Gist of recent important tax caselaws

Below are the recent important tax caselaws related to Income tax, Service tax, Excise in brief. The citation is made available for your benefit :

INCOME TAX

SECTION 2(15)

CHARITABLE PURPOSE

Medical relief : Where assessee, a non-profit making company entered into agreement with State Government in terms of which assessee had to provide Emergency Medical Transport Services to patients free of cost, it was to be concluded that assessee was incorporated for charitable purpose of providing medical relief and, thus, its application seeking registration under section 12AA was to be allowed - GVK EMRI (UP) v. Director of Income-tax (Exemption), Hyderabad (2014) 45 taxmann.com 90 (Hyderabad - Trib.)     SECTION 37(1) BUSINESS EXPENDITURE - ALLOWABILITY OF Education expenses : Where expenditure on higher education of employee had an intimate and direct connection with assessee's business, it would be appropriately deductible, even though such an employee was son of a director - Kostub Investment Ltd. v. Commissioner of Income-tax (2014) 45 taxmann.com 123 (Delhi)       SECTION 40A(2) BUSINESS DISALLOWANCE - EXCESSIVE OR UNREASONABLE PAYMENTS Commission : Where revenue authorities disallowed payment of sales commission made by assessee to its agents by invoking provisions of section 40A (2), in view of fact that those agents were house wives were not in a position to offer any professional advice on matters relating to production, market survey or procurement of orders, impugned disallowance was to be confirmed - Luxco Electronics v. Commissioner of Income-tax (2014) 45 taxmann.com 122 (Allahabad)       SECTION 92 Comparables and adjustments/CUP Method/TNMM : Where assessee had to incur additional cost in relation to services rendered by it to unrelated parties as compared to similar services rendered to related parties, assessee should have been allowed relief on account of functions performed, risk assumed and asset employed in services rendered by it to related and unrelated parties - J.P. Morgan India (P.) Ltd. v. Assistant Commissioner of Income-tax (2014) 44 taxmann.com 466 (Mumbai - Trib.)       Comparables and adjustments : Where comparable was a big company in all respects including range of turnover, same should be excluded from list of comparables to small companies which were captive service providers having considerably low turnover - United Online Software Development (India) (P.) Ltd. v. Income-tax Officer (2014) 44 taxmann.com 424 (Hyderabad - Trib.)     CENTRAL EXCISE ACT SECTION 11B REFUND – GENERAL Refund has to claim only as per section 11B of Central Excise Act, 1944 and no civil suit cannot be instituted for refund of claim based on discovery of mistake of law - Union of India v. Rajasthan Spinning & Weaving Mills Ltd. (2014) 45 taxmann.com 2 (Rajasthan) SECTION 14 SUMMONS - RETRACTION OF STATEMENT Onus lies on Department to prove that there was clandestine removal by assessee; and for that purpose, department must put forth evidence and conduct examination of witnesses and buyers to prove the charge - Commissioner of Central Excise, Ahmedabad v. Gopi Synthetics (P.) Ltd. (2014) 45 taxmann.com 57 (Gujarat)

Tax News : Transfer pricing income adjustments decline 14% in 2013-14

We also bring to you latest news from Tax in India. Below is the article published in one of the News Tabloid in India.

After a 54% jump in transfer pricing (TP) adjustments to Rs70,000 crore last year, additions to the income of companies conducting international transactions has dropped by over 14% to Rs60,000 crore in FY14.

A financial ministry official told FE that data collated after the completion of the latest round of audit pertaining to assessment year 2010-11, shows that TP adjustments have fallen mainly because the orders this year have taken into account concerns raised by the MNCs after some high-pitched adjustments last year.

The official added that additions to the income of companies in those cases have been much less than last year. The heavy TP addition cases in FY13 included those of Shell, Vodafone, Microsoft and Maruti.

In case of Shell involving share transfers to the related entities, TP additions have been only about Rs3,500 crore in the current audit as compared to Rs15,000 crore in FY13 audit. For Vodafone, the adjustments for assessment year 2010-11 has been around Rs3,100 crore.

