S. 54F – If intention was to construct a residential property, subsequent change to commercial property, does not disentitle the claim

Shyamlal Tandon v ITO [IT APPEAL NO.1774 (HYD.) OF 2012 dated 21.0.10214] – Hyderabad ITAT


The assessee, an individual, did not file his return of income for the AY 2003-04. From the information received from DDIT(Inv), it came to light that the assessee has earned capital gains, which were not disclosed, and consequently, within the meaning of S.147 of the Act, the AO, held the view that there was escapement of income chargeable to tax. Accordingly a notice under section 148 of the Act was issued. In response thereto, assessee filed return declaring ‘nil’ income.

Assessment Proceedings

  • During the course of assessment proceedings, it was submitted that the assessee, alongwith his father purchased a piece of land on 17.3.1978 for Rs.34,320. The assessee and his son had demolished the house standing on the above plot and gave the property for development. 
  • As per clause (4) of the development agreement, both the father and son were entitled to share the built up area on 50:50 basis in exchange of transfer of the land. However, neither the father nor the son have has declared any long term capital gains on transfer of the land in exchange for 50% of the built up area either in the year in which the development agreement was entered into, relevant to assessment year 2001-02 or in the relevant assessment year in which transfer of 50% of the land and building took place. 
  • According to the AO, the long term capital gain worked out to Rs.55,75,661 of which the assessee’s share came to Rs.27,87,831, which was assessable to tax in the assessment year 2001-02.   (more…)

Companies with turnover less than 1 crore and abnormally high turnover to be excluded from TP study – Hyd ITAT

ADAPTEC (INDIA) PVT LTD v ACIT (ITA No.1758/Hyd/2012 dated 21/03/2014) – Hyderabad ITAT


The asseseee is engaged in the business of software design, development and testing in the areas of high performance storage solutions. The assessee renders software development services to its Associated Enterprise (AE) i.,e., Adaptec Inc, USA. The assessee is registered as 100% EOU under the STPI Scheme.  The assessee being a captive service provider to its AE is remunerated on a cost plus mark up basis for the services provided. On the basis of FAR analysis, the assessee categorized it as a risk mitigated contract service provider and selected itself as the tested party. Transactions Net Margin Method (TNMM) was chosen as the most appropriate method for determining ALP. Operating profit/operating cost was selected as the profit hence Indicator (PLI). The assessee conducted search from the database to select comparable companies and finally selected 28 companies as comparables with weighted average arithmetic mean of 14.53%. As the assessee’s net margin from the provision of services to AE at 14.03% was within the arm’s length, no adjustment was made in the TP study. 

The TPO, though accepted TNMM as the most appropriate method and the PLIOP/OC, he nevertheless rejected the TP study of the assessee by observing that multiple year data was considered while selecting comparables and companies engaged in software development have been treated as comparables irrespective of the verticals/horizontals of software services which has made the comparability analysis defective and unreliable.  TPO also applied certain additional filters, one of them being companies having turnover of less than 1 crore were rejected. The TPO finally selected 19 companies as comparables with average margin of 26.20% and after allowing working capital adjustments of 3.58% arrived at the adjusted arithmetic mean PLI of 22.62% and determined the ALP at Rs.19,48,41,447. The TPO treated the shortfall of Rs.1,82,73,532/- as the transfer pricing adjustments u/s 92CA of the Act.


Delhi ITAT ruling on factors considered for determining PE and taxability of software embedded in supply of equipments

HUAWEI TECHNOLOGIES CO LTD, China v ADIT (ITA Nos.5253/Del/2011, 5254/Del/2011, 5255/Del/2011 & 5256/Del/2011 dated 21/03/2014) – Del ITAT


The assessee, which is a company incorporated in China, is engaged in the business of supplying non-terminal products, i.e., telecommunications network equipment. The assessee had not filed any return of income. During the course of survey undertaken at the office premises of Huawei India, several documents were found and statements of various senior executives were recorded. On the basis of the said documents and statements, the Assessing Officer arrived at the conclusion that the assessee was having Permanent Establishment (PE) in India and the income that has accrued to the assessee from the supply of telecommunications network equipment during the previous year is taxable in India. In view of the above, the AO issued notice under Section 148 of the Income-tax Act, 1961. In response to the notice under Section 148, the assessee filed the return of income on 30th July, 2009 disclosing total income of Rs 82,69,535. (more…)

Corporate guarantee is not an ‘international transaction’ subject to TP provisions – Del ITAT

Bharti Airtel Limited vs. ACIT (ITAT Delhi)

The assessee issued a corporate guarantee to Deutsche Bank on behalf of its associated enterprise, Bharti Airtel (Lanka), whereby it guaranteed repayment for working capital facility. The assessee claimed that since it had not incurred any cost on account of issue of such guarantee, and the guarantee was issued as a part of the shareholder activity, no transfer pricing adjustment could be made. However, the TPO held that as the AE had benefited, the ALP had to be computed on CUP method at a commission income of 2.68% plus a mark-up of 200 bp. This was upheld by the DRP by relying on the retrospective amendment to s. 92B which specifically included guarantees in the definition of “international transaction”. On appeal by the assessee to the Tribunal HELD allowing the appeal: (more…)

