SEBI notifies revised delisting norms

In order to make delisting more effective, the SEBI has notified revised regulations for delisting process through the reverse book-building route that would make the delisting easier for companies. Under the revised norms the timeline for completing the process has been reduced. It provides for relaxation of rules on a case-to-case basis. The key features of amendment are as under:

• Timeline for completing the delisting process has been reduced to 76 working days from 137 calendar days.
• Now stock exchanges would be given five working days to give their in-principle approval for delisting. 
• SEBI has retained the reverse book building process for determining the price of shares for the purpose of delisting. However, delisting would be considered successful only if at least 25 % of the public shareholders would participate in the reverse book building process. Further, the shareholding of the acquirer, together with the shares tendered by public shareholders, should be 90 % of the company's total share capital. 
• To ensure that a delisting plan has been decided in a fair manner, company's board would have to approve of it only after a due diligence process, for which it can appoint a merchant banker on behalf of the firm and the promoter. 
• Further, the company's board would have to certify that the company is in compliance with applicable securities law and that it would be in the interest of shareholders. 
• Companies having paid-up capital of not more than Rs 10 crore, and networth that does not exceed Rs 25 crore as on the last day of the previous financial year are exempted from following the Reverse Book Building process. 
• The exemption would be available only if there is no trading in the shares of the company in the last one year from the date of the board's resolution authorising the company to go in for delisting, and trading of shares of the company has not been suspended for any non-compliance during the same period.

Department couldn't allege suppression against assessee while issuing subsequent notices on same issues

Commissioner of Central Excise & Customs v. Rivaa Textiles Inds. Ltd.(2015) 54 taxmann.com 239 (Gujarat High Court)

Where all relevant facts were in knowledge of authorities when first show-cause notice was issued, while issuing second and third show-cause notices on similar facts, department couldn't allege suppression of facts by assessee. 

• Department carried out inspection on 16-9-1996 and issued notices on 14-3-1997 and 20-4-1998 alleging clandestine removal of goods.
• Later, department issued third notice dated 27-3-2001 invoking extended period alleging suppression of facts. 
• Assessee challenged third notice as time-barred, as all facts were within knowledge of department since 16-9-1996. 
• Department argued that if any suppression of material facts of fraud was detected, then extended period of limitation of five years was available to the department,therefore, the entire proceedings were legal and within the time-limit prescribed by the Act as the third notice was issued within 5 years from 16-9-1996.

High Court held in favour of assessee as under:

• Show-cause notices were issued with regard to part of transactions for different periods, but on basis of same inspection made on 16-9-1996. Once earlier show-cause notices were issued with regard to same inspection, then department could not claim having discovered suppression, fraud, etc., subsequently, as everything was within its knowledge since 16-9-1996. Hence, extended period of five years was not available to department.
• The High Court took note of the judgment of Supreme Court in Nizam Sugar Factory v. Collector of Central Excise 2006 (197) ELT 465 in which it was held that where all relevant facts were not in the knowledge of the authorities when the first show-cause notice was issued, while issuing second and third show-cause notices to the assessee on similar facts,it could not be taken as suppression of facts on the part of the assessee as the facts were already within the knowledge of the authorities.

Unabsorbed research expenditure claimed as revenue expense can't be carried forward if hit by section 79

DEPUTY CIT V. TEJAS NETWORKS LTD. (2015) 55 taxmann.com 55 (Bangalore - Tribunal)


If assessee did not capitalize scientific research expenditure and claimed it as revenue expenditure, any unabsorbed portion of such research exp. would be in nature of business loss and not in nature of unabsorbed depreciation - Therefore, it would be subject to restriction imposed under Section 79 in case of closely held company

Issue for consideration:

• In view of Section 79 of the Act, where a change in shareholding (i.e., 51%) has taken place in a previous year in the case of a company (being closely held company), no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year.
• In the instant case, an issue arose whether unabsorbed scientific research expenditure would also be subject to same treatment as that of carry forward of losses in Section 79 
• Assessee's contention was that the unabsorbed scientific research expenditure had to be treated at par with unabsorbed depreciation based on the principles laid down in the case of Mahyco Vegetable Seeds Ltd. [2010] 123 ITD 40 ( Mum.)