Vodafone and Shell were accused of undervaluing their shares in transactions to their respective parents overseas, and legitimate tax has to be paid on that. Both have disputed this view.
The official said in the cases which are under litigation, additions have been substantially less as compared to the previous years, and in some of the new ones, no adjustments have been made at all this year.

Some 3,600 cases were taken up for TP audit in FY14 and additions have been made in about half of them. Business recast has emerged as a new issue in the TP orders in the current round.
The TP office also questioned R&D investments in India by Microsoft and Maruti last year, and made significant adjustments to their income — Microsoft was charged with understating income during FY06 and FY09 by R5,135 crore and Maruti was disallowed FY09 expenses worth R448 crore.
The IT department, however, has taken a number of steps since then to improve the TP framework as these adjustments were termed as one of the factors spooking investor sentiments. “Special care has been taken to keep TP orders reasonable,” said the official.

Recent Important Tax caselaws / judgements

Below are the recent important tax caselaws related to Income tax, Service tax in brief. The citation is made available for your benefit :

INCOME TAX ACT

SECTION 12A

CHARITABLE OR RELIGIOUS TRUST - REGISTRATION OF

Trust established under State Act : Provisions of section 12A (1)(b) are mandatory and, therefore, even if a trust is incorporated under a State Act, it is bound to get its accounts audited in case its total income without giving effect to provisions of sections 11 and 12 exceeds maximum amount not chargeable to tax - Vice Chancellor, Vishweshwaraiah Technological University v. Commissioner of Income-tax, Belgaum (2014) 42 taxmann.com 205 (Panaji - Trib.)     SECTION 32 DEPRECIATION - ADDITIONAL DEPRECIATION Wind Electric Generator : Additional depreciation was to be allowed on setting up of wind electric generator to an assessee who was engaged in manufacture and sale of chemicals - Commissioner of Income-tax-I v. Diamines & Chemicals Ltd. (2014) 42 taxmann.com 193 (Gujarat)       SECTION 35 SCIENTIFIC RESEARCH EXPENDITURE Applicability of : Where assessee, engaged in business of development of vaccines and bio-pharmaceuticals, claimed product development expenditure being interest on loan and cost of consumable, in view of fact that said expenditure had nothing to do with scientific research, provisions of section 35(1) (i) or (iv) had no application to assessee's case and, thus, its claim for deduction was to be rejected - Deputy Commissioner of Income-tax, Circle -1(3), Hyderabad v. Bharat Biotech International Ltd. (2014) 42 taxmann.com 204 (Hyderabad - Trib.)       SECTION 92C TRANSFER PRICING - COMPUTATION OF ARM’S LENGTH PRICE Comparables and adjustments : Where in transfer pricing proceedings, TPO made adjustment in respect of import of raw material from AE located abroad, in view of fact that assessee had imported raw material of superior quality and, moreover, it had also obtained comparative rate of sale, in similar product manufactured by independent parties which showed that assessee was importing even at a higher rate, impugned adjustment made by authorities below was to be set aside - Merck Ltd. v. Assistant Commissioner of Income-tax, Circle -6(3) (2014) 42 taxmann.com 275 (Mumbai - Trib.) Comparables and adjustments : Where in course of transfer pricing proceedings, Assessing Officer made addition to assessee's ALP on account of notional interest charged on loan granted to AE, in absence of any independent uncontrolled transaction available on record in that regard, impugned addition was not sustainable - Crest Animation Studios Ltd. v. Assistant Commissioner of Income-tax, 11(1) (2014) 42 taxmann.com 222 (Mumbai - Trib.)       SECTION 145 METHOD OF ACCOUNTING - SYSTEM OF ACCOUNTING Project completion method v. Percentage completion method : In construction business of one concern of assessee, income may be declared by following project completion method, while in other, percentage completion method is followed - Commissioner of Income-tax –V v. Umang Hiralal Thakkar (2014) 42 taxmann.com 194 (Gujarat)       SERVICE TAX SECTION 65(19) TAXABLE SERVICES - BUSINESS AUXILIARY SERVICES Merely provision of space (with furniture) as accommodation to banks/financial institutions in premises of an automobile dealer may not amount to Business Auxiliary Services (BAS) and may constitute renting; however, some promotion activity falling under section 65(19) is done, it would amounts to BAS - Pagariya Auto Center v. Commissioner of Central Excise, Aurangabad (2014) 42 taxmann.com 371 (Mumbai - CESTAT) (LB)       RULE 2(l) CENVAT CREDIT - INPUT SERVICE Where, during relevant time, revenue demanded Service Tax under reverse charge and assessee paid service tax, then, Cenvat credit thereof cannot be denied for reason that later it was decided that service tax itself was not payable - Aksh Technologies Ltd. v. Commissioner of Central Excise, Jaipur-I (2014) 42 taxmann.com 396 (New Delhi - CESTAT)

