITO – 56 taxmann.com 255 (Mum)

The assessee, gifted one of her house property to her spouse. The date of gifting was near to

the date of purchase of another house property. Assessing Officer held that the transaction

was a colorable device to evade tax.

The Tribunal explained that there is no provision in law that would regard the assessee as

owner or even part owner of the property, gifted by the assessee to her spouse. Even if the

same is for the purpose of availing benefit under Section 54F, one cannot by any score treat

it as invalid in the eyes of law. The Tribunal stated that the law does not oblige a person to

pay maximum taxes or authorize disregarding a lawful transaction if the same has the effect

of reducing his tax liability. Hence gift cannot be considered as sham or bogus,

notwithstanding that the assessee would continue to reside with her family, including her

husband, in the said house, i.e., both before and after its gift to her husband.



Set-off of long term capital loss arising from sale of equity shares (STT paid) against

long term capital gain on the sale of land.

Raptakos Brett & Co. Ltd v. DCIT (58 taxmann.com 115)(Mum Trib)

The assessee in its return of income claimed set-off of long term capital loss arising on

transfer of shares where STT was paid against long term capital gain arising from the sale of

land. AO denied the set-off of such loss by relying on the decision of the Supreme Court in

the case of Commissioner of Income Tax (CIT) vs. Hariprasad & Company Pvt. Ltd (1975)

99 ITR 118. This was based on the view that income includes loss and if the long term

capital gain arising from sale of shares where STT was paid did not form part of the total

income as per Section 10(38), then the loss arising from such shares also could not be set off

against the other long term capital gains

The tribunal held that the ratio and principle laid down by the Supreme Court would not

apply in the case of the assessee, as the concept that 'income will include loss' would only

apply when the entire source of income is exempt from tax and not when only one of the

incomes falling within such source is exempt. The tribunal explained that if the entire source

is exempt or is considered as 'not to be included' in computing the total income then in such

a case, the profit or loss resulting from such a source would not enter the computation at all.

If a part of the source is exempt by virtue of a particular "provision" of the Act to benefit

the assessee, then it cannot be held that the entire source will not enter into computation of

total income. Accordingly the Tribunal allowed set off of long term capital loss on sale of

shares against long term capital gains on sale of land.

TDS

No deduction of tax at source for Lease Premium

ITO v. Earnest Towers (Pvt.) Ltd. (ITA No. 265/Kol/2012)(Kol. Trib)

The assessee had paid lease premium in respect of acquiring leasehold rights for a plot. The

AO took a view that the lease premium was in fact an advance rent paid and therefore the

assessee was required to deduct tax at source.

The Tribunal on facts held that the premium was paid for acquisition of rights in leasehold

land rather than for use of land. The Tribunal further held that Section 194-I applies only to

amounts paid for “use” of the land and not for amounts paid to “acquire” the rights. The

purport of Section 194 I of the Act is not to bring in its purview payments of any or every

kind. Hence Section 194I was not applicable.



Sum paid on account of legal obligation instead of contractual obligation is not

subject to TDS under Section 194C.

Executive Officer Jalandar Improvement Trust v. ITO TDS (Amritsar Trib)(58

taxmann.com 258)

Assessee was a Public trust which had made payments to Punjab Water Supply and Sewerage

Board for execution of work relating to sewage pipe lines and for treatment of polluted

water of the city. The TDS AO raised a demand on account of non-deduction of tax at

source.

The Tribunal held that provisions of Section 194C come into play only when there is a

contractual obligation. The contract may be oral, written, express or implied but there needs

to be a contractual obligation to trigger provisions of Section 194C. Since the instant

payment was on account of legal obligation, provisions of Section 194C were not attracted.

Wealth Tax

Use of premises by subsidiary does not amount to use of premises by assessee for its

own business

Kapri International (Pvt.) Ltd. v. CIT 373 ITR 50 (SC)

The assessee had given a part of its premises to its subsidiary. In return a license fee was

charged by assessee for utilization of its premises. The subsidiary also charged assessee for

whatever worked it did for assessee. The assessee claimed that entire building was ‘used for

the purpose of its business’ and was hence entitled to exemption from levy of wealth tax.

However, the contention of the assessee was rejected by the Income tax authorities.

