WHAT'S INSIDE... Direct Tax

Transfer Pricing

Indirect Tax

August 01-15, 2015

M & A

What’s inside… DIRECT TAX

1. DTAA to prevail over rates prescribed by Section 206AA 2. Services that do not allow the recipient to use the

knowledge in future do not satisfy the ‘make available’ condition and hence cannot be taxed as ‘Fee for Technical Services

3. Amendment extending the limitation period under section 201 not retrospective

4. India signs agreement with the USA to implement the Foreign Account Tax Compliance Act

TRANSFER PRICING

5. Re-characterisation of legitimate redemption of preference

shares by giving it a “different color” of advancing unsecured loan is inappropriate. Commercial expediency of the transaction cannot be questioned. Deletes interest adjustment on re-characterised transaction. Remits the matter with regards to transfer of shareholding in subsidiary for re-verification by applying DCF method.

6. Auditor’s certificate merely spelling out Head Office overheads as a percentage of revenues of Indian Entity cannot be treated as determinative of arm’s length price (“ALP”) without undertaking a benchmarking analysis, follows Delhi HC’s Cushman & Wakefield ruling

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7. Transfer pricing Adjustment cannot exceed the amount

received by the AE customers and the actual value of international transaction between the AEs; Extraordinary expenses/losses to be excluded for the computation of operating profit margin during start-up phaseA quasi-capital loan or advance is not a routine loan transaction; nevertheless, the arm’s length price for the same could not be NIL.

INDIRECT TAX 8. Limitation period of 1 year under Section 11B of the Central

Excise Act 1944 not applicable to refund claims filed under Rule 5 of Cenvat Credit Rules 2004

M & A

9. Relinquishment of property share under family arrangement not regarded as transfer

What’s inside…

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DIRECT TAX 1. DTAA to prevail over rates prescribed by

Section 206AA

Infosys BPO Limited [‘the taxpayer’] filed statements of deduction of tax for various quarters of the FY 2010-11 and 2012-13 in respect of payments made to non-resident during the period. The Assessing Officer [‘AO’], by an intimation u/s 200A, issued a demand against the taxpayer as it was of view that there were cases of short deduction.

The AO opined that since the taxpayer did not furnish the PAN of the recipient, it was obligated to deduct tax @ 20% as envisaged u/s 206AA of the Income Tax Act [‘the Act’]. The taxpayer challenged the AO’s order on the ground of jurisdiction of the AO u/s 200A and the raising of consequential demand. The Commissioner of Income Tax (Appeals) [‘CIT(A)’], upon appeal, rejected the objections regarding the scope of Section 200A, though decided the appeal in the taxpayer’s favour by ruling that TDS cannot be more than the tax liability provided under the DTAA. Aggrieved, both parties preferred an appeal before the Income Tax Appellate Tribunal.

Before the Income Tax Appellate Tribunal the taxpayer challenged the jurisdiction of the AO u/s 200A for making such adjustment and raising the consequential demand on the ground that issue of applying the rate of tax was is not arithmetical error in the statement or an incorrect claim apparent from any information in the statement. The Revenue challenged the same by citing subsection 1 of Section 200A which clarified that in respect of deduction where such rate was not in accordance with provisions of the Act the same could be considered as an incorrect claim apparent from the statement. The Income Tax Appellate Tribunal observed and ruled as under - The payment being in nature of Royalty and FTS, the taxpayer

deducted tax @ 10%. The application of DTAA to taxpayer was not disputable. The scope of deduction of tax at source cannot be more than the tax liability under DTAA.

Reliance was placed on the Pune ITAT ruling in Serum Institute of India Limited [TS-158-ITAT-2015(PUN)], Co-ordinate bench ruling in Bosch Ltd. [TS-904-ITAT- 2012(Bang)]. Further reliance was placed on the Karnataka HC ruling in Bharti Airtel Limited & Ors [TS-722- HC-2014(KAR)] to hold that the obligation of deducting tax at source arose only when there was a sum chargeable under the Act.

