Transaction at uniform global price can’t be assumed to be at ALP unless comparability analysis is done

Purchase transactions could not be held to be at arm’s length where no comparability analysis was done, simply because AE supplied products globally at listed price.

The assessee, a wholly owned subsidiary of 'K', Netherlands, had international transactions with its Associated Enterprises (‘AEs’). In its TP report, assessee applied RPM. However, it did not provide the working or basis of its benchmarking of arm’s length price and claimed the transactions to be at ALP. TPO rejected assessee’s claim and made upward adjustment. The CIT(A) confirmed the order of TPO.

ITAT remanded the matter with following observations:

1) The fact that the AE supplied the products at listed price worldwide could not justify the assessee’s stand because no analysis had been done on the supplies made by the AE to the other countries;

2) If any comparability analysis would have been carried out in case of other parties to whom the AE had supplied the same material, then such a plea of the assessee could have been accepted;

3) The foundation of the TP mechanism is to determine the most appropriate ALP by following any of the prescribed method. The initial burden is on the assessee to demonstrate as to which appropriate method should be followed for carrying out comparability analysis of controlled transactions with the uncontrolled transactions for benchmarking its transaction and justifying that it is at ALP;

4) Therefore, the entire issue needed to be restored back to the file of the TPO for de novo adjudication after taking into consideration what should be the most appropriate method (that is, whether RPM or CUP method), and the onus would be on the assessee to demonstrate as to why CUP method had to be followed and what would be the comparables based on which comparability analysis could be done - Kodak Polychrome Graphics (I) (P.) Ltd. v. ACIT [2013] 36 taxmann.com 42 (Mumbai - Trib.)

No registration for a trust seeking employment for students in lieu of subscription fees

Activities of assessee-trust, of charging fees for providing employment opportunities to students of a college, were not charitable in nature
In the instant case the assessee-trust filed the application seeking registration under section 12A. The CIT rejected its application for grant of registration under section 12A on ground that trust was created to provide opportunities for students of a college (Delhi School of Economics) to seek employment; it was charging fees for the same and it was also charging subscription fees from companies who were providing employment to the enrolled students. Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of revenue as under:

1) The activities of trust were focused on education of the college students. After completion of their courses, the trust provides opportunity to these students to interact with corporate and non-corporate houses approaching the college;

2) The public at large was neither eligible to become a member of the trust nor was provided any benefit by the trust, as all its activities were for the enrolled members;

3) Moreover, its activities couldn’t be in any manner be classified as being charitable in nature. Apart from administrative heads of expenditure, no other expenses were shown to have been incurred on any charitable activity;

4) As per the documents submitted by the assessee it couldn’t be held that the assessee's activities were charitable in nature. Therefore, the order of CIT was to be upheld - DSE-Economics Placement Cell v. DIT (Exemptions) [2013] 35 taxmann.com 459 (Delhi - Trib.)

Sum incurred to defend directors arrested for narcotics offence was not an allowable business exp.

Expenditure incurred on professional fees to defend directors of assessee-company who were arrested for narcotics offence couldn’t be allowed being squarely covered within the meaning of Explanation to section 37(1)

In the instant case the assessee was engaged in the business of import of timber and heavy metal scrap. On a specific information, a container destined to be delivered to the assessee was intercepted in mid sea by the officers of Norcotics Control Bureau (NCB). Thereafter, the directors of the assessee-company were arrested by NCB. The assessee claimed the deduction of legal expenses incurred to defend the directors of the company in that case. During assessment, the AO disallowed the deduction towards such expenditure on the ground that it was incurred for the purpose of an offence prohibited by law. The CIT (A) upheld the order of the AO. Aggrieved assessee filed the instant appeal.

The Tribunal held as under:

1) A bare perusal of the Explanation to section 37(1) (‘the Explanation’) indicates that incurring of any expenditure for a purpose which is an offence or prohibited by law cannot be allowed as deduction. As no final order on conviction or acquittal of directors was passed till relevant time, it showed that the charge was still continuing, which was otherwise an offence under the Narcotics Drugs and Psychotropic Substances Act, 1985;

2) There could be no reason to allow deduction towards such an expenditure which had been incurred for the purpose of an offence prohibited by law and which was squarely covered within the meaning of the Explanation;

3) The next ground of the assessee, about there being no nexus between the legal fees paid and breach of law, was not sustainable. Mandate of the Explanation is crystal clear that any expenditure incurred for any purpose which is an offence or which is prohibited by law cannot be allowed as deduction;

4) It does not make any difference whether expenditure was direct or indirect. So long as nexus of the expenditure with the offence was established, it would continue to be hit by the Explanation to section 37(1). Thus, there was no infirmity in the impugned order passed by CIT(A) - OPM International (P.) Ltd. v. Dy.CIT [2013] 35 taxmann.com 480 (Mumbai - Trib.)

