A cost contribution arrangement has to be consistent with the arm’s length principle. The assessee’s share of overall contribution to costs must be consistent with the benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. The TPO’s objection that the cost should be shared in the ratio of actual use of services and should be charged as per Indian employee costs is not acceptable. There is no objective way in which the use of services can be measured and as is the commercial practice even in market factors driven situation, the costs are shared in accordance with some objective criterion, including sales revenues and number of employees. The question of charging as per domestic employee costs cannot be a basis of allocating the costs because such an allocation will deal with some hypothetical pricing whereas the allocations are to be done for the actual costs incurred

S. 271(1)(c) imposes “strict civil liability“. It is not understandable how a CA firm can have any doubt about the receipt being clearly a professional receipt. If it is so, it is not understandable how the assessee can discharge its role as a professional consultant. It is unimaginable that a professional firm will have any doubt on such a simple proposition of professional receipt. The advance tax payment is an indication of the mindset of the assessee

The amendment to s. 40(a)(ia) by the FA 2010 was made retrospectively applicable only from AY 2010-11 and not earlier. It is nowhere stated that the amendment is curative or declaratory in nature nor is such an intention discernible. Ordinarily, a substantive provision is “prospective” in operation and courts cannot give it “retrospective effect” except in limited circumstances where, say, the amendment makes explicit what was earlier implicit or where the amendment was to remove unintended consequences in the existing provison and to make it workable. A provision giving relief cannot be regarded as retrospective only because the original provision caused hardship to the assessee. S. 40(a)(i) caused “intended difficulty” with the object of discouraging non-compliance with the TDS provisions. A partial relaxation in its rigor, inserted with prospective effect, cannot be treated as “retrospective“

While the license to use the “shrink wrapped” or “off the shelf” software does not involve transfer of intellectual property, it constitutes “royalty” u/s 9(1)(vi) and Article 12(3) of the DTAA because it is for “the use of and the right to use of intellectual property such as copyright of a literary, artistic or scientific work or any patent, trade mark, design or model, plan etc“. Thus, the consideration received by Oracle for use of its software constitutes “royalty” and the assessee ought to have deducted tax at source

S. 40A(9) provides that no deduction shall be allowed in respect of “any sum paid by the assessee as an employer … as contribution to any fund … except where such sum is so paid … as required by or under any other law for the time being in force“. In the case of statutory corporations, the regulations providing for the terms and conditions of employment and conditions of service have the force of law. There is no distinction in principle between a person directly under the employment of the Government and a person under the employment of a statutory corporation. Consequently, the service regulations framed by the assessee by which it agreed to make payment to the Fund carried statutory force and fell within the expression “as required by or under any other law” for purposes of s. 40A(9). (U. P. Warehousing Corporation 1980 3 SCC 459 followed)

Hyundai Heavy Industries 291 ITR 482 (SC) is not applicable because there (a) the project office was to work only as a liaison office and was not authorized to carry on any business activity and (b) the contract was divisible into two parts and so the argument that the PE does not come into existence till the fabrication work is done was accepted

We are of the view that the conduct of the learned CIT(A) in addressing correspondence to the Hon’ble Members in respect of an appeal which has been heard and under consideration for passing orders is improper. It is an attempt to interfere with the due course of any judicial proceeding and tends to interfere with or obstructs or tends to obstruct the administration of justice and as such would be “Criminal contempt” within the meaning of the Contempt of Courts Act, 1971. The allegations made in the letters dated 23.3.2010 and 24.3.2010 are serious enough to warrant an action seeking protection of the Hon’ble High Court in exercise of its powers to punish for contempt of the sub-ordinate Courts and Tribunals. In our opinion, there cannot be a fitter case for imposition of exemplary costs on the learned Departmental Representative, who in our view, is responsible for such a M.A. and for wasting the time of the Tribunal by raising frivolous arguments and making blatantly false submissions. The cost should have to be recovered from the salary of the delinquent employee, who is responsible for such actions and entry made in his service record on the adverse comments made against the D.R. by the Tribunal. We however refrain from doing so in the hope that such indiscretion would not be repeated in future and also in view of the letter of apology filed by the D.R.

On merits, though the accreditation fees permitted the assessee the use of name of British Dental Health Foundation, it did not constitute “royalty” under Article 13 of the India-UK DTAA because it did not allow the accredited product to use, or have a right to use, a trademark, nor any information concerning industrial, commercial or scientific experience so as to fall within the definition of the term. The purpose of the accreditation by a reputed body was to give certain comfort level to the end users of the product and to constitute the USP of the product. The term “royalty” cannot be construed as per its normal connotations in business parlance but has to be construed as per the definition in Article 13. The amount constituted “business profits” and as the recipient did not have a PE in India, it was not taxable in India

Explanation 1 to s. 271(1)(c) does not apply to transfer pricing adjustments. Penalty for transfer pricing adjustments is governed by Explanation 7 to s. 271(1)(c). Under Explanation 7 to s. 271(1)(c), the onus on the assessee is only to show that the ALP was computed by the assessee in accordance with the scheme of s. 92 C in “good faith” and with “due diligence”. The assessee adopted the TNMM and no fault was found with the computation of ALP as per that method. Instead, the method was rejected on the ground that CUP method was applicable. It is a contentious issue whether any priority in the methods of determining ALPs exists. So, when TNMM is rejected, without any specific reasons for inapplicability of the TNMM and simply on the ground that a direct method is more appropriate to the fact situation, it is not a fit case for imposition of penalty. The expression ‘good faith’ used alongwith ‘due diligence’, which refers to ‘proper care, means that not only must the action of the assessee be in good faith, i.e. honestly, but also with proper care. An act done with due diligence would mean an act done with as much as care as a prudent person would take in such circumstances. As long as no dishonesty is found in the conduct of the assessee and as long as he has done what a reasonable man would have done in his circumstances, to ensure that the ALP was determined in accordance with the scheme of s. 92 C, deeming fiction under Explanation 7 cannot be invoked

Under Article 12 (3) of the India-Israel DTAA, royalty is defined inter alia to mean payments for the “use of” a “copyright” or a “process”. There is a distinction between “use of copyright” and “use of a copyrighted article”. In order to constitute “use of a copyright”, the transferee must enjoy four rights viz: (i) the right to make copies of the software for distribution to the public, (ii) The right to prepare derivative computer programmes based upon the copyrighted programme, (iii) the right to make a public performance of the computer programme and (iv) The right to publicly display the computer programme. If these rights are not enjoyed, there is no “use of a copyright”. The consideration is also not for “use of a process” because what the customer is paying for is not for the “process” but for the “results” achieved by use of the software. It will be a “hyper technical approach totally divorced from ground business realities” to hold that the use of software is use of a “process”. Motorola Inc 96 TTJ 1 (Del) (SB) and Asia Sat 332 ITR 340 (Del) followed. Gracemac Corp 42 SOT 550 (Del) not followed