The provisions of TDS have to be read along with the machinery provisions of computing the tax liability and there was no error or illegality in the order of the CIT(A) on the fact that there was no scope for deduction of tax at the rate of 20% as provided under the provisions of Section 206AA of the IT Act when the benefit of DTAA is available.

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The issue of applying the rate of tax at 20% and ignoring the provisions of DTAA is a debatable issue and did not fall in the category of any arithmetical error or incorrect claim apparent from any information in the statement, as per the provisions of section 200A (1) of the Act. The Revenue’s contention in this regard was rejected. The ITAT noted that in present case the question of applying the rate of 20% as provided u/s 206AA requires a long drawn reasoning and finding.

The Tribunal thus held that applying the rate of 20% without considering the provisions of DTAA and consequent adjustment while framing the intimation u/s 200A was beyond the scope of the said provision and the AO travelled beyond its jurisdiction by making the adjustment u/s 200A. Ruling was made in favour of the taxpayer.

[Source: TS-408-ITAT-2015(Bang)]

2. Services that do not allow the recipient to use the knowledge in future do not satisfy the ‘make available’ condition and hence cannot be taxed as ‘Fee for Technical Services

ABB Inc. [‘the taxpayer’] is a company incorporated in the United States of America and engaged, inter alia, in providing business development, market services and other support services to its Indian Associated Entities [‘AEs’], i.e. ABB Limited

and ABB Global Industries & Services Limited. The taxpayer earned fees towards support services provided to its AEs. The respective AEs had withheld taxes on such payment. The taxpayer in its return of income claimed that the services provided to Indian AEs did not ‘make available’ any technical knowledge, experience, skill etc. and hence, were not taxable as ‘fees for technical services’ in India under India-US tax treaty. The Assessing Officer (‘AO’) rejected the claim on the grounds that a person without technical knowledge cannot provide sales and marketing, pricing, product development strategy and are mostly covered by consultancy services. Further, the AO opined that once Indian AEs have withheld taxes on the payments made, the taxpayer cannot take a different view in its tax return. The Dispute Resolution Panel, on appeal, confirmed the AO’s contention and held ABB Global Industries & Services Limited to be a Dependent Agency PE [‘DAPE’] of the taxpayer in India and directed the AO to tax the profit attributable to the DAPE. Aggrieved, the taxpayer preferred an appeal before the Income Tax Appellate Tribunal which observed and ruled as under – The Tribunal placed reliance on the decision of the Hon'ble

Karnataka High Court in the case of De Beers India (P) Ltd [346 ITR 467] and held that unless there was a transfer of technology involved in technical services extended by the US company, the 'make available' clause was not satisfied and, accordingly, the consideration for such services could not be taxed under Article 12(4)(b) of India-US tax treaty.

The decisive factor for taxability was to see whether the services results in transfer of technology. The services did not enable the recipient of the services to utilize the knowledge or know-how on his own in future without the aid of the service provider. Therefore the make available condition is not satisfied. Accordingly, the

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he additions made on account of ‘Fees for technical services’ were deleted. In connection with DAPE, when the PE was admittedly in respect of

the trading transactions only, no part of the earning from rendering of services to the AE could be related to the nature of the PE activities, the consideration for these services can be brought to tax in the source jurisdiction, i.e. India.

Further, in connection with taxability of the profit of the DAPE in the hands of the taxpayer, the Tribunal relied on Bombay High court decision of SET Satellite (Singapore) Pte. Ltd [307 ITR 205] and held that even if there was a DAPE, it would have no taxable income in the hands of the taxpayer in the absence of the finding that the DAPE had been paid a remuneration less than arm’s length remuneration. Accordingly, the additions made on account of DAPE were deleted.

