ITAT lays down litmus test to determine ‘closely linked’ transactions for TP purposes and for their clubbing

When the transactions are influenced by each other, particularly in determining the price/profit involved in the transactions then those transactions would be regarded as ‘closely linked’ transactions. Transactions of hiring of equipment to be used for execution of a project to be clubbed only to the extent of number of transactions with each AE.

Facts:

a)The assessee, a Dutch based firm, entered into dredging contract with Indian Oil Corporation. It had international transactions with its AEs (in respect of hiring of vessels/equipments on leasing basis) for purposes of execution of contract.

b)The assessee had clubbed various leasing transactions with AEs for purpose of determining the ALP. The TPO rejected the claim of assessee on the ground that all transactions were not closely linked or continuous, therefore, ALP needed to be determined on transaction-by-transaction basis.

c)Thus, the issue arose for consideration of Tribunal was: “Whether the CIT(A) had erred in adopting a vessel-by-vessel approach in determining the lease rentals of vessels paid to Associated Enterprises (‘AEs’) without following ‘class of transactions’ approach (i.e., clubbing) in respect of closely linked transactions?”

The Tribunal held as under:

1)If a number of transactions are closely linked and are arising from continuous transactions of supply of amenity or services,they can be deemed as closely linked transactions for the purpose of Transfer Pricing in terms of Rule 10A(d);

2)Aggregation/clubbing of the closely linked transaction are permitted under the Income-tax Rules and Transfer Pricing guidelines of OECD also support this approach;

3)In order to examine whether the number of transactions are closely linked or continuous so as to aggregate then for the purpose of evaluation it is to be considered that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and is dependent wholly or substantially on the earlier transaction;

4)Therefore, when the transactions are influenced by each other, particularly in determining the price and profit involved in the transactions then those transactions can safely be regarded as closely linked transactions;

5)In the instant case, the assessee had taken a number of dredging equipments from more than one AE. In the business decisions when number of transactions were entered into between two parties then it was very important to consider a portfolio approach rather than the individual transaction approach for determination of price of the transactions between the parties.

6)Therefore, the hiring of various equipments to be used for execution of a project could be aggregated for the purpose of determination of ALP only to the extent of number of transactions with each AE;

7)The transactions carried out with different AEs could not be clubbed or aggregated, because they could not be termed as closely linked so as to influence the price in aggregate or the profit of the parties arising from transactions;

8)Thus, the AO/TPO was to be directed to determine the ALP by aggregating the various transactions between the assessee and each AE separately and not by clubbing the transactions with all AEs - BOSKALIS INTERNATIONAL DREDGING INTERNATIONAL CV V. DY. DIT, INTERNATIONAL TAXATION [2014] 47 taxmann.com 150 (Mumbai - Trib.)

Transfer of division in exchange of shares only couldn’t be held as slump sale; rules HC

Facts

a)The assessee had transferred its lift division to T Ltd and the said transfer took place under the Scheme of Arrangement under section 391, read with section 394 of the Companies Act, 1956.

b)The disbursement on transfer of division was made by way of allotment or issue of bonds/preference shares. The Assessing Officer (‘AO’) opined that the transfer of division was a slump sale under section 2(24C) and was taxable in terms of section 50B. c)The order of AO was affirmed by CIT(A). However, it was rejected by the Tribunal. The aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Section 2(42C) of the Income-tax Act defines slump sale as under: ‘Slump sale' means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

2)Thus, from the bare reading of the definition of slump sale, it is clear that sale must be affected for a lump sum consideration to hold it as slump sale.

3)The Tribunal had rightly held that it was not a case where the consideration was determined and decided by parties in terms of money, rather its disbursement was made by way of allotment of bonds/preference shares. Thus, it was a case of exchange and not a sale. Accordingly, the impugned transaction was not a slump sale and the additions made by the Assessing Officer was not sustainable -CIT VS. BHARAT BIJLEE LTD. [2014] 46 taxmann.com 257 (Bombay)

NBFC couldn't take shelter of prudential norms to treat overdue interest as NPA if it didn't try to recover it

Overdue interest could not be treated as NPA by taking shelter of prudential norms of RBI prohibiting recognition of interest on loans, which remained overdue for more than six months if assessee had not taken any steps to recover it.

