The assessee’s act of getting its’ wholly owned subsidiary (‘WOS’) to distribute tax-free dividend, and thereby reduce the FMV of the shares of the WOS, just prior to the sale of those shares, did result in a tax advantage to the assessee because it paid lower tax on capital gains. However, the transaction of dividend distribution by the WOS cannot be regarded as a "colourable device" or as an "impermissible tax avoidance scheme". A transaction can be regarded as a "sham" where "the document is not bona fide nor intended to be acted upon, but is only used as a cloak to conceal a different transaction" or where "it is intended to give to third parties the appearance of creating between the parties legal rights and obligations which are different from the actual legal rights and obligations which the parties intend to create". On facts, the transaction cannot be regarded as a "sham" or a "colourable device" because (a) the WOS had sufficient reserves and cash surplus for the distribution of dividend & (b) the WOS paid dividend distribution tax which was duly accepted in its assessment

The FAR analysis gives the basis of broad characterization for e.g. Manufacturer, Service Provider, Distributor, etc with a further sub-characterization including low-risk service provider, high risk service provider; Full-Fledged manufacturer, contract manufacturer, etc. These characterizations are vitally important to determine the arm’s length price of international transactions

Rule 8D(2)(ii) allocates “expenditure by way of interest ……….. which is not directly attributable to any particular income or receipt”. This refers to interest relatable to tax-free income as well as taxable income. However, the definition of variable ‘A’ embedded in the formula under Rule 8D(2)(ii) refers only to interest expenditure directly related to tax exempt income but not to interest expenditure directly related to taxable income. The result is that while Rule 8D(2)(ii) seeks to allocate all interest expenditure, it ends up allocating only interest expenditure relatable to tax-free income. This is clearly incongruous. In Godrej & Boyce Mfg Co Ltd 328 ITR 81 (Bom), the department took the stand, to defend the constitutional validity of Rule 8 D, that both, interest directly attributable to tax exempt income as well as interest directly relatable to taxable income would be excluded from the definition of variable ‘A’ in the Rule 8D(ii) formula. Once the Revenue has taken a particular stand about the applicability of the formula in Rule 8 D(2)(ii) based on which the constitutional validity of Rule 8D is upheld, it is not open to the Revenue to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Accordingly, the correct application of the formula set out in Rule 8D(2)(ii) is, as noted in Godrej and Boyce, that interest expenses directly attributable to tax exempt income as also directly attributable to taxable income have to be excluded from the computation of common interest expenses to be allocated under Rule 8D(2)(ii)

Though the assessee’s project, when it was commenced in the year 2003, was in compliance with s. 80-IB(10) as it then stood, the law prevailing in the year of completion of the project has to be seen. As the Project breached the ceiling of maximum commercial area imposed by s. 80-IB(10)(d) inserted w.e.f. 1.4.2005 (lesser of 2000 sq. ft or 5% of aggregate BU area), the assessee is not eligible for s. 80-IB(10) relief (Saroj Sales Corp vs. ITO 115 TTJ Mum 485 not followed; Brahma Associates 333 ITR 289 (Bom) & Reliance Jute 120 ITR 921 (SC) referred)