[Source: ITA No. 1613/Bang/12]

3. Amendment extending the limitation period under section 201 not retrospective

Oracle India Pvt. Ltd. [‘the assessee’] was held to be an assessee in default and was re-issued a notice u/s 201(1)/(1A) dated January 20, 2015 for TDS defaults for the AY 2008-09. Subsequently, an order dated March 17, 2015 was passed

5 was passed treating assessee in default. The said notice was premised on the amendment introduced in Section 201(3) vide Finance (No. 2) Act, 2014, whereby the limitation to treat an assessee as one in default was increased to seven years from the end of relevant Financial Year. Earlier, for the same assessment year, a notice had been issued under the same provisions on February 17, 2014. The Delhi High Court vide order dated December 5, 2015 [WP(C) 2061/2014] had quashed the notice holding that the said notice was time barred in view of the provisions of Section 201(3) as it then existed. Aggrieved by the reissuance of notice u/s 201(1)/(1A), the assessee filed a writ petition before Delhi High Court. Before the High Court, the assessee relied on the Supreme Court ruling in the case of S.S. Gadgil v. Lal & Co.[53 ITR 231(SC)] which has been subsequently followed in several other decisions of the Supreme Court including K.M. Sharma v. ITO [254 ITR 772 (SC)] and National Agricultural Cooperative Marketing Federation of India v. UOI [ 260 ITR 548 (SC)]. Based on these rulings, the assessee argued that the limitation prescribed by the Income Tax Act was not merely a period of limitation but that it imposed a fetter upon the power of the AO to take action under the said provisions. In this context, it was submitted that since the power in respect of AY 2008-09 expired on March 31, 2011 in terms of Sec 201(3) as it then existed, it could not be revived unless the legislature specifically made a retrospective amendment to the same. The substitution of Section 201(3) by the Finance (No.2) Act, 2014 was with effect from October 1, 2014 and not with retrospective effect. The High Court noted that Revenue had re-issued the notice in an attempt to take advantage of the amendment to Section 201(3)

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which was brought into effect from October, 2014. Taking note ofthe co-ordinate bench ruling in assessee’s own case quashing issuance of original notice u/s 201(1)/(1A), the High Court held that those proceedings which had ended and attained finality with the passing of the order dated December 5, 2014 of this Court in WP(C) 2061/2014 cannot now be sought to be revived through this methodology adopted by the Assessing Officer. Even otherwise, insofar as the Financial Year 2007-08 was concerned, the period for completing the assessment under Section 201(1)/201(1A) had expired on March 31, 2015. In light of above, the High Court quashed the notice reissued and order u/s 201 and allowed assessee’s writ petition. [Source: TS-406-HC-2015(Del)]

4. India signs agreement with the USA to implement the Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act [‘FATCA’] was enacted in 2010 by the Government of the United States of America with a view to combat tax evasion by U.S. citizens and residents through the use of offshore accounts. India has signed an Inter-Governmental Agreement [‘IGA’] with the United States of America to implement the FATCA. Pursuant to the IGA, foreign financial institutions [‘FFIs’] in India

will be required to report tax information about United States [‘US’] account holders directly to the Indian Government which will, in turn, relay that information to the US Internal Revenue Service [‘IRS’]. Further, the US IRS will provide similar information about Indian citizens having any accounts or assets in the US. This automatic exchange of information is scheduled to begin on 30 September 2015. FATCA requires ‘financial institutions’ to register with the IRS and obtain a Global Intermediary Identification Number (GIIN) and undertake due diligence of its records (typically the documents obtained from the customers at the time of opening the accounts) to identify whether the ‘financial account’ is held by a US citizen/ resident, or not. FACTA requires US financial institutions to withhold 30% of the payments made to FFIs who do not agree to identify and report information on US account holders. Till date, the US has IGAs with more than 110 jurisdictions. Till date, 714 Indian financial institutions have obtained registration with the US IRS FATCA is likely to impact a wide range of non-US financial institutions namely banks, hedge funds, private equity funds, broker-dealers, clearing organisations, trust companies and insurance companies, as they will now have to collect specified details from US persons and/ or withhold tax on qualifying payments. Affected institutions will be required to comply with specific due diligence and verification procedures. Certain information on US account holders must be submitted to the IRS through Indian Government on an annual basis. FATCA will have a major impact on fresh investments coming into India from US entities (including NRIs based in US), as India is one of the world's largest recipient of remittances from its diaspora based abroad, particularly in the US.