Tribunal held as under:

• In the case of Mahyco Vegetable Seeds Ltd(Supra), the expenditure in question was unabsorbed capital expenditure incurred on scientific research claimed as deduction under section 35. Therefore, the unabsorbed capital expenditure on scientific research had the same effect as unabsorbed depreciation;
• Therefore, for applying the above cited decision, it was necessary that the scientific research expenditure should have been capitalized before claiming deduction under section 35; 
• If assessee treated scientific research expenditure as revenue expenditure and claimed deduction thereof, it would give rise to business losses and couldn't be deemed as similar to unabsorbed depreciation. 
• Therefore, in such case there would be a business loss and the provisions of section 79 would be applicable.

Assessee not entitled to interest on refund of excess self-assessment tax paid by it

CIT vs Engineers India Ltd. (2015) 55 taxmann.com 1 (Delhi High Court)
Refund of excess self-assessment paid by assessee was not eligible for interest as the provisions of Section 244A would not apply thereto.

The issue that arose for consideration of the High Court is as under:

"Whether the Tribunal was right in holding that the assessee would be entitled to interest under Section 244A in respect of excess self-assessment tax paid by it?"

The High Court held in favour of revenue as under:

• Clause (a) of Section 244A(1) provides that where refund of any amount becomes due to the assessee, he shall be entitled to receive simple interest thereon where the refund is out of any tax paid under section 115WJ or collected at source under section 206C or paid by way of advance tax or treated as paid under section 199.
• The provisions contained in Sections115WJ or 199 or 206C or Section 207 have no connection with the liability to pay self-assessment tax. Therefore, clause (a) of sub-section (1) of Section 244A would not apply to refund arising out of excess self-assessment tax paid by assessee. 
• Clause (b) of Section 244A(1) was also not applicable in the instant case asit provides that the amount paid by the assessee (from which refund was to be made) must have been deposited pursuant to demand notice issued by the assessing authority. 
• There cannot be a general rule that whenever a refund of income tax is to be paid, the Revenue must necessarily pay interest on the refunded amount. 
• If the excess amount was paid due to erroneous assessment by the Revenue, the reimbursement would be accompanied by payment of interest at the statutorily prescribed rate.Conversely, if the assessee was to be blamed for the miscalculation, the Revenue does not owe any interest even if the excess payment of tax was liable to be refunded. 
• There being no allegation that such excess deposit was pursuant to demand by the Revenue, the claim for interest on excess payment voluntarily made could not be sustained.Therefore, theorder of ITAT directing the AO to pay interest to the assessee on the refunded amount was to be set aside. 

Tribunal couldn't restore appeal when assessee didn't pray for extension of pre-deposit time before High Court and Supreme Court

Kisaan Gramodyog Sansthan v. Commissioner of Central Excise, Kanpur (2015) 54 taxmann.com 155 (Allahabad High Court)


Where High Court/Supreme Court has confirmed pre-deposit order of Tribunal and there was no prayer before High Court/Supreme Court seeking extension of time to make pre-deposit, Tribunal cannot restore appeal even after belated compliance with pre-deposit order.

• On assessee's stay application, Tribunal directed pre-deposit in part.
• Assessee filed appeal thereagainst before High Court, which was dismissed and a special leave petition before Supreme Court, which was also dismissed. 
• After the dismissal of SLP, assessee made pre-deposit and applied for restoration of appeal before Tribunal. 
• Tribunal held that since its order had merged with order of High Court/Supreme Court, it did not have power to restore appeal. 
• Assessee challenged Tribunal's decision before High Court.

High Court held in favour of revenue as under:

• Once a substantive appeal has been filed before the High Court against an order of the Tribunal on the application for waiver of pre-deposit, the order of the Tribunal, in such a case, would merge with the order of the High Court.
• No prayer was made before the High Court which dismissed the appeal for extension of time for pre-deposit or for restoration of the appeal. No such prayer was also made before the Supreme Court when the special leave petition was dismissed. In that view of the matter, the Tribunal was not in error in dismissing the miscellaneous application.

No section 115E benefit on short-term capital gain from sale of foreign exchange asset as it isn't an investment income

CIT V. SHAM L. CHELLARAM (2015) 54 taxmann.com 348 (Bombay High Court)

Issue:

Whether short-term capital gain arising on sale of shares of an Indian company purchased in foreign currency would be deemed as investment income so as to entitle for concessional rate of tax of 20% under Section 115E?

