Wednesday, May 29, 2013

Section 13 can’t be invoked to deny exemption if siphoning off of funds by trustee can’t be proved

In absence of material on record showing that difference in cost of construction of building disclosed by assessee-society and estimation made by DVO resulted in siphoning off of money by managing trustee, AO was not justified in denying exemption of income to assessee by invoking provisions of section 13(1)(c)

In the instant case, the assessee-society was running an educational institution. During the assessment proceedings, the AO took a view that there was huge difference in the amount claimed to have been spent by the assessee on construction of building and estimation made by the DVO and it could be concluded that the money was being siphoned out of the society to benefit the managing trustee. The AO held that there was clear violation of section 13(1)(c)(ii) and assessee was not entitled to exemption under sections 11 and 12. The CIT (A) confirmed the order of AO. Aggrieved assessee filed instant appeal.

The Tribunal held in favour of assessee as under:

1) If the person in the prohibited category renders services and in lieu thereof a benefit is provided then the case doesn’t fall in clause (ii) of section 13(1)(c);

2) A benefit would be said to have been given to the persons of prohibited category, if they in return do nothing but only enjoy the fruits of the trust/society and take away the funds/income of the society for their personal benefit or for discharging personal obligations. There was no such situation in the case under consideration;

3) Section 13 carves out an exception to the general exemption granted under sections 11 and 12. The onus lies on the revenue to bring on record cogent material/evidence to establish that the trust/charitable institution is hit by provisions of Section 13;

4) The AO had made out the case on presumption, as he had neither brought on record any evidence nor was able to point out modus operandi, and how was the managing trustee directly or indirectly benefited out of the construction cost of building of the society;

5) Thus, it was held that the AO had erroneously invoked section 13 and withdrawn benefit of section 11, read with section 12. Consequently, the appeal filed by the assessee was allowed - Amol Chand Varshney Sewa Sansthan v. ACIT [2013] 33 366 (Agra - Trib.)

Expenditure disallowed for default in withholding tax would qualify for sec. 80-IB deductions

Disallowance for non-deduction of TDS liability would increase profit of assessee from business of developing housing projects and ultimate profit would qualify for deduction under section 80-IB

In the instant case, interalia, the issue that arose before the Gujarat HC was as under:

Whether disallowance under section 40(a)(ia) would  qualify for deduction under section 80IB(10) of the Act?

The High Court held as under:

Even if a expenditure incurred by the assessee for the purpose of developing housing project was not allowable by virtue of section 40(a)(ia) of the Act, since the assessee had not deducted the tax at source as required under law, it couldn’t be denied that such disallowance would ultimately go to increase the assessee's profit from the business of developing housing project. So, whatever be the ultimate profit of assessee even after making disallowance under section 40(a)(ia) of the Act, would qualify for deduction as provided for under the law. As no question of law arose, tax appeal was dismissed – ITO v. Keval Construction [2013] 33 277 (Gujarat)

Method of discounted cash flow can be used for share valuation if other methods of sec. 92C are not applicable

Where assessee-company sold its stake in an Indian company to its foreign associate company, discounted cash flow method could be used for valuation of shares sold, due to non-applicability of other methods prescribed under section 92C(1)

In the instant case, the assessee-company owning 84.97% of shareholding of AITPCL India, entered into a contract with its AE for sale of its stake in AITPCL. The TPO valued the shares using discounted cash flow method and made Transfer Pricing adjustment. The objections filed by the assessee were rejected by the Dispute Resolution Panel. Aggrieved assessee filed instant appeal.

The Tribunal held as under:

1) As per Section 92C, ALP in relation to an international transaction has to be determined by one of the six methods mentioned therein;

2) Re-sale price Method couldn’t be applied in the instant case because the shares sold by the assessee were, in turn, not sold to anybody else. Cost Plus Method couldn’t be applied since assessee had made no value addition to any item. Original cost per share was only its face value, and the cost incurred which resulted in increase of its intrinsic value couldn’t be correctly ascertained. Neither Profit Split Method nor TNM Method could be used. Further, similar companies doing similar share transactions were hard to find;

3) Purpose of transfer pricing rules is to verify whether the prices at which an international transactions have been carried out is comparable with the market value of the underlying asset or commodity or service. This might require some subtle adjustments in the methodology prescribed for evaluation of an international transaction;

4) A water-tight attitude of interpretation of the prescribed methods will defeat the very purpose of enactment of transfer pricing rules and regulations and also detrimentally affect the effective and fair administration of an international tax regime;

5) Interpretation of the word 'shall' need not always be mandatory and could also be read as 'may', is a rule laid down by the Gujarat High Court in the case of CIT v.Gujarat Oil & Allied Industries [1993] 201 ITR 325;

6) Hence, while finding the most appropriate method, it is not that modern valuation methods fitting the type of underlying service or commodities have to be ignored. Fixing enterprise value based on discounted value of future profits or cash flow is a method used worldwide.

Endeavour was only at arriving at a value which would give a comparable uncontrolled price for the shares sold. If viewed from this angle, it couldn’t be said that the discounted cash flow method adopted by the TPO was not in accordance with section 92C(1) - Ascendas (India) (P. )Ltd. v. Dy.CIT [2013] 33 295 (Chennai - Trib.)