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5. Re-characterisation of legitimate redemption of preference shares by giving it a “different colour” of advancing unsecured loan is inappropriate. Commercial expediency of the transaction cannot be questioned. Deletes interest adjustment on re-characterised transaction. Remits the matter with regards to transfer of shareholding in subsidiary for re-verification by applying DCF method. Facts of the case

Aegis Limited [“the Taxpayer”], is engaged in providing IT enabled business processing outsourcing services (BPO) to its Associates Enterprises (AEs) for the third party contracts and in-house campaigns and receivable management services. During the year under consideration i.e. AY 2009-10 the following issues were raised before the Tribunal for its adjudication.

Transfer Pricing ITES segment Taxpayer provided three sets of services viz. provision of ITeS for

third party contracts, for in-house campaigns and receivable management services

Transactional Net Margin Method (“TNMM”) was selected as the most appropriate method (“MAM”) in the transfer pricing documentation for benchmarking all the three transactions independently and were determined to be at arm’s length.

TPO however, aggregated these transactions and undertook fresh benchmarking thereby arriving at final set of 8 comparables having an arithmetic of 30.46% which was later reduced to 25.99% by the Dispute Resolution Panel [“DRP”] after considering foreign exchange as non-operating in nature. Aggrieved by the decision of the DRP, taxpayer approached the Tribunal. Taxpayer argued before the Tribunal that if three comparables viz. Accentia Technologies Limited, Coral Hub Limited and Genesys International are excluded based on various jurisprudence and R Systems be included then the Taxpayer’s margin falls within the +/-5% tolerance band. The arguments were accepted and the corresponding addition deleted if it falls within the +/-5% variation. Transfer of equity shares Taxpayer sold 1,65,28,404 shares out of its shareholding in Aegis

BPO Services (Gurgaon) Limited [“Aegis BPO”] to Essar Services Holding Limited, Mauritius [“Essar Mauritius”]. These shares

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were valued at “Nil” based on the certificate obtained from chartered accountant whilst the transaction was undertaken at Rs. 12.72 per equity share. TPO observed that the taxpayer had also issued its own equity

shares to Essar Mauritius at Rs. 400 per equity share whilst the fair market value [“FMV”] based on CCI guidelines worked out to 22.82. On this basis, the TPO applied rate of 133 per share (after considering the swap ration 1:3) on transfer of 1,65,28,404 shares of Aegis BPO and rejected the valuation undertaken by the Taxpayer thereby proposing an adjustment.

DRP reduced the valuation to Rs. 104 per share.

Tribunal observed that there were several defects in the

computation of the lower authorities. Accordingly, Tribunal upheld application of DCF as the method for valuation, remitted the matter back to the TPO for re-computation partly allowing the ground.

Corporate Guarantee Taxpayer entered into certain guarantee arrangements in respect

of certain borrowings taken by the AEs. This transaction was not disclosed in the Accountant’s Report i.e. Form 3CEB on the pretext that the said transaction does not constitute an international transaction.

TPO held that 5% ought to have been charged on such corporate guarantee by the taxpayer, thereby proposing an adjustment. On further appeal, DRP reduced the margin to 3% (2% for providing corporate guarantee and 1% towards risk).

