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.