Dt of agreement and not the dt of confirmation letter to be considered for computing holding period of booking rights – Del HC

Gulshan Malik v CIT (IT APPEAL NO. 55 OF 2014 dated 14.03.2014) – Delhi High Court


The assessee and his wife had booked an apartment vide an application dated 31.07.2004, by payment of a booking amount of Rs. 2,00,000/-on 3.08.2004 and consequently, it is claimed, acquired rights or interests in the same. The builder DLF issued a letter dated 6.08.2004 provisionally allotting the apartment and two parking spaces. A buyer’s agreement was executed on 4.11.2004 between DLF and the allottees. Per the payment schedule, a total payment of Rs. 87,12,500/- was made from 31.07.2004 to 03.08.2006 towards the purchase of the apartment. Following this, the Assessee entered into an agreement to sell dated 2.11.2007 to sell their booking rights/rights or interest in the apartment.

In the computation of income, the assessee declared a long term capital gain of Rs. 31,35,740/- on the sale of booking rights/extinguishment of rights in the apartment (period between acquisition and sale of the booking rights in the apartment was claimed to be 39 months and 2 days). An exemption was claimed under Section 54 of the Act, 1961 as the same was invested in purchase of another apartment in June 2008.


TP: Potential comparables cannot be excluded merely on the ground that their profit is abnormally high – Mumbai Sp Bench

Maersk Global Centres (India) Pvt. Ltd vs. ACIT (ITAT Mumbai Special Bench)

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  (more…)

Interest income is “profit derived from business of undertaking” eligible for 10A/10B benefit – Karnataka HC

CIT v Motorola India Electronics (P) Ltd. (ITA NO.447 OF 2007) (Kar HC) (dated 11.12.2013)


The assessee had outstanding borrowings by way of External Commercial Borrowings. The borrowings were for the business of STP undertaking. The Government had formulated a policy on pre-payment and the policy stated that approval of pre-payment would be granted only to the extent of 10% of the outstanding loan. Hence, it is required to temporarily park the funds, until the date of repayment, and also keep paying the interest on the loans. The assessee took a business decision to place these funds with various sister concerns as inter-corporate deposits.

The assessee claimed that the interest income as derived from the business of export of articles or things or computer software and the same is eligible for exemption under section 10A of the Act. The AO disallowed the exemption claimed with respect to the interest income.  (more…)

LG Electronics ruling on AMP Expenses is applicable even for distributors – Del ITAT

ACIT v Casio India Co P Ltd I.T.A .No.-6135/Del/2012 (Delhi ITAT) Dated 13/12/2013


Assessee is a wholly owned subsidiary of Casio and Computer Company Ltd., Japan (hereinafter called `Casio Japan’). The assessee distributes watches and consumer information products and other related products of Casio Japan, in India. The assessee entered into certain international transactions with Casio Japan which were benchmarked on ‘Transactional Net Margin Method’ (TNMM). On a reference made by the AO, the Transfer Pricing Officer (TPO) noticed that the assessee incurred a certain sum on the Advertising, Marketing & Promotion (AMP) expenses. Out of that, a sum of Rs.2,63,50,982/- was held to be towards developing marketing intangibles for the Associated Enterprise (AE). As against that, only a sum of Rs.1,02,13,645/- was reimbursed by the AE. Adding in mark-up of 14.93% on the differential amount, the TPO proposed adjustment accordingly(more…)

If it is proved that goods are actually purchased (even though the parties are bogus), only resultant profit is taxable – Guj HC

CIT v Bholanath Poly Fab (P.) Ltd [2013] 40 taxmann.com 494 (Gujarat)


Assessee is engaged in the business of trading in finished fabrics. For the assessment year 2005-06, the Assessing Officer held that the purchases worth Rs. 40,69,546 were unexplained. Assessing Officer had issued notice to all parties from whom such purchases were allegedly made. Such notices were returned unserved by the postal authorities with the remark that the address was incomplete. He, therefore, disallowed such expenditure claimed by the assessee and computed the total income of Rs. 41,10,187. The Commissioner rejected the appeal, upon which the assessee went in further appeal before the Tribunal. The Tribunal, substantially allowed the assessee’s appeal.


No TDS on service tax component – CBDT Circular

CBDT Circular No. 1 of 2014

Rajasthan High Court in the case of CIT(TDS) vs. Rajashthan Urban Infrastructure held that the words “any sum paid” used in Section 194J of the Income Tax Act, relate to “fees for professional services or fees for technical services”. In terms of the agreement, the amount of Service Tax was to be paid separately and was not included in the fees. Accordingly, it was decided that if Service tax is payable in addition to professional/ technical fees under the contract, the withholding tax will be restricted to the professional fees.

The CBDT vide CBDT Circular No. 1 of 2014 dated 13.01.2014 has decided in exercise of powers u/s 119 that wherever the terms of the agreement/ contract between the payer and the payee, the service tax component comprised in the amount is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.

The aforesaid circular should apply to all kinds of payments made to residents.

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