Year: 2013

Archive for 2013


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DATE: (Date of pronouncement)
DATE: May 9, 2013 (Date of publication)
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CITATION:

Though the assessee is not a dealer in foreign exchange, it entered into forward contracts with banks for the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts. The transactions in foreign exchanges were incidental to the assessee’s regular course of business and the loss was thus not a speculative loss u/s 43(5) but was incidental to the assessee’s business and allowable as such. The fact that there may have been no direct co-relation between the exchange document and the precise export contract cannot be seen in isolation if there are in fact several separate contracts with the bankers (Soorajmull Nagarmull 129 ITR 169 (Cal) & Badridas Gauridu 261 ITR 256 (Bom) followed; M. G. Brothers 154 ITR 695 (AP) distinguished)

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DATE: (Date of pronouncement)
DATE: May 9, 2013 (Date of publication)
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CITATION:

The question whether a particular activity of the assessee such as the interest generating activity should be taken into consideration in the determination of the ALP is a question which needs to be decided considering the nature of the business of the assessee and its’ “business model”. The Tribunal rightly held that as the earning of interest income was only the result of investment of surplus funds and was not a primary income-generating activity, the interest income had to be excluded from the “operating profit” for purposes of determination of ALP

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DATE: (Date of pronouncement)
DATE: May 8, 2013 (Date of publication)
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The argument that the ITES/BPO industry has several segments starting from low end segment such ‘call centre’, ‘customer care’ to high end segments such as ‘KPO’, ‘content development’ etc. in which there is wide variation in the billing rates and that high end services are not comparable to the low end services is not acceptable because under Rule 10B(2) the comparability of an international transaction with an uncontrolled transaction has to be judged with the reference to the services provided, functions performed, asset employed and risk assumed. All companies which are in the ITES segment are providing similar services and difference is in the internal working which is reflected through difference in qualifications and skills of the employees. The difference in skill/ qualification of the employees and their payment structure and the difference in billing rate does not affect the comparability in any significant manner under TNMM

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DATE: (Date of pronouncement)
DATE: May 7, 2013 (Date of publication)
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CITATION:

There is a difference between a “speculative transaction” and a “hedging transaction”. S. 43(5) defines a “speculative transaction” to mean a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. Proviso (a) to s. 43(5) refers to a “hedging transaction” as a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchandising business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him. In order for a transaction to be a “hedging transaction”, the commodity dealt in should be the same. If the subject matter of the transaction is different, it cannot be termed a hedging transaction. Also, the merchandise in respect of which the forward transactions have been entered into by the assessee must have a direct connection with the goods sold by him. On facts, as the assessee was not dealing in Foreign Exchange, the forward transactions entered into by it cannot be held to be hedging transactions. As the assessee is dealing in diamonds, only the forward contracts entered into for diamonds would be covered by Proviso (a) to s. 43(5). Consequently, the loss suffered by the assessee is a speculative loss

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DATE: (Date of pronouncement)
DATE: May 6, 2013 (Date of publication)
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The condition precedent for the AO to invoke Rule 8D is that he first must examine the accounts of assessee and then record by giving cogent reasons why he is not satisfied with the correctness of the assessee’s claim. In the absence of an examination of accounts and the recording of satisfaction, Rule 8D cannot be invoked. On facts, the assessee had itself disallowed interest, Demat charges and administrative expenses. The AO had not examined the accounts or given a finding how the assessee’s computation was wrong. Consequently, the invocation of Rule 8D was improper and the disallowance was not permissible (Godrej & Boyce 328 ITR 81 (Bom), Maxopp Investment 247 CTR 162 (Del), Walfort Share 326 ITR 1 (SC), Hero Cycles 323 ITR 518 (P&H), Justice Sam P Bharucha & Pawan Kumar Parameshwar Lal followed)

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DATE: (Date of pronouncement)
DATE: May 6, 2013 (Date of publication)
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CITATION:

The assessee exported tea to Iraq under the ‘Oil for Food Program’, as sanctioned by the United Nations. It paid commission of Rs 1.28 crores to one Alia Transportation, a Jordanian company. The Volcker Committee, which was set up to expose the ‘Oil for Food scam’ found that this company was a front company for the Iraqi regime, meant to receive illegal kickbacks, and did not render any services. The AO, acting on the report, held that the commission paid by the assessee was “illegal” and not allowable under the Explanation to s. 37(1). This was reversed by the CIT (A). On appeal by the department, the Tribunal (72 DTR 425) upheld the stand of the assessee on the ground that even if the amounts paid to Alia were actually kickbacks to Iraqi regime, that fact per se would not attract Explanation to s. 37(1). It was pointed out that while the transactions between Alia and the Iraqi regime may be contrary to the UN sanctions, the transactions between the assessee and Alia were not hit by the UN sanctions and that there was no specific violation of law by the assessee. It was emphasized that what the recipient of the payment does is not important because the assessee has no control over the matter. The onus of demonstrating that the assessee was aware that the payments were intended for kickbacks is on the AO which has not been discharged. It was held that the “purpose” of the expenditure has to be seen and if the payment is for bonafide business purposes, the fact that they end up being used as illegal kickbacks, will not attract Explanation to s. 37(1). On appeal by the department to the High Court, HELD dismissing the appeal

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DATE: (Date of pronouncement)
DATE: May 3, 2013 (Date of publication)
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CITATION:

Though s. 92B(2) provides for a situation where even a transaction between two non-associated enterprises can be subject to the transfer pricing provisions, it is essential that there should first be an “AE” with whom there exists an “international transaction” before it can be examined whether the international transaction with the “the non-AE” exists or not. On facts, the agreement between the two foreign companies was independent of the agreement between the two Indian domestic companies. The assessee had full authorization to perform and take its own decision with regard to the sale of the imaging segment to the buyer. Even if one accepts that the sale agreement by the assessee was as the result of prior agreement or was consequential upon the agreement between the two non resident companies, yet, as the holding company had not dictated the terms and conditions of the sale and the entire exercise of transfer of imaging segment was independently done on its own terms by the assessee and the buyer, the deeming provision of s. 92B(2) does not apply. The Department’s argument that the legal character of the assessee and the other enterprise be disregarded due to the influence of the agreement between the foreign holding companies is not acceptable (Vodafone vs. UOI 341 ITR 1 (SC) followed)

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DATE: (Date of pronouncement)
DATE: May 2, 2013 (Date of publication)
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CITATION:

Though in Capgemini it was held that the concept of economy of scale is relevant only for manufacturing concerns, which have high fixed assets, and not for service concerns and that the turnover filter cannot be applied to exclude companies with an extremely large turnover from comparison, a contrary view has been taken in Deloitte Consulting 145 TTJ 589 (Hyd) that “giant” companies like Wipro are not at all comparable with smaller “pygmy” companies. Consequently, giant companies line Wipro and Infosys cannot be taken as comparables as their turnover is multiple number of times higher compared to that of the assessee and the TPO erred in considering their PLI to arrive at the arithmetic mean

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DATE: (Date of pronouncement)
DATE: May 1, 2013 (Date of publication)
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CITATION:

S. 149 (1) (b) provides that no notice u/s 148 shall be issued after the expiry of 4 years from the end of the relevant AY unless the income chargeable to tax which has escaped assessment amounts to Rs. 1 lakh or more. Under the proviso to s. 151 (1), no notice u/s 148 can be issued after the expiry of four years from the end of the relevant AY unless the CCIT/ CIT is satisfied on the reasons recorded by the AO that it is a fit case for issue of such notice. Accordingly, it is imperative that the AO should state in the recorded reasons that the escaped income is likely to be Rs.1 Lakh or more so that the sanctioning authority is aware that it has exercised power of extended period of limitation u/s 149 (1) (b) and applies its mind accordingly. A sanction given without being aware of this fact is not valid. On facts, as there is nothing in the recorded reasons to suggest that the income chargeable to tax which has escaped the assessment is Rs. one lakh or more, the reopening is not valid

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DATE: (Date of pronouncement)
DATE: April 30, 2013 (Date of publication)
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CITATION:

There was a controversy on whether the +/- 5% tolerance adjustment was a standard deduction or not. After the retrospective amendment to the second proviso to s. 92C by the Finance Act, 2012 with retrospective effect from 1.4.2002, it is evident that if the variation between the arm’s length price and the price at which international transaction was actually undertaken does not exceed the specified percentage, then only the price at which the international transaction has actually been undertaken shall be deemed to be arm’s length price. Thus, the benefit of tolerance margin would be available only if the variation is within the tolerance margin. Once the variation exceeded the tolerance margin, then there would be no benefit even up to tolerance margin. Then, the ALP as worked out under s. 92C(1) shall be taken as ALP without any benefit of tolerance margin. The view taken in Piagio Vehicle was without considering the amendment and is per incuriam and not good law. The challenge to the constitutional validity of the retrospective amendment cannot be made before the Tribunal as it is a creation of the Act and not a constitutional authority