If there is no nexus between borrowed funds and investments made in purchase of shares, disallowance u/s 14A is not warranted (Winsome Textiles 319 ITR 204 (P&H) & Hero Cycles 323 ITR 518 followed)

It is a pre-requisite that before invoking Rule 8D, the AO must record his satisfaction on how the assessee’s calculation is incorrect. The AO cannot apply Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses. Further, the onus is on the AO to show that expenditure has been incurred by the assessee for earning tax-free income. Without discharging the onus, the AO is not entitled to make an ad hoc disallowance. A clear finding of incurring of expenditure is necessary. No disallowance can be made on the basis of presumptions (law laid down in assessee’s own case for AY 2007-08 reiterated)

Assuming that a reduction of shares in the manner done by the assessee amounts to a “transfer”, s. 45 is not attracted because there is no “consideration” received by the assessee for the transfer. Unless and until a particular transaction leads to “computation” of capital gains or loss as contemplated by s. 45 & 48, it cannot attract capital gain tax. On facts, the assessee had not received any consideration for reduction of share capital. While the number of shares held by the assessee has reduced to 50%, nothing had moved from the side of the company to the assessee (B. C. Srinivasa Setty 128 ITR 294 (SC) & Bombay Burmah 147 TR 570 followed)

The argument that the “Excess Earning Method” adopted by the TPO is not a prescribed method is not acceptable. A sale of IPR is not a routine transaction involving regular purchase and sale. There are no comparables available. The “Excess Earning Method” is an established method of valuation which is upheld by the U.S Courts in the context of software products. The “Excess Earning Method” method supplements the CUP method and is used to arrive at the CUP price i.e. the price at which the assessee would have sold in an uncontrolled condition (method explained, Intel Asia Electronics Inc followed)

While, in Devendra Motilal Kothari 50 DTR 369, the Mumbai Bench held that the fees paid for portfolio management services was neither diversion of income by overriding title nor cost of acquisition nor cost of improvement, a contrary view was taken by the Pune Bench in KRA Holding & Trading by relying on the judgement of the Bombay High Court in Shakuntala Kantilal 190 ITR 56 (Bom). Subsequently, the Mumbai Bench in Pradeep Kumar Harlalka (included in the file) declined to follow the Pune Bench on the ground that the judgement of the Bombay High Court in Shakuntala Kantilal had been held to not be good law in Roshanbabu Mohammed 275 ITR 231 (Bom). The majority opinion (in terms of number of orders) and the latest order (in the point of time) were against the assessee.

Under Rule 10B(1)(e)(ii), “the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transaction is computed having regard to the same base;” The term “uncontrolled transaction” is defined in Rule 10A(a) to mean “a transaction between enterprises other than associate enterprises, whether resident or non-resident”. The result is that in applying the TNMM, the net profit margin realized from a comparable uncontrolled transaction is to be taken into consideration. The conditions require that a case should not only be comparable but also have uncontrolled transactions. These twin conditions need to be cumulatively satisfied. If a case is only comparable but has controlled transactions or vice-versa, it falls outside the ambit of the list of comparable cases

The assessee has regularly employed the cash system of accounting in recording its day today business transactions. It is not a case where the assessee has been maintaining its accounts of day to day business under the mercantile system of accounting and thereafter prepares accounts in accordance with cash system of accounting for income tax purposes. Section 209(3) of the Companies Act, 1956 does not override s. 145 of the Income-tax Act. There was also no valid basis for the AO’s action in rejecting the books of account and system of accounting followed by the assessee.Further, since the department has accepted the assessee’s system for the past several years, the principles of consistency apply and there should be finality and certainty in litigation in the absence of fresh facts to show that the assessee’s system of accounting is arbitrary or perverse (Amarpali Mercantile 45 ITD 386 (Del) distinguished, Chennai Finance 81 ITD 7 (Hyd) followed)

U/s 92A(1)(a) & (b), if one enterprise controls the decision making of the other or if the decision making of two or more enterprises are controlled by same person, these enterprises are required to be treated as ‘associated enterprises’. Though the expression used in the statute is ‘participation in control or management or capital’, essentially all these three ingredients refer to de facto control on decision making. The assessee had “de facto control” over the CBU as the CBU was wholly dependent on the use of trade-marks in respect of which the assessee had exclusive rights. Further, the entities from which the CBU imported the raw materials were affiliates of the assessee and controlled by the common parent Diageo Plc. Accordingly, the assessee, the CBU and its Diageo group supplier of raw materials were “associated enterprises” as they were de facto controlled, directly or indirectly or through intermediaries, by the same person i.e. Diageo PLC. Further, as the costs incurred by the CBU for purchase of the raw materials was borne by the assessee, the transaction was actually between the assessee and the Diageo group concerns supplying the raw material to the CBU and constituted an “international transaction“

Transfer Pricing: Important Principles of Cost Plus, CUP & TNMM Explained The assessee, engaged in the business of manufacture and export of studded diamond and gold jewellery, imported & exported diamonds and exported jewellery to associated enterprises. For transfer pricing …

ACIT vs. Tara Ultimo Private Limited (ITAT Mumbai) Read More »

U/s 144C (5), the DRP can issue directions only in respect of the objections raised by the assessee and the objections are to be in terms of the variation proposed in the draft order. S. 144C (8) restricts the powers of the DRP to “confirm, reduce or enhance the variations proposed in the draft assessment order“. Hence, the DRP’s directions have to be with reference to the objections to the variations proposed in the draft order. In the context of the erstwhile s. 144B, it was held by Courts that the IAC’s review powers were limited to the additions proposed by the AO and that he had no jurisdiction to give instructions which were beyond the purview of the draft order and objections. This principle applies to s. 144C as well. (GE India Technology Centre vs. DRP followed)