Transfer Pricing: Foreign associated enterprise can be taken as ‘Tested Party’

While there is nothing in the transfer pricing law as to the selection of the tested party, the tested party normally should be the party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed. It may be local or foreign entity, i.e., one party to the transaction. The object of transfer pricing exercise is to gather reliable data, which can be considered without difficulty by both the parties, i.e., taxpayer and the revenue. It is also true that generally least of the complex controlled taxpayer should be taken as a tested party. But where comparable or almost comparable, controlled and uncontrolled transactions or entities are available, it may not be right to eliminate them from consideration because they look to be complex. If the taxpayer wishes to take foreign AE as a tested party, then it must ensure that it is such an entity for which the relevant data for comparison is available in public domain or is furnished to the tax administration. The taxpayer is not then entitled to take a stand that such data cannot be called for or insisted upon from the taxpayer. This is supported by the United Nation’s Practical Manual on Transfer Pricing for Developing Countries which stated that a foreign entity (a foreign AE) could also be taken as a tested party for comparison. The revenue’s argument that GMDAT should not be selected as a ‘tested party’ as it does not fall within the ambit of TPO’s jurisdiction and he can neither call for any additional information nor scrutinize their books of accounts is not acceptable because the Revenue can get all the relevant particulars around the globe by using the latest technology under its thumb or direct the assessee to furnish the same (Ranbaxy Laboratories 110 ITD 428 (Del), Mastek Limited, Development Consultants 136 TTJ 129 & Sony India 114 ITD 448 (Del) followed; Onward Technologies (Mum) & Aurionpro Solutions (Mum) not followed/ distinguished)

S. 14A/ Rule 8D: Scope in the context of shares held as stock-in-trade explained

S. 14A gets attracted on incurring of expenditure in relation to tax-exempt income. The purpose for which the shares are purchased and held would not impact the applicability of s. 14A. S. 14A comes into play irrespective of the head of income (on account of it arising qua a trading asset) under which the income is assessable. The fact that the share trading business yields both taxable income in the form of share trading profit and tax-exempt income by way of dividend income makes no difference to the applicability of s. 14A. Accordingly, s. 14A applies to shares held as stock-in-trade

S. 14A/ Rule 8D: Interest expenditure has to be netted against interest income and only the difference, if any, can be considered for disallowance

No nexus has been established by the AO between the expenditure incurred by the assessee and the tax free income earned by him. Further, as the interest income was more than interest expense and the assessee was having net positive interest income, the interest expenditure cannot be considered for disallowance u/s 14A and Rule 8D (Trade Apartment (ITAT Kol) & Morgan Stanley (ITAT Mum) (both included in the file) followed)

ESOP to expatriate employee of foreign company not chargeable for period he was outside India even if ESOP was vested and exercised in India

If a part of the activity done by the assessee-employee has no relation to any India specific job or activity it is not chargeable to tax in India. On facts, the assessee was in India only for a short period i.e. 1.4.2006 onwards. Prior to that, he has not done any service connected with any activity in India. Accordingly, as the assessee has not rendered service in India for the whole grant period, only such proportion of the ESOP perquisite as is relatable to the service rendered by the assessee in India is taxable in India (Sumit Bhattacharya 112 ITD 1 (SB) referred)

S. 195 TDS: Application for refund of TDS due to cancellation of contract with non-resident can be made vide s. 154 application

Before the CIT(A) the assessee filed copies of various invoices raised on it in pursuance to the contract by the Taiwanese company and also filed copy of credit note issued pursuant to the cancellation of the contract and documents showing inward remittance of the amount earlier paid. The CIT(A) held that the case of the assessee is covered by sub-clause (b) of clause 2 of Circular No. 7 dated 23.10.2007 and clause 2(b) of Circular No. 790 dated 20.04.2000. In para 2.1 of Circular 7 dated 23.10.2007, it is clearly provided that once the amount already remitted in pursuance of a contract has been refund back to the remitted after cancellation of the contract, no income accrues to the non-resident. It is also provided in the circular that the amount of tax paid u/s195 can be refunded to the deductor with prior approval of the CCIT. The detailed procedure is provided in the said circular and certain pre-conditions are to be satisfied, suitable undertaking from the deductor has to be obtained before the refund can be issued. It is also specified that refund can be given only if the non-resident has not filed any return and the time limit for filing of return has already expired. It was held that as the contract has been cancelled and the money has been received back, no tax is payable by the non-resident assessee. The CIT (A) directed the AO to verify that the conditions laid down in Circular No.7 of 2007 have been satisfied. There is no infirmity in the order of the CIT(A) and it cannot be said that AO was not allowed any opportunity as he has to verify the details before granting any refund of tax if any

S. 195(2) TDS: AO has no power to issue Nil TDS certificate

S. 195(2) presupposes that the person responsible for making the payment to a non-resident is in no doubt that tax is payable in respect of the some part of the amount to be remitted to a non-resident, but is not sure as to what should be portion so taxable or is not sure as to the amount of tax to be deducted. Consequently, in an application made u/s 195(2), the AO cannot assume jurisdiction to hold that the entire payment is not chargeable to tax and the payer need not deduct tax at source. As the AO had no power u/s 195(2) to hold that no tax is deductible at source, the order passed by him holding that no tax is deductible at source on the technology transfers is non est in law. As there is no estoppel against the law, the assessee cannot take advantage of such an order (GE India Technology Centre 327 ITR 456 (SC) referred)

S. 14A/ Rule 8D: Interest on loans for specific taxable purposes to be excluded

Rule 8D(2)(ii) refers to expenditure by way of interest which is not directly attributable to any particular income or receipt. If loans have been sanctioned for specific projects/expansion and have been utilized towards the same, then obviously they could not have been utilized for making any investments having tax-free incomes and have to be excluded from the calculation to determine the disallowance under Rule 8D(2)(ii) (Champion Commercial Co. Ltd (ITAT Kol) followed)

S. 14A/ Rule 8D does not apply to short-term investments gains from which is taxable

Some of the investments made by the assessee are short term. Since assessee is paying capital gains tax on short term investments, Rule 8D will not apply on them and the AO is directed to recompute disallowance u/s 14A read with Rule 8D after excluding short term investments

The assessee’s contention is that the assessee voluntarily surrendered and consented to pay tax to avoid further litigation and to buy peace of mind though the department’s contention is that the surrender was only because the assessee failed to establish the genuineness of the claim. If the assessee gives an explanation which is unproved but not disproved i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee’s case is false, then the penalty is not imposable. In the present case, the assessee’s explanation remained unproved but it cannot be said as disproved. Further, s. 68 is an enabling provision for making an addition where the assessee fails to give an explanation regarding the cash credit but such addition does not automatically justify imposition of penalty u/s 271(1)(c) r/w Explanation 1 thereto. In order to justify levy of penalty, there must be some material or circumstances leading to a reasonable conclusion that the amount does represent the assessee’s income and the circumstances must show that there was a conscious concealment or act of furnishing of inaccurate particulars. From a bare reading of s. 271, it is clear that the provisions of Explanation 1 to s. 271 do not make the assessment order conclusive evidence that the amount assessed was, in fact, the income of the assessee and that the assessee did not satisfactorily explain the cash credits by producing evidence and documents. Accordingly, penalty u/s 271(1)(c) is not leviable (Upendra V. Mithani (Bom) (included in file) and National Textile 249 ITR 125 (Guj) followed)