Before the Tribunal it was argued that based on the decision of the Delhi Tribunal in the case of Bharti Airtel Limited, said transaction

cannot be held to be an international transaction. Without prejudice, plethora of decisions were referred to wherein 0.5% to 1% has been held as adequate compensation towards said transaction. The Taxpayer in subsequent year had entered into guarantee commission agreement and has recovered 1% with effect from FY 2007-08. Thus, such an adjustment is unwarranted. Tribunal agreed to the Taxpayer’s contention and upheld

application of 1% as sufficient remuneration thereby allowing the ground.

Subscription and redemption of equity shares Taxpayer had subscribed to preference shares of its AE i.e. Essar

Mauritius. During the year under consideration, it redeemed part of the preference shareholding at par and determined it to be at arm’s length.

TPO contented that since the preference shares were non-cumulative and redeemable at par without any dividend, the said transaction is in essence advancing an interest free loan on which interest of 15.41% ought to have been recovered based on the FINMMDA guidelines and 133(6) response from CRISIL thereby re-characterising the transaction as such.

DRP granted partial relief by reducing the interest rate to 13.78% to be increased by 1.65% mark-up for the risks.

Aggrieved, Taxpayer requested for Tribunal’s intervention in the matter. Taxpayer opposed the approach adopted by the TPO of re-characterising a legitimate transaction and questioning the commercial expediency by relying on various judicial pronouncements on the matter.

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On detailed analysis of the facts the Tribunal held: Tribunal reject the approach adopted by the TPO of re-

characterising the transaction on the pretext that its exceptional circumstances without placing any material facts on record.

TPO cannot “disregard any apparent transaction and substitute it, without any material of exception circumstances highlighting that the assessee has tried to conceal the real transaction or some sham transaction has been unearthed.”

Commercial expediency of the taxpayer cannot be questioned. Transaction pertaining to investment is shares cannot be given

different colour so as to expand the scope of transfer pricing adjustments by re-characterising it as “interest free loans”. Reliance is also placed on decision of jurisdictional High Court Besix Kier Dabhol 1

It has been consistently held that subscription of shares cannot be characterised as loan and thereby no interest thereon be chargeable. Accordingly, the adjustment on account of re-characterisation is deleted.

Foreign exchange gain on redemption of preference shares The taxpayer had earned foreign exchange gain on account of

redemption of preference shares. TPO treated this gain as “business income” rather than under the head “capital gains” and was considered to be taxable since the preference shares held by the taxpayer was akin to giving interest free loans.

_________________________ 1210 Taxmann 151 (Bom - HC)

On further appeal, Tribunal held that the approach of the TPO is not correct since the gain was on account of shares which is capital in nature and shall be chargeable under the head “capital gains”.

Alleged interest on advance to AE Taxpayer paid advance for engaging consultants for identifying

prospective companies for acquisition in South African region which was erroneously disclosed as “advance” to AE.

TPO held it to be in the nature of interest free loans and imputed interest at 15.41%, thereby making the alleged addition, confirmed by DRP

Before the Tribunal, facts were clarified alongwith supporting evidences and it was thereby held that the same could not be treated as loan as the transaction was purely for business and commercial consideration and revenue in nature. Accordingly the alleged addition stood deleted.

The decision also covers other grounds pertaining to few other direct tax disallowances which are not covered in detail herein. Comments: This is yet another decision which emphasizes the fact that the revenue authorities can neither step into the shoes of the taxpayer nor question the commercial expediency while re-characterising a legitimate business transaction, specifically being capital in nature with an attempt to tax the alleged income based on premises and assumptions and without bringing on record any unblemished evidences. [Source: Aegis Limited (ITA No. 1213/Mum/2014)]

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Facts of the case During AY 2009-10, the taxpayer entered into international

transactions pertaining to purchase of assets/ spare parts, reimbursement of direct expenses and reimbursement of Head Office expenses with its associated enterprises (“AEs”).