The High Court held in favour of revenue as under:

• Section 115E which is part of Chapter XII-A of the Income-tax Act grants benefit of concessional rate of tax to the extent the income of the Non-resident Indian consists of 'Investment Income' or 'Income by way of long term capital gains' arising out of specified asset, inter-alia, shares of an Indian Company purchased in convertible foreign exchange.
• Section 115E of the Act specifically indicates income by way of long term capital gains to be entitled to the benefit of Section 115E of the Act as it is not considered to be an income derived from an investment. 
• So, Chapter XIIA of the Act itself makes a distinction between income derived from an asset and an income arising on sale of assets, leading to long term capital gains. The latter is a case of income being attributable to sale of assets. 
• Therefore, income arising on sale of assets leading to short term capital gains could not be considered as income derived from foreign exchange asset so as to qualify as investment income within the meaning of section 115E of the Act.

Note:
The short-term capital gain derived from sale of listed shares chargeable to STT is taxable at 15%. Thus, the issue of availability of concessional tax rate would not arise in the instant case if the sale of such shares were chargeable to STT.

High Court denies section 54F/54B relief to mother for buying properties in name of her married daughters

GANTAVIJAYA LAKSHMI V. ITO (2015) 54 taxmann.com 301 (Andhra Pradesh High Court)

In the instant case assessee had made investment in purchase of an agricultural land and residential flat in name of her two married daughters. While computing long-term capital gain she claimed exemption in respect of such properties under sections 54B and 54F.

The AO and as well as Tribunal denied the deduction under Sections 54F and 54B. The learned Counsel submits that his client was entitled to benefit of sections 54B and 54F as the intention of the legislature was to extend the benefit to the members of the family which includes married daughters. The aggrieved assessee filed the instant appeal.

The High Court denies to grant benefit of Sections 54F and 54B to assessee on purchase of properties in name of her married daughters as it did not find any infirmity in the order of Tribunal.
 

Bajaj Auto Ltd. v. Union of India (2015) 54 taxmann.com 202 (Uttarakhand High Court)

An area-based exemption from basic excise duty or special excise duty leviable under Central Excise Tariff Act, 1985 does not extend to education cesses and National Calamity Contingent Duty leviable under various Finance Acts.

• Assessee, a unit in specified area at Uttarakhand, was eligible for area-based exemption. However, department argued that in absence of reference to National Calamity Contingent Duty (NCCD) and Education Cesses (EC/SHEC) in exemption Notification No. 50/2003-CE, said duty was payable by assessee.
• Assessee argued that said duty should be treated as exempted in view of Industrial Policy envisaging 100 per cent outright exemption from excise duty.

The High Court held in favour of revenue as under: 

• Main submission of learned Senior Advocate for the petitioner is on the concept of liberal interpretation. It is vehemently contended by him that implementing notification has to be interpreted liberally and general principle of strict interpretation of an exemption notification in taxation, is not applicable.
• In addition, he submitted that in interpretation of an implementing notification, the industrial policy would prevail. This submission of learned Senior Advocate for the petitioner is not acceptable to this Court, as exemption from paying NCCD cannot be read into the notification no. 50 of 2003 by simply applying the principles of liberal interpretation. Notification is to be read in plain and simple manner. 
• Therefore, exemption granted by a notification must be read limited to duty of excise as mentioned in notification, and by simple interpretation, it cannot be extended to cover any other kind of excise duty. 
• Moreover, assessee : (a) was getting and availing benefit of exemption notification, (b) was not aggrieved by any condition contained in notification (c) had not challenged notification, hence, present writ petition was dismissed. Thus, assessee was liable to pay NCCD, EC and SHEC as demanded.

Recommendation

An opinion given by an analyst to his/her clients about whether a given stock is worth buying or not. Investment firms employ thousands of analysts whose job is to issue reports and recommendations on specific stocks. These analysts typically look at the company's fundamentals and then build financial models in order to project future trends, most notably future earnings. They then use these projections as a basis for issuing recommendations on whether or not they think the stock should be bought or sold. Each brokerage has its own terminology, which makes it difficult to compare recommendations between brokerages, but the most common ratings are (in descending order of quality) strong buy, buy, hold, and sell.

Transactions between head office and foreign branch aren't international transactions under Transfer Pricing provisions

Aithent Technologies (P.) Ltd. V. ITO - (2015) 54 taxmann.com 261 (Delhi - Tribunal)


Transactions between head office and its foreign branch could not be deemed as international transactions under Section 92B since branch office was not a separate entity distinct from assessee-company.

Facts:

• Assessee, an Indian company, had entered into international transactions with its branch office located in Canada.
• In computation of the arm's length price, the assessee inadvertently considered transactions with its branch in Canada as international transactions. The TPO selected some comparable cases and determined their average operating profit rate. 
• Assessee raised objection before Tribunal that transactions with branch office were not in the nature of transactions with AEs and, hence, same should have been excluded.

Tribunal held in favour of assessee as under:

• Section 92B(1) provides that an "international transaction" means a transaction between two or more associated enterprises….". A bare perusal of the definition of 'international transaction' brings to light that for treating any transaction as an international transaction, it is essential that there should be two or more separate AEs.
• By considering the definition of 'International transaction' provided under section 92B along with the meaning of the AE given in section 92A, it would clearly emerge that there have to be two or more separate entities in order to describe a transaction as an 'international transaction'. 
• When the assessee was only one entity dealings with the head office and its branch office, such inter se dealings ceased to be commercial transactions in the primary sense, as the pre-requisite condition for an 'international transaction' is that transaction has to be between two or more associated enterprises. 
• Since the branch office in Canada was not a separate entity, distinct from the assessee, the transactions between the head office and its branch could not be considered as an international transaction under Section 92B.

Internal Rate of Return (IRR)

The rate of return that would make the present value of future cash flows plus the final market value of an investment or business opportunity equal the current market price of the investment or opportunity.

Sum paid to Non-Resident professional for preparation of scheme for raising finance and tie up for loans was Fee for Technical Service 'FTS'

GVK Industries Ltd. v. ITO - (2015) 54 taxmann.com 347 (Supreme Court)

Facts:

• The assessee-company intended to set up a gas based power project to generate and sell electricity. It entered into an agreement with Swiss company to utilize the expert services of qualified and experienced professionals who could prepare a scheme for raising the required finance and tie up the required loan.
• Pursuant to the aforesaid exercises carried out by the Swiss company, the assessee was successful in availing loan/financial assistance from India and outside India. In this backdrop, "success fee" was paid to the Swiss company. 
• Assessee approached AO for issuance of 'NOC' to remit the said sum with the contention that since Swiss company had rendered no technical services, thus, Section 9(1)(vii) was not attracted. 
• The non-success in revision petition compelled the assessee to approach the High Court. The High Court held that success fee" would come within the scope of technical service under Section 9(1)(vii)(b). The aggrieved assessee filed the instant appeal.

The Supreme Court held in favour of revenue as under:

• Swiss company was very actively associated not only in arranging loan but also in providing various services which fall within the ambit of both managerial as well as consultancy services. Swiss company acted as a consultant and it had the skill, acumen and knowledge in the specialized field, i.e., preparation of a scheme for required finances and to tie-up required loans.
• Nature of service rendered by the Swiss company would come within the ambit and sweep of the term 'consultancy service' and, therefore, tax at source should have been deducted as the amount paid as "Success Fess" would be taxable as 'fee for technical service'. 
• Once the tax was payable/paid, the grant of 'NOC' was not legally permissible.The order passed by the High Court was absolutely impregnable.

Risk

The quantifiable likelihood of loss or less-than-expected returns. 

Examples: currency risk, inflation risk, principal risk, country risk, economic risk, mortgage risk, liquidity risk, market risk, opportunity risk, income risk, interest rate risk, prepayment risk, credit risk, unsystematic risk, call risk, business risk, counterparty risk, purchasing-power risk, event risk.

Even statutory reserve created by NBFC was to be added back for computing book profits for MAT purposes

SREI Infrastructure Finance Ltd. v. ACIT - [2015] 54 taxmann.com 254 (Delhi High Court)

For the purpose of section 115JB, reserve required to be created by NBFC under the RBI Act is to be treated in a similar manner as other reserves. Such reserve is out of the profits earned by a NBFC and it is not an amount diverted at source by overriding title. Thus, statutory reserve created by NBFC is to be added back to book profits computed under Section 115JB.

Facts:

• Assessee was a NBFC engaged, interalia, in the business of leasing of commercial vehicles and financing of infrastructure project equipment's. It had created a special reserve under the RBI Act. The AO added back the amount of said reserve to Book profit computed under section 115JB.
• The CIT(A) and the Tribunal affirmed the finding of AO. The contention of the assessee was two-fold. Firstly, the reserve created as per the mandate of Section 45-IC of the RBI Act was, in fact, a liability and not a reserve. Secondly, it did not have any title over the reserve and, therefore, it was a case of diversion of income at source. 
• The aggrieved-assessee filed the instant appeal before the High Court.

The High Court held in favour of revenue as under:

• Explanation 1 to Section 115JB provides that "book profit" shall be increased by the amounts carried to any reserves, by whatever name called [other than a reserve specified under section 33AC]. The word "any" refers to all kinds of reserves and encompasses all types and categories without any exception. Only reserves specified in section 33AC of the Act have to be excluded from computing book profit.
• The reserve which is required to be created under the RBI Act, is out of the profits earned by a non-banking financial institution. It is not an amount diverted at source by overriding title. 
• Such reserve of not less than 20% of net profit can only be computed after net profit is calculated and computed. Reserve so created is not a liability known or ascertained, even estimated. Hence, it can neither be diversion of income at source nor an expenditure or liability.
• Section 45-IC ensures that a NBFC does not appropriate entire net profit as disclosed in the Profit and Loss account but this percentage is either ploughed back into business or is represented by a portion of the asset. 
• It is an added measure of protection created by the statute to prevent defaults by the NBFCs. Section 45-IC of the RBI Act also permits appropriation but in restricted or controlled manner by a NBFC. 
• Hence, statutory reserves required to be created by NBFC under section 45-IC of the RBI Act was to be added back for computing book profits under section 115JB.6)

Fee charged for late filing of TDS return isn't a tax; High Court upholds constitutional validity of section 234E

Rashmikant Kundalia v. Union of India (2015) 54 taxmann.com 200 (Bombay High Court)

The fee sought to be levied under section 234E is not a tax that is sought to be levied on the deductor. The provisions of section 234E is not onerous on the ground that the section does not empower the AO to condone the delay in late filing of the TDS return, or that no appeal is provided for from an arbitrary order passed under section 234E

Facts :

• Petitioner, a practicing Chartered Accountant, challenged the constitutional validity of section 234E. Section 234E seeks to levy a fee of Rs.200/- per day (subject to certain other conditions) inter-alia on a person who deducts Tax at Source and then fails to deliver or cause to be delivered the TDS return to the authorities within the prescribed period.
• He argued that legislature had categorically termed the levy under section 234E of the Act as a "fee", it necessarily could be levied only in the event the Government was providing any service. In the absence thereof, the said section seeks to collect tax in the guise of a fee. This, according to the learned counsel, was impermissible either in common law or under the taxing statute, and encroached on the rights of life and liberty of the citizens. 
• He further submitted that the provisions of section 234E were extremely onerous as the AO was not vested with any power to condone the delay in filing the TDS return and there was also no provision of appeal against order of AO.

The High Court upheld the constitutional validity of Section 234E and made following observations:

• There is an obligation on the Income Tax Department to process the income tax returns within the specified period. Department cannot accurately process the return until information of TDS is furnished by the deductor within the prescribed time.
• If the income tax returns having refund claims were not processed in a timely manner, it would result in delay in issuing refunds or raising of infructuous demands. Late payment of refund also affects the government financially as the Government has to pay interest for delay in granting the refunds. 
• The Legislature took note of the fact that a substantial number of deductors were not furnishing their TDS returns within the prescribed time frame which was absolutely essential. This led to an additional work burden upon the Department due to the fault of the deductor by not furnishing the TDS returns in time. It was in this backdrop, and to compensate for the additional work burdened upon the Department, that a fee was sought to be levied under section 234E. Thus, section 234E is not punitive in nature but a fee which is a fixed charge for the extra service which the Department has to provide due to the late filing of the TDS statements. 
• A right of appeal is not a matter of right but is a creature of the statute, and if the Legislature deems it fit not to provide a remedy of appeal, so be it. Even in such a scenario it was not as if the aggrieved party was left remediless. Such aggrieved person could always approach this Court in its extra ordinary equitable jurisdiction under Article 226 / 227 of the Constitution of India, as the case may be. Therefore, we do not agree with the argument of the Petitioners that simply because no remedy of appeal was provided for, the provisions of section 234E were onerous.

