S. 56(2)(vii) does not apply to bonus & rights shares offered on a proportionate basis even if the offer price is less than the FMV of the shares

S. 56(2)(vii)(c) (ii) provides that where an individual or a HUF receives any property for a consideration which is less than the FMV of the property, the difference shall be assessed as income of the recipient. S. 56(2)(vii) does not apply to the issue of bonus shares because there is a mere capitalization of profit by the issuing-company and there is neither any increase nor decrease in the wealth of the shareholder as his percentage holding remains constant. The same argument applies pari material to the issue of additional shares to the extent it is proportional to the existing share-holding because to the extent the value of the property in the additional shares is derived from that of the existing shareholding, on the basis of which the same are allotted, no additional property can be said to have been received by the shareholder. The fall in the value of the existing holding has to be taken into account. As long as there is no disproportionate allotment, i.e., shares are allotted pro-rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares; there being only an apportionment of the value of their existing holding over a larger number of shares. There is, accordingly, no question of s. 56(2)(vii)(c) getting attracted in such a case. A higher than proportionate or a non-uniform allotment though would attract the rigor of the provision to the extent of the disproportionate allotment and by suitably factoring in the decline in the value of the existing holding

Transfer Pricing: Companies in ITES cannot be classified into low-end BPO services and high-end KPO services for comparability analysis but have to be classified based on the functions performed. Comparables with abnormal profit margins cannot be discarded per se but must be examined to determine whether the high margins are due to normal business conditions or not

(iv) As suggested in the OECD Guidelines on Transfer Pricing, determining a reliable estimate of arm’s length outcome requires flexibility and the exercise of good judgment. It is to be kept in mind that the TNMM may afford a practical solution to otherwise insoluble transfer pricing problems if it is used sensibly and with appropriate adjustments to account for differences. When the comparable uncontrolled transactions being used are those of an independent enterprise, a high degree of similarity is required in a number of aspects of the AE and the independent enterprise involved in the transactions in order for the controlled transactions to be comparable. Given that often the only data available for the third parties are company-wide data, the functions performed by the third party in its total operations must be closely aligned to those functions performed by the tested party with respect to its controlled transactions in order to allow the former to be used to determine an arm’s length outcome for the latter. The overall objective should be to determine a level of segmentation that provides reliable comparables for the controlled transaction, based on the facts and circumstances of the particular case. The process followed to identify potential comparables is one of the most critical aspects of the comparability analysis and it should be transparent, systematic and verifiable. In particular, the choice of selection criteria has a significant influence on the outcome of the analysis and should reflect the most meaningful economic characteristics of the transactions compared. Complete elimination of subjective judgments from the selection of comparables would not be feasible but much can be done to increase objectivity and ensure transparency in the application of subjective judgments

Entire law on taxability of “composite” contracts for supply of offshore & onshore supply & services under Act & DTAA explained

(i) The first question which requires to be decided is whether it is a case of composite contract? In our considered opinion, the AO was initially not correct in holding that the contract was a composite one devoid of any bifurcation towards onshore and offshore supplies and services, which stand was subsequently altered to the correct position. We, therefore, hold that it is wide off the mark to categorize the present contract agreement as a composite one since all its major four components are distinctly identifiable with separate consideration for each. There is a separate mention of consideration for supply of equipments and for rendition of services. Simply because the supply of equipment and the rendition of services is to one party and for a common purpose, we are unable to find any logic in treating the entire amount as one composite payment attributable commonly both to the supply of equipment and rendering of services, more so when there is a specific identifiable amount relatable to these segments

S. 80-IB(10): Limit on extent of commercial area imposed by clause (d) of s. 80IB (10) inserted w.e.f. 1.4.2005 does not apply to projects approved before that date

In the assessee’s own case for the same project relating to AYs 2005-06 and 2006-07, which falls after the insertion of clause (d) to s. 80IB(10), the Tribunal held that the assessee is eligible for deduction u/s 80IB(10) in respect of the housing project. Not only this, in Manan Corporation 214 Taxmann 373 (Guj) it was held that the condition of limiting commercial establishment/shops to 2000 sq.ft, which has come into force w.e.f. 1.4.2005 would be applicable for projects approved on or after 1.4.2005 and where the approval of the project was prior to 31.3.2005, the amended provision would have no application for those projects. The Gujarat High Court placed heavily reliance on the decision of the Bombay High Court in Brahma & Associates 333 ITR 289 (Bom)