OXFORD UNIVERSITY PRESS (AAR No.1110 of 2011) Background The assessee (applicant) is engaged in publishing, printing and reprinting of educational books for schools, Universities, Professional and other educational institutions or scholarly books. The applicant has appointed Ms Geetha Kumararaja, a resident of Colombo, Sri Lanka as a marketing executive that involves promotion of sale of books published by the applicant. The question before the AAR was whether the remuneration received by Ms Geetha was chargeable to tax in India and consequently, whether the payment should be subjected to tax deduction under the income tax Act.
Yearly Archives: 2014
RADIALS INTERNATIONAL v ACIT ITA No.485/2012 dated 25.04.2014 (Delhi HC) Background: Assessee is a partnership firm, engaged in the business of providing technical, marketing and maintenance services. Assessee offered the profit on sale of shares lying in PMS as capital gains. The AO held that since the motive of the transactions was the earning of profit and not a dividend, where the holding period was ranging from a few days to a few months, it was concluded that the income was business income earned by way of adventure in the nature of trade. Commissioner of Income Tax (Appeals) held that the intention at the time of purchase and sale, the magnitude and frequency of transactions has to be seen to test whether the sum of gain made “was a mere enhancement of value by realizing a security” or a “gain made in operation of business in carrying out a scheme for profit-making”. It was concluded that the shares were not in the nature of property which yielded any income or personal enjoyment to the owner, by virtue solely of its ownership. Thus, the intention was concluded to be profit-making, and the gains were found to be business income.
Delhi HC lays down important principles in treatment of profit on sale of shares lying ...
CIT v KAJAL EXPORTS [Tax Appeal No. 756 of 2013 dated 23.01.2014] (Gujarat High Court) Background: Assessee is engaged in business of export activities. During the course of assessment proceedings, the AO observed that the assessee had made borrowings throughout the year under the banner of business necessity and on review of the purchases and the sales patterns of the assessee, held that the funds borrowed were utilised for purposes other than business. The AO further noted that the assessee had advanced money to close relatives/ sister concerns without charging the interest. Accordingly, the AO disallowed the interest expenditure. CIT(Appeals) concluded that the borrowed funds were not used for the business purposes in the AY 2003-04 and the AO was justified in disallowing the expenditure on such borrowed funds to the extent it is claimed in the P&L account. The Tribunal deleted the entire amount except Rs.21,900/-, i.e. 15% of Rs.1.46 lakhs.
No disallowance of interest, if interest-free unsecured loans are sufficient to meet interest-free advances – ...
CCIT v Sarva Equity (P.) Ltd [IT APPEAL NOS. 322 TO 324 OF 2014 dtd 08.01.2014] – Karnataka HC Background: Assessee and Ittina Properties Private Limited are sister concerns. The assessee had taken an unsecured loan from Ittina of Rs.9,56,48,107. The AO treated the loan as a deemed dividend under Section 2(22)(e). The Directors and shareholders of both the companies, are members of one and the same family and they have substantial holding in M/s. Ittina and assessee company. The Appellate Authority reversed the order passed by the Assessing Officer holding that the respondent-assessee is not a shareholder of M/s. Ittina Properties Private Limited and in view thereof, not liable to pay taxes under Section 2(22)(e) of the Act. The order of the appellate authority has been confirmed by the Tribunal.
Indirect shareholding is not covered under the fiction of deemed dividend u/s 2(22)(e) – Karnataka ...
Nortel Networks India (P.) Ltd. v Addln CIT [ITA No 4765 (DELHI) OF 2011 & 427 (DELHI) OF 2013 dated 25.02.2014] – Delhi ITAT Background: Assessee entered into a service agreement for the provision of marketing and after sales support services on a cost plus mark-up basis. By this agreement, assessee provides marketing and after sales support services to AEs in relation to sale of telecommunication equipments, software and other IT products to customers in India. The assessee considered TNMM as the most appropriate method and has benchmarked the transaction taking Operating profit/ Operating cost (“OP/OC”) as PLI. TPO though accepted assessee’s TNMM method as appropriate method for the ALP, however reworked the same by applying inapplicable comparables as under: In its transfer pricing analysis, the assessee has considered seven comparable companies, whose average unadjusted margin comes to 11.57%, TPO held two out of seven as not comparable. The Capital Trust Limited was held as not a comparable because of low revenue as and Cyber Media Events Limited because of related party transaction exceeding 25% and having diminishing revenue. DRP upheld TPOs order on the ground that the turnover of the comparable in the relevant segment is Rs. 25 Lakh and cannot be compared with the company whose revenue from business support services is more than Rs. 134 Crores.
TP: Companies with lower turnover can also be considered if they are functionally comparable – ...