The Supreme Court observed that the assessee and its subsidiary, though under the same

management, were distinct entities. This was evident from the fact that the assessee

company charged licensee fee to its subsidiary and the subsidiary also charged the assessee

for work done. This established that the two companies preserved their individual corporate

entities in respect of these transactions. The Court held that it cannot be said that the

building was used by the assessee for its own business purposes, and thus, value of portion

used by subsidiary was to be included in the assessee's net wealth.



International Taxation / Transfer

Pricing

Circulars/Notifications

Transfer Pricing

Clarification on Rollback Provisions of Advance Pricing Agreement

Scheme (APA)

Circular No. 10/2015 dated 10th June, 2015

Rollback provisions of APA Scheme were introduced through Finance Act, 2014, and were

notified recently through Rules 10MA and 10RA dated 14th March, 2015. Pursuant to

requests for clarification regarding certain issues received by the CBDT, the CBDT has

issued clarification through Circular No. 10/ 2015, in the form of 14 FAQs.

The summary on the clarifications issued by CBDT on APA Rollback provisions are

enumerated herein below:

Return of Income: APA rollback provision will not be available for belated return u/s

139(4), however it would be available for revised return filed u/s 139(5), provided the

original return was filed on or before its due date of filing.

Same International Transaction: The term same international transaction for the rollback

years means that the transaction in the rollback year has to be of the same nature (e.g.

rendering of ITES or Software Development services) and undertaken with the same

associated enterprises (e.g. X and Y), as proposed to be undertaken in the future years and in

respect of which APA has been reached. Further it is also clarified that rollback provisions

would apply only if the FAR analysis of the rollback year does not differ materially from

the FAR validated for the purpose of reaching an APA in respect of international

transactions to be undertaken in future years. In this context, the word “materially” is

defined to mean a material change of facts and circumstances which could reasonably have

resulted in an APA with significantly different terms and conditions.

Choice of years for rollback: The applicant does not have option to choose the years for

which it wants to apply for rollback. The applicant has to either apply for all the four years

or not to apply at all. However, exception is provided under the following situations:



a. Covered international transactions did not exist in a rollback year.

b. Any disqualification exists in a rollback year.

Scope of “ITAT passing an order”: Rollback provisions will not apply to matters that

have reached finality. Therefore the rollback provisions will not apply where ITAT has

passed an order on any factual issue, as ITAT is the final fact finding authority. However, if

the ITAT has not decided the matter and has only set aside the order for fresh consideration

by the lower authorities with full discretion at their disposal, the matter shall not be treated

as one having reached finality and hence, rollback provisions would be applicable.

Effect on total income or total loss: Rollback provisions could be applied where the

determination of ALP is subject to the condition that the ALP would get modified to the

extent that it does not result in reducing the total income or increasing the total loss, as the

case may be, of the applicant as declared in the return of income of the said year.

Cancellation of Agreement: In case effect cannot be given to the rollback provision, for

any rollback year on account of failure of assessee, the entire agreement shall be cancelled.

Mutual Agreement Procedure (MAP) applications: Where MAP has already been

concluded, rollback will not be applicable. If MAP request is pending, applicant may exercise

the option to either proceed with MAP or rollback application for such year.

Arm’s Length Price: For the rollback years, ALP could be different for different years.

However, the manner of determination of ALP including choice of method, comparability

analysis and tested party would be same.

Withdrawal/Acceptance of rollback application: The applicant has an option to

withdraw its roll back application even while maintaining the APA application for the future

years. However, it is not possible to accept the rollback results without accepting the APA

for the future years.

Already concluded APAs can be revised to include rollback provisions.

Draft Rules on “Range Concept” and “ Multiple Year Data”

LETTER [F.NO.134/11/2015-TPL] dated 21st May, 2015

The Finance Minister in his Budget Speech in July 2014 had announced that the ‘range

concept’ would be introduced in the Indian transfer pricing regime. It was also announced

that use of multiple year data would be permitted for undertaking comparability analysis.



The CBDT has since released a draft proposal wherein it has prescribed the manner of

Arm’s Length Price (ALP) computation for any international or Specified Domestic

Transaction (‘SDT’) entered into by the tax payers on or after 1stApril 2014 (i.e. from AY

2015-16).