Recent Important judgements on Transfer Pricing

DCIT vs. Panasonic AVC Networks India Co Ltd (ITAT Delhi)

Transfer Pricing: Adjustment to profit margin for “capacity underutilization” can be made. In choosing comparables, there cannot be a cherry picking for deciding parameters of rejection. All comparables must face the same test


Under Rule 10B (1)(e)(ii), an adjustment to the net profit margin has to be made for “capacity underutilization”. Capacity underutilization by enterprises is an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Of course, the fundamental issue, so far as acceptability of such adjustments is concerned, is reasonable accuracy embedded in the mechanism for such adjustments, and as long as such an adjustment mechanism can be found, no objection can be taken to the adjustment. On facts, the CIT(A)’s approach is reasonable and the adjustments are on a conceptually sound basis

DCIT vs. Air Liquide Engineering India (ITAT Hyderabad)

Transfer Pricing: TPO cannot sit in judgement on commercial expediency. RBI approval means the payment is at ALP. If overall TNMM analysis done, royalty cannot be analyzed separately


The TPO is not entitled to sit on judgment on the business and commercial expediency of the assessee in paying royalty to its’ parent company as per the provisions of the Act as laid down clearly by the Delhi High Court in EKL Appliances 345 ITR 241. It is also noted that various Tribunals such as DCIT vs. Sona Okegawa Precision Forgings (ITA No. 5386/Del/2010), Hero Motocorp (ITA No 5130/Del/2010), ThyssenKrupp Industries (ITA No 6460/Mum/2012), Abhishek Auto Industries (ITA No 1433/Del/2009) have taken a view that RBI approval of the Royalty rates itself implies that the payments are at Arm’s Length and hence no further adjustment needs to be made viewed from this angle too. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company’s transaction, it covers under its ambit the Royalty transactions in question too and hence separate analysis and consequent deletion of the Royalty payments by the TPO seems erroneous. We draw support from Cadbury India (ITA No 7408/Mum/2010 and ITA No.7641/Mum/2010 wherein the ITAT upheld the use of TNMM for Royalty

Tilda Riceland Pvt Ltd vs. ACIT (ITAT Delhi)

Transfer Pricing: No bar on reliance of private database u/R 10D(3). Nuances of the CUP Method under Rule 10B(1)(a)(i) explained


(i) Rule 10 D(3) is only illustrative in nature and merely describes the information required to be maintained by the assessee under section 92D “shall be supported by authentic documents, which may include the following …”. The logic employed by the Transfer Pricing Officer that since databases compiled by private entities is not included in rule 10D (3), such databases cannot be relied upon by the assessee is clearly fallacious inasmuch as an item not being included in illustrative list of required documents does not take outside the ambit of ‘acceptable document’ for the required purposes. In any event, all that Tips Software does is to collect the data, compile the same in easy to refer format and make it available to the end-user of such data online. The data is public data maintained by the customs department at various ports. It was also open to the TPO to, if he had any doubts, call for further information from this database supplier and examine authenticity of the data so furnished. His summary rejection of the data as unreliable on a technical ground is not tenable in law

Lummus Technology Heat Transfer BV vs. DCIT (ITAT Delhi)

Transfer Pricing: Unaudited segmental accounts can be relied upon for comparing profitability of controlled transactions with uncontrolled transactions. While size is relevant in entity level comparison, it is not relevant in transaction level comparison within the same entity