Shyamlal Tandon v ITO [IT APPEAL NO.1774 (HYD.) OF 2012 dated 21.0.10214] – Hyderabad ITAT Background: The assessee, an individual, did not file his return of income for the AY 2003-04. From the information received from DDIT(Inv), it came to light that the assessee has earned capital gains, which were not disclosed, and consequently, within the meaning of S.147 of the Act, the AO, held the view that there was escapement of income chargeable to tax. Accordingly a notice under section 148 of the Act was issued. In response thereto, assessee filed return declaring ‘nil’ income. Assessment Proceedings During the course of assessment proceedings, it was submitted that the assessee, alongwith his father purchased a piece of land on 17.3.1978 for Rs.34,320. The assessee and his son had demolished the house standing on the above plot and gave the property for development. As per clause (4) of the development agreement, both the father and son were entitled to share the built up area on 50:50 basis in exchange of transfer of the land. However, neither the father nor the son have has declared any long term capital gains on transfer of the land in exchange for 50% of the built up area either in the year in which the development agreement was entered into, relevant to assessment year 2001-02 or in the relevant assessment year in which transfer of 50% of the land and building took place. According to the AO, the long term capital gain worked out to Rs.55,75,661 of which the assessee’s share came to Rs.27,87,831, which was assessable to tax in the assessment year 2001-02.
S. 54F – If intention was to construct a residential property, subsequent change to commercial ...
ADAPTEC (INDIA) PVT LTD v ACIT (ITA No.1758/Hyd/2012 dated 21/03/2014) – Hyderabad ITAT Background: The asseseee is engaged in the business of software design, development and testing in the areas of high performance storage solutions. The assessee renders software development services to its Associated Enterprise (AE) i.,e., Adaptec Inc, USA. The assessee is registered as 100% EOU under the STPI Scheme. The assessee being a captive service provider to its AE is remunerated on a cost plus mark up basis for the services provided. On the basis of FAR analysis, the assessee categorized it as a risk mitigated contract service provider and selected itself as the tested party. Transactions Net Margin Method (TNMM) was chosen as the most appropriate method for determining ALP. Operating profit/operating cost was selected as the profit hence Indicator (PLI). The assessee conducted search from the database to select comparable companies and finally selected 28 companies as comparables with weighted average arithmetic mean of 14.53%. As the assessee’s net margin from the provision of services to AE at 14.03% was within the arm’s length, no adjustment was made in the TP study. The TPO, though accepted TNMM as the most appropriate method and the PLIOP/OC, he nevertheless rejected the TP study of the assessee by observing that multiple year data was considered while selecting comparables and companies engaged in software development have been treated as comparables irrespective of the verticals/horizontals of software services which has made the comparability analysis defective and unreliable. TPO also applied certain additional filters, one of them being companies having turnover of less than 1 crore were rejected. The TPO finally selected 19 companies as comparables with average margin of 26.20% and after allowing working capital adjustments of 3.58% arrived at the adjusted arithmetic mean PLI of 22.62% and determined the ALP at Rs.19,48,41,447. The TPO treated the shortfall of Rs.1,82,73,532/- as the transfer pricing adjustments u/s 92CA of the Act.
Companies with turnover less than 1 crore and abnormally high turnover to be excluded from ...
HUAWEI TECHNOLOGIES CO LTD, China v ADIT (ITA Nos.5253/Del/2011, 5254/Del/2011, 5255/Del/2011 & 5256/Del/2011 dated 21/03/2014) – Del ITAT Background: The assessee, which is a company incorporated in China, is engaged in the business of supplying non-terminal products, i.e., telecommunications network equipment. The assessee had not filed any return of income. During the course of survey undertaken at the office premises of Huawei India, several documents were found and statements of various senior executives were recorded. On the basis of the said documents and statements, the Assessing Officer arrived at the conclusion that the assessee was having Permanent Establishment (PE) in India and the income that has accrued to the assessee from the supply of telecommunications network equipment during the previous year is taxable in India. In view of the above, the AO issued notice under Section 148 of the Income-tax Act, 1961. In response to the notice under Section 148, the assessee filed the return of income on 30th July, 2009 disclosing total income of Rs 82,69,535.
Delhi ITAT ruling on factors considered for determining PE and taxability of software embedded in ...
Bharti Airtel Limited vs. ACIT (ITAT Delhi) The assessee issued a corporate guarantee to Deutsche Bank on behalf of its associated enterprise, Bharti Airtel (Lanka), whereby it guaranteed repayment for working capital facility. The assessee claimed that since it had not incurred any cost on account of issue of such guarantee, and the guarantee was issued as a part of the shareholder activity, no transfer pricing adjustment could be made. However, the TPO held that as the AE had benefited, the ALP had to be computed on CUP method at a commission income of 2.68% plus a mark-up of 200 bp. This was upheld by the DRP by relying on the retrospective amendment to s. 92B which specifically included guarantees in the definition of “international transaction”. On appeal by the assessee to the Tribunal HELD allowing the appeal: