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Issue 04 April , 2011
DIRECT TAXES …... 1-9

INDIRECT TAXES …….… 9

OTHER LAWS ………... 9 - 12

SN K
IMPORTANT DUE DATES… 12

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DIRECT TAXES
Judicial pronouncements

ACIT v. Harshad V. Doshi (ITA No.1367/MDS/2009) [2011]
Newsletter
9 taxmann.com 48

Amounts advanced by a company to its director under a
Board resolution, for specific purpose, would not fall under
mischief of section 2(22)(e).

ACIT v. U.P. Cricket Association (ITA NO.422(LUC.)/2009)
[2011] 9 taxmann.com 102

Transfer of funds by a charitable society to another charitable
institution is application of income as per section 11.

Yatish Trading Co Pvt Ltd vs. ACIT (ITAT Mumbai)(ITA
No. 456 /Mum/2009)
shares. The AO has not disputed the assessee’s claim
No s. 14A disallowance of interest on borrowed funds that the dividend had been received on shares pur-
used to buy shares for trading purposes chased for trading purposes. Interest on borrowed funds
The assessee, engaged in trading and investment of shares, used for trading activity is allowable u/s 36(1)(iii) and it
received tax-free dividend income of Rs. 2.98 crores in AY cannot be treated as expenditure for earning dividend
2004-05. The AO invoked s. 14A and disallowed the interest income which is incidental to the trading activity. If the
on borrowings, administrative and other expenses on propor- real purpose was to use borrowed funds for trading pur-
tionate basis. In appeal, the CIT (A) upheld the disallowance poses and incidentally there is tax-free dividend, it can-
but directed that it should be computed as per Rule 8D. On not be said that the interest has been incurred for earn-
appeal to the Tribunal, HELD: ing the dividend income (Wallfort Share & Stock Brokers
326 ITR 1 (SC), Godrej & Boyce 234 DTR 1 (Bom), Em-
(a) Rule 8D does not apply prior to AY 2008-09 (Godrej &
raid 284 ITR 586 (Bom), Leena Ramchandranan (Ker) &
Boyce 328 ITR 81 (Bom) followed);
Eicher 101 TTJ (Del) 369 followed);
(b) The expression “in relation to” in s. 14A means dominant
(d) Though, as held in Godrej & Boyce 234 DTR 1 (Bom), it
and immediate connection or nexus with the exempt in-
is implicit within s. 14A that expenditure incurred for an
come. In order to disallow expenditure u/s 14A, there
indivisible purpose has to be apportioned, this principle
must be a live nexus between the expenditure incurred
of apportionment is applicable only where it is not possi-
and the tax-free income. Disallowance cannot be made
ble to determine the actual expenditure incurred “in rela-
on presumptions and estimation by the AO. Notional ex-
tion to” tax-free income. When it is possible to determine
penditure can be apportioned for the purpose of earning
the actual expenditure “in relation to” the exempt income
income if there is no actual expenditure incurred “in rela-
or where no expenditure is incurred “in relation to” the
tion to” the tax-free income;
exempt income, the principle of apportionment embed-
(c) On facts, the business of the assessee predominantly ded in s 14A has no application;
was trading in shares though it also had investments in
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DIRECT TAXES
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(a) As regards the disallowance of lowances such as depreciation activities, advanced Rs. 27.97 lakhs for
administrative expenditure, the allowance. Accordingly, deprecia- development of a website. As the ad-
AO’s basis of disallowance based tion cannot be the subject matter vance was not recoverable, the as-
on the ratio of taxable income and of disallowance u/s 14A (ratio of sessee wrote off the amount and
dividend is wrong because the ex- Nectar Beverages 314 ITR 314 claimed it as a “bad debt” even though