The highlights of the proposed mechanism and the conditions laid down in the draft

rules under which the multiple year data and range concept would be used for

determination of ALP are as under:

Adoption of the Range Concept

The range concept shall be used only in case the method used for determination of

ALP is Transactional Net Margin Method (‘TNMM’), Resale Price Method (‘RPM’) or

Cost Plus Method (‘CPM’)

In order for the range concept to be used by a taxpayer, a minimum of nine comparable

entities are required to be selected for the purpose of benchmarking the tested

transaction.

Weighted average (i.e. the numerator and denominator of the chosen Profit Level

Indicator) of 3-year data of each comparable entity would be used to construct the data

set. At least 2 out of 3 years’ data for each comparable entity should be considered.

The data points lying within the 40th to 60th percentile of the data set of series would

constitute the range.

In a scenario where the transfer price of the tested party falls outside the range, the

median of the range would be taken as ALP in order to make an adjustment to transfer

price.

Use of Multiple Year Data

Multiple year data shall be used only in case where determination of ALP is by TNMM,

RPM or CPM.

Multiple data to comprise 3 years including the current year (i.e., the year in which the

transaction has been undertaken). However, in case of non- availability of data for 3

years for one or more reasons as specified by the CBDT, the use of data of 2 out of

relevant 3 years shall be permitted.

In a scenario where the current year data is not available at the time of filing of return

of income by the taxpayers, the current year data can be used during the transfer pricing

audit by both the taxpayer and the department if it becomes available at the time of

audit.



Continued use of Arithmetic Mean

In cases where range concept does not apply e.g. less than 9 comparables are available

or selection of a method other than those prescribed under the range concept, the

arithmetic mean concept shall continue to apply in the same manner as it applied along

with benefit of tolerance range.

Multiple year data will be considered for computation of ALP irrespective of the fact

whether range concept is used or arithmetic mean is used.

Recent Judicial Decisions

International Tax

Agent appointed in India by Foreign Company engaged in business of

telecasting TV channels for giving time slots to advertisers did not

constitute a PE of Foreign Company in India as the activities of these

agents was incidental or auxiliary/preparatory in nature which was

carried out in a routine manner as per direction of assessee without

application of mind. It was accordingly held that the income earned by

Foreign Company is not liable to Indian income tax.

B4U International Holdings Ltd. v DIT (IT) - II [57 taxmann.com 146(Bombay High

Court)]

Assessee is a Mauritius based company engaged in the business of telecasting of TV channels

such as B4U Music, MCM etc. The income of the assessee from India consisted of

collections from time slots given to advertisers from India through its agents. The assessee

claimed that it did not have any permanent establishment in India and has no tax liability in

India.

The Assessing Officer did not accept this contention of the assessee and held that affiliated

entities of the assessee are basically an extension in India and constitute a permanent

establishment of the assessee within the meaning of Article 5 of the Double Taxation

Avoidance Agreement (DTAA) between India and Mauritius.

The High Court held that the Tribunal had correctly stated that B4U cannot be treated as

dependent agent of the assessee, and even assuming that it can be so treated, it has been

remunerated at arm's length and therefore no further profits is attributable. Further the High

Court confirmed with the findings of the Tribunal that after referring to the clauses in the



agreement between the assessee and B4U, it can be held that B4U India is not a decision

maker nor does it have the authority to conclude contracts.

Based on the above observations it was held that the activities carried out in India is

incidental or auxiliary / preparatory in nature which is carried out in a routine manner as per

the direction of the principal without application of mind and hence income earned by

Foreign Company was not liable to Indian income tax

Assessee, a joint venture between UPS WWF, USA, and 'J' Ltd made

reimbursement of debtor collection charges to it AE. It was held that had

the assessee made direct payment to the payee, the same would have

been a pure reimbursement and would not have fallen within the ambit

of 'fee for technical services'. Hence the assessee was not required to

deduct tax at source while making the said payment

UPS Jetair Express (Pvt.) Ltd. v. DCIT 9(3)[56 taxmann.com 387(Mumbai- Tri)]

The Assessee, an Indian Company is a joint venture between UPS WWF Inc., USA and 'J'