Cap Rate

The discount rate used to determine the present value of a stream of future earnings. Typically this will be an appropriate risk-free return plus a premium to reflect the risk of that specific investment.

Receipts from capacity 'sale' of telecom cable link with transfer of ownership isn't taxable as 'royalty': ITAT

Flag Telecom Group Ltd. v. DCIT - (2015) 54 taxmann.com 154 (Mumbai - Tribunal)
 
What is envisaged in section 9(1)(vi) read with Explanation thereto, is consideration for use or rights to use of any equipment. If consideration was received by foreign company for sale of capacity involving transfer of ownership of cable system to Indian Company as distinguished from a mere payment for simply user of capacity, the consideration would not be taxable as royalty.

Facts :

• The assessee-company was incorporated in Bermuda, from where it was managed and controlled. Since, India does not have any tax treaty with Bermuda, therefore, the Income Tax Act was applicable.
• It was set up to build fibre optic cable system to increase the telecommunication traffic between and among Western Europe, Middle East, South Asia, South East Asia and Far East. 
• Assessee had entered into Memorandum of understanding (MOU) with 13 parties for the purpose of planning and implementation of the said Fibre optic Cable System. Videsh Sanchar Nigam Limited ('VSNL') was one of the original landing party to the MOU. For the purpose of selling the capacity in the cable system, Cable Sales Agreement (CSA) was entered into amongst the parties. 
• The assessee had sold the capacity to VSNL for USD 28,940,000. The CSA provided for the ownership rights in the Cable System with all the rights and obligations in the capacity cable.

The issue that arose for consideration of Tribunal was:

Whether the amount of US $ 28,940,000 was taxable in the hands of assessee as royalty income-tax Act?

The Tribunal held in favour of assessee as under:

• The entire agreement was for the period of 25 years which coincided with the life of the cable. In the agreement there were clear cut clauses for the ownership.
• One of the clauses of agreement clearly envisaged that the net proceeds on disposition of the cable system would be shared amongst the signatories in proportion to their ownership rights. 
• Not only that, there was right to assign the capacity, which was borne out from the fact that purchaser of the capacity could sell or grant right to use the capacity in the cable system to some other party. 
• All this clearly indicated that the signatory would become the owner of the capacity in the cable system after the purchase, that is, the VSNL in the instant case. 
• This fact further establishes that there was no payment for simply user of the capacity. In case of a 'royalty', agreement, the complete ownership is never transferred to the other party. What is envisaged in section 9(1)(vi) read with Explanation thereto, is that there should be transfer of rights of any kind of the property as defined therein; or imparting of any information in respect of various kinds of property; or use of rights to use of any equipments, etc. 
• If the consideration was received for transferring the ownership with all rights and obligations then such a consideration could not be taxed as 'royalty'.

Collateral

Assets pledged by a borrower to secure a loan or other credit, and subject to seizure in the event of default, also called security.

CIT can't consider violation of provisions of section 13 while granting registration to a trust

Kul Foundation v. CIT (2015) 54 taxmann.com 143 (Pune - Tribunal)

Provisions of section 13 couldn't be applied to deny registration to a trust or an Institution under section 12A - It shall be applied to decide deduction to be allowable to a trust or an Institution while completing assessment proceedings.

Facts :

• In the instant case, one of the objects of the trust was limited to the benefit of Jain community;
• The CIT contended that trust had violated provisions of section 13(1)(b) since benefits of sections 11 and 12 could not be extended to the charitable trust or institution which was established for the benefit of any specific religious community. Hence, he denied registration to trust under section 12A.

Issue:
The issue that arose for consideration before the Tribunal was:
"Whether the CIT has erred in denying the trust registration under Section 12A holding that the object clause of the Trust Deed is specifically for the benefit of the Jain Community which is a specific religious community and hence attracts the provisions of sec.13(1)(b)?"