penditure did not depend on the (SC) followed); the conditions of s. 36(1)(vii) & 36(2)
profit or loss arising from the busi- were not satisfied. The AO rejected the
(b) Similarly, the deduction u/s 80D is
ness activity. If the expenditure is claim though the CIT (A) allowed it. On
not expenditure for earning tax-
apportioned on the basis of in- appeal by the department to the Tribu-
free income but is a permissible
come, then in the case of no in- nal, HELD:
deduction from gross total income
come, no expenditure can be as-
under Chapter VIA. (i) Though the claim as a ‘bad debt’ is
signed. In case of transaction of
not allowable, the assessee is enti-
purchase and sale of shares, the CIT v. Sandan Vikas (India) Ltd. (ITA
tled under Rule 27 to support the
reasonable basis for apportion- No. 348 of 2011)(Delhi HC)
CIT (A)’s order on the ground that
ment of administrative expenditure
Benefit of weighted deduction on in- the amount should be allowed as a
should be the volume and nature
house Research and Development ‘business loss’. The subject-matter
of the transaction under different
expenditure is allowed from the year of an appeal should be understood
activities. There cannot be an
in which the taxpayer has filed an not in a narrow and unrealistic
equal basis for apportionment of
application and not when it is ap- manner but should be so compre-
admin expenses between delivery
proved by DSIR hended as to encompass the en-
based transactions and non-
tire controversy between the par-
delivery based transactions etc. The Court held that the taxpayer was
ties which is to be adjudicated
eligible to claim weighted deduction on
Hoshang D Nanavati vs. ACIT (ITAT upon by the Tribunal. Such a claim
in-house Research and Development
Mumbai)(ITA No. 3567/Mum/07) can be considered provided no
(R&D) expenditure from the year in
new facts are needed (Edward
S. 14A disallowance cannot be which the taxpayer made an applica-
Keventer 123 ITR 200 (Del) & Gil-
made for “depreciation” tion to the Department of Scientific and
bert & Barker 111 ITR 529 (Bom)
Industrial Research (DSIR). The High
The assessee, a partner in a firm of followed);
Court observed that the provisions of
solicitors, received Rs 14 lakhs to-
the Income-tax Act, 1961 (the Act) (ii) On merits, the department’s argu-
wards remuneration as a working part-
does not suggest or imply that the cut- ment that the amounts paid for
ner and Rs 46 lakhs towards share of
off date mentioned in the certificate development of websites cannot
profit in the partnership. The question
issued by the DSIR will be the cut-off be allowed as business loss be-
arose whether, given that the remu-
date for eligibility of weighted deduc- cause if the websites had been
neration was taxable as business prof-
tion on the expenditure incurred on in- successfully put up, the expendi-
its, disallowance u/s 14A could be
house R&D to avail benefit of Section ture would have been capital ex-
made in respect of (a) depreciation
35(2AB) of the Act. penditure is not acceptable. be-
and (b) deduction u/s 80D in respect of
cause (a) as the expenditure was
health insurance premium. HELD by DCIT vs. Edelweiss Capital Ltd
abortive, no capital asset has in
the Tribunal: (ITAT Mumbai)(ITA No. 3971/
fact been acquired and (b) even if
Mum/2009)
(a) S. 14A permits a disallowance of the website had materialized, it
“expenditure incurred by the as- If not “Bad Debt”, claim for does not result in an advantage of
sessee” and not of “allowance ad- “Business loss” maintainable. Web- an enduring nature or in the capital
missible” to him. There is a distinc- site development expense is not field as it is only for the day-to-day
tion between “expenditure” and capital expenditure running of the business and provi-
“allowance”. The expression sion of information.
The assessee, engaged in investment
“expenditure” does not include al-

