The assessee’s argument that the non-charging of interest on the working capital advances to AEs from whom the assessee was getting good business was justified by commercial considerations and that no transfer pricing adjustment is warranted is not acceptable because the existence or non existence of commercial consideration between the assessee and the AEs is not a required condition for applicability of the TP regulations Further, the advance was not the credit period extended to the AEs in respect of business transactions but was a transaction of advancing loans to the AEs which falls under the ambit of “international transaction” u/s 92B. In principle, the DRP is justified in its view that the ALP should be determined on the basis of the interest rate that would have been earned by the assessee by advancing loans to an unrelated third party (in India) such as a Fixed Deposit with the Bank. However, since LIBOR has been accepted by the Tribunal in other cases, the ALP should be determined on the basis of LIBOR + 2% (Siva Industries 59 DTR 182 (Che), Tech Mahindra 46 SOT 141 (Mum) & Tata Autocomp Systems 73 DTR 220 (Mum) referred)

The India-France DTAA does not say anything about inclusion of surcharge and education cess for the purpose of deduction of tax at source. Therefore, there is an apparent conflict between the Income-tax Act and the DTAA between the two sovereign countries with regard to deduction of tax at source on surcharge and education cess. U/s 90(2) if the provisions of the DTAA are more beneficial to the taxpayer, the DTAA prevails over the Act. Since the DTAA is silent about the surcharge and education cess for the purpose of deduction of tax at source, the taxpayer may take advantage of that provision in the DTAA for deduction of tax

If the eligible unit has no profit, the loss & depreciation of the eligible unit is entitled to be set-off against the other income. However, despite such set-off, the loss and depreciation has to be aggregated and notionally carried forward for set-off against the future profits of the eligible unit

The Income-tax department has issued instructions with regard to procedure for selection of cases for scrutiny from time to time both qua corporate assessees as well as non-corporate assessees. These instructions give detailed procedure on the basis on which the concerned officers are required to make a random selection of assessees whose cases are taken up for scrutiny. These instructions are in public domain even prior to the enactment of the RTI Act. Most of these instructions have been issued in the middle of the financial year and not in the beginning and they are applied to pending returns as well. Therefore, the argument, that assessees would configure their returns in the manner, which would impact the economic interest of the country, cannot be accepted. The expression “economic interest” takes within its sweep matters which operate at a macro level and not at an individual, i.e., micro level. By no stretch of imagination can scrutiny guidelines impact the economic interest of the country. These guidelines are issued to prevent harassment to assessees generally. It is not as if, de hors the scrutiny guidelines, the I.T. Department cannot take up a case for scrutiny, if otherwise, invested with jurisdiction, in that behalf. This is an information which has always been in public realm, and therefore, there is no reason why the department should keep it away from the public at large. The department shall supply the relevant scrutiny guidelines to the petitioner for the financial year 2009-10 and hereafter upload the guidelines with regard to scrutiny on their website

The fiction created by s. 80-IA(5) is that the eligible business is the only source of income and the deduction would be allowed from the initial assessment year or any subsequent assessment year. It nowhere defines as to what is the “initial assessment year”. Prior to 1.4.2000, s. 80-IA(12) defined the “initial assessment year” for various types of eligible assessees. However, after the amendment by the Finance Act, 1999, the definition of “initial assessment year” has been specifically taken away. Now, when the assessee exercises the option of choosing the initial assessment year as culled out in s. 80-IA(2) from which it chooses its’ 10 years of deduction out of 15 years, then only the losses of the years starting from the initial assessment year alone are to be brought forward as stipulated in s. 80IA(5). The loss prior to the initial assessment year which has already been set-off cannot be brought forward and adjusted into the period of ten years from the initial assessment year as contemplated or chosen by the assessee. It is only when the loss have been incurred from the initial assessment year, then the assessee has to adjust loss in the subsequent assessment years and it has to be computed as if the eligible business is the only source of income and then only deduction u/s 80-IA can be determined. This is the true import of s. 80-IA(5) (Velayudhaswamy Spinning Mills 340 ITR 477 (Mad), Emerala Jewel Industry 53 DTR 262 (Mad) followed, Goldmine Shares 302 ITR (AT) 208 (SB) (Ahd), Hyderabad Chemical Supplies 137 TTJ 732 (Hyd) & Pidilite Industries 46 SOT 263 (Mum) distinguished)

The expression, “any other business or commercial rights of similar nature” in the definition of “intangible asset” in s. 32 (1)(i) shows that the initial part, i.e. know how, patents, copyrights, trademarks, license, franchises, has been disjointed by the conjunction ‘or. The use of the disjunction ‘or’ has a very relevant role, because, the legislature accepts the difference and distinction of intangibles and rights. The legislature has used ‘or’ in the provision for explaining the distinction of application of like nature with that of the unlike nature, which is an accepted principle i.e. doctrine of ejusdem generis. Taking note of the word ‘or’, used as a disjunction is essential to carve out a meaningful genus. The argument whether non compete rights constitute is a right in rem or a right in personam is a matter to be decided by an appropriate higher judicial forum. The judgement of the Supreme Court in Smifs Securities 348 ITR 302 (SC) that goodwill is an intangible asset eligible for depreciation is not applicable to a non-compete right. Non-compete fee does not fall within the ambit of any other commercial or business rights. As regards the claim of amortization, since the payment of Rs. 18 crores is a capital expenditure, it cannot be allowed as an expense and also can(not) be amortized (Sharp Business System 254 CTR 233(Del) followed. Real Image Tech 120 TTJ 983)(Che), Medicorp Technologies 30 SOT 506 (Che), Bunge Agribusiness 132 lTD 549)(Mum), Serum Institute 135 ITD 69)(Pune) treated as not good law).

Share application money or share application advance is distinct from ‘loan or advance’. Although share application money is one kind of advance given with the intention to obtain the allotment of shares/equity/preference shares etc, such advances are innately different form the normal loan or advances specified both in section 269SS or 2(22)(e) of the Act. Unless the mala fide is demonstrated by the AO with evidence, the book entries or resolution of the Board of the assessee become relevant and credible, which should not be dismissed without bringing any adverse material to demonstrate the contrary. It is also evident that share application money when partly returned without any allotment of shares, such refunds should not be classified as ‘loan or advance’ merely because share application advance is returned without allotment of share. In the instant case, the refund of the amount was done for commercial reasons and also in the best interest of the prospective share applicant. Further, it is self explanatory that the assessee being a ‘beneficial share holder’, derives no benefit whatsoever, when the impugned ‘share application money/advance’ is finally returned without any allotment of shares for commercial reasons. In this kind of situations, the books entries become really relevant as they show the initial intentions of the parties into the transactions. It is undisputed that the books entries suggest clearly the ‘share application’ nature of the advance and not the ‘loan or advance’. As such the revenue has merely suspected the transactions without containing any material to support the suspicion. Therefore, the share application money may be an advance but they are not advances which are referred to in section 2(22)(e) of the Act. Such advances, when returned without any allotment or part allotment of shares to the applicant/subscriber, will not take a nature of the loan merely because the same is repaid or returned or refunded in the same year or later years after keeping the money for some time with the company. So long as the original intention of payment of share application money is towards the allotment of shares of any kind, the same cannot be deemed as ‘loan or advance’ unless the mala fide intentions are exposed by the AO with evidence

U/s 5(2)(b) income accruing or arising in India is chargeable to tax in India. A website does not constitute a ‘permanent establishment’ unless the servers on which websites are hosted are also located in the same jurisdiction. As the servers of Google and Yahoo are not located in India, there is no PE in India. As regards the second limb of s. 5(2)(b) of “income deemed to accrue or arise in India”, on heas to consider s. 9. S. 9(1)(i) does not apply as there is no “business connection” in India nor are the online advertising revenues generated in India serviced by any entity based in India. As regards s. 9(1)(vi), it is held in Yahoo and Pinstorm that the advertising revenues are not assessable as “royalty”. As regards s. 9(1)(vii), the services are not “managerial” or “consultancy” in nature as both these words involve a human element. Applying the rule of noscitur a sociis, even the word “technical” in Explanation 2 to s. 9 (1) (vii) would have to be construed as involving a human element. If there is no human intervention in a technical service, it cannot be treated as a technical service u/s 9(1)(vii). On facts, the service rendered by Google & Yahoo is generation of certain text on the search engine result page. This is a wholly automated process. In the services rendered by the search engines, which provide these advertising opportunities, there is no human touch at all. The results are completely automated. Consequently, the whole process of actual advertising service provided by Google & Yahoo, even if it be a technical service, is not covered by the limited scope of s. 9(1)(vii). Consequently, the receipts in respect of online advertising on Google and Yahoo cannot be brought to tax in India under the provisions of the Act or the India US and India Ireland tax treaty.

The view of the Larger Bench that the assessee had to be directly engaged in developing, maintaining and operating the facility and that there had to be a complete development of the facility and not just a part of it is contrary to the law laid down in ABG Heavy Industries 322 ITR 323 (Bom). The High Court held that the effect of the amendment by the Finance Act of 1999 is that the benefit of s. 80IA(4) is available to any enterprise carrying on the business of (i) developing, (ii) maintaining & operating, or (iii) developing, maintaining and operating an infrastructure facility. It was also held that the assessee did not have to develop the entire project in order to qualify for deduction u/s 80-IA and that Parliament did not legislate a condition impossible of compliance. The Explanation below 80-IA (13) inserted by FA 2007 & 2009 w.r.e.f 1.4.2000 which provides that s. 80-IA(4) shall not apply to a person executing a “works contract” does not apply to a case where the assessee executes the work by shouldering Investment & technical risk by employing team of technically & administratively qualified persons and it is liable for liquidated damages if failed to fulfill the obligation laid down in the agreement and also securing by Bank guarantee. On facts, the assessee had shouldered the investment & technical risk in respect of the work executed and it was liable for liquidated damages if failed to fulfill the obligation laid down in the agreement. The liability which had been assumed by the assessee were obligations involving the development of an infrastructure facility. Consequently, it is not correct to say that the assessee is merely a contractor & not a developer. The assessee is eligible for benefit u/s 80-1A even if only part of the Infrastructural Project work is executed by it

Press Note no.9 of 2000 issued by the Ministry of Commerce and Industry in respect of FDI policy and prescribing the percentage of royalty to the sales allowed under automatic route cannot substitute as ALP to be determined under the provisions of the Act and Rules. FDI policy permitting certain percentage of payment of royalty is only for remittance of the amount in foreign exchange and therefore, such permission given in an entirely different context and purpose cannot be considered as relevant for determination of the ALP under I. T. Act. The RBI is only concerned with the foreign exchange and, therefore, would look into the matter from that point of view. The RBI, at the time of giving such permission would not keep in mind the provisions of the I T Act and that is the function of the income tax authorities and, cannot be validly go into such an issue. When a proper mechanism is provided under the provisions of the I. T. Act and Rules for determination of the ALP, then the approval by other than the I. T. Authorities, for the purpose of remittance/outflow of the foreign exchange, does not ipso facto, partake the character of ALP, which has to be determined as per TP regulations (Nestle India Ltd 337 ITR 103 (Del) followed)