The Tribunal Held in favour of assessee as under:

• In order to avail of the deduction under sections 11 and 12 of the Act, the trust or institution has to make an application for registration under section 12AA of the Act;
• The CIT after satisfying himself about the objects of the trust or Institution and about the genuineness of its activities, had to pass an order in writing granting or refusing the registration; 
• The Assessing Officer had to consider non-fulfillment of the conditions laid down in section 13(1)(b) during assessment procedure while allowing deduction under sections 11 and 12 to the trust or Institution; 
• Therefore, the CIT was not authorized to consider violation by the trust or Institution on account of provisions of section 13(1)(b) while granting it registration under section 12A.

Recognition of revenue by developer only on registration of sale deeds wasn't a valid method under section 145

ACIT. v. Alcon Developers (2015) 54 taxmann.com 54 (Panaji - Tribunal)

Section 145 makes it mandatory on the part of the assessee to follow either cash or mercantile system of accounting. Recognizing the revenue by developer (i.e., assessee) only when the sale deeds would be registered in favour of the buyers could not be regarded to be either cash or mercantile system of accounting. This method was neither project completion method nor percentage of completion method, thus, this was not a recognized method to recognize revenue under AS-7 too.

Facts :

• Assessee was engaged in the business of real estate activities, such as construction of residential-cum-commercial project, developing of plots, etc. It had completed development work of plots on 31.3.2009, but it did not show the sale proceeds in the profit and loss account even after receiving 70-80% of the sale proceeds.
• The Assessing Officer ('AO') was of the view that development had already been completed, therefore, he re-computed the profit relating to these projects. 
• Assessee contended that he was following project completion method as per AS-7 and it was showing the sales when the registration of the sale deed would be carried out. 
• On appeal, the CIT(A) deleted the additions on the ground that the AO had changed the profit recognition method from project completion to percentage completion. The aggrieved revenue filed the instant appeal before Tribunal.

The Tribunal held in favour of revenue as under:

• The CIT(A) had agreed with assessee's contention that he was following the project completion method but assessee was not recognizing the revenue on the basis of the project completion method.
• Registration of the sale deed represents only the transfer of the title in favour of the buyer once development work on the plots had been completed. 
• Assessee was recognizing the revenue only when the sale deeds would be registered in favour of the buyers. Under AS-7 this was not a recognized method of recognizing the revenue. This method of revenue recognition followed by assessee was neither project completion method nor percentage of completion method.
• Section 145 makes it mandatory on the part of the Assessee to follow either cash or mercantile system of accounting regularly. This method of recognizing the revenue when the sale deeds would be registered in favour of the buyers could not be regarded as either cash or mercantile system of accounting.
• Thus, the method adopted by the assessee was not in compliance with the ingredients as laid down under Section 145. Consequently, the order of AO was to be restored.

Condemnation

The legal seizure of property by a government authority for public use, through the powers of eminent domain, in exchange for fair market value.

Disallowance under section 40(a)(i) should be limited to sum chargeable to tax and not total remittance: CBDT

Section 40(a)(i) stipulates that any interest, royalty , fees for technical services or other sum chargeable to tax, payable either in India to a non-resident/foreign company or payable outside India, shall not be allowed as a deduction if there has been a failure in deduction or in payment of tax deducted in respect of such amounts. Doubts have been raised about interpretation of the term 'other sums chargeable', i.e., whether this term refers to the whole sum being remitted or only the proportion representing the sum chargeable to income-tax. The CBDT has clarified that for the purpose of making disallowance of 'other sum chargeable' under section 40(a)(i), the appropriate portion of the sum which is chargeable to tax shall form the basis of such disallowance. P.S. :The CBDT has clarified that disallowance is not to be made on basis of whole sum remitted to non-resident/foreign company without deduction of tax as section 40(a)(i) contemplates disallowance of only that portion of sum which is chargeable to tax and on which TDS default is made by payer.

Credit Union

A non-profit financial institution that is owned and operated entirely by its members. Credit unions provide financial services for their members, including savings and lending. Large organizations and companies may organize credit unions for their members and employees, respectively. To join a credit union, a person must ordinarily belong to a participating organization, such as a college alumni association or labor union. When a person deposits money in a credit union, he/she becomes a member of the union because the deposit is considered partial ownership in the credit union.