2

DIRECT TAXES SNK

CIT vs. Niraj Amidhar Surti (Gujarat intention of the assessee had al- (i) Though the provisions of block
High Court)(Tax Appeal No. 836 of ways been that of making invest- assessment are special, the argu-
2009) ment in shares and not dealing in ment that they are a complete
shares. This is also apparent from Code and the other provisions
Merely because shares are pur-
the fact that the shares had not cannot apply is not acceptable. S.
chased by taking loan at high inter-
been treated as stock in trade by 40A(3) applies to block proceed-
est does not mean gains are taxable
the assessee. The fact that the ings. Suresh Gupta 297 ITR 322
as business profits
shares were in the physical pos- (SC) & M. G. Pictures 185 CTR
The assessee, a CA, offered income session of the lender was not rele- (Mad)185 followed; Cargo Clearing
from profession, LTCG, STCG & vant because the assessee was Agency 218 CTR (Guj) 541 not
speculation profits. He borrowed funds the owner thereof; followed;
@ 30% p.a. and bought a large num-
(ii) A capital investment and resale (ii) The argument that if income is as-
ber of shares of Home Trade Ltd at Rs.
does not lose its capital nature sessed by estimation on GP rate,
50. The shares were pledged as secu-
merely because the resale was no other disallowance can be
rity for the loan. After 14 months, the
foreseen and contemplated when made is not of universal applica-
assessee repaid the loan, obtained the
the investment was made and the tion. If expenditure which is legally
shares & sold them at Rs. 750 each for
possibility of enhanced values mo- not permissible has been taken
a profit of Rs. 1.73 crores which was
tivated the investment {Sutlej Cot- into account that can certainly be
offered as LTCG. The assessee in-
ton Mills Supply Agency Ltd 100 disallowed even where income is
vested in s. 54 EC bonds & claimed
ITR 706 (SC)} followed. estimated.
exemption. The AO held that as the
assessee had borrowed at an JSW Steel Ltd. v. ACIT (ITA No.922/
“exorbitant” rate of interest & taken BANG/2009) [2011] 9 taxmann.com
risk, the transaction was an “adventure 77 (bang. - ITAT)
in the nature of trade” and the profits
Conversion of interest liability into
assessable as business profits. This
share capital is not hit by Explana-
was reversed by the CIT (A) & Tribu-
tion 3C to section 43B.
nal. On appeal by the department,
HELD dismissing the appeal: The loan cannot be equated with Pref-
erence Share and consequently, it
(i) The AO held the transaction to be
CIT vs. M/s Sai Metal Works (P&H cannot be construed that Explanation
an “adventure in the nature of
High Court)(ITA No. 125 of 2004) 3C to section 43B covers not only
trade” and not normal investment
loans and advances but also prefer-
on the basis that (a) assessee had S. 40A(3) Disallowance can be made
ence shares.
borrowed funds at an exorbitant in Block Assessment even if GP es-
rate of 30% and (b) the shares timated Madhu Rani Mehra vs. CIT (Delhi
were held by the lender till the en- High Court)(ITR No. 541/1992)
Pursuant to a search, the AO passed a
tire loan was paid. However, this Capital asset treated as stock-in-
block assessment order u/s 158BC in
reasoning loses sight of the fact trade of proprietary business has to
which he made a disallowance u/s 40A
that merely because the shares be valued at market value
(3) in respect of cash payments ex-
had been purchased from bor-
ceeding Rs. 20,000. The CIT (A) & The assessee, a partner of a firm, re-
rowed funds obtained on high rate
Tribunal struck down the disallowance ceived stock-in-trade on dissolution of
of interest would not change the
on the ground that s. 40A(3) could not the firm. The stock was used by the
nature of the transaction from in-
be invoked in a case where a block assessee to start a proprietorship busi-
vestment to one in the nature of an
assessment was by estimate on the ness. In the assessment of the firm,
“adventure in the nature of trade”.
basis of GP rate. On appeal by the the Tribunal held, following ALA Firm
Moreover, as the shares were held
department, HELD reversing the Tribu- 189 ITR 285 (SC), that the option to
for a long-period of 14 months, the
nal:

3

DIRECT TAXES SNK

value stock at the lower of cost or mar- not determinable the “cost of acquisition” of the un-
ket was available only to a going con- dertaking be determined. In the
The assessee transferred its undertak-
cern and as the firm had dissolved, the absence of a cost/date of acquisi-
ing on a “going concern” basis pursu-
stock had to be valued at the market tion, the computation & charging
ant to a scheme of arrangement u/s
value. However, in the assessment of provisions of s. 45 fail and the
391 to 394 of the Companies Act. In
the assessee’s proprietorship busi- transaction cannot be assessed
consideration, the transferee allotted
ness, it was held that as the proprietor- (Premier Auto 264 ITR 193 (Bom)
preference shares & bonds to the as-
ship concern had acquired the stock distinguished).
sessee. The assessee claimed that the
from the dissolved firm and continued
transfer was not liable to tax on capital
the same business, the opening stock
gains on the basis that there was no
could not be valued at a price higher
“cost of acquisition” of the undertaking.
than the book value as the assessee
The AO held that the transaction was a
had not paid anything in excess of the
“slump sale” as defined in s. 2(42C)
said amount. On appeal to the High
and that the gains had to be computed
Court, HELD allowing the appeal:
u/s 50B. This was upheld by the CIT
When a partnership firm is dissolved (A). On appeal by the assessee to the
and the erstwhile partner receives Tribunal, HELD allowing the appeal: ACIT v. C. Rajini (ITA NO. 1239/
stock, it is a capital asset in his hands. MDS/2008) [2011] 9 taxmann.com
(i) In order to constitute a “slump
When that asset is introduced into a 115 (CHENNAI – ITAT)
sale” u/s 2(42C), the transfer must
business as stock, it gets converted
be as a result of a “sale” i.e. for a A developer and builder is not required
into stock-in-trade. The value of this
money consideration and not by to be owner of land on record for
stock will have to be the market value
way of an “Exchange”. The differ- claiming a deduction under section 80-
on the date of introduction. The Tribu-
ence between a sale and an ex- IB(10).
nal’s reasoning that the assessee can-
change is this that in the former
not value the stock introduced in the ITO v. Galaxy Saws Pvt. Ltd. (ITA
the price is paid in money, whilst in
business at market value because that No. 3747/M/2010)
the latter it is paid in goods by way
was not the price she paid for it is Revaluation reserve not routed
of barter. The presence of money
flawed because if the assessee on through Profit and Loss Account
consideration is an essential ele-
having received her distributed share could not be added to net profit
ment in a transaction of sale. If the
of stock of jewellery from the dissolved while computing the book profit for
consideration is not money but
firm had sold it, and thereafter com- the purpose of MAT
some other valuable consideration
menced her proprietorship business of
it may be an exchange or barter The Tribunal held that revaluation re-
jewellery again; within short span; by
but not a sale. On facts, as the serve not routed through Profit & Loss
buying the jewellery from the market
undertaking was transferred in Account but directly transferred to bal-
from the proceeds of stock sold on
consideration of shares & bonds, it ance sheet could not be added to net
dissolution of the erstwhile firms, the
was a case of “exchange” and not profit while computing the book profit
stock of the proprietorship concern
“sale” and so s. 2(42C) and s. 50B for the purpose of Minimum Alternate
would without doubt be valued at mar-
cannot apply; Tax (MAT). Further, the Tribunal reiter-
ket value. The same principle would
(ii) As regards taxability u/s 45 & 48, ated that principle that once the ac-
apply if the assessee used her share
the “capital asset” which was counts have been prepared as per the
of the stock obtained from the dis-
transferred was the “entire under- provisions Schedule VI of the Compa-
solved firm in the new business.
taking” and not individual assets nies Act and adopted at the Annual
Bharat Bijilee Limited vs. ACIT (ITAT General Meeting (AGM) of the com-
and liabilities forming part of the
Mumbai)(ITA No. 6410/MUM/2008) pany, the net profit disclosed in such
undertaking. There was no basis
Despite s. 50B, transfer of undertak- for apportioning the consideration accounts cannot be tinkered with by
ing for non-money consideration amongst the various assets com- the Assessing Officer (AO) while com-
not taxable if “cost of acquisition” prised in the undertaking nor could puting the book profit.