(i) In applying the Transactional Net Margin Method (TNMM) under Rule 10B(1)(e) it is not necessary that the net profit computations, in the case of internal comparables (i.e. assessee’s transactions with independent enterprise), have to be based on the audited books of accounts or the books of accounts regularly maintained by the assessee. All that is necessary for the purpose of computing arm’s length price, under TNMM on the basis of internal comparables, is computation of net profit margin, subject to comparability adjustments affecting net profit margin of uncontrolled transactions, on the same parameters for the transactions with AEs as well as Non AEs, i.e. independent enterprises, and as long as the net profits earned from the controlled transactions are the same or higher than the net profits earned on uncontrolled transactions, no ALP adjustments are warranted. It is not at all necessary that such a computation should be based on segmental accounts in the books of accounts regularly maintained by the assessee and subjected to audit
Source:Itatonline

Vodafone’s case: HC puts ball in DRP’s court to decide applicability of TP provisions on issue of shares

a) Assessee allotted shares to its foreign holding company (AE) at a premium of Rs. 8,951 per share and received the amount against allotment of shares;

b) The AO (Assessing Officer / Tax Officer) referred this transaction to TPO (Transfer Pricing Officer) for determining its ALP. The TPO issued show cause notice to assessee;

c) The assessee contended that Chapter X doesn’t apply to issue of equity shares as no income arises from issue of equity shares and the transaction is a capital account transaction;

d) TPO rejected assessee’s contentions relying on retro amendment to section 92B made by the Finance Act, 2012 by inserting Explanation(i)(c) and (e) which brings capital financing transactions within the purview of international transactions and TP provisions of Chapter X;

e) The TPO determined ALP of shares and made TP adjustments of 1397.27 crores. The AO passed draft assessment order wherein he didn’t deal with assessee’s objections. Thus, the assessee filed the instant writ petition challenging AO’s draft assessment order.

The High Court disposed off the petition with following directions:

1) We were not inclined to set aside the draft assessment order of the AO or the order of the TPO and remand the matter to AO, because the AO has already filed an affidavit contesting the petition on merits and justifying the stand that the alleged shortfall in premium upon issue of shares was chargeable to tax under Chapter X.";

2) Thus, instead of remanding the matter to the AO to examine this question, the merits of this question must be considered by DRP;

3) The petitioner would submit before the DRP its preliminary objections to Draft Assessment Order and the TPO's order within two weeks by raising jurisdictional issues;

4) The DRP would decide the issue of jurisdiction before considering issue of valuation raised by the petitioner in its objections filed before the DRP, of course subject to the additional grounds on jurisdiction being filed by the petitioner within two weeks;

5) The DRP would decide the issue of jurisdiction as a preliminary issue within two months from the date on which the petitioner filed its objections on the question of jurisdiction;

6) In case the decision of the DRP on the above preliminary issue was adverse to the petitioner, it would be open to the petitioner to challenge the order of the DRP on the preliminary issue in a writ petition if a case was made out at that stage that the decision of the DRP was patently illegal, notwithstanding the availability of alternative remedy of filing an appeal before the Income Tax Appellate Tribunal - VODAFONE INDIA SERVICES (P.) LTD. V. UNION OF INDIA (2013) 39 taxmann.com 201 (Bombay)

Latest Transfer Pricing: Finance Ministry Press Release Reg Safe Harbour Rules

The Ministry of Finance has issued a press release stating that the Safe Harbour Rules have been finalized after considering the comments of various stake holders. The significant aspect is that in case of transactions in the nature of routine ITES and ITS activities the earlier ceiling of Rs 100 crore has been removed. Transactions upto Rs. 500 crore have been provided safe harbour margin of 20% and transaction above Rs.500 crore have been provided safe harbour margin of 22%. 

 Similarly, the ceiling of Rs. 100 crore provided for transactions in the nature of corporate guarantee has been removed. Also, the rules provide for a time bound procedure for determination of the eligibility of the assessee and the international transactions. Any rejection of the option exercised by the assessee shall be by way of a reasoned order passed after hearing the assessee. The assessee shall have a right to file an objection with the Commissioner against adverse finding regarding the eligibility. The Commissioner shall thereafter decide about the validity of the option exercised by the assessee.