Based on the recommendations of Supreme Court in the case of CIT Vs. Glaxo SmithKline Asia (P) Ltd. (195 Taxman 35) (SC), Finance Minister introduced transfer pricing regulations applicable to specified domestic transactions in Finance Act, 2012. Please find attached in the link below an overview of the Domestic Transfer Pricing regulations applicable with effect from Assessment Year 2013-2014 Click here to download the overview
Recent Updates
DDIT v Lucent Technologies International Sales Ltd [IT Appeal No. 4054 (Delhi) of 2011 dtd 24.08.2012] Delhi ITAT Background: During the year under consideration, the assessee supplied telecom equipments to various companies. In its return of income for A.Y. 2006-07, the income from services rendered in India was offered to tax. However, income from offshore supplies made to Indian customers was not offered to tax. A survey u/s 133 A of the Act was carried out on 22.2.2009 at the office premises of Alcatel Lucent India Ltd. located at New Delhi and Gurgaon. Based upon the documents found, statement recorded during and after the survey and subsequent discussions, it was held in the assessment order of Alcatel Lucent France, for assessment year 2006-07 that various Alcatel Lucent Overseas entities including the assessee had a permanent establishment (PE) in India. The AO determined net income chargeable to tax as attributable to PE in India @ 2.5% of the sales made by the assessee in India. Accordingly, assessment was framed at an income of Rs.6,55,033/- and also levied the interests u/s 234A, 234B and 234C. Before the CIT (A), the assessee questioned the levy of interest u/s 234B by the AO at Rs. 3,46,360/-. The CIT(A) being convinced with the contention of the assessee has deleted the interest levied u/s 234B.
Advance tax not required to be paid (for 234B calculation), if the payer defaults in ...
CIT v Pelican Investments (P.) Ltd. [ITA No: 3424 of 2010 dtd 21 August 2012] Bombay High Court Background: The assessee by an agreement dated 7th November, 1984 with Hotel Leelaventure Limited (HLL) was granted a licence to occupy a shopping arcade for a period of 11 years. The assessee was required to pay to HLL, compensation for the said licence commencing from the date of occupation certificate, at the rate of Rs. 150/- per sq. mtr. per month during the period of the licence. Thereafter, the assessee and HLL entered into a fresh agreement dated 24th January, 1999, by which HLL granted the assessee further licence in respect of the same premises for a period of 10 years. The assessee filed its return of income on 29th October, 2006 for , declaring a total loss of Rs. 48,626/-. The AO made an order under section 143(3). The annual value under section 23(1)(a) was computed at Rs. 60,27,027/-. A deduction under section 24 at 30% amounting to Rs. 18,08,108/- was allowed. The AO, accordingly, assessed a sum of Rs. 42,18,919/- to be income from house property.
In the absence of renewal clause in the lease agreement, subsequent agreement cannot be merged ...
Justice Sam Bharucha v Addln CIT [ITA No. 3889/Mum/2011 dtd 25/07/2012] (Mum ITAT) Background: During the year (AY 2006-07), the assessee has earned dividend of Rs 30,43,306 from mutual funds and Rs 6,71,468 from shares besides interest on RBI ta-free bonds of Rs 13,73,750 which are exempt income. The AO disallowed a sum of Rs2,26,581 under section 14A by applying RUle 8D by following decision of Mumbai ITAT in the case of Daga Capital Management Pvt Ltd. On appeal, the CIT(A) confirmed the disallowance made by the AO.
If no expense incurred in relation to exempt income, no 14A disallowance – Mum ITAT
Sonata Information Technology Ltd. v DCIT [ITA NO. 1507 (MUM.) OF 2012 dated 7.9.2012] (Mum ITAT) Background: The assessee is a company engaged in the business of purchase and sale of software. Assessee made a payment of Rs. 199,79,11,595/- for purchase of software from persons who are resident in India. The Assessee did not deduct tax at source while making payment towards such purchases. According to the AO, the payment is in the nature of Royalty because it was for a right to use software and therefore the Assessee ought to have deducted tax at source and since the Assessee had not so deducted tax at source, the sum in question was not allowed as deduction under the provisions of Section 40(a)(ia) of the Act. The CIT(A) also confirmed the addition.
Amendment in definition of royalty does not extend to disallowance u/s 40(a) – Mum ITAT
Ganjam Trading Co. (P.) Ltd. v DCIT ITA No: 3724 (MUM.) OF 2005, 932 (MUM.) OF 2006 and 1384 & 289 (MUM.) OF 2007] (Mum ITAT) Background: The assessee, in the business of trading and investment in goods, securities, etc., had declared income from interest, dividend and profit/loss from trading of shares. In the years under consideration, the assessee had declared huge losses from trading in shares which were treated by the Assessing Officer as speculation loss under the provisions of Explanation to section 73 of the Act. The assessee had also paid huge interest on borrowings. The Assessing Officer disallowed the interest relating to the investment made in shares under section 14A of the Income Tax Act, 1961 (for short “the Act”) and also disallowed interest on borrowings under section 36(1)(iii) of the Act holding that borrowings to that extent had not been utilised for the purpose of business. AO observed that the assessee had made huge borrowings on which substantial interest running into crores had been paid in all the years under consideration. The assessee had advanced the borrowed funds for allotment of shares of group companies. The assessee had also advanced Rs. 25 crores to Panther Invest-trade Ltd. for acquisition of equity shares of companies. The AO made disallowance u/s 36(1)(iii) by computing interest @ 15%. CIT(A) confirmed the disallowance of interest under section 36(1)(iii) for assessment years 2001-02 and 2002-03. In assessment year 2003-04, the CIT(A) observed that the assessee had substantial interest free funds amounting to Rs. 169.09 crores. He held that the disallowance of interest has to be worked out on proportionate basis after taking into account the total interest free funds and interest bearing funds and investments made.
Interest on borrowings for investment in group company cannot allowed u/s 36(1)(iii) – Mum ITAT
CIT v Deutsche Post Bank Home Finance Ltd. (ITA No. 312 OF 2012 (dtd 2.7.2012) (Delhi HC) Background: Assessee is a 100% subsidiary of one BHW Holding AG, Germany (‘Holding Company’) and is engaged in the activity of housing finance. By two letters dated 24.09.2004 and 04.02.2005, the Holding Company granted subvention assistance to the assessee to an extent of Euro two million i.e. equivalent to Rs. 11,22,38,874/-. This was done on the evaluation of the Holding Company, that the assessee was likely to incur losses which would be substantially if not entirely eroded. The AO held that the subvention receipt was by way of casual receipt in order to assist the assessee to continue its business operation and therefore rejected the assessee’s contention. The assessee preferred an appeal to the CIT(A) who accepted the assessee’s contention holding that the money received could not be taxed as it was akin to a gift, and Gift Tax had been abolished. The Revenue appealed to the ITAT. The ITAT held as under:
Funding by Holding Co to recoup future losses is not taxable – Delhi HC
Harshad J Choksi v CIT (Income Tax Appeal No. 43 OF 1997 dated August 14, 2012) (Bom HC) Background: The assessee is a stock and share broker. During the assessment year 1991-1992, the assessee sought to write off an amount of Rs.47.58 lacs as bad debts, due to breach committed by 3 members of the BSE. The AO held that the assessee was not entitled to claim the benefit of bad debts in respect of Rs.47.58 lacs, as the assessee has not satisfied the condition precedent as provided under Section 36(2) of the Act, which requires that the amount must be offered to tax in an earlier previous year. On Appeal, the Commissioner of Income Tax (Appeals) upheld the finding of the Assessing Officer to the extent of Rs.44.98 lacs after having allowed an amount of Rs.2.60 lacs as a business loss. On appeal before the Tribunal the assessee contended that even if the deduction is not allowable as bad debts under Section 36(1)(vii) of the Act, the aforesaid amount of Rs.44.98 lacs should be allowed as a business loss in computing the profits and gains earned in carrying on a business. The Tribunal held that once an assessee has made a claim for loss on account of bad debts then unless the assessee fulfills the requirements of Section 36(2) of the Act, the benefits of the same cannot be extended to the assessee.
Bad debts if not allowable u/s 36(2), would be allowable u/s 37 – Bombay HC
CIT v Smifs Securities Limited [2012] 24 taxmann.com 222 (SC) Background: In accordance with Scheme of Amalgamation of YSN Shares & Securities (P) Ltd with Smifs Securities Ltd (duly sanctioned by Hon’ble High Courts of Bombay and Calcutta) with retrospective efect from 1st April, 1998, assets and liabilities of YSN Shares & Securities (P) Ltd were transferred to and vest in the company. In the process goodwill has arisen in the books of the company. The assessee claimed that the extra consideration over the value of net assets acquired of YSN Shares and Securities Private Limited [Amalgamating Company] was paid towards the reputation which the Amalgamating Company was enjoying in order to retain its existing clientele. The Assessing Officer held that goodwill was not an asset falling under Explanation 3 to Section 32(1) of the Income Tax Act, 1961. CIT(A) came to a conclusion that the assessee in the process of amalgamation had acquired a capital right in the form of goodwill because of which the market worth of the assessee stood increased. This finding was also been upheld by Income Tax Appellate Tribunal.