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DIRECT TAXES
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Honeywell Automation India Ltd vs. views on the likely decision of the decision of the Tribunal was chal-
DCIT (ITAT Pune)(Stay Application Tribunal on the issues raised in the lenged by the department in the
No. 08/PN/2011) appeal; (iv) departmental urgen- Bombay High Court by specifically
cies in matters of collection and raising a question as to the appli-
Direct Stay Application to Tribunal
recovery; (v) guarantees provided cability of the Third Proviso to s.
maintainable. Not necessary that
by the assessee to safe guard the 254(2A) as amended w.e.f
lower authorities must be ap-
interest of the revenue etc. 1.10.2008. The High Court, vide
proached first
Tata Communications Ltd vs. ACIT order dated 22.10.2010, dismissed
The assessee filed a stay application
(ITAT Mumbai – Special Bench)(S.A. the department’s appeal. As such,
before the AO, Addl CIT & CIT but
Nos.196 to 198/Mum/2009) the Tribunal’s order holding that
none of the authorities dealt with it.
there was power to extend stay
The assessee also filed a stay applica- Despite Third Proviso to s. 254(2A),
even after 365 days stood af-
tion before the Tribunal which was op- Tribunal has power to extend stay
firmed;
posed by the Department on the beyond 365 days if delay not attrib-
utable to assessee (ii) The department’s argument that
ground that the application was not
the High Court’s order in Ronak
maintainable without there first being a The Third Proviso to s. 254(2A), as
Industries should be treated as per
rejection by the lower authorities. amended w.e.f. 1.10.2008, provides
incuriam on the ground that the
HELD dismissing the department’s ob- that if the appeal filed by the assessee
amendment made by the FA 2008
jection: is not disposed off within the period of
was not considered by it is not ac-
(i) It is settled law that a Direct Stay stay granted by the Tribunal (which
ceptable because (a) In Narang
Application filed before the Tribu- cannot exceed 365 days), the order of
Overseas (rendered prior to the
nal is maintainable and it is not the stay shall stand vacated even if the
amendment) a wider view was
requirement of the law that as- delay in disposing of the appeal is not
taken as regards the power to
sessee should necessarily ap- attributable to the assessee. The as-
grant stay, (b) In the appeal filed
proach the CIT before approaching sessee filed a stay application request-
by the department in Ronak Indus-
the Tribunal for grant of stay. It ing stay of demand for penalty of Rs.
tries a specific question with regard
does not make any difference 369 crores. On the expiry of 365 days
to the effect of the Third Proviso
whether the assessee filed any of stay, the assessee asked for exten-
was raised and so it cannot be said
application before the Revenue sion of stay relying on the Tribunal’s
that the High Court had not taken
and not awaited their decisions order in Ronak Industries where, stay
cognizance of the amendment, (c)
before filing application before the had been granted beyond 365 days
the Tribunal cannot ignore a High
Tribunal or directly approached the relying on the judgement of the Bom-
Court’s decision on the ground that
Tribunal without even filing the ap- bay High Court in Narang Overseas
a provision of law was not consid-
plications before the Revenue au- 295 ITR 22 (Bom). As it was felt by the
ered by the High Court and (d) the
thorities, when there exists threat Tribunal that the reliance in Ronak In-
fact that there is no discussion in
of coercive action by the AO; dustries on Narang Overseas was mis-
the High Court’s order in Ronak
placed in view of the amendment to the
(ii) In deciding a stay application, the Industries does not mean that does
Third proviso to s. 254(2A) w.e.f.
following aspects have to be con- not lay down any ratio decidendi;
1.10.2008, the question whether the
sidered: (i) liquidity of the funds of
Tribunal had jurisdiction to extend stay (iii) However, the recovery of the ar-
the assessee to clear the tax ar-
beyond 365 days referred to the Spe- rears by the AO on the expiry of
rears out of own funds at the rele-
cial Bench. HELD by the Special 365 days of stay cannot be or-
vant point of time based on the
Bench: dered to be refunded because on
assessee’s financial status at the
the date of recovery the stay had
time of the stay petition hearing; (ii) (i) In Ronak Industries, the Tribunal
expired and the application for ex-
creditworthiness of the assessee to held, relying on Narang Industries,
tension was pending before the
outsource the funds to clear the that the Tribunal has the power to
Special Bench. The AO’s act was
departmental dues; (iii) prima facie extend stay beyond 365 days. This
bona fide and as the recovery was

5

DIRECT TAXES
Judicial pronouncements (International Taxation)
SNK
by adjustment of refunds, it was not a livery based transactions, is deemed to Tribunal, HELD:
“coercive measure” (RPG Enterprises be speculation profits and so the as- (i) The First proviso to s.92C(2) (pre
251 ITR (AT) 20 (Mum) & other cases sessee is entitled to set off the share amendment by F (No 2) Act 2009
holding that the AO must refund taxes trading losses from the share trading w.e.f. 1.10.09) which provides that
collected during the pendency of a profits (Lokmat Newspapers 322 ITR “where more than one price is de-
stay application distinguished). 43 (Bom) followed). termined by the most appropriate
Synergy Entrepreneur Solutions Pvt CIT v. Subhash Kumar Jain (ITA No. method, the arms length price
Ltd vs. DCIT (ITAT Mumbai)(ITA No. 225 of 2003) [2011] 9 taxmann.com shall be taken to be the arithmeti-
3076/Mum/10) 112 (PUNJ. & HAR.) cal mean of such prices or at the
Penalty for concealment of income - option of the assessee, a price
S. 263 Revision order is Invalid, if
Section 271(1)(c) r.w.s. 263 which may vary from the arithmeti-
for reason not stated in show-cause
cal mean of an amount not ex-
notice Once assessee’s offer to surrender
ceeding five per cent of such arith-
The assessee, engaged in share trad- certain income subject to no penal ac-
metical mean” is clear that the as-
ing, claimed set-off of trading losses tion under section 271(1)(c) was ac-
sessee has an option when there
against trading profits which was ac- cepted by department and assessment
is arithmetical mean involved while
cepted by the AO u/s 143(3). The CIT was made accordingly, no penalty pro-
computing the ‘arm’s length price’
issued a show-cause notice u/s 263 in ceedings under section 271(1)(c) could
and it happens only if more than
which he claimed that the share trad- be initiated against assessee thereaf-
one price is determined by the
ing losses were “speculation losses” u/ ter.
most appropriate method. The
s 73 and could not be set off against First Proviso becomes operational
other income. Upon the assessee where more than one comparable
clarifying that under the Explanation to price is determined. The assessee
s. 73 the trading losses were eligible to at his option can make claim of
be set-off against the trading profits, deduction out of the arithmetic
the CIT, without rejecting the claim, mean not exceeding 5%.
passed an order u/s 263 on the ground
(ii) All the judicial pronouncements
that the AO had not examined the is-
(SAP Labs 6 ITR (Trib) 81 (Bang),
sue. On appeal to the Tribunal, HELD
Sony 315 ITR (AT) 150 (Del), UE
quashing the s. 263 order: Judicial Pronouncements - Inter-
Trade Corp (Del), Essar Steel
(i) The reason given for the revision in national Taxation
(Vizag) & Perot Systems 130 TTJ
the s. 263 order (that the AO has not Cummins India Limited vs. DCIT 685 (Del) are uniform in making
verified the issue) is different from the (ITAT Pune)(ITA No. 277 & 1412/ the proposition that where arithme-
reason set out in the show-cause no- PN/07) tic mean is involved, the assessee
tice (that speculation loss cannot be
Transfer Pricing: If ALP determined obtains the eligibility for claim of
set-off against other income). If a
by arithmetical mean, 5% deduction deduction out of such arithmetic
ground of revision is not mentioned in
allowable mean. It is commonsense that the
the show-cause notice, it cannot be
statistical concept of arithmetic
made the basis of the order for the In determining the arms’ length price
mean arises only when there ex-
reason that the assessee would have for transfer pricing purposes in respect
ists more than one price data.
had no opportunity to meet the point of international transactions relating to
Such concept is irrelevant to the
(Maxpack Investments 13 SOT 67 ‘procurement Support Services’, the
data with only one variable. In the
(Del), G.K. Kabra 211 ITR 336 (AP) & TPO considered 61 comparable prices
assessee’s case, as there were
Jagadhri Electric Supply 140 ITR 490 and finally relied on 3 prices to arrive
three comparable price data, the
(P&H) followed); at the arithmetic mean. However, he
assessee was entitled for deduc-
did not give a deduction from the arith-
(ii) On merits, the result of the Expla- tion not exceeding 5% out of the
metic mean as required by the first
nation to s. 73 is that the entire profits arithmetic mean.
proviso to s. 92C(2). On appeal to the
from trading in shares, even from de-

