Rule 10B(e)(iii) provides that “the profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market“. While the “differences” are not specified, it covers “any differences” which could materially affect the amount of net profit margin. The litmus test to be applied is if the ‘difference, if any, is capable of affecting the NPM in open market? If yes, then the TPO is under statutory obligation to eliminate such differences. The revenue cannot say that difference is likely to exist in all accounts and so the demands of the assessee should be ignored. The revenue’s stand that the assessee is ineligible for any adjustments if he provides the set of comparable is not correct because under Rule 10(3) it is the duty of the AO/TPO/DRP to minimize/eliminate the difference which is likely to materially affect the price. It is the settled proposition that ‘working capital’ adjustment is an adjustment that is required to be made in TNMM. The revenue’s contention that the ‘differences’ specified should refer to only (i) the factor of demand and supply; (ii) existence of marketable intangibles i.e. brand name etc; (iii) geographical location and the like is not acceptable. Further, as the difference in the Arm’s length Operating Margin of the Comparables before and after making the adjustment for working capital was up to 3.77%, it was “material” and had to be eliminated (Mentor Graphics 109 ITD 101 (Del), E-gain Communication 118 ITD 243 (Pune) Sony India 114 ITD 448 (Del) & TNT India followed)

S. 72 (1) allows brought forward business loss to be set-off against the “profits & gains of any business or profession” of the subsequent year. The expression “profits & gains of business” means income earned out of business carried on by the assessee and not just income connected in some way to the business or profession carried on by the assessee. The land & building were fixed & capital assets used by the assessee for its business purposes. The gains arising there from were assessable as capital gains and were not eligible for set-off against the brought forward business loss u/s 72 (Express Newspapers 53 ITR 250 (SC) followed; Cocanada Radhaswami Bank 55 ITR 17(SC) distinguished; Steelcon Industries reversed)

In order to constitute a PE under Article 5(1) & 5(2), three criteria are required to be satisfied viz; physical criterion (existence), functionality criterion (carrying out of business through that place of physical location) & subjective criterion (right to use that place). There must exist a physical “location”, the enterprise must have the “right” to use that place and the enterprise must “carry on” business through that place. An “agency” PE will not satisfy this condition because the enterprise will not have the “right” to use the place of the agent. Under Article 5(6) of the India-French DTAA (which is at variance with the UN & OECD Model Conventions), even a wholly dependent agent is to be treated as an independent agent unless if it is shown that the transactions between him and the enterprise are not at arms’ length. The Department’s argument that as the AO had not examined whether the transactions were done in arm’s length conditions, the matter should be restored to him is not acceptable because the onus was on the Revenue to demonstrate that the assessee had a PE. The onus is greater where the very foundation of DAPE rested on the negative finding that the transactions between the agent and the enterprise were not made under at arms length conditions. A negative finding about transactions with the dependent agent not being at ALP is sine qua non for existence of a DAPE under the India-France DTAA. The AO could not be granted a fresh inning for making roving and fishing enquiries whether the transactions were at arm’s length conditions or not

In a Portfolio Management Scheme, the choice of securities and its period of holding is left to the portfolio manager and the assessee has no control. Only the portfolio manager can deal with the Demat account of the assessee. While, at the time of depositing the amount, the assessee will make entry in his books of account as investment in PMS, he is not aware of the transactions in the shares being entered into by the portfolio manager on his behalf as his agent. Since the assessee comes to know about the purchase and sale of shares under PMS after the expiry of the quarter, the accounting treatment in the books of the assessee in respect of shares purchased/sold by the portfolio manager under PMS cannot be entered in the books of the assessee. It is at the end of the year the shares available in the DEMAT account can be entered. Therefore, at the time of deposit of amount, the intention of the assessee was to maximize the profit. As the purchase and sale of shares under PMS is not in the control of the assessee at all, it cannot be said that the assessee had invested money under PMS with intention to hold shares as investment. The portfolio manager carried out trading in shares on behalf of his clients to maximize the profits. Therefore, it cannot be said that shares were held by the assessee as investment. The fact that the transactions were frequent and its volume was high indicated that the portfolio manager had done trading on behalf of the assessee. The fact that the shares remaining at the end of the year were shown under the head ‘investment’ makes no difference. Even the LTCG is assessable as business profits and s. 10(38) exemption is not available. The fact that the AO took a contrary view in the preceding year is irrelevant. There is no difference between similar transactions carried out by an individual in shares and the transactions carried out by portfolio manager. There is, however, a difference between investment in a mutual fund and PMS

While Rule 10D(4) requires that the information should be “contemporaneous” and exist latest by the “specified date”, there is no “cut-off date” upto which only the information available in public domain can be considered by the TPO. Even data that becomes available in the public domain after the specified date can be considered. If the TPO collects information u/s 133(6), he is not required to inform the assessee about the process used by him nor is he required to furnish the entire information to the assessee. However, the assessee must be given proper hearing if any information is proposed to be used against it

To fall within s. 194-H, the payment must be by a “person acting on behalf of another person“. The element of “agency” has necessarily to be there. If the dealings between the parties is not on a “principal to agent” basis, s. 194-H does not get attracted