Ltd. and was engaged in business of international integrated transportation services. Based

on a global arrangement with 'RMS', USA provided debtor collection services to assessee

outside India. UPS WWF initially made payment to RMS, which was then reimbursed by

assessee on cost-to-cost basis without any mark-up. During the course of assessment

proceedings, Assessing Officer opined that UPS WWF was only a conduit or a facilitator and

assessee was not released from its obligation to make TDS as per Section 195 read with

Section 9(1)(vii) and Explanation to Section 9(2) and accordingly assessing officer disallowed

the said payment u/s 40(a)(i).CIT(A) also confirmed the assessment order.

Tribunal held that invoices raised by AE (UPS WWF) on assessee are matched back to back

with the invoices raised by 3rd party (RMS). From the invoices it is proved that

reimbursements are made without any mark up. Even if the assessee would have made direct

payments to third party (RMS) for Debtors collection services, it would not fall within the

ambit of Royalties or Fees for Technical Services under the Act as well as under Article 12 of

the India-USA Tax Treaty. Thus, provisions of Section 195 were not attracted and there was

no merit in the disallowance made by the Assessing Officer under Section 40(a)(i) of the

Income Tax act.



Transfer Pricing

Mechanism of choosing comparable discussed.

Aginity India Technologies (Pvt.) Ltd. [Delhi - Trib.)

Assessee a wholly owned subsidiary was engaged in providing software development and IT

services to its overseas AEs and operated as a limited risk bearing captive service provider.

The TPO rejected 11 out of 17 comparables selected by the assessee and accordingly made

transfer pricing adjustment. On Appeal CIT (A) rejected the objections of the assessee.

However, he accepted the contention of the assessee that high turnover companies should

not be included in the list of comparables.

Tribunal held that:

A giant company in area of development of software which assumed all risks leading to

higher profits is not comparable with assessee which is a captive unit of parent company and

assumed only a limited risk.

That a functionally comparable company could not have been excluded simply because of

high turnover only.

A software product company is incomparable to software development service provider

A company cannot be said to have failed Related Party Transaction (RPT) filter solely on

ground that it has not disclosed RPT computation.

Where the prices varies on account of various issues, TNMM method is

the most appropriate method to benchmark the International transaction

Amphenol Interconnect India (Pvt.) Ltd. v. ACIT [58 taxmann.com 168 (Pune -

Trib.)]

Assessee was engaged in manufacturing of broad range of inter-connected products and

assemblies for voice, video and data communication systems. During the year assessee had

entered into international transactions of import of raw materials and export of finished

goods. In addition, the assessee had received indenting commission. Assessee had exported

finished goods to the associated enterprises and also to the third parties located outside India

and also finished goods were sold in domestic market. The assessee had followed TNMM

method to be the most appropriate method to determine the arm's length price. However

the TPO opined that to benchmark export sales CUP method would give more fair and

reasonable results. CIT(A) upheld the additions made by the TPO.

On appeal to the tribunal, it was held that for benchmarking the international transactions

the entire circumstances of the case need to be examined. Where the prices vary on account

of various issues, i.e., timing of the transaction, volume of order and geographical location

then CUP method cannot be applied and it is most appropriate to apply TNMM method.



Foreign exchange gains are to be considered as part of Operating

Income while computing operating margin if such gains are derived

from operating activity

Denso Kirloskar Industries Pvt. Ltd. v. ACIT [Banglore - Trib.)]

The Assessee Company was engaged in the business of manufacture of aluminum radiator

and air conditioners for cars and multi utility vehicles. During AY 2010-11, assessee had

entered into international transactionwith its AE (Denso Japan) and adopted TNMM as

most appropriate method and considered ratio of operating profits to total revenue as Profit

Level Indicator (PLI).

Assessee considered foreign exchange gain on sale proceeds as a part of Operating income

while determining Operating margin, which was not accepted by the AO.

On appeal before CIT(A), replying on the decision of SAP Labs India Pvt. Ltd. v. ACIT

(2011) CIT(A)held that foreign exchange fluctuation gain is nothing but integral part of the

sale proceeds of the assessee carrying on export business and that the same should be treated

as operating income. Revenue aggrieved by the said decision filed an appeal before Tribunal.

ITAT held that the stand taken by the Revenue was unsustainable when the nexus of the

foreign exchange gain with the business activity of the tax payer had been clearly established.

Therefore, ITAT dismissed Revenue’s appeal.

Assessee is not entitled for deduction under Section 10B in respect of the

addition suomoto made by the assessee as per Form 3CEB.

Agilisys IT Services India Pvt. Ltd. v. ACIT[Mumbai– Trib.)]

Assessee underpriced its services to AEs and made transfer pricing adjustment suomoto.

The assessee claimed that entire export turnover reported in books had been received in

convertible foreign exchange within stipulated time, therefore, it is eligible for exemption

under Section 10B.

Transfer pricing officer opined that increased profit on account of transfer pricing

adjustment was not brought into India by assessee in convertible foreign exchange;

therefore, deduction under Section 10B had to be recalculated after excluding said amount.

CIT(A) confirmed the assessment order.

On appeal to Tribunal, assessee contended that the provisions of Section 92C(4) would

come into operation only when the enhancement of export income takes place consequent

to determination of the arm's length price by the Assessing Officer under Section 92C(3) and



in the given case assessee itself made transfer pricing adjustment and, thus, there was no

question of denying exemption under Section 10B.

The Tribunal noted that Section 10B is a special provision in respect of newly established

100 per cent EOU wherein a deduction is allowed to 100 per cent EOU from the export of

articles or things or computer software for a period of ten consecutive assessment years. The

legislative intention is clear to give incentive to 100 per cent export oriented unit but at the

same time expecting such EOU to bring the sale proceeds in the convertible foreign

exchange in India within a period of six months from the end of the previous year. At this

point assuming that there is no enhancement by the TPO and the assessee is allowed the

benefit of Section 10B then every tax payer will first underprice its sale with associated

enterprises and thereafter suomoto enhance the sale price by making transfer pricing

adjustment and claim the deduction under Section 10B, stating that the underprice sale

originally declared by the assessee in its books of account have been brought in India in

convertible foreign exchange thereby keeping a certain portion of the sale abroad.

One cannot permit the assessee to stretch the benevolent provision to avail the benefit

which the legislature never intended to. Therefore, the finding of the lower authorities is

upheld and assessee is not entitled for deduction under Section 10B in respect of the

addition suomoto made by the assessee as per Form 3CEB.

No transfer pricing adjustment is required to the extent of the loan

converted into equity with effect from date of such conversion

Shrenuj & Co. Ltd. v. ACIT) 57 taxmann.com 274 (Mumbai-Trib.

The assessee had given advance to its wholly owned foreign subsidiaries (WOS) on which no

interest had been charged.

The Transfer Pricing Officer applied 6% interest on the basis of advance given to WOS. It

was argued by the assessee that the loans given to wholly owned subsidiary cannot be

anything but quasi equity for the reason that they are wholly owned and their entire fund

requirement in any case has to be provided for by the Holding company.

The Tribunal held that the issue with regard to determining arm's length adjustment in

respect of loan given to its wholly owned subsidiaries is covered by the decision of

jurisdictional High Court in the case of CIT v Tata Autocomp Systems Ltd. [IT Appeal No.

1320 of 2012 [dated 3-2-2015], wherein it was held that the rate of interest was to be

determined by applying the Euribor rate of interest i.e., rates prevailing in Europe. Similarly

the decision of Tribunal in the case of VVF Ltd. v. Dy. CIT [IT Appeal No. 673 (Mum.) of

2006 and in the case of DCIT v. Tech Mahindra Ltd. [2011] 46 SOT 141/12 taxmann.com

132 (Mum.) also supports this issue. Accordingly the Tribunal directed the Assessing Officer



to make arm's length adjustment by applying the LIBOR rate of interest.

Further from the record it was also found that part of loan was subsequently converted into

equity. The Tribunal held that to the extent of loan converted into equity, no transfer pricing

adjustment is required with effect to the date of such conversion, in view of decision of

jurisdictional High Court in the case of Vodafone India Services (P.) Ltd. v. UOI [2014] 386

ITR 1 [2015] 228 Taxman 25/50 taxmann.com 300 (Bom)



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