6

DIRECT TAXES
Judicial pronouncements (International Taxation)
SNK
TNT India Private Limited vs. ACIT data cannot be considered. The party. As the assessee’s margins
(ITAT Bangalore)(ITA No.1442 contemporaneous data of relevant were higher than that of comparables
(BNG)/08) financial year is to be used for (9% vs. 8.37%), the transactions were
making the comparable analysis claimed to be at arms’ length. The
Transfer Pricing: Prior Years’ data
for arriving at the ALP unless it is TPO & CIT (A) held that in computing
cannot ordinarily be relied upon to
proved otherwise; the Operating Profit (a) interest in-
justify ALP. Non-operating income
come and (b) abnormal costs had to
& expenditure should be excluded (b) For arriving at the net margin of
be excluded. On appeal to the Tribu-
while comparing operating income, only operating
nal HELD:
income and operating expenses
The assessee, a courier company,
for the relevant business activity (a) Even if interest on surplus funds is
paid Rs. 43.46 crores to its holding co
of the assessee has to be taken assessed as “business income”, it
in Netherlands towards the reimburse-
into consideration. Other income, has to be excluded in computing
ment of cost in transport of consign-
such as dividend income, profit on the ‘operating profits’ because if it
ments. The TPO & CIT (A) adopted
sale of assets, donations as well is included, one is computing the
the TNMM and claimed that as the
as non-operating expenses which “return on investment” which is an
operating profit /operating income of
are included in the operating in- inappropriate profit level indicator
the comparables was higher than that
comes of other comparable com- for a service provider. As the PLI
earned by the assessee, an adjust-
panies should be excluded as it is the Operating Margin on Cost,
ment had to be made. It was also
effects the net margin of the oper- neither the interest income nor
claimed that the assessee was not
ating profits of the comparables. interest expenses is a relevant
entitled to rely on the data of earlier
Working capital adjustments also factor. The essential element is
years. On appeal to the Tribunal,
have to be considered while arriv- the cost incurred for the operating
HELD:
ing at the operating net margins. activity which has to be taken into
(a) In respect of FY 2001-02, the as- account;
(c) The assessee is entitled to a stan-
sessee used data pertaining to
dard deduction of 5% as provided (b) In computing the ALP, abnormal
AYs 1999-2000 & 2000-01. While
under proviso to s. 92C (2) before expenses which are not of a rou-
the argument that at the time of
making adjustments of the trans- tine nature as well as those of a
TP study, the data relating to rele-
fer price. (Schefenacker Mother- personal nature have to be ex-
vant comparable for FY 2001-02
son 123 TTJ (Del) 509 and SAP cluded;
is acceptable, the assessee has
Labs 6 ITR 81 (Bang)(Trib) fol-
to adopt the data available for the (c) Compensation for closure of cer-
lowed)
TP study at the time of filing of the tain units, though not a regular
return. By the time of filing of re- Marubeni India Private Ltd vs. ACIT phenomena, has a direct link with
turn, the data relevant to FY 2001- (ITAT Delhi)(ITA No. 809/Del/2009) the international transaction. The
02 was available. Further, prior assessee was receiving certain
Transfer Pricing: For TNMM, inter-
year data is relevant only if the charges at cost plus 10%. By
est on surplus & abnormal costs to
assessee is able to prove that the closing down certain branches,
be excluded
pricing pattern of the assessee for the cost to the AE was reduced
the relevant financial year has The assessee, a subsidiary of a Japa- and so such receipts would al-
been influenced by the market nese company, received commission ways be considered as operating
conditions/business cycle/product for agency and market research ser- expenses. The cost of closure
life cycle of the earlier years vices. For Transfer pricing purposes, cannot be excluded in computing
(which is not there in the courier the assessee adopted the Transac- the operating expenses;
business). The OECD guidelines tional Net Margin Method (TNMM)
(d) The current year data should be
are not of binding nature and even and chose the Operating Profit Margin
used for comparison purposes
the Proviso to Rule 10B (4) pro- on Operating Cost (OP/OC) as the
and not the data of preceding two
vides that any subsequent year PLI and treated itself as the tested
years;

7

DIRECT TAXES
Judicial pronouncements (International Taxation) / Circulars / Notification
SNK

(e) The argument that as the assessee The assessee claimed that in the com- der no obligation to deduct tax u/s
did not take any financial risk while putation of profits of the PE under Arti- 195 and consequently no disallow-
providing agency services and as it cle 7(3)(b) of the India-Netherlands ance u/s 40(a)(i) can be made in
also did not have a patent etc, DTAA, the interest paid to the HO was the hands of the branch.
there must be an adjustment for deductible. The AO & CIT (A) held that
the “functional and risk level differ- while the interest was deductible in
ence” is not acceptable because principle in the hands of the PE, it was
no evidence as required by Rule taxable in the hands of the HO and as
10D to show the risk born by com- there was no TDS u/s 195, the interest
parables is shown. The assessee had to be disallowed u/s 40(a)(i). The
has to demonstrate “exact details, result was that the interest paid by the
Circulars / Notifications
exhibiting the risk born by the com- PE to the HO was disallowed in the
parable vis-à-vis the risk in running hands of the PE while being assessed Notification No. 16/2011 dated 29-3-
the assessee’s business” (Sony in the hands of the HO. On appeal, the 2011
India 114 ITD 448 (Del) where a Special Bench (98 TTJ Kol 295) held Two new information required in
20% adjustment was permitted that the PE and the HO were the same quarterly statement of deduction of
distinguished); person and the interest paid was nei- tax from 1st April 2011
ther deductible in the hands of the PE
(f) The argