1

DIRECT TAXES Judicial pronouncements

SN K

Issue 04 April , 2011

Newsletter Website : www.snkca.com Email: newsletter@snkca.com

� DIRECT TAXES …... 1 - 9

� OTHER LAWS ………... 9 - 12

� IMPORTANT DUE DATES… 12

� INDIRECT TAXES …….… 9

ACIT v. Harshad V. Doshi (ITA No.1367/MDS/2009) [2011]

9 taxmann.com 48

Amounts advanced by a company to its director under a

Board resolution, for specific purpose, would not fall under

mischief of section 2(22)(e).

ACIT v. U.P. Cricket Association (ITA NO.422(LUC.)/2009)

[2011] 9 taxmann.com 102

Transfer of funds by a charitable society to another charitable

institution is application of income as per section 11.

Yatish Trading Co Pvt Ltd vs. ACIT (ITAT Mumbai)(ITA

No. 456 /Mum/2009)

No s. 14A disallowance of interest on borrowed funds

used to buy shares for trading purposes

The assessee, engaged in trading and investment of shares,

received tax-free dividend income of Rs. 2.98 crores in AY

2004-05. The AO invoked s. 14A and disallowed the interest

on borrowings, administrative and other expenses on propor-

tionate basis. In appeal, the CIT (A) upheld the disallowance

but directed that it should be computed as per Rule 8D. On

appeal to the Tribunal, HELD:

(a) Rule 8D does not apply prior to AY 2008-09 (Godrej &

Boyce 328 ITR 81 (Bom) followed);

(b) The expression “in relation to” in s. 14A means dominant

and immediate connection or nexus with the exempt in-

come. In order to disallow expenditure u/s 14A, there

must be a live nexus between the expenditure incurred

and the tax-free income. Disallowance cannot be made

on presumptions and estimation by the AO. Notional ex-

penditure can be apportioned for the purpose of earning

income if there is no actual expenditure incurred “in rela-

tion to” the tax-free income;

(c) On facts, the business of the assessee predominantly

was trading in shares though it also had investments in

shares. The AO has not disputed the assessee’s claim

that the dividend had been received on shares pur-

chased for trading purposes. Interest on borrowed funds

used for trading activity is allowable u/s 36(1)(iii) and it

cannot be treated as expenditure for earning dividend

income which is incidental to the trading activity. If the

real purpose was to use borrowed funds for trading pur-

poses and incidentally there is tax-free dividend, it can-

not be said that the interest has been incurred for earn-

ing the dividend income (Wallfort Share & Stock Brokers

326 ITR 1 (SC), Godrej & Boyce 234 DTR 1 (Bom), Em-

raid 284 ITR 586 (Bom), Leena Ramchandranan (Ker) &

Eicher 101 TTJ (Del) 369 followed);

(d) Though, as held in Godrej & Boyce 234 DTR 1 (Bom), it

is implicit within s. 14A that expenditure incurred for an

indivisible purpose has to be apportioned, this principle

of apportionment is applicable only where it is not possi-

ble to determine the actual expenditure incurred “in rela-

tion to” tax-free income. When it is possible to determine

the actual expenditure “in relation to” the exempt income

or where no expenditure is incurred “in relation to” the

exempt income, the principle of apportionment embed-

ded in s 14A has no application;

2

SNK DIRECT TAXES

Judicial pronouncements

(a) As regards the disallowance of

administrative expenditure, the

AO’s basis of disallowance based

on the ratio of taxable income and

dividend is wrong because the ex-

penditure did not depend on the

profit or loss arising from the busi-

ness activity. If the expenditure is

apportioned on the basis of in-

come, then in the case of no in-

come, no expenditure can be as-

signed. In case of transaction of

purchase and sale of shares, the

reasonable basis for apportion-

ment of administrative expenditure

should be the volume and nature

of the transaction under different

activities. There cannot be an

equal basis for apportionment of

admin expenses between delivery

based transactions and non-

delivery based transactions etc.

Hoshang D Nanavati vs. ACIT (ITAT

Mumbai)(ITA No. 3567/Mum/07)

S. 14A disallowance cannot be

made for “depreciation”

The assessee, a partner in a firm of

solicitors, received Rs 14 lakhs to-

wards remuneration as a working part-

ner and Rs 46 lakhs towards share of

profit in the partnership. The question

arose whether, given that the remu-

neration was taxable as business prof-

its, disallowance u/s 14A could be

made in respect of (a) depreciation

and (b) deduction u/s 80D in respect of

health insurance premium. HELD by

the Tribunal:

(a) S. 14A permits a disallowance of

“expenditure incurred by the as-

sessee” and not of “allowance ad-

missible” to him. There is a distinc-

tion between “expenditure” and

“allowance”. The expression

“expenditure” does not include al-

lowances such as depreciation

allowance. Accordingly, deprecia-

tion cannot be the subject matter

of disallowance u/s 14A (ratio of

Nectar Beverages 314 ITR 314

(SC) followed);

(b) Similarly, the deduction u/s 80D is

not expenditure for earning tax-

free income but is a permissible

deduction from gross total income

under Chapter VIA.

CIT v. Sandan Vikas (India) Ltd. (ITA

No. 348 of 2011)(Delhi HC)

Benefit of weighted deduction on in-

house Research and Development

expenditure is allowed from the year

in which the taxpayer has filed an

application and not when it is ap-

proved by DSIR

The Court held that the taxpayer was

eligible to claim weighted deduction on

in-house Research and Development

(R&D) expenditure from the year in

which the taxpayer made an applica-

tion to the Department of Scientific and

Industrial Research (DSIR). The High

Court observed that the provisions of

the Income-tax Act, 1961 (the Act)

does not suggest or imply that the cut-

off date mentioned in the certificate

issued by the DSIR will be the cut-off

date for eligibility of weighted deduc-

tion on the expenditure incurred on in-

house R&D to avail benefit of Section

35(2AB) of the Act.

DCIT vs. Edelweiss Capital Ltd

(ITAT Mumbai)(ITA No. 3971/

Mum/2009)

If not “Bad Debt”, claim for

“Business loss” maintainable. Web-

site development expense is not

capital expenditure

The assessee, engaged in investment

activities, advanced Rs. 27.97 lakhs for

development of a website. As the ad-

vance was not recoverable, the as-

sessee wrote off the amount and

claimed it as a “bad debt” even though

the conditions of s. 36(1)(vii) & 36(2)

were not satisfied. The AO rejected the

claim though the CIT (A) allowed it. On

appeal by the department to the Tribu-

nal, HELD:

(i) Though the claim as a ‘bad debt’ is

not allowable, the assessee is enti-

tled under Rule 27 to support the

CIT (A)’s order on the ground that

the amount should be allowed as a

‘business loss’. The subject-matter

of an appeal should be understood

not in a narrow and unrealistic

manner but should be so compre-

hended as to encompass the en-

tire controversy between the par-

ties which is to be adjudicated

upon by the Tribunal. Such a claim

can be considered provided no

new facts are needed (Edward

Keventer 123 ITR 200 (Del) & Gil-

bert & Barker 111 ITR 529 (Bom)

followed);

(ii) On merits, the department’s argu-

ment that the amounts paid for

development of websites cannot

be allowed as business loss be-

cause if the websites had been

successfully put up, the expendi-

ture would have been capital ex-

penditure is not acceptable. be-

cause (a) as the expenditure was

abortive, no capital asset has in

fact been acquired and (b) even if

the website had materialized, it

does not result in an advantage of

an enduring nature or in the capital

field as it is only for the day-to-day

running of the business and provi-

sion of information.

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SNK DIRECT TAXES

Judicial pronouncements

CIT vs. Niraj Amidhar Surti (Gujarat

High Court)(Tax Appeal No. 836 of

2009)

Merely because shares are pur-

chased by taking loan at high inter-

est does not mean gains are taxable

as business profits

The assessee, a CA, offered income

from profession, LTCG, STCG &

speculation profits. He borrowed funds

@ 30% p.a. and bought a large num-

ber of shares of Home Trade Ltd at Rs.

50. The shares were pledged as secu-

rity for the loan. After 14 months, the

assessee repaid the loan, obtained the

shares & sold them at Rs. 750 each for

a profit of Rs. 1.73 crores which was

offered as LTCG. The assessee in-

vested in s. 54 EC bonds & claimed

exemption. The AO held that as the

assessee had borrowed at an

“exorbitant” rate of interest & taken

risk, the transaction was an “adventure

in the nature of trade” and the profits

assessable as business profits. This

was reversed by the CIT (A) & Tribu-

nal. On appeal by the department,

HELD dismissing the appeal:

(i) The AO held the transaction to be

an “adventure in the nature of

trade” and not normal investment

on the basis that (a) assessee had

borrowed funds at an exorbitant

rate of 30% and (b) the shares

were held by the lender till the en-

tire loan was paid. However, this

reasoning loses sight of the fact

that merely because the shares

had been purchased from bor-

rowed funds obtained on high rate

of interest would not change the

nature of the transaction from in-

vestment to one in the nature of an

“adventure in the nature of trade”.

Moreover, as the shares were held

for a long-period of 14 months, the

intention of the assessee had al-

ways been that of making invest-

ment in shares and not dealing in

shares. This is also apparent from

the fact that the shares had not

been treated as stock in trade by

the assessee. The fact that the

shares were in the physical pos-

session of the lender was not rele-

vant because the assessee was

the owner thereof;

(ii) A capital investment and resale

does not lose its capital nature

merely because the resale was

foreseen and contemplated when

the investment was made and the

possibility of enhanced values mo-

tivated the investment {Sutlej Cot-

ton Mills Supply Agency Ltd 100

ITR 706 (SC)} followed.

CIT vs. M/s Sai Metal Works (P&H

High Court)(ITA No. 125 of 2004)

S. 40A(3) Disallowance can be made

in Block Assessment even if GP es-

timated

Pursuant to a search, the AO passed a

block assessment order u/s 158BC in

which he made a disallowance u/s 40A

(3) in respect of cash payments ex-

ceeding Rs. 20,000. The CIT (A) &

Tribunal struck down the disallowance

on the ground that s. 40A(3) could not

be invoked in a case where a block

assessment was by estimate on the

basis of GP rate. On appeal by the

department, HELD reversing the Tribu-

nal:

(i) Though the provisions of block

assessment are special, the argu-

ment that they are a complete

Code and the other provisions

cannot apply is not acceptable. S.

40A(3) applies to block proceed-

ings. Suresh Gupta 297 ITR 322

(SC) & M. G. Pictures 185 CTR

(Mad)185 followed; Cargo Clearing

Agency 218 CTR (Guj) 541 not

followed;

(ii) The argument that if income is as-

sessed by estimation on GP rate,

no other disallowance can be

made is not of universal applica-

tion. If expenditure which is legally

not permissible has been taken

into account that can certainly be

disallowed even where income is

estimated.

JSW Steel Ltd. v. ACIT (ITA No.922/

BANG/2009) [2011] 9 taxmann.com

77 (bang. - ITAT)

Conversion of interest liability into

share capital is not hit by Explana-

tion 3C to section 43B.

The loan cannot be equated with Pref-

erence Share and consequently, it

cannot be construed that Explanation

3C to section 43B covers not only

loans and advances but also prefer-

ence shares.

Madhu Rani Mehra vs. CIT (Delhi

High Court)(ITR No. 541/1992)

Capital asset treated as stock-in-

trade of proprietary business has to

be valued at market value

The assessee, a partner of a firm, re-

ceived stock-in-trade on dissolution of

the firm. The stock was used by the

assessee to start a proprietorship busi-

ness. In the assessment of the firm,

the Tribunal held, following ALA Firm

189 ITR 285 (SC), that the option to

4

SNK

value stock at the lower of cost or mar-

ket was available only to a going con-

cern and as the firm had dissolved, the

stock had to be valued at the market

value. However, in the assessment of

the assessee’s proprietorship busi-

ness, it was held that as the proprietor-

ship concern had acquired the stock

from the dissolved firm and continued

the same business, the opening stock

could not be valued at a price higher

than the book value as the assessee

had not paid anything in excess of the

said amount. On appeal to the High

Court, HELD allowing the appeal:

When a partnership firm is dissolved

and the erstwhile partner receives

stock, it is a capital asset in his hands.

When that asset is introduced into a

business as stock, it gets converted

into stock-in-trade. The value of this

stock will have to be the market value

on the date of introduction. The Tribu-

nal’s reasoning that the assessee can-

not value the stock introduced in the

business at market value because that

was not the price she paid for it is

flawed because if the assessee on

having received her distributed share

of stock of jewellery from the dissolved

firm had sold it, and thereafter com-

menced her proprietorship business of

jewellery again; within short span; by

buying the jewellery from the market

from the proceeds of stock sold on

dissolution of the erstwhile firms, the

stock of the proprietorship concern

would without doubt be valued at mar-

ket value. The same principle would

apply if the assessee used her share

of the stock obtained from the dis-

solved firm in the new business.

Bharat Bijilee Limited vs. ACIT (ITAT

Mumbai)(ITA No. 6410/MUM/2008)

Despite s. 50B, transfer of undertak-

ing for non-money consideration

not taxable if “cost of acquisition”

not determinable

The assessee transferred its undertak-

ing on a “going concern” basis pursu-

ant to a scheme of arrangement u/s

391 to 394 of the Companies Act. In

consideration, the transferee allotted

preference shares & bonds to the as-

sessee. The assessee claimed that the

transfer was not liable to tax on capital

gains on the basis that there was no

“cost of acquisition” of the undertaking.

The AO held that the transaction was a

“slump sale” as defined in s. 2(42C)

and that the gains had to be computed

u/s 50B. This was upheld by the CIT

(A). On appeal by the assessee to the

Tribunal, HELD allowing the appeal:

(i) In order to constitute a “slump

sale” u/s 2(42C), the transfer must

be as a result of a “sale” i.e. for a

money consideration and not by

way of an “Exchange”. The differ-

ence between a sale and an ex-

change is this that in the former

the price is paid in money, whilst in

the latter it is paid in goods by way

of barter. The presence of money

consideration is an essential ele-

ment in a transaction of sale. If the

consideration is not money but

some other valuable consideration

it may be an exchange or barter

but not a sale. On facts, as the

undertaking was transferred in

consideration of shares & bonds, it

was a case of “exchange” and not

“sale” and so s. 2(42C) and s. 50B

cannot apply;

(ii) As regards taxability u/s 45 & 48,

the “capital asset” which was

transferred was the “entire under-

taking” and not individual assets

and liabilities forming part of the

undertaking. There was no basis

for apportioning the consideration

amongst the various assets com-

prised in the undertaking nor could

the “cost of acquisition” of the un-

dertaking be determined. In the

absence of a cost/date of acquisi-

tion, the computation & charging

provisions of s. 45 fail and the

transaction cannot be assessed

(Premier Auto 264 ITR 193 (Bom)

distinguished).

ACIT v. C. Rajini (ITA NO. 1239/

MDS/2008) [2011] 9 taxmann.com

115 (CHENNAI – ITAT)

A developer and builder is not required

to be owner of land on record for

claiming a deduction under section 80-

IB(10).

ITO v. Galaxy Saws Pvt. Ltd. (ITA

No. 3747/M/2010)

Revaluation reserve not routed

through Profit and Loss Account

could not be added to net profit

while computing the book profit for

the purpose of MAT

The Tribunal held that revaluation re-

serve not routed through Profit & Loss

Account but directly transferred to bal-

ance sheet could not be added to net

profit while computing the book profit

for the purpose of Minimum Alternate

Tax (MAT). Further, the Tribunal reiter-

ated that principle that once the ac-

counts have been prepared as per the

provisions Schedule VI of the Compa-

nies Act and adopted at the Annual

General Meeting (AGM) of the com-

pany, the net profit disclosed in such

accounts cannot be tinkered with by

the Assessing Officer (AO) while com-

puting the book profit.

DIRECT TAXES

Judicial pronouncements

5

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Honeywell Automation India Ltd vs.

DCIT (ITAT Pune)(Stay Application

No. 08/PN/2011)

Direct Stay Application to Tribunal

maintainable. Not necessary that

lower authorities must be ap-

proached first

The assessee filed a stay application

before the AO, Addl CIT & CIT but

none of the authorities dealt with it.

The assessee also filed a stay applica-

tion before the Tribunal which was op-

posed by the Department on the

ground that the application was not

maintainable without there first being a

rejection by the lower authorities.

HELD dismissing the department’s ob-

jection:

(i) It is settled law that a Direct Stay

Application filed before the Tribu-

nal is maintainable and it is not the

requirement of the law that as-

sessee should necessarily ap-

proach the CIT before approaching

the Tribunal for grant of stay. It

does not make any difference

whether the assessee filed any

application before the Revenue

and not awaited their decisions

before filing application before the

Tribunal or directly approached the

Tribunal without even filing the ap-

plications before the Revenue au-

thorities, when there exists threat

of coercive action by the AO;

(ii) In deciding a stay application, the

following aspects have to be con-

sidered: (i) liquidity of the funds of

the assessee to clear the tax ar-

rears out of own funds at the rele-

vant point of time based on the

assessee’s financial status at the

time of the stay petition hearing; (ii)

creditworthiness of the assessee to

outsource the funds to clear the

departmental dues; (iii) prima facie

views on the likely decision of the

Tribunal on the issues raised in the

appeal; (iv) departmental urgen-

cies in matters of collection and

recovery; (v) guarantees provided

by the assessee to safe guard the

interest of the revenue etc.

Tata Communications Ltd vs. ACIT

(ITAT Mumbai – Special Bench)(S.A.

Nos.196 to 198/Mum/2009)

Despite Third Proviso to s. 254(2A),

Tribunal has power to extend stay

beyond 365 days if delay not attrib-

utable to assessee

The Third Proviso to s. 254(2A), as

amended w.e.f. 1.10.2008, provides

that if the appeal filed by the assessee

is not disposed off within the period of

stay granted by the Tribunal (which

cannot exceed 365 days), the order of

stay shall stand vacated even if the

delay in disposing of the appeal is not

attributable to the assessee. The as-

sessee filed a stay application request-

ing stay of demand for penalty of Rs.

369 crores. On the expiry of 365 days

of stay, the assessee asked for exten-

sion of stay relying on the Tribunal’s

order in Ronak Industries where, stay

had been granted beyond 365 days

relying on the judgement of the Bom-

bay High Court in Narang Overseas

295 ITR 22 (Bom). As it was felt by the

Tribunal that the reliance in Ronak In-

dustries on Narang Overseas was mis-

placed in view of the amendment to the

Third proviso to s. 254(2A) w.e.f.

1.10.2008, the question whether the

Tribunal had jurisdiction to extend stay

beyond 365 days referred to the Spe-

cial Bench. HELD by the Special

Bench:

(i) In Ronak Industries, the Tribunal

held, relying on Narang Industries,

that the Tribunal has the power to

extend stay beyond 365 days. This

decision of the Tribunal was chal-

lenged by the department in the

Bombay High Court by specifically

raising a question as to the appli-

cability of the Third Proviso to s.

254(2A) as amended w.e.f

1.10.2008. The High Court, vide

order dated 22.10.2010, dismissed

the department’s appeal. As such,

the Tribunal’s order holding that

there was power to extend stay

even after 365 days stood af-

firmed;

(ii) The department’s argument that

the High Court’s order in Ronak

Industries should be treated as per

incuriam on the ground that the

amendment made by the FA 2008

was not considered by it is not ac-

ceptable because (a) In Narang

Overseas (rendered prior to the

amendment) a wider view was

taken as regards the power to

grant stay, (b) In the appeal filed

by the department in Ronak Indus-

tries a specific question with regard

to the effect of the Third Proviso

was raised and so it cannot be said

that the High Court had not taken

cognizance of the amendment, (c)

the Tribunal cannot ignore a High

Court’s decision on the ground that

a provision of law was not consid-

ered by the High Court and (d) the

fact that there is no discussion in

the High Court’s order in Ronak

Industries does not mean that does

not lay down any ratio decidendi;

(iii) However, the recovery of the ar-

rears by the AO on the expiry of

365 days of stay cannot be or-

dered to be refunded because on

the date of recovery the stay had

expired and the application for ex-

tension was pending before the

Special Bench. The AO’s act was

bona fide and as the recovery was

DIRECT TAXES

Judicial pronouncements

6

SNK

by adjustment of refunds, it was not a

“coercive measure” (RPG Enterprises

251 ITR (AT) 20 (Mum) & other cases

holding that the AO must refund taxes

collected during the pendency of a

stay application distinguished).

Synergy Entrepreneur Solutions Pvt

Ltd vs. DCIT (ITAT Mumbai)(ITA No.

3076/Mum/10)

S. 263 Revision order is Invalid, if

for reason not stated in show-cause

notice

The assessee, engaged in share trad-

ing, claimed set-off of trading losses

against trading profits which was ac-

cepted by the AO u/s 143(3). The CIT

issued a show-cause notice u/s 263 in

which he claimed that the share trad-

ing losses were “speculation losses” u/

s 73 and could not be set off against

other income. Upon the assessee

clarifying that under the Explanation to

s. 73 the trading losses were eligible to

be set-off against the trading profits,

the CIT, without rejecting the claim,

passed an order u/s 263 on the ground

that the AO had not examined the is-

sue. On appeal to the Tribunal, HELD

quashing the s. 263 order:

(i) The reason given for the revision in

the s. 263 order (that the AO has not

verified the issue) is different from the

reason set out in the show-cause no-

tice (that speculation loss cannot be

set-off against other income). If a

ground of revision is not mentioned in

the show-cause notice, it cannot be

made the basis of the order for the

reason that the assessee would have

had no opportunity to meet the point

(Maxpack Investments 13 SOT 67

(Del), G.K. Kabra 211 ITR 336 (AP) &

Jagadhri Electric Supply 140 ITR 490

(P&H) followed);

(ii) On merits, the result of the Expla-

nation to s. 73 is that the entire profits

from trading in shares, even from de-

livery based transactions, is deemed to

be speculation profits and so the as-

sessee is entitled to set off the share

trading losses from the share trading

profits (Lokmat Newspapers 322 ITR

43 (Bom) followed).

CIT v. Subhash Kumar Jain (ITA No.

225 of 2003) [2011] 9 taxmann.com

112 (PUNJ. & HAR.)

Penalty for concealment of income -

Section 271(1)(c) r.w.s. 263

Once assessee’s offer to surrender

certain income subject to no penal ac-

tion under section 271(1)(c) was ac-

cepted by department and assessment

was made accordingly, no penalty pro-

ceedings under section 271(1)(c) could

be initiated against assessee thereaf-

ter.

Judicial Pronouncements - Inter-

national Taxation

Cummins India Limited vs. DCIT

(ITAT Pune)(ITA No. 277 & 1412/

PN/07)

Transfer Pricing: If ALP determined

by arithmetical mean, 5% deduction

allowable

In determining the arms’ length price

for transfer pricing purposes in respect

of international transactions relating to

‘procurement Support Services’, the

TPO considered 61 comparable prices

and finally relied on 3 prices to arrive

at the arithmetic mean. However, he

did not give a deduction from the arith-

metic mean as required by the first

proviso to s. 92C(2). On appeal to the

Tribunal, HELD:

(i) The First proviso to s.92C(2) (pre

amendment by F (No 2) Act 2009

w.e.f. 1.10.09) which provides that

“where more than one price is de-

termined by the most appropriate

method, the arms length price

shall be taken to be the arithmeti-

cal mean of such prices or at the

option of the assessee, a price

which may vary from the arithmeti-

cal mean of an amount not ex-

ceeding five per cent of such arith-

metical mean” is clear that the as-

sessee has an option when there

is arithmetical mean involved while

computing the ‘arm’s length price’

and it happens only if more than

one price is determined by the

most appropriate method. The

First Proviso becomes operational

where more than one comparable

price is determined. The assessee

at his option can make claim of

deduction out of the arithmetic

mean not exceeding 5%.

(ii) All the judicial pronouncements

(SAP Labs 6 ITR (Trib) 81 (Bang),

Sony 315 ITR (AT) 150 (Del), UE

Trade Corp (Del), Essar Steel

(Vizag) & Perot Systems 130 TTJ

685 (Del) are uniform in making

the proposition that where arithme-

tic mean is involved, the assessee

obtains the eligibility for claim of

deduction out of such arithmetic

mean. It is commonsense that the

statistical concept of arithmetic

mean arises only when there ex-

ists more than one price data.

Such concept is irrelevant to the

data with only one variable. In the

assessee’s case, as there were

three comparable price data, the

assessee was entitled for deduc-

tion not exceeding 5% out of the

arithmetic mean.

DIRECT TAXES

Judicial pronouncements (International Taxation)

7

SNK DIRECT TAXES

Judicial pronouncements (International Taxation)

TNT India Private Limited vs. ACIT

(ITAT Bangalore)(ITA No.1442

(BNG)/08)

Transfer Pricing: Prior Years’ data

cannot ordinarily be relied upon to

justify ALP. Non-operating income

& expenditure should be excluded

while comparing

The assessee, a courier company,

paid Rs. 43.46 crores to its holding co

in Netherlands towards the reimburse-

ment of cost in transport of consign-

ments. The TPO & CIT (A) adopted

the TNMM and claimed that as the

operating profit /operating income of

the comparables was higher than that

earned by the assessee, an adjust-

ment had to be made. It was also

claimed that the assessee was not

entitled to rely on the data of earlier

years. On appeal to the Tribunal,

HELD:

(a) In respect of FY 2001-02, the as-

sessee used data pertaining to

AYs 1999-2000 & 2000-01. While

the argument that at the time of

TP study, the data relating to rele-

vant comparable for FY 2001-02

is acceptable, the assessee has

to adopt the data available for the

TP study at the time of filing of the

return. By the time of filing of re-

turn, the data relevant to FY 2001-

02 was available. Further, prior

year data is relevant only if the

assessee is able to prove that the

pricing pattern of the assessee for

the relevant financial year has

been influenced by the market

conditions/business cycle/product

life cycle of the earlier years

(which is not there in the courier

business). The OECD guidelines

are not of binding nature and even

the Proviso to Rule 10B (4) pro-

vides that any subsequent year

data cannot be considered. The

contemporaneous data of relevant

financial year is to be used for

making the comparable analysis

for arriving at the ALP unless it is

proved otherwise;

(b) For arriving at the net margin of

operating income, only operating

income and operating expenses

for the relevant business activity

of the assessee has to be taken

into consideration. Other income,

such as dividend income, profit on

sale of assets, donations as well

as non-operating expenses which

are included in the operating in-

comes of other comparable com-

panies should be excluded as it

effects the net margin of the oper-

ating profits of the comparables.

Working capital adjustments also

have to be considered while arriv-

ing at the operating net margins.

(c) The assessee is entitled to a stan-

dard deduction of 5% as provided

under proviso to s. 92C (2) before

making adjustments of the trans-

fer price. (Schefenacker Mother-

son 123 TTJ (Del) 509 and SAP

Labs 6 ITR 81 (Bang)(Trib) fol-

lowed)

Marubeni India Private Ltd vs. ACIT

(ITAT Delhi)(ITA No. 809/Del/2009)

Transfer Pricing: For TNMM, inter-

est on surplus & abnormal costs to

be excluded

The assessee, a subsidiary of a Japa-

nese company, received commission

for agency and market research ser-

vices. For Transfer pricing purposes,

the assessee adopted the Transac-

tional Net Margin Method (TNMM)

and chose the Operating Profit Margin

on Operating Cost (OP/OC) as the

PLI and treated itself as the tested

party. As the assessee’s margins

were higher than that of comparables

(9% vs. 8.37%), the transactions were

claimed to be at arms’ length. The

TPO & CIT (A) held that in computing

the Operating Profit (a) interest in-

come and (b) abnormal costs had to

be excluded. On appeal to the Tribu-

nal HELD:

(a) Even if interest on surplus funds is

assessed as “business income”, it

has to be excluded in computing

the ‘operating profits’ because if it

is included, one is computing the

“return on investment” which is an

inappropriate profit level indicator

for a service provider. As the PLI

is the Operating Margin on Cost,

neither the interest income nor

interest expenses is a relevant

factor. The essential element is

the cost incurred for the operating

activity which has to be taken into

account;

(b) In computing the ALP, abnormal

expenses which are not of a rou-

tine nature as well as those of a

personal nature have to be ex-

cluded;

(c) Compensation for closure of cer-

tain units, though not a regular

phenomena, has a direct link with

the international transaction. The

assessee was receiving certain

charges at cost plus 10%. By

closing down certain branches,

the cost to the AE was reduced

and so such receipts would al-

ways be considered as operating

expenses. The cost of closure

cannot be excluded in computing

the operating expenses;

(d) The current year data should be

used for comparison purposes

and not the data of preceding two

years;

8

SNK DIRECT TAXES

Judicial pronouncements (International Taxation) / Circulars / Notification

(e) The argument that as the assessee

did not take any financial risk while

providing agency services and as it

also did not have a patent etc,

there must be an adjustment for

the “functional and risk level differ-

ence” is not acceptable because

no evidence as required by Rule

10D to show the risk born by com-

parables is shown. The assessee

has to demonstrate “exact details,

exhibiting the risk born by the com-

parable vis-à-vis the risk in running

the assessee’s business” (Sony

India 114 ITD 448 (Del) where a

20% adjustment was permitted

distinguished);

(f) The argument that there is a

“general recession” in the interna-

tional market and so an adjustment

should be made is not acceptable

because the comparables adopted

by the TPO takes into considera-

tion the general factor available to

the assessee vis-à-vis to the com-

parable in the market. No ad-hoc

separate adjustment can be made

for the general conditions of the

market at the relevant point of time;

(g) The benefit of +/- 5% adjustment is

not a ‘standard universal deduc-

tion’. This option is available only

when assessee is computing the

ALP and not when the AO/TPO is

computing the ALP.

ABN AMRO Bank NV vs. CIT

(Calcutta High Court)(ITA No. 458 of

2005)

Interest paid by a branch of a For-

eign Bank to its HO is deductible in

the hands of the branch. Such inter-

est is not taxable in the HO’s hands

The assessee, a Netherlands Bank,

carried on banking business through a

PE in India. The PE borrowed funds

from its HO on which interest was paid.

The assessee claimed that in the com-

putation of profits of the PE under Arti-

cle 7(3)(b) of the India-Netherlands

DTAA, the interest paid to the HO was

deductible. The AO & CIT (A) held that

while the interest was deductible in

principle in the hands of the PE, it was

taxable in the hands of the HO and as

there was no TDS u/s 195, the interest

had to be disallowed u/s 40(a)(i). The

result was that the interest paid by the

PE to the HO was disallowed in the

hands of the PE while being assessed

in the hands of the HO. On appeal, the

Special Bench (98 TTJ Kol 295) held

that the PE and the HO were the same

person and the interest paid was nei-

ther deductible in the hands of the PE

nor assessable in the hands of the HO.

On appeal by the assessee, HELD re-

versing the Special Bench:

(i) As regards deductibility of the inter-

est in the hands of the PE, though

a branch and the HO are the

“same person” in general law, Arti-

cles 5 & 7 of the DTAA provide that

the PE shall be assessable as a

separate entity. Under Article 7(3)

(b) payment of interest by a bank’s

PE to its HO is allowed as a deduc-

tion. The result is that the interest

paid by the PE to the HO is de-

ductible in computing the PE’s

profits (Betts Hartley Huett 116 ITR

425 (Cal) distinguished);

(ii) As regards taxability in the hands

of the HO & obligation for TDS u/s

195, in accordance with the princi-

ples of apportionment of profits

between the PE & the HO as laid

down in Hyundai Heavy Industries

291 ITR 482 (SC) & Morgan

Stanley 162 TM 165 (SC), only the

PE is to be taken as the assessee

and not the HO. As the interest

was not chargeable to tax in the

hands of the HO, the PE was un-

der no obligation to deduct tax u/s

195 and consequently no disallow-

ance u/s 40(a)(i) can be made in

the hands of the branch.

Circulars / Notifications

Notification No. 16/2011 dated 29-3-

2011

Two new information required in

quarterly statement of deduction of

tax from 1st April 2011

CBDT has notified amendment to Rule

31 and inserted tow new information to

be provided by every deductor of tax in

its quarterly statement of tax deduction.

Under Rule 31, every person responsi-

ble for deduction of tax under Chapter

XVII-B, are required to submit quarterly

statement of tax. Sub Rule 4 of Rule

31A prescribes what information are

required to be given . Till 31s March

2011 , the Sub Rule 4 was as under

(4) The deductor at the time of prepar-

ing statements of tax deducted shall,-

(i) quote his tax deduction and collec-

tion account number (TAN) in the

statement;

(ii) quote his permanent account num-

ber (PAN) in the statement except

in the case where the deductor is

an office of the Government;

(iii) quote the permanent account num-

ber of all deductees;

(iv) furnish particulars of the tax paid to

the Central Government including

book identification number or

challan identification number, as

the case may be.

9

SNK INDIRECT TAXES / OTHER LAWS

Circular / Notifications

However, from 01/04/2011, two new

clause to sub-rule 4 are being added.

These are

(v) furnish particulars of amount paid

or credited on which tax was not

deducted in view of the issue of

certificate of no deduction of tax

under section 197 by the Assess-

ing Officer of the payee;

(vi) furnish particulars of amount paid

or credited on which tax was not

deducted in view of the compli-

ance of provisions of sub-section

(6) of section 194C by the payee."

Please note that Rule 28AA is also

being substituted which provides for

‘certificate for deduction at lower rates

or no deduction of tax from income

other than dividends’.

INDIRECT TAXES

Circulars / Notifications

Circular No. 942/03/2011-CX dated

the 14th March, 2011

Liability of interest where CENVAT

credit was wrongly taken but re-

versed by assessee before utiliza-

tion- Circular No. 942/03/2011-CX

Attention is invited to the Board’s Cir-

cular No. 897/17/2009-CX dated

03.09.09, wherein it was clarified that

in light of clear and unambiguous pro-

visions of Rule 14 of the CENVAT

Credit Rules, 2004, the interest shall

be recoverable when credit has been

wrongly “taken”, even if it has not

been utilized.

2. References have been received to

re-examine the issue in light of

judgment of P&H High Court in

the case of Ind-Swift Labs. V/s

UOI [2009(240)ELT328(P&H)].

The said judgment of P&H High

Court held that under provisions

of Rule 14 of CENVAT Credit

Rules, 2004, interest cannot be

claimed from the date of wrong

availment of credit. It is required

to be paid from the date it is

wrongly utlilized.

3. The matter has been examined. It

is observed that the issue has

now been conclusively settled by

the Apex Court in the departmen-

tal appeal against the above men-

tioned judgment of P&H High

Court. The Apex Court vide its

judgment dated 21.02.11 in Civil

Appeal No. 1976 of 2011 has set

aside the aforesaid order of

Hon’ble High Court. The Apex

Court has ruled that “If the afore-

said provision is read as a whole

we find no reason to read the

word “OR” in between the expres-

sions ‘taken or utilized wrongly or

has been erroneously refunded’

as the word “AND”. On the hap-

pening of any of the three circum-

stances such credit becomes re-

coverable along with interest.” In

effect, therefore, the view taken

by the Board in circular dated

03.09.09 has now been endorsed

by the Apex Court.

4. Immediate action may be taken to

safeguard revenue in light of the

judgment of Apex Court.

OTHER LAWS

COMPANY LAW

General Circular No. 09/2011, dated

31.03.2011

Compulsory Filing of Balance

Sheet and profit and Loss Account

in extensible Business Reporting

Language (XBRL) mode

It has been decided by the Ministry of

Corporate Affairs to mandate certain

class of companies to file balance

sheets and profit and loss account for

the year 2010-11 onwards by using

XBRL taxonomy. The Financial State-

ments required to be filed in XBRL

format would be based upon the Tax-

onomy on XBRL developed for the

existing Schedule VI, as per the exist-

ing, (non converged) Accounting

Standards notified under the Compa-

nies (Accounting Standards) Rules,

2006. The said Taxonomy is being

hosted on the website of the Ministry

at www.mca.gov.in shortly. The Fre-

quently Asked Questions (FAQs)

about XBRL have been framed by the

Ministry and they are being annexed

as Annexure I with this circular for the

information and easy understanding

of the stakeholders.

Coverage in Phase I

2. The following class of companies

have to file the Financial State-

ments in XBRL Form only from

the year 2010-2011:-

(i) All companies listed in India and

their subsidiaries, including over-

seas subsidiaries;

(ii) All companies having a paid up

capital of Rs. 5 Crore and above

or a Turnover of Rs. 100 crore or

above .

Additional Fee Exemption

3. All companies falling in Phase -I

are permitted to file upto 30-09-

2011 without any additional fil-

ing fee.

Training Requirement

4. Stakeholders desir-

ous to have train-

ing on the XBRL or on taxon-

omy related issues, may contact

the persons as mentioned in An-

nexure II.

10

SNK

Company Law : Companies (Name

Availability) Rules, 2011

In exercise of the power conferred by

clause (a) of sub-section (1) of section

642 read with sections 20 and 21 of

the Companies Act, 1956 (1 of 1956),

the Central Government hereby

makes the following Rules:

1. (i) These Rules may be called

“Companies (Name Availability)

Rules, 2011”;

(ii) It shall come into force on such

date as the Central Government

may, by notification in the Official

Gazette, appoint.

2. As per provisions contained in

section 20 of the Companies Act,

1956, no company is to be regis-

tered with undesirable name. A

proposed name is considered to

be undesirable if it is identical with

or too nearly resembling with:

(i) Name of a company in exis-

tence; or

(ii) A registered trade-mark or a

trade mark which is subject of an

application for registration, of any

other person under the Trade

Marks Act, 1999.

3. After notification of these Rules,

while applying for a name in the

prescribed e-form-1A, using Digi-

tal Signature Certificate (DSC),

the applicant shall be required to

furnish a declaration to the effect

that:

(i) he has used the search facili-

ties available on the portal of

the Ministry of Corporate Af-

fairs (MCA) i.e.,

www.mca.gov.in/MCA21 for

checking the resemblance of

the proposed name(s) with the

companies and Limited Liability

Partnerships (LLPs) already

registered or the names al-

ready approved.

(ii) the proposed name(s) is/are

not infringing the registered

trademarks or a trademark

which is subject of an applica-

tion for registration, of any

other person under the Trade

Marks Act, 1999;

(iii) the proposed name(s) is/are

not in violation of the provisions

of Emblems and Names

(Prevention of Improper Use)

Act, 1950 as amended from

time to time;

(iv) The proposed name is not of-

fensive to any section of peo-

ple, e.g., proposed name does

not contain profanity or words

or phrases that are generally

considered a slur against an

ethnic group, religion, gender

or heredity;

(v) he has gone through all the

prescribed guidelines, given in

these Rules, understood the

meaning thereof and the pro-

posed name(s) is/are in confor-

mity thereof;

(vi) he undertakes to be fully re-

sponsible for the conse-

quences, in case the name is

subsequently found to be in

contravention of the prescribed

guidelines.

4. Where, the proposed name is

containing more than one word,

there will be an option in the e-

form 1A for certification by the

practicing Chartered Account-

ants, Company Secretaries and

Cost Accountants, who will cer-

tify that he has used the search

facilities available on the portal

of the Ministry of Corporate

Affairs (MCA) i.e.,

www.mca.gov.in/MCA21 for

checking the resemblance of

the proposed name(s) with the

companies and Limited Liability

Partnerships (LLPs) already

registered or the names al-

ready approved and the search

report is attached with the ap-

plication form. The professional

will also certify that the pro-

posed name is not an undesir-

able name under the provisions

of section 20 of the Companies

Act, 1956 and also is in confor-

mity with Companies (Name

Availability) Rules, 2011 and

Guidelines made therein.

5. (i). Where e-form 1A has been

certified by the professional in the

manner stated at ‘4’ above, the

name will be made available by

the system online to the applicant

without backend processing by the

Registrar of Companies (ROC).

This facility is not available for ap-

plications for change of name of

existing companies.

(ii) Where a name has been made

available online on the basis of

certification of practicing pro-

fessional in the manner stated

above, if it is found later on that

the name ought not to have

been allowed under provisions

of section 20 of the Companies

Act read with these Rules, the

OTHER LAWS

Company Law

11

SNK

professional shall also be liable for

penal action under provisions of the

Companies Act, 1956 in addition to

the penal action under Regulations

of respective professional Insti-

tutes.

Where e-form 1A has not been

certified by the professional, the

proposed name will be processed

at the back end office of ROC and

availability or non-availability of

name will be communicated to the

applicant.

6. The name if made available, is li-

able to be withdrawn anytime be-

fore registration of the company, if

it is found later on that the name

ought not to have been allowed.

However, ROC will pass an spe-

cific order giving reasons for with-

drawal of name, with an opportu-

nity to the applicant of being heard,

before withdrawal of such name.

7. The name if made available to the

applicant, shall be reserved for

sixty days from the date of ap-

proval and further extension of

thirty days with revalidation appli-

cation and fees. If, the proposed

company has not been incorpo-

rated within such period, the name

shall be lapsed and will be avail-

able for other applicants.

8. Even after incorporation of the

company, the Central Government

has the power to direct the com-

pany to change the name under

section 22 of the Companies Act,

1956, if it comes to his notice or is

brought to his notice through an

application that the name too

nearly resembles that of another

existing company or a registered

trademark.

9. In determining whether a proposed

name is identical with another, the

following shall be disregarded:

(i) The words Private, Pvt, Pvt., (P),

Limited, Ltd, Ltd., LLP, Limited Li-

ability Partnership;

(ii) The words appearing at the end of

the names – company, and com-

pany, co., co, corporation, corp,

corpn, corp.;

(iii) The plural version of any of the

words appearing in the name;

(iv) The type and case of letters, spac-

ing between letters and punctua-

tion marks;

(v) Joining words together or separat-

ing the words does not make a

name distinguishable from a name

that uses the similar, separated or

joined words;

(vi) The use of a different tense or

number of the same word does not

distinguish one name from another;

(vii) Using different phonetic spellings

or spelling variations does not dis-

tinguish one name from another.

For example, J.K. Industries limited

is existing then J and K Industries

or Jay Kay Industries or J n K In-

dustries or J & K Industries will not

be allowed. Similarly if a name con-

tains numeric character like 3, re-

semblance shall be checked with

‘Three’ also;

(viii)Misspelled words, whether inten-

tionally misspelled or not, do not

conflict with the similar, properly

spelled words;

(ix) The addition of an internet related

designation, such as .COM, .NET,

.EDU, .GOV, .ORG, .IN does not

make a name distinguishable from

another, even where (.) is written

as ‘dot’;

(x) The addition of words like New,

Modern, Nav, Shri, Sri, Shree,

Sree, Om, Jai, Sai, The, etc. does

not make a name distinguishable

from an existing name such as

New Bata Shoe Company, Nav

Bharat Electronic etc. Similarly, if it

is different from the name of the

existing company only to the extent

of adding the name of the place,

the same shall not be allowed. For

example, ‘Unique Marbles Delhi

Limited’ cannot be allowed if

‘Unique Marbles Limited’ is already

existing;

Such names may be allowed only if

no objection from the existing com-

pany by way of Board resolution is

produced/ submitted;

(xi) Different combination of the same

words does not make a name dis-

tinguishable from an existing name,

e.g., if there is a company in exis-

tence by the name of “Builders and

Contractors Limited”, the name

“Contractors and Builders Limited”

should not be allowed;

(xii) If the proposed name is an exact

Hindi translation of the name of an

existing company in English espe-

cially an existing company with a

reputation, e.g., Hindustan Steel

Industries Ltd. will not be allowed if

there exists a company with name

‘Hindustan Ispat Udyog Limited’;

OTHER LAWS

Company Law

12

SNK

The Queen vs. General Electric

Capital Canada Inc (Court of Ap-

peal, Canada)(2010 FCA 344)

Transfer Pricing: Despite “Implicit

support” by holding company, sub-

sidiary entitled to pay holding com-

pany at arms’ length for “explicit

support”

The assessee, a wholly-owned sub-

sidiary of General Electric Capital US

(GECUS), was in the business of pro-

viding financial services and took

loans for this purpose in the form of

commercial paper and unsecured de-

bentures. Between 1988 and 1995,

GECUS provided to the assessee, at

no cost, an explicit guarantee for its

debt issuances. From 1996, GECUS

began charging a fee equal to 1% of

the face amount of the assessee’s

debt issuances for that same guaran-

tee which amounted to about $135.4

million. The assessee’s claim for de-

duction of the fee was denied by the

tax department u/s 69(2)/247(2)

(transfer pricing provisions) on the

ground that as there was “implicit sup-

port” by GECUS to the assessee, the

payment of the guarantee fee was

“superfluous” and not at arms’ length.

This was reversed by the Tax Court

on the basis that by the explicit guar-

antee from the holding company, the

assessee had a better rating and had

to pay lower interest and received a

benefit which was valued at 1.83%.

As the fee paid for the benefit was

only 1%, it was at arms’ length. On

appeal by the department, HELD dis-

missing the appeal:

(i) In determining the arms length

price, all economically relevant

factors (including the “implicit sup-

port” that the subsidiary enjoys

from the holding company) have

to be considered. The explicit

guarantee by the holding com-

pany also has a value to the sub-

sidiary (Para 1.6 of the OECD

Commentary on Transfer Pricing

Guidelines for Multinational Enter-

prises and Tax Administrations

referred). The question is how

much an arm’s length party, bene-

fiting from the implicit guarantee

would be willing to pay for the ex-

plicit guarantee;

(ii) The “yield method” can be

adopted which requires a com-

parison between the credit rating

which an arm’s length party, in the

same circumstances as the as-

sessee, would have obtained and

the credit rating which would have

been obtained without the explicit

guarantee. On facts, it was shown

that the assessee would have en-

joyed a lower credit rating without

the explicit guarantee from the

holding company and would have

had to pay a higher interest than it

did with the explicit guarantee.

The incremental cost that the as-

sessee would have had to pay if it

did not have the explicit guarantee

was valued at 1.83% and so the

guarantee fee was at arms length.

M/s. Hyderabad Engineering v.

State Of A.P. (Civil Appeal No. 3781

of 2003)(SC)

Goods transported to out-of-state

depots otherwise than as a result

of direct sale which would attract

tax under Section 6 of the Central

Sales Tax Act

The SC dismissed the appeal ruling

that the transactions between several

cities constituted inter-state sales, as

contemplated under Section 3(a) of

the Central Sales Tax Act. The com-

pany was part of Jay Engineering

Works with head office in Delhi. It has

other related companies with different

names in different states. The com-

pany claimed exemption on a turnover

of Rs 8,87,75,643 towards goods

transported to out-of-state depots oth-

erwise than as a result of direct sale

which would attract tax under Section

6 of the Central Act. It argued, the

transactions on which exemptions

claimed cannot be regarded as sales

in the course of inter-state trade,

chargeable to tax under the Central

Act. This contention of the assessee

was rejected by the high court and the

SC.

OTHER LAWS

Others

Due Dates of key compliances pertaining to the month of April 2011:

The information contained in this newsletter is of a general nature and it is not intended to address specific facts, merits and circumstances of any indi-vidual or entity. We have tried to provide accurate and timely information in a condensed form however, no one should act upon the information pre-sented herein, before seeking detailed professional advice and thorough examination of specific facts and merits of the case while formulating business decisions. This newsletter is prepared exclusively for the information of clients, staff, professional colleagues and friends of SNK.

10th April Excise Return ER1 / ER2 /ER6

15th April PF Contribution for March

20th April Excise return ER3 for quarter ended March

21st April ESIC Payment for March

25th April Half yearly return of service tax

30th April TDS payment for March (whether amount credit on 31st March or not)