Facts

a)The assessee, a company registered as NBFC, advanced term loans to two companies. In return of income, the assessee didn’t show interest income on the ground that prudential norms of RBI prohibited recognition of interest on loans which remained overdue for more than six months.

b)The Assessing Officer (‘AO’) opined that assessee was bound to show the interest accrued on the loans as its income as it was following mercantile system of accounting. Further, he held that interest accrued on loans was chargeable to tax and consequently, made additions.

c)On appeal, the CIT(A) deleted the additions made by AO. The aggrieved revenue filed the instant appeal. The Tribunal held in favour of revenue as under:

1)Rule 3 of prudential norms states that income including interest/discount shall be recognized only when it is actually realised if a loan is considered as NPA. It further prescribes that a loan can be treated as NPA when it remained overdue for a period of six months or more. However, in the instant case, the assessee had been unable to produce any document to show that it had made any demand for return of the loan.

2)As per section 5 of the income-tax Act, total income shall include all income from whatsoever source derived by such person, which accrues or arise to him in a given in previous year.

3)In case of Southern Technologies Ltd. v. Jt. CIT [2010] 187 Taxman 346 (SC) it was held by the Supreme Court that prudential norms issued by the Reserve Bank of India could not override the provisions of the Act. Thus, by virtue of the application of the accrual principle, interest income had definitely accrued to the assessee.

4)The concerned companies (i.e. borrowers) were charging interest in their respective accounts, deducting tax at source and also remitting such tax to the Government account. Hence, there was nothing on record to show that there was no possibility of realising the interest.

5)Hence, one could not presume that interest income was illusory. Therefore, the CIT (A) had erred in deleting the addition made by the AO – ITO V. TRADELINK SECURITIES LTD [2014] 46 taxmann.com 190 (Kolkata - Trib.)

‘Ready to print books’ exported in form of CD or email deemed as customized electronic data; eligible for sec. 10B relief

'Ready to print books' exported by assessee in form of a CD or e-mail were customized electronic data eligible for claiming benefit of deduction under section 10B.

Facts:

a)The assessee was engaged in business of export of software of 'ready to print books'. It had claimed exemption under section 10B on account of export of ready to print books in form of a CD or e-mail.

b)The AO disallowed the said claim and made addition to the income of the assessee. The CIT(A) confirmed the disallowance made by AO.

c)Aggrieved by the CIT(A)’ s order, assessee filed the instant appeal before Tribunal.

The Tribunal held in favour of assessee as under:

1)Section 10B applies to an undertaking which manufactures or produces any articles or things or computer software. Clause (i) of Explanation 2 to section 10B defines ‘computer software as under- "computer software" means—

(a)any computer programme recorded on any disc, tape, perforated media or other information storage device; or

(b)any customized electronic data or any product or service of similar nature as may be notified by the Board,

which is transmitted or exported from India to any place outside India by any means.

2)Thus, the intention of the Legislature is very clear that it provides deduction under section 10B not only to enterprises engaged in manufacture or production of any article or thing but even to those assessees whose end product is any customized electronic data.

3)In the instant case, the assessee after collecting raw data and pictures had utilized its expert designing skills in producing 'a ready to print e-book'. The final product was intended for use of a particular customer and, therefore, the case under consideration would fit in the category of production of 'any customized electronic data' as per the definition of 'computer software' defined in the Explanation 2 to section 10B.

4)Thus, the AO was to be directed to allow deduction under section 10B in accordance with law.- KIRAN KAPOOR V. ITO [2014] 46 taxmann.com 147 (Delhi - Trib.)

Verdict in Satyam's case: SEBI bars 'Ramalinga Raju' from accessing securities market for 14 long years

Facts:

a)Mr. B Ramalinga Raju, ex-Chairman, Satyam Computer Services Limited, individually as well as acting in concert with others falsified books of account and misstated financials of Satyam Computers and, thus, portrayed a false picture of its published quarterly/annual results;

b)False CEO/CFO certifications were provided, and various announcements were made and advertisements/press releases were issued on basis of falsified and misstated financial position of company and indulged in insider trading on basis of unpublished price sensitive information (UPSI).

