the TPO is wrong in adopting the enterprise level margins as the TNMM. U/s 92F (ii) r.w.s. 10B(e), TNMM requires comparison of net profit margins realized by an enterprise from an international transaction(s) and not comparison of operating margins of enterprises

The assessee had included the said capital gains in the P & L A/c and it was not its’ case that same was not includible. The fact that the capital gains was exempt u/s 47(iv) does not mean it can be excluded from the “book profit” because no such exclusion was permitted under the Explanation to s. 115JB. The taxability of capital gain is relevant only for the purpose of computation of income under the normal provisions and has nothing to do with the computation of “book profits”.

In CIT vs. Samsung Electronics 227 CTR 335 the Karnataka High Court has confined its decision to the issue of responsibility of the assessee u/s 195 in deducting tax at source before making remittances to non-residents. Even though the court held in favour of the Revenue on the application of the TDS provisions, the court made it clear in paragraph 78 that it has not examined the question of tax liability of the non-resident assessees in respect of the payments received from assesses in India

The amendment made to s. 32(2) w.e.f AY 2002-03 is substantive. A substantive amendment is normally prospective in operation. S. 32(2) is a deeming provision which by legal fiction provides that the unabsorbed depreciation allowance u/s 32(1) is deemed to be depreciation allowance for the succeeding year(s). A deeming provision has to be strictly interpreted and cannot extend beyond the purpose for which it is intended. S. 32(1) deals with depreciation allowance for the current year and s. 32(2) uses the present tense to refer to allowance to which effect `cannot be’ and `has not been’ given. This indicates that s. 32(2) speaks of depreciation allowance u/s 32(1) for the current year starting from AY 2002-03. Brought forward unabsorbed depreciation of earlier years cannot be included within the scope of s. 32(2). If the intention of the legislature had been to allow such b/fd unabsorbed depreciation of earlier years at par with current depreciation for the year u/s 32(1), s. 32(2) would have used past or past prefect tense and not the present tense. Further, the unabsorbed depreciation for the period from AY 1997-1998 to 1999-2000 has been referred to as “unabsorbed depreciation allowance” and given a special name and cannot fall within s. 32(1) in AY 2002-03

The recorded reason that the violation of s. 11(5) r.w.s. 13(1)(d) by the assessee led the amount of Rs. 1.02 crores to be included in the assessee’s total income is clearly contrary to the legal position that while the assessee may lose exemption u/s 10(23C) for not adhering to the conditions of s. 11(5), this does not result in the said amount being chargeable to tax in the hands of the assessee. The fact that the amount was not invested in the prescribed manner does not mean that it can be assessed as income

The assessee was not rendering simple technical or consultancy services but was rendering specific activities through the PE. Accordingly, Article 12 of the DTAA was not applicable. Income attributable to a PE is assessable under Article 7 of the DTAA. Under Article 7(2), the PE is deemed to be a wholly independent enterprise and under Article 7(3) deduction in accordance with the subject to the law relating to the tax in India is allowable. Since Article 7 of the DTAA comes into play, s. 9(1)(vii) is not applicable. Since Article 7 (2) of the DTAA specifies that the PE in India is to be treated as a wholly independent enterprise in India, ss. 44D and 115A will not apply in so far as they relate to foreign companies.

As per the law laid down in Sudhir Mehta 265 ITR 548 (Bom), where an order is passed as per the prevailing law, a retrospective amendment which comes into force after the date of the passing of the order does not show any mistake in the order.

On merits, under the Act, when a non-resident has operations in India through a presence in India, such presence is to be treated as a “permanent establishment” (“PE”) in India. The PE is to be treated as hypothetically independent of the non-resident . The assets of the PE are also to be recognized as such and the profit or gains on sale of assets of the PE have to be treated as profits of the PE. The gains or losses on sale of PE assets have to be treated as “accruing or arising in India” irrespective of whether the assets were sold in India or outside India. The income can also be deemed to have accrued or arisen in India u/s 9(1)(i) as the rig was part of a “business connection” and “an asset or source of income” in India (principles laid down in Hyundai Heavy Industries 291 ITR 482 followed)

The external comparables selected by the assessee were from a public data base and the assessee has followed a detailed search process and made an analysis considering the various factors of selecting the external comparables as required under Transfer Pricing Regulations and Guidelines. Therefore, the transfer pricing study of the assessee and ALP determined on the basis of such study simply cannot be rejected without any cogent reasons. Unless proper method is followed, comparables are chosen and selected after doing a proper FAR study as well as adjustments are made to the extent possible it is unfair to summarily reject the transfer pricing analysis made by the assessee

The department has the option u/s 166 to assess either the non-resident principal or the representative assessee. Once the choice is made and the income is brought to tax in the hands of the principal, the same income cannot be again assessed u/s 163 in the hands of a representative assessee (Saipem UK 298 ITR (AT) 113 (Mum) followed). Consequently, the assessment order on the agent had to be annulled