6. Auditor’s certificate merely spelling out Head Office overheads as a percentage of revenues of Indian Entity cannot be treated as determinative of arm’s length price (“ALP”) without undertaking a benchmarking analysis, follows Delhi HC’s Cushman & Wakefield ruling

Facts of the case Metro Tunneling Group [“the Taxpayer”], is a joint venture (“JV”) undertaking of two Indian entities (i.e. M/s Larson and Toubro and M/s IRCON) and three foreign entities (i.e. M/s Shimizu Corporation, M/s Samsung Corporation and M/s Dywidag International). Registered as an AOP, it was formed to execute a contract awarded by Delhi Metro Rail Corporation for the design and construction of tunnel.

As per the MOU entered into between the members of JV, the cost of assets and spare parts supplied to the taxpayer by the members and the amount of direct expenses incurred by them on behalf of the taxpayer shall be reimbursed by the taxpayer.

The members of JV are entitled to charge indirect expenses i.e. Head Office overheads, on the basis of the Overhead Absorption Rate certificate issued by their respective auditors not exceeding 8.5% of revenues attributable to respective members.

The taxpayer, in its income tax return, itself has suo-moto disallowed INR 78 lacs, being the excess reimbursement charged in the books.

During the course of the assessment proceedings the Transfer Pricing Officer [“TPO”] accepted the ALP of two transactions viz purchase of spare parts and reimbursement of expenses. However, TPO determined the ALP reimbursement of head office expenses at NIL on following basis: There is no objective basis for upper limit of 8.5%;

The taxpayer failed to justify the cost-benefit analysis for

reimbursement of such expenses;

The taxpayer failed to identify the comparable uncontrolled transaction i.e. how such services would be valued by an independent entity dealing in similar circumstances;

Taxpayer failed to provide bifurcation in terms of nature of services, overhead cost and amount involved.

Taxpayer failed to show the utility of services rendered and its

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quantification which demonstrate that charges are not linked with actual service. Aggrieved by the findings of the TPO, taxpayer approached the Commissioner of Income Tax (Appeals) [“CIT(A)”] but failed to find any relief. Subsequently, the taxpayer approached the Tribunal to adjudicate the matter. Contentions of the Taxpayer before the Tribunal: Taxpayer has duly benchmarked transaction relating to

reimbursement of head office expenses on the basis of Auditor’s certificate and suo-moto disallowed INR 78 lacs out of reimbursements;

Identical reimbursements made in the preceding year have been accepted by the Assessing Officer;

Foreign entities are bound to incur indirect expenses when they are supplying assets and spares hence, such reimbursement is justified;

It is not in the domain of TPO to examine the prudence of the taxpayer or necessity to incur expenditure while forming opinion that foreign entities should not have allocated any indirect expenses at all.

Contentions of the Taxpayer before the Tribunal: Auditors for each of AEs have adopted different criteria to determine

indirect expenses;

Certificate of Samsung pertained to calendar year 2008, while that of Shimizu pertains to FY 2007-08 whilst the year under consideration is FY 2008—09.

Percentage of overheads have been estimated by Auditor and same does not prove the nature of services rendered by AEs.

Taxpayer has claimed application of cost plus method however, AEs have raised debit notes on estimate basis.

Applying the ration of Delhi HC in the case of Cushman & Wakefield, taxpayer failed to ascertain ALP of head office expenses so reimbursed and hence, the lower authorities are justified in determining ALP at NIL.

Tribunal’s conclusions: The Tribunal duly considered the facts of the case and arrived at the following conclusion: TPO is not entitled to question the commercial prudence of the

taxpayer or necessity to incur expenses.

Tribunal observed that supply of assets and spares and incurring of direct expenses are possible only if the AEs maintain proper establishment and infrastructure and hence it is essential to allocate a portion of indirect expenses to the taxpayer.

Upper limit of 8.5% has been ascertained for calendar year 2008 in two cases and for financial year 2007-08 in one case vis-à-vis financial year 2008-09 which is under consideration. Therefore, such mismatch of the period indicates that AEs have charged the taxpayer on estimated basis and not on actual basis.

Tribunal also illustrated fallacy in the approach adopted by the taxpayer which gives misleading results.

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Tribunal rejected the acceptance of auditor’s certificate on following basis: They pertain to different accounting year; There is no standardization of types of overheads that is

required to be considered; They have given certificates with qualifications.

Accordingly it was held that the taxpayer has merely relied on the auditor’s certificate and did not undertake benchmarking exercise as per Indian TP regulations. Thus, the said approach is rejected. In view of specific directions, the matter was remitted back to the file of the TPO for fresh examination. [Source: Metro Tunneling Group; ITA No. 564/Mum/2015]

7. Transfer pricing Adjustment cannot exceed the amount received by the AE customers and the actual value of international transaction between the AEs; Extraordinary expenses/losses to be excluded for the computation of operating profit margin during start-up phase Facts of the case HCL Technologies BPO Service Ltd. (“the Taxpayer”), is a private limited company engaged in providing IT enabled services (“ITeS”).

During the year under consideration, the taxpayer had entered into the international transaction of provision of ITeS, amounting to 13.06 crores and applied Transactional Net Margin Method (“TNMM”) as the Most Appropriate Method (“MAM”) for benchmarking its transaction, considering itself as the tested party. Also, Operating Profit/Total Cost was taken to be the Profit Level Indicator. The taxpayer had conducted transfer pricing analysis by using multiple year data of previous financial year in which data of three years was on actual basis and for two years on project basis. For the application of TNMM, the taxpayer identified eight comparable companies engaged in rendering voice based/web based BPO/ITES. The operating margin of five financial years of the comparable companies was computed at 14.09% and that of the taxpayer was 13.56%. Hence, the taxpayer has considered the international transaction to be at arm’s length. The transfer pricing officer (“TPO”) rejected the taxpayer’s approach of using multiple year data and determined adjustment of INR 17.03 crores. Aggrieved taxpayer appealed before the Commissioner of Income Tax (Appeals) [“CIT(A)”]. The CIT(A) accepted the taxpayer’s plea on the grounds that the addition made by TPO cannot go beyond the amount actually retained by associated enterprises (“AEs”). Thereby, the CIT(A) reduced the amount of addition made by TPO from INR 17.03 crores to INR 1.19 crores. However, the Aggrieved with the same the Revenue filed an appeal before the Income Tax Appellate Tribunal (“the Tribunal”/ “the ITAT”). Transfer pricing Adjustment cannot exceed the amount received by the AE from customers and the actual value of international transaction between with its group entity

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In the light of above rulings, the taxpayer submitted that appropriate adjustment for idle capacity is required to be made while computing its operating margin. The Tribunal accepted the taxpayer’s submission that while calculating the operating cost, the abnormal cost incurred on account of start-up should be excluded and also keeping on view the judgment of ITAT co-ordinate Bench in case of Transwitch India (Supra), affirmed by The Delhi High court. Hence, the Tribunal directed the Assessing Officer to re-determine the operating cost exclusive of all the abnormal costs incurred on account of start-up entity like rent, salary and depreciation. Source: HCL Technologies BPO Services Limited Vs. ACIT (ITA No. 3547/Del/202010

8. Limitation period of 1 year under Section 11B of the Central Excise Act 1944 not applicable to refund claims filed under Rule 5 of Cenvat Credit Rules 2004

Affinity Express India Private Limited (‘Appellant’) is engaged in providing services under the taxable service categories of Business Auxiliary services and Management Consultancy services.