The SEBI held as under:

1)Given the vital function of protecting investors and safeguarding the integrity of the securities market vested in SEBI and the commensurate powers given to it under the securities laws, it was necessary for SEBI to exercise these powers firmly and effectively to insulate the market and its investors against the fraudulent actions of the participants in the securities market.

2)One of the basic premises that underlines the integrity of securities market is that the participants conform to standards of transparency, good governance and ethical behaviour prescribed in securities laws and do not resort to manipulative, deceptive and fraudulent activities.

3)In this case, the acts, omissions and conduct of the noticees, as brought out in the SCNs had been in violation of this basic premise. The financial frauds as found in this case were inimical to the interests of the investors in securities and endangered the market integrity. This was a case where befitting enforcement action was necessary to send a stern message to the market to create an effective deterrence.

4)The Acts and omissions of ex-Chairman/Managing Director/CFO, etc., were, clearly a device employed by noticees to defraud in connection with dealing in securities of Satyam Computers and would fall within ambit of prohibited activities under section 12A(a)(b)(c) of The SEBI Act and regulations 3 and 4 of PFUTP Regulations;

5)In order to protect interest of investors and integrity of securities market, Ramalinga Raju alongwith others were restrained from accessing securities market and prohibited from dealing in securities, directly or indirectly, or being associated with securities market in any manner, whatsoever, for a period of 14 years – Satyam Computer Services Ltd. In re (2014) 47 taxmann.com 47 (SEBI)

Even joint ownership in second house at the time of sale of capital assets would lead to denial of sec. 54F benefits

Where assessee owns a residential house even jointly with another person, on date of sale of long-term capital asset, his claim for deduction under Section 54F would be rejected.

Facts:

a)During relevant assessment year, assessee had sold his undivided interest in land. He claimed deduction under 54F in respect of long-term capital gain arising from sale of land.

b)The revenue authorities rejected assessee's claim for deduction under sections 54F on the ground that assessee was having two residential houses having one half share each therein on date of sale of land.

c)The Tribunal, however, allowed assessee's claim under Section 54F on the ground that 'a residential house' means complete residential house and would not include shared interest in a residential house. The aggrieved revenue filed the instant appeal.

The High Court held in favour of revenue as under:

1)Section 54F provides that if the assessee has a residential house he cannot seek the benefit of long-term capital gains. Under this provision, merely because the words residential house were preceded by word 'a' would not exclude a house shared with any other person.

2)Even if assessee shared the residential house, his right and ownership in the house, to whatever extent, was exclusive and nobody could take away his right in the house without due process of law.

3)Even if right of assessee, was one half in the residential house, it could not be taken away without due process of law or it would continue till there was a partition of such residential house. 4)Thus, the view expressed by the Tribunal on this issue could not be accepted. Hence, the assessee was not eligible to claim Section 54F benefit.- CIT V. M.J. SIWANI [2014] 46 taxmann.com 170 (Karnataka)

No sec. 40A(2) disallowance if payment to director was authorized by CLB and taxed at maximum rate in his hands

Where payment made to director was authorised by CLB and said payment was taxed at maximum rate, no addition could be made under section 40A(2).

Facts:

a)The assessee had made payment to its director which was disallowed by AO by invoking section 40A(2). b)However, addition made by AO was deleted by CIT(A) and Tribunal. Thus, the aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Section 40A(2) permits the Assessing Officer to disallow certain expenses or payments, where he is of the opinion that such expenditure or payment is excessive or unreasonable; having regard to the fair market value of the goods, services or facilities for which the payment is made.

2)In the instant case, the members of the Company approved of the payment made to director in the annual general meeting and such payment was also approved by the Company Law Board. The salary was also taxed in the hands of director at maximum rate.

3)Nothing had been brought on record by the Revenue to controvert the findings of CIT(A) and, therefore, the impugned payment to director was to be allowed-[2014] 45 taxmann.com 478 (Gujarat)

Sums incurred on transfer of human skill and HR database from predecessor to successor co. are allowable expenses

Where in pursuance of an agreement, a part of business being handled by erstwhile TATA IBM was handed over to assessee-company, expenditure incurred by assessee for use of domestic customer database and transfer of human skills in terms of said agreement, was to be allowed as business expenditure.

Facts

a)A part of the business being handled by the erstwhile TATA IBM was handed over to the assessee-company in view of bifurcation of the software and hardware business.

b)For the transfer of domestic customer database and the man power, the assessee paid certain amount to TATA IBM which was claimed as business expenditure.

c)The AO taking a view that expenditure in question resulted in enduring benefit to assessee, disallowed assessee's claim. Further, the CIT(A) upheld the order of AO. The Tribunal, however, allowed assessee's claim. The aggrieved-revenue filed the instant appeal.

High Court held in favour of assessee as under:-

1)In the instant case, insofar as payment for getting domestic customer database was concerned it was clear that assessee had only got the right to use that database. The company which had provided such database was not precluded from using such database. Hence, the expenditure was incurred for the use of database and not for acquisitions of such database.

2)In respect of payment made towards transfer of human skill, it had been made towards the expenses incurred for training and on recruitment. Such expenses were under revenue field, and ,therefore, the payments had been made to save such revenue expenses as per the agreement.

3)TATA IBM had spent lot of money to impart training to those employees who were transferred to the assessee-company. They were trained in the field of software.

4)They had opted for employment with assessee-company and for their past services in TATA IBM, expenditure had been incurred. Hence, the expenditure incurred on transfer of human skill was also in nature of revenue expenditure. – CIT V. IBM GLOBAL SERVICES INDIA (P.) LTD [2014] 46 taxmann.com 55 (Karnataka)

SAT affirmed penalty as appellant failed to make public announcement of acquisition of equity in excess of 5%

Where appellants-promoters acquired shareholding of target company beyond 5 per cent limit prescribed under regulation 11 of Takeover Regulations but failed to make public announcement, appellants were liable to pay interest.

Facts:

a)Appellant-promoters had acquired shareholding of target company which exceeded shareholding limit of 5 per cent prescribed under regulation 11 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

b)After conducting enquiry, SEBI found the appellants guilty of having violated regulation 11(1) as appellants failed to make public announcement to shareholders of company.

c)SEBI directed appellants to make public announcement and to pay interest on offer price from date when appellants had acquired shares of target company. The aggrieved-appellant filed the instant appeal.

The Securities Appellate Tribunal held as under:

1)The acquisition of shares of the target company by each appellant was effected at the instance of appellant who was admittedly, the promoter and Managing Director of the target company. The appellants failed to make public announcement on acquiring shareholding beyond 5 per cent, and, thus, appellants were liable to pay interest.

2)In view of clear violation of the mandate of Takeover Regulations, there was no substance in the present case to take a lenient view in relation to making public announcement by altering the impugned order.

3)Thus, it was not found appropriate to interfere with the impugned order in exercise of powers conferred under section 15T(4) of the SEBI Act, 1992. - MS. SANGEETA SETHIA V. SEBI (2014) 46 taxmann.com 164 (SAT - Mumbai)

No concealment penalty if assessee opts to take route of presumptive taxation to escape sec. 40A(3) disallowance

Where at time of initiating penalty proceedings AO did not have any material on record showing that payments made by assessee were bogus, he could not have concluded that assessee had provided inaccurate particulars and levy penalty merely on basis of assessee's offer to be taxed on presumptive basis,

Facts

a)The assessee, a construction company, had issued large number of bearer cheques to small suppliers for delivering building material at construction site.

b)The AO disallowed said payments by invoking Section 40A(3). In response, assessee had shown its income on presumptive basis under Section 44AD to stay away from unnecessary litigation. The AO accepted the contention of assessee and completed the assessment by applying presumptive taxation.

c)After completing the assessment, the AO passed a penalty order under section 271(1)(C) and it was affirmed by the CIT (A). The Tribunal, however, set aside penalty order passed by CIT (A).The aggrieved-revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)Since at time of initiating penalty proceedings the AO did not have any material on record to show that payments made to suppliers were bogus, he could not have concluded that assessee had provided inaccurate particulars in its return merely on basis of assessee's offer to be taxed on estimate basis,

2)Moreover, the course of action suggested by the Assessing Officer was, in fact, accepted by the assessee as reasonable. Thus, the imposition of penalty was not justified. Therefore, there was no infirmity in the impugned order of the Tribunal. - Vatika Construction (P.) Ltd v. [2014] 45 taxmann.com 471 (Delhi)