A registered society is a ‘person’ defined under section 2(31); capable to exercise all rights of a natural person

Primary co-operative credit society which is registered under Co-operative Societies Act, must be treated as juristic person capable of exercising all rights of a natural person

In the instant case the appellants were Primary Co-operative Credit Societies registered under the Kerala Co-operative Societies Act. Notices were issued to the appellants under section 142 for submitting returns. The appellants challenged said notices contending that they were not persons as contemplated under section 142(1). The Single Judge took the view that a combined reading of section 142(1) and section 2(31) would show that co-operative societies like the appellants were also 'persons' as defined in the Act and it could not be held that the notices issued were without jurisdiction.

The High Court held as under:

A perusal of the definition of the word 'person' showed that it included within its sweep all juridical persons. Appellants were cooperative societies. Indisputably they were registered under the Co-operative Societies Act. On a reading of section 9 of the Kerala Co-operative Societies Act it showed that the appellants were co-operative societies which had been registered and which were to be treated as body Corporates vide section 9 of the Kerala Co-operative Societies Act. Under section 2(31) a person comprehends juristic entity. Having regard to the fact that appellants were registered under the Co-operative Societies Act, the appellants had to be treated as body corporate and, therefore, juristic persons capable of exercising all the rights of natural persons as provided in the Act - Mangalam Service Co-operative Bank Ltd. V. ITO [2013] 35 taxmann.com 381 (Kerala)

Assessee can’t claim status of a ‘trust’ if its parental body doesn’t surrender its status of mutual club

Where assessee-trust was an extension of mutual club, status of mutuality having transgressed to assessee, it could not be held to be a Charitable Institution and, accordingly, it could not be granted approval under sub-section (5) of section 80G

In the instant case the assessee was registered under section 12AA as a charitable trust. It was also granted recognition under section 80G for a period. The Director of Income-tax (Exemption) refused to give it approval under section 80G for further period on the ground that the assessee had not carried out any charitable activities for previous three financial years.

The Tribunal held as under:

1) The trust was an extension of the Mutual Club of Masons. The status of mutuality reflected on the assessee trust also. Therefore, it couldn’t claim the status of a charitable institution;

2) As the mother body (i.e., Club of Masons) was not surrendering its status of mutuality, it was not possible to treat the assessee-trust as an independent charitable institution. If it was so treated, one would be encouraging violation of law by permitting the mother body to go beyond the perimeter of mutuality through the medium of a trust;

3) Therefore, even though the assessee was registered under the law relating to trust, yet it couldn’t be construed as a charitable institution for the purpose of the Income-tax Act. Consequently, the application put up by the assessee under section 80G couldn’t be entertained - Lodge of Universal Charity 273 EC Charitable Trust v. DIT (Exemptions) [2013] 35 taxmann.com 429 (Chennai - Trib.)

Section 54F exemption to be allowed on investment even if transaction hasn’t been completed within stipulated time

Assessee would be entitled to benefit under section 54F if he had invested amount of capital gain in purchasing or constructing a residential house, even though transaction was not completed within stipulated period

In the instant case the assessee had sold certain property and claimed exemption from capital gains under section 54F by stating that he had invested the amount in purchase of land and construction of house property. During the assessment, the AO noted that the period of 3 years from the date of sale of that property had expired and that the assessee had neither purchased any residential house nor had completed construction of any residential house as stipulated in section 54F, therefore, assessee was not eligible for deduction under section 54F. The CIT (A) confirmed the action of the AO. Aggrieved assessee filed the instant appeal.

The Tribunal held as under:

1) Provisions contained in section 54F being a beneficial provisions, have to be construed liberally. In various judicial precedents it has been held that the condition precedent for claiming benefit under section 54F is only that the capital gain realized from the sale of capital asset should be invested by assessee either in purchasing or constructing a residential house within the stipulated period;

2) If the assessee had invested the money in construction of residential house, merely because the construction was not complete in all respects and the house was not in a fit condition to be occupied within the period stipulated, that would not disentitle the assessee from claiming the benefit under section 54F;

3) Once the assessee demonstrated that the consideration received on transfer had been invested, even though the transaction was not complete in all respects, he would be entitled to avail of benefit under section 54F;

4) Even though investment made in purchasing a plot of land for the purpose of construction of a residential house had been held to be an investment satisfying the conditions of section 54F, yet the assessee was required to prove the actual date of investment and the amount invested towards purchase or construction of the residential house with supporting evidence;

5) The order of CIT (A) was to be set aside and matter was to be restored to the file of the AO. Thus, ground raised by the assessee was to be allowed - NARASIMHA RAJU RUDRA RAJU V. ACIT 35 taxmann.com 90 (Hyderabad - Trib.)

Service tax refund can't be denied without specifying documents required from assessee

Department cannot deny refund of service tax alleging non-supply of 'requisite documents'; it must specify, in writing, list of documents required, in addition to documents already submitted by assessee

In the instant case the assessee was a service provider to its associates which were located outside India. The assessee wrongly raised invoices on its associates for commission which had to be received from the associates and paid service tax thereon. Later on, on finding that invoice was not to be issued, it issued credit note and filed a claim for refund along with copy of service tax returns, invoices, credit notes, correspondence and challan and a certificate from chartered accountant. Despite all that the refund claim was rejected on the premise that the assessee had not provided the required documents in support of claim of its refund.

The Tribunal remanded the matter with the following observation:

The adjudicating authority must have specified, in writing, list of documents required, apart from documents already submitted by the assessee. Matter was to be remanded back for supply and verification of additional documents required by the adjudicating authority - CMA CGM Global (India) (P.) Ltd. v. Commissioner of Service Tax [2013] 35 taxmann.com 318 (Mumbai - CESTAT)

Failed candidates could endanger lives of PSC interviewer; their personal details out of ambit of RTI Act

Disclosure of names and addresses of members of Interview Board of PSC would ex facie endanger their lives; such disclosure would serve no fruitful public purpose

In the instant case the Bihar Public Service Commission (‘the Commission’) published advertisement to fill up post of 'State Examiner of Questioned Documents in police Laboratory’. The advertisement stated that written examination would be conducted if adequate number of applications were received. Since limited applications were received, selection was done on basis of viva voce test. The respondent filed an application before the Commission seeking information regarding interview conducted for aforesaid post. The Commission furnished all information. However, particulars of members of interview Board were not furnished.  Aggrieved assessee filed the writ in HC which was also dismissed. Assessee challenged the judgment of the learned Single Judge before the Division Bench of that Court which held in favour of assessee.

On appeal, the Supreme Court held as under:

1) The disclosure of names and addresses of the members of the Interview Board would ex facie endanger their lives or physical safety. The possibility of a failed candidate attempting to take revenge from such persons couldn’t be ruled out. Disclosure was likely to expose the members of the interview Board to harm and it would serve no public purpose;

2) Furthermore, the view of the High Court in the judgment under appeal that element of bias could be traced and would be crystallized only if the names and addresses of the interviewers were furnished, was without any substance;

3) The element of bias could hardly be correlated with the disclosure of the names and addresses of the interviewers. The transparency that was expected to be maintained in such process would not take within its ambit the disclosure of the information called for regarding the names and particulars of examiners;

4) Transparency in such cases was relatable to the process where selection was based on collective wisdom and collective marking. Marks were required to be disclosed but disclosure of individual names would hardly be relevant either to the concept of transparency or for proper exercise of the right to information. The judgment of HC was to be set aside and the Commission was not bound to disclose the information asked for by the applicant - Bihar Public Service Commission v. Saiyed Hussain Abbas Rizwi [2013] 35 taxmann.com 333 (SC)

ESOPs from foreign employer are taxable in India if these relate to services rendered by employee in India

In case of an assessee, being an employee of a foreign company, only such proportion of ESOP is taxable which relates to service rendered by such assessee in India

In the instant case the assessee, an employee of foreign company, had exercised ESOPs while on his assignment in India. He, therefore, offered to tax the amount of proportionate ESOP earned in India, i.e., proportionate to the number of days of his assignment in India. However, the AO while framing the assessment brought to tax the entire amount of perquisite on account of stock options. On appeal, the CIT (A) allowed assessee's appeal. Aggrieved revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) The principle laid down by the Delhi 'I' Bench in the case of Asstt. CIT v. Ellin 'D' Rozario [IT Appeal No. 2918 (Delhi) of 2005, dated 5-12-2008] was that only proportionate salary would be taxable in India, if a part of activity done by the assessee had no relation to any India-specific job or activity;

2) In the instant case, it was not in dispute that the assessee was in India only for a short period and prior to it, he had not done any service connected with any activity in India;

3) As the assessee had not rendered service in India for the whole grant period, applying the proposition laid down (supra), only such proportion of the ESOP would be taxable in India as related to the service rendered by the assessee in India. - ACIT v. Robert Arthur Keltz [2013] 35 taxmann.com 424 (Delhi - Trib.)

Income of Indian branch computed on basis of commercial activities rendered by it to its foreign HO

For determining the total income of an Indian branch receipt arising on account of commercial services rendered by it to American head office to be considered

The Tribunal held as under:

1) Article 7(3) of the India-US DTAA is in two parts. The first part of the Article relates to the activity carried on by the branch office which is commercial in nature whereas the second part relates to the activities which are not commercial in nature and relates to specific services performed by the branch office;

2) The assessee contented that it was rendering services covered by second part and, hence, the income arising on account of such specific services couldn’t be considered for determining its total income;

3) The services performed by the branch office was on account of outsourcing of commercial activities by its head office and, therefore, income arising out of such services rendered would be taxable under article 7(3) of India-USA DTAA, whereas if some non-commercial activities were specifically assigned by the head office to its branch office, then income arising out of such activity would not be taxable;

4) The branch office was involved in the customer care and medical transcription services. Thus, it was very clear that the branch office was also rendering services of commercial nature which had been outsourced by the head office;

5) After going through the order of the CIT (A), it was quite obvious that the assessee was only carrying out the normal commercial activities of the head office, in USA, i.e., a part of medical transcription work and software development. The assessee hadn’t established the fact that the activities carried on by it were non-commercial and in the nature of specific services as per the instruction of the head office. There was no infirmity in the order of the CIT (A) in holding that the income earned by the assessee from the activities carried on by it was taxable in India - Wellinx Inc. v. ADIT (International taxation) [2013] 35 taxmann.com 420 (Hyderabad - Trib.)