INDIRECT TAX

The Appellant had filed refund claim of Rs. 26.20 lakhs (appox.) for the period of January 2009 to March 2009 under Rule 5 of the Cenvat Credit Rules 2004 (‘Credit Rules’) read with Notification No. 5/2006–CE(NT) dated 14 March 2006 (‘Notification’) since he was unable to utilize the input service credit availed against the services exported during the said period. The Assistant Commissioner allowed the refund claim of Rs. 4.94 lakhs (approx), while rejecting the balance amount. Aggrieved by the order of the Assistant Commissioner, the Appellant filed an appeal before the Commissioner (Appeals), who rejected the claim of Rs. 21.23 lakhs (approx). The Appellant filed an appeal before the Appellate Tribunal, Mumbai (‘Tribunal’) against the order of the Commissioner (Appeals). The Tribunal, inter-alia, observed as follows: With respect to the denial of the refund claim on account of

limitation, the Appellant had submitted that clause 6 of the Notification mentions that the refund claim may be filed before the expiry of the period specified under Section 11B of the Central Excise Act 1944 (‘Excise Act’). Further Rule 5 of the Credit Rules permits refund of credit accumulated over a period of time, upon a condition that the service provider is not able to utilize the said credit on account of export of output services, which do not attract service tax. If one looks at clause (B) to the Explanation appended to Section 11B of the Excise Act, none of the sub-clauses therein would apply to determine the ‘relevant date’ for refund filed under Rule 5 of the Credit Rules. In other words, the Notification does not throw any light on the date from which the limitation under Section 11B of the Excise Act has to be reckoned. Accordingly no time limit should apply for the refund claim under Rule 5 of the Credit Rules. In any case the

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period of one year should be computed from the date of receipt of foreign exchange for the services exported and not from the date of invoice. The Appellate Tribunal, relying on the decisions in the case of Deepak Spinners Ltd., Elcomponics Sales Pvt. Ltd. and accepting the submissions of the Appellant, held that no time limit would apply to refund claim under Rule 5 of the Credit Rules and further that prior to the date of crystallization of the right to refund, no limitation can start running. Where the assessee has inadvertently indicated the turnover of a

service in the return against the column for final product, instead of output service, the same would not disentitle them for refund, if the following is established: From the agreements it is established that the activity is in the

nature of service;

Actual export of the underlying service and receipt of foreign exchange is not in dispute.

Where certain input services provided were essential and in fact

used by the Appellant to provide output services and where the Revenue did not challenge when the Appellant claimed cenvat credit on these input services, the same cannot be rejected while granting refund.

[Source: M/s Affinity Express India Pvt. Ltd. v Commissioner of Central Excise, Pune-I (Appeal no. ST/216/11)]

9. Relinquishment of property share under

family arrangement not regarded as transfer

Facts of the case The assessee, being an individual, relinquished her rights in her father-in-law’s property, which she inherited and devolved upon her after the death of her husband and minor son. The consideration for relinquishing of such share in property in favour of her deceased husband’s two brothers was not offered to tax. The AO held sought to tax the said transaction as capital gains since it held such

relinquishment to be a transfer of a capital asset. The CIT(A) upheld the AO’s order on the ground that relinquishing the rights in the property inherited by the assessee amounts to transfer of a capital asset and hence, the consideration received under the said transaction is taxable under the head capital-gain in accordance with provisions of Section 45 of the Act. Issue before ITAT Whether the consideration passed under the family settlement taxable as long term capital gains?

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ITAT decision The assessee placing reliance on various judgments contended that a settlement under a family arrangement amongst the members cannot be considered to be a transfer of a capital asset. The ITAT observed that a family settlement only settles the conflicting claims which had pre-existing joint interests, to a separate interest and there is no conveyance or transfer of a property, thus cannot be treated as transfer of a capital asset. ITAT relied on Madras HC Ruling in CIT vs Kay Arr Enterprises & Others (2008) 299 ITR 348 wherein the HC held that family arrangement did not attract capital gain and allowed the assessee’s appeal stating that a family settlement or arrangement does not tantamount to any transfer of a title, albeit it is akin to a partition of the family asset amongst the members, which is not regarded as a transfer u/s 47(i) of the Act. Mrs. Urmila Mahesh Nathani Vs ITO [5921/Mum/2012]