No advance ruling for proposed transactions to be undertaken with entities to be established in future

Trade Circle Enterprises LLC, In re [2014] 42 taxmann.com 287 (AAR - New Delhi)

In order to cover proposed transaction under section 245N, the partnership firm and subsidiary-company have to exist in reality with which that transaction is to be undertaken.

 Facts:

• The applicant-company, registered in UAE, is engaged in the business of developing and investing in the infrastructure and real estate sector. It intends to invest in a 100% subsidiary company in India under the prevailing FDI regulations;
• This Indian subsidiary company of the applicant intends to set-up a consortium by way of partnership firm with another Indian company, namely, MEPPL;
• This consortium proposes to acquire the undertaking of MEP Infra Private Limited which is engaged in the business of operating and maintaining of roads and bridges in Mumbai.

The applicant seeks ruling, interalia, on the following question:

Whether, the transfer of Undertaking of MEP Infra Toll Road Private Limited to the partnership firm would affect the allowability of deduction under section80IA(4)(i) to the partnership firm?

The Authority held as under:

• In order to apply the provisions of section 245N, there has to be either a transaction undertaken or proposed transaction to be undertaken by the non-resident applicant. This is not the case in the present application;
• The question relates to proposed setting-up of the subsidiary and the partnership firm with the Indian company and as to whether the subsidiary or the partnership firm would be eligible to 100 per cent deduction under section80IA?;
• The 100 per cent subsidiary company has to exist in reality and the partnership firm has to be set-up in order to make transaction or proposed transaction of the applicant with the Indian company or subsidiary;
• Thus, the question posed does not fall under the purview of this Authority. Consequently, the application is to be rejected.

Deemed transfer of property in development agreements if right to sell a few flats was transferred to builders

Dy. CIT v. Jai Trikanand Rao [2014] 41 taxmann.com 453 (Mumbai - Tribunal)

Where assessee had entered into development agreement under which developer had constructed a building on property of assessee and, in turn, developer had right to sell some of the flats, grant of development right to that extent was to be treated as transfer.

Facts:

• The assessee entered into a development agreement with the developer under which the developer agreed to construct a building on property of assessee. The major part of the building was to be transferred to the assessee. However, the developer was entitled to sell the remaining flats.
• The Assessing Officer (‘AO’) held that capital gain arose on account of grant of development rights by the assessee. The alternate contention of assessee was that he was entitled to sec. 54 relief in respect of three floors of building.
• The AO party allowed assessee’s claim of exemption under section 54 in respect of one residential floor. On appeal, the CIT (A) upheld the order of the AO as regards the transfer of property, however, he partly allowed the exemption claimed by the assessee under section 54.

The Tribunal held as under:

• The developer had the right to sell the said flats on account of the additional FSI. To that extent the rights, title and interest in the said plot of land had been transferred. Hence, it was a clear case of transfer envisaged both under the income-tax  Act and Transfer of Property Act;
• The High Court of Delhi in the case of CIT v. Gita Duggal [2013] 30 taxmann.com 230  held the fact that residential house consisted of several independent units couldn’t be permitted to act as an impediment to allow the deduction under section 54;
• In the case of CIT v. D. Anand Basappa [2009] 180 Taxman 4 (Kar.), the High Court has held that 'a residential house' as mentioned in section 54(1), had to be understood in a sense that the building had to be of a residential nature and the word 'a' had not be understood to indicate a singular number;
• Therefore, the assessee was entitled to exemption under section 54 as regards the investments/cost of construction claimed by the assessee in respect of all the flats.

Cost Accounting and its objectives

Cost Accounting

The process of accounting for cost which begins with recording of income and expenditure or the bases on which they are calculated and ends with the preparation of periodical statements and reports for ascertaining and controlling costs.

Objectives of Cost Accounting:

The primary objective of study of cost is to contribute to profitability through Cost  Reduction and Cost Control. The following objective of Cost Accounting can be identified.

• Ascertainment of Cost: This involves collection of cost information, by recording them under suitable heads of account and reporting such information on a periodical basis.
• Determination of selling price: Selling price is influenced by a number of factors. However prices cannot be fixed below cost save in exceptional circumstances. Hence cost accounting is required for determination of proper selling price.
• Cost Control and Cost Reduction: In the long run, higher profits can be achieved only through Cost Reduction and Cost Control.
• Ascertaining the profit of each activity: Profit of each department / activity / product can be determined by comparing its revenue with appropriate cost. Hence Cost Accounting ensures profit measurement on an objective basis.
• Assisting management in decision-making: Business decisions are taken after conducting Cost-Benefit Analysis. Hence Cost and benefits of various options are analysed and the Manager chooses the least cost option. Thus Cost Accounting and reporting system assists managers in their decision making process.

Scope of section 50 limited to compute capital gain; tax rate to be fixed as per holding period of depreciable assets

Smita Conductors Ltd. v. Dy. CIT [2014] 41 taxmann.com 514 (Mumbai - Tribunal)

The Tribunal held as under:

• It had been argued by the learned AR that the provisions of section 50, deeming the capital gain as short-term capital gain was only for the purposes of sections 48 and 49 which relates to computation of capital gain;
• The view canvassed by the learned AR was supported by the judgment of the Mumbai bench of Tribunal in case of  Manali Investments v. Asstt. CIT [2011] 45 SOT 128/10 taxmann.com 293 in which it had been held that the provisions of section 50 were to be extended only to the stage of computation of capital gain and, therefore, capital gain resulting from transfer of depreciable asset which was held for more than three years would retain the character of long-term capital gain for the purpose of all other provisions of the Act;
• For the purpose of computation of capital gain, the flat had to be treated as short-term capital assets, but for the purpose of applicability of tax rate it had to be treated as long-term capital assets if held for more than three years;
• Thus, the AO was to be directed to compute the capital gain from the sale of flat and apply the appropriate tax rate after necessary verification in the light of observations made in this order.

Amount credited to PPF account immune from attachment for recovery of income-tax dues

Dineshchandra Bhailalbhai Gandhi v. Tax Recovery Officer [2014] 42 taxmann.com 300 (Gujarat)

 

The High Court held as under:

• Rule 10 of the Second Schedule to the Income-Tax Act provides that all such property as is by the Code of Civil Procedure, 1908, exempt from attachment and sale in execution of a decree of a civil court shall be exempt from attachment and sale under this Schedule.
• Proviso to section60(1) of Code of Civil Procedure contains list of properties which shall not be liable to attachment or sale which, inter alia, covers all deposits and other sums derived from any fund to which the Public Provident Fund Act, 1968, applies,  in so far as they are declared by the said Act as not to be liable to attachment;
• Therefore, any amount lying in the PPF account of a subscriber is immune from attachment and sale for recovery of the income tax dues. As long as an amount remains invested in a PPF account of an individual, the same would be immune from attachment from recovery of the tax dues.

Capacity underutilization is certainly an important factor affecting net profit margin of enterprise as it results in higher costs per unit, which, in turn, result in lower profits. Thus, adjustment of capacity utilization is to be made to determine ALP of international transaction

Panasonic AVC Networks India Co. Ltd. v. Dy. CIT [2014] 42 taxmann.com 420 (Delhi - Trib.)

 

The Tribunal held as under:

• Rule 10 B (1)(e)(ii) does indeed provide that the net profit margin realized in a comparable uncontrolled transaction is adjusted, inter alia, for differences in enterprise entering into such transactions, which could materially affect the net profit margin in open market;
• Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Thus, the adjustment for capacity utilization was rightly approved by the CIT(A).

Tax papers are an identity thief's dream

Identity thefts can happen in numerous ways, ranging from simple to sophisticated techniques. Phishers can send emails or text messages asking you to update your information by directing you to a false website that remarkably resembles the legitimate site. Lesser sophisticated techniques include posing as bank representatives, stealing wallets, rummaging through dustbins, etc.
Tax-related identity theft is an ongoing problem. This is the time of the year when there is abundant personal and financial data circulating in the form of photocopies and over the Internet. If criminals intercept just one 16A form - or if they dupe someone into providing that information - they gain enough information that can be used for identity theft.
A person filed her returns online in the last week of February. She received a notification that two tax refunds were filed under her name. After making enquiries, she found that her PAN card number was stolen in a data breach and all her personal data was used to file a false tax return.

This is not an isolated incident. The threat of identity theft leaves you with more to worry about than whether or not you have filed your return on time. While the thought of someone messing with your personal information is unsettling enough, most people are not aware that a thief may use sensitive information, such as a PAN number, to claim a fraudulent tax refund, open fraudulent credit cards/loans or commit other criminal acts.
Following a few simple steps can go a long way to help safeguard your identity during tax time.

• Keep a regular tab on your form 26AS as this is a consolidated record of all the tax payments and receipts. Any irregular change in the same not tallying with expected tax deductions or receipts needs to be noted. If there is a suspicion of identity theft the same needs to be reported to the income tax department immediately. 
• Place tax documents in a secure location, such as a safe or a locking file cabinet, and store them there until needed to prepare tax forms. Do not leave them in a car or other easily accessible places.
• Use a secure delivery method to deliver your documents. Avoid using a public wi-fi network to e-file taxes. Public wi-fi networks are especially vulnerable as these are not secured or encrypted networks and sophisticated fraudsters can always infiltrate the same without difficulty.
• Some tax apps require users to take photos of form 16A. Be sure to delete images after use and password-protect your smartphone at all times.
• Do not follow links in emails or text messages that falsely claim to be from the income tax department. Always type 'incometaxindia. gov.in' directly into a browser to avoid spurious links.
• Keep operating systems and all computer protection software up to date to avoid phishing. Remember to wipe your hard drive clean before disposing your old computer/laptop.
• Don't leave photocopies of your PAN lying around. It is not only the actual PAN card that can be used for identity theft but also photocopies which are typically submitted while opening bank accounts, obtaining a new credit card etc.
• Provide PAN details to authorised people and only when needed.
• Don't give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know who you are dealing with.

A fraudster can eventually use tax-related information such as the PAN number in opening bank accounts or getting a line of credit. A very valuable instrument that can be used to detect any such event is your Credit Information Report. This report can be obtained from any established credit bureau. Key points to look for in your credit report are:

• Credit cards and other loan accounts and compare it with known liabilities. 
• Past enquiries section of the credit report which indicates if someone is attempting to obtain new loans using your identity.
• Verify if the PAN and other details quoted in the report against each loan account are accurate. Inaccuracies in the same especially against an unknown loan account can be indicative of fraud.
• Any major, unexpected changes in your scores could signal identity theft.

If you know your personal information has been compromised, you can report it immediately, thus averting identity fraud. Using this tool judiciously can save you time and money in the long run. 

Source: Business-Standard (http://bit.ly/1p2s4Sq)

Sun Pharma to acquire Ranbaxy in a US$4 billion landmark transaction

Sun Pharmaceutical Industries Ltd.and Ranbaxy Laboratories Ltd today announced that they have entered into definitive agreements pursuant to which Sun Pharma will acquire 100% of Ranbaxy in an all-stock transaction. Under these agreements, Ranbaxy shareholders will receive 0.8 share of Sun Pharma for each share of Ranbaxy. This exchange ratio represents an implied value of `457 for each Ranbaxy share, a premium of 18% to Ranbaxy’s 30-day volume-weighted average share price and a premium of 24.3% to Ranbaxy’s 60-day volume-weighted average share price, in each case, as of the close of business on April 4, 2014.
 

The combination of Sun Pharma and Ranbaxy creates the fifth-largest specialty generics company in the world and the largest pharmaceutical company in India. The combined entity will have operations in 65 countries, 47 manufacturing facilities across 5 continents, and a significant platform of specialty and generic products marketed globally, including 629 ANDAs. On a pro forma basis, the combined entity’s revenues are estimated at US$ 4.2 billion with EBITDA of US$ 1.2billion for the twelve month period ended December 31, 2013.The transaction value implies a revenue multiple of 2.2based on12 months ended December 31, 2013.

The proposed transaction has been unanimously approved by the Boards of Directors of Sun Pharma, Ranbaxy, and Ranbaxy’s controlling shareholder, Daiichi Sankyo. Ranbaxy’s board and Sun Pharma’s board have recommended approval of the transaction to their respective shareholders.

The acquisition is expected to be accretive to Sun Pharma’s cash earnings per share in the first full year. Additionally, Ranbaxy’s shareholders will participate in the value creation of the combined company through their ownership of Sun Pharma shares. Sun Pharma expects to realize revenue and operating synergies of US$ 250 million by third year post closing of the transaction. These synergies are expected to result primarily from topline growth, efficient procurement and supply chain efficiencies. As part of the transaction, Sun Pharma intends to leverage the human capital that has supported both companies, in order to drive future growth.

Under the agreements, Ranbaxy shareholders will receive 0.8 shares of Sun Pharma for each share of Ranbaxy. This exchange ratio represents an implied value of Rs 457 for each Ranbaxy share, a premium of 18% to Ranbaxy’s 30-day volume-weighted average share price and a premium of 24.3% to Ranbaxy’s 60-day volume-weighted average share price, in each case, as of the close of business on April 4, 2014.The transaction has a total equity value of approximately US$ 3.2 billion.

The transaction is expected to represent a tax-free exchange to Ranbaxy shareholders, who are expected to own approximately 14% of the combined company on a pro forma basis. Upon closing, Daiichi Sankyo will become a significant shareholder of Sun Pharma and will have the right to nominate one director to Sun Pharma’s Board of Directors. 

Ranbaxy has recently received a subpoena from the United States Attorney for the District of New Jersey requesting that Ranbaxy produce certain documents relating to issues previously raised by the FDA with respect to Ranbaxy’s Toansa facility. In connection with the transaction, Daiichi Sankyo has agreed to indemnify Sun Pharma and Ranbaxy for, among other things, certain costs and expenses that may arise from the subpoena.

The transaction will need approval by majority in number representing 75% in value of the shares present and voting at the shareholder meetings of each of Sun Pharma and Ranbaxy. Both Daiichi Sankyo (which holds approximately 63.4% of the outstanding shares of Ranbaxy) and promoters of Sun Pharma (who hold approximately 63.7% of the outstanding shares thereof), have irrevocably agreed to vote in favor of the transaction. 

Additionally, the closing of the transaction will be subject to customary closing conditions, including approval by the Indian Central Government, approval by the High Courts of Gujarat and Punjab and Haryana, approval by the Competition Commission of India and expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act in the United States. Pending approvals, Sun Pharma anticipates that the transaction will close by the end of calendar year 2014.

http://www.ranbaxy.com/sun-pharma-to-acquire-ranbaxy-in-a-us4-billion-landmark-transaction/

Mandatory e-filing for firms, political parties and trusts giving notice of accumulation of income

The CBDT amended Rule 12 with Income-tax (Fourth Amendment) Rules, 2014, which brings following assessee within the net of mandatory e-filing of return or notice, as the case may be:

• Partnership firms: Earlier e-filing of return was mandatory only for those firms who were liable to get their accounts audited. In view of this amendment, every firm is now required to e-file the return even when they are not liable for tax audit for Assessment Year 2014-15. 
• Political parties: Earlier political parties were given an option to file e-returns. Now every political party (it its income exceeds the maximum amount not chargeable to tax) is under an obligation to file e-return. 
• Specified Trust: As per section 11(2) every trust can accumulate its income for application in subsequent years if its total income wasn’t applied or was not deemed to have been applied for charitable purposes in India during the previous year. Such trusts are required to give notice to the Assessing officer in prescribed format regarding accumulation of income. These trusts are now are required to file such notice in electronic mode.

NOTIFICATION NO.24/2014 [F.NO.142/2/2014-TPL]/SO 997(E), DATED 1-4-2014

Capacity underutilization lowers profits; ITAT affirms its adjustment to fix ALP of Panasonic’s product

Panasonic AVC Networks India Co. Ltd. v. Dy. CIT [2014] 42 taxmann.com 420 (Delhi - Tribunal)

Capacity underutilization is certainly an important factor affecting net profit margin of enterprise as it results in higher costs per unit, which, in turn, result in lower profits. Thus, adjustment of capacity utilization is to be made to determine ALP of international transaction.

The Tribunal held as under:

• Rule 10 B (1)(e)(ii) does indeed provide that the net profit margin realized in a comparable uncontrolled transaction is adjusted, inter alia, for differences in enterprise entering into such transactions, which could materially affect the net profit margin in open market;
• Capacity underutilization by enterprises is certainly an important factor affecting net profit margin in the open market because lower capacity utilization results in higher per unit costs, which, in turn, results in lower profits. Thus, the adjustment for capacity utilization was rightly approved by the CIT(A).

Trust can work for charity with life-long members; registration can't be revoked on ground of perpetual members

CIT v. Baba Kartar Singh Dukki Educational Trust [2014] 42 taxmann.com 17 (Punjab & Haryana High Court)

The High Court held as under:

• The object of Section 12AA is to examine the genuineness of the objects of the Trust and though while examining genuineness, the income as well as resources of the Trust may be taken into consideration but any suspicion as to these facts cannot be the sole criteria for rejecting an application under Section 12A;
• Merely because a trustee was a life-long member of a trust, same could not itself raise an inference that trust was not charitable. Therefore, Tribunal was justified in directing registration of assessee as charitable trust.