No denial of section 35 deduction without seeking opinion of prescribed authority about nature of research activity

CIT V. MASTEK LTD. (2015) 53 taxmann.com 388 (Gujarat High Court)

Where assessee raised claim for deduction under section 35(1), Assessing Officer (AO) could not decide the issue but had to place the issue before the Board who, in terms of section 35(3), would refer the question to the prescribed authority to seek opinion on nature of research activity undertaken by assessee.

The issue that arose before the High Court was as under:

Whether AO could disallow deduction under section 35(1) without placing the matter before the CBDT to make a reference to the prescribed authority if he was not sure about nature of research activity undertaken by assessee?

The High Court held in favour of assesse as under:

• Section 35(3) requires a reference to be made by the Board to the prescribed authority when a question arises as to whether and if so to what extent, any activity constitutes or constituted or any asset is or was being used for scientific research. The decision of the prescribed authority on such a question would be final.
• Therefore, whenever any such question arises, the Assessing Officer cannot decide the issue but must place the issue before the Board who, in terms of section 35(3) of the Act, would refer the question to the prescribed authority.
• However, no such reference is required in cases where the assessee lodges a claim without any supporting material or claim of the assesse is accepted by AO.

ITAT denies to make TP adjustment for location saving relying on BEPS Action plan

Watson Pharma (P.) Ltd. v. Deputy Commissioner of Income-tax-8 (3), Mumbai - (2015) 54 taxmann.com 88 (Mumbai - Tribunal)

Facts:

• The assessee was engaged in providing contract manufacturing and contract research and development services to its AE(s). In consideration of the said services, the AE(s) compensate the assessee on a total operating cost plus arm's-length mark-up basis.
• During the course of proceeding, TPO/DRP accepted the TNM method and also the comparables selected by assessee for benchmarking contract manufacturing services provided by the assessee to its AEs.
• However, the TPO/DRP contended that the assessee ought to have received extra compensation on account of location savings over and above the margins earned by the comparables. Thus, TPO suggest adjustment on account of location savings.
• On appeal, the DRP sustained the approach of TPO.

The ITAT held in favour of assessee as under:

• The comparables selected by the assessee to determine arm's length price of transaction were local Indian comparables operating in similar economic circumstances as the assessee. Further, OECD and G20 in 'Action 8: Guidance on Transfer Pricing Aspects of Intangibles' which is part of Base Erosion and Profit Shifting Project, has provided guidance on issue of location savings and concluded that where local market comparables are available specific adjustment for location saving is not required.
• The concept of Transfer Pricing is based on the principle that instead of entering into a transaction with related party, if the assessee had entered into a similar transaction with unrelated party, what would have been the prices of said transaction between the assessee and unrelated party. The comparison is always in the context of the effect of the related party transaction and unrelated party transaction in the hands of the assessee. Therefore, the financial results of the AE were not relevant for the purpose of determination of arm's length price in relation to the international transaction entered into by the assessee.
• Thus, once the TNMM method was accepted as method of considering assessee as a tested party then any benefit/advantage accruing to AE would be irrelevant if the PLI was within the range of comparables
• The TPO had based his computation on a method, which was not ascribed by the provisions of the Act. The AO erred in making the adjustment on account of location savings. Therefore, the order of the DRP was to be set aside and the AO was to be directed to delete the addition.

TPO can't decide about deductibility of an expense as his jurisdiction is limited to determination of ALP

ITW India Ltd. v. ACIT (2015) 53 taxmann.com 531 (Delhi - Tribunal)

Facts:

• The international transaction which was disputed in the instant case was commission payment by the assessee to its AEs.
• The TPO held that ALP of this transaction was Nil because the assessee failed to provide any evidence of an independent transaction between unrelated parties and further the assessee could not explain with any documentary evidence about the functions performed by the AE necessitating the payment of such commission.
• The assessee remained unsuccessful before the DRP and the Assessing Officer, accordingly, made addition of entire commission paid by the assessee to its AEs. The aggrieved-assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

• The Delhi High Court in the case CIT v. Cushman and Wakefield India Pvt. Ltd. (2014) 46 taxmann.com 317 (Delhi), held that the authority of the TPO was limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO.
• Applying the ratio decidendi of Cushman and Wakefield India Pvt. Ltd. (supra) to the facts of the instant case, it was to be held that the TPO was required to simply determine the ALP of this transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount under Section 37(1).
• Therefore, case was remanded to AO with an instruction to decide the deductibility of the commission paid to foreign AE.