S. 14A uses the words “for the purpose of computing the total income under this Chapter ……. expenditure incurred in relation to income which does not form part of the total income under this Act”. Thus for the applicability of s. 14A there must be (a) taxable income and (b) tax-free income. If either one is absent, s. 14A has no applicability. If it is assumed that s. 14A would apply even when the assessee does not have tax-free income, the expenditure would get disallowed year after year so long as the assessee held the shares and if he sold them and made a capital gain, that would be taxed as well. This is not contemplated by s. 14A. If there is no claim for tax-free income, there cannot be any disallowance u/s 14A (Walfort Share and Stock Brokers 326 ITR 1 (SC), Godrej & Boyce 328 ITR 81 (Bom) & Winsome Textile 319 ITR 204 (P&H) referred)

S. 56(2)(v) exempts gifts from a “relative”. Though the definition of the term “relative” does not specifically include a Hindu Undivided Family, a ‘HUF” constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. As all these persons fall in the definition of “relative”, an HUF is ‘a group of relatives’. As a gift from a “relative” is exempt, a gift from a ‘group of relatives’ is also exempt since the singular will include the plural

Merely because a company is showing losses, it does not lose its status of comparable if the other criteria depict its status as a comparable because the declaration of loss is an incident of business which is at par with profit. However, while the assessee considered these companies on the basis of their FAR Analysis i.e. (function performed, assets employed and risk assumed), the TPO held that FAR of a company indicated the avowed objective of the company and the tools that it sought to employ to achieve that objective but it was the financial result which decided whether that company has been successfully in achieving the objective or not. The TPO held that if the assessee’s contention based on FAR analysis only is accepted then the process of choosing comparable will not proceed beyond the matching of FAR. All types of other tests i.e. data base screening, quality and quantitative screening or use of diagnostic with ratios will be rendered meaningless and unnecessary. Further, while the assessee itself applied a filter of persistent operative losses and companies on that basis, what was the basis for inclusion of the loss making companies? The loss making companies had not been excluded simplicitor on the ground that they are declaring loss but the TPO had pointed out that their comparablity has been taken into consideration by the assessee on the basis of FAR analysis and other aspects have not been considered

The word “use” in relation to equipment occurring in clause (iva) of Expl to s. 9(1)(vi) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of the two expressions “use” and “right to use” followed by the word “equipment” indicate that there must be some positive act of utilization, application or employment of equipment for the desired purpose. If an advantage was taken from sophisticated equipment installed and provided by another, it could not be said that the recipient/customer “used” the equipment as such. The customer merely made use of the facility, though he did not himself use the equipment. What is contemplated by the word “use” in clause (iva) of Expl 2 to s. 9(1)(vi) is the customer came face to face with the equipment, operated it or controlled its functions in some manner. But if it did nothing to or with the equipment and did not exercise any possessory rights in relation thereto, it only made use of the facility created by the service provider who was the owner of the entire network and related equipment and there was no scope to invoke clause (iva) in such a case because the element of service predominated (ISRO Satellite 307 ITR 59 (AAR), Dell International 305 ITR 37 (AAR) & Asia Satellite 332 ITR 340 (Del) followed; Frontline Soft 12 DTR 131 (Hyd) held not good law)

The device adopted by the assessee was obviously with the intention to avoid payment of full taxes. There is obvious tax avoidance. S. 36(1)(ii) is intended to prevent escape from taxation by describing the payment as bonus or commission when in fact it should have reached the shareholders as profit or dividend (Loyal Motor 14 ITR 647 (Bom) referred)

In a turnkey contract, in which the assessee is under obligation to supply the equipment and the software and also install them, the profit is taxable on completion of each milestone and not at the time of handing over the functioning system to the contracting party. The department’s argument that in a works contract, mere supply of equipment and software is of no consequence till installation and so profits should be taxed at that stage is not correct because even if “turnkey”, the taxable events in the execution of a contract may arise in several stages in several years if the obligations under the contract are distinct ones. The supply profits are consequently not taxable as it accrued on supply outside India

While in principle, it is correct that if loss making units are excluded, abnormal profit making units should also be excluded, on facts, the TPO had rightly rejected the loss making companies as not being comparable. In principle, neither loss making units nor high profit making units can be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that a comparable has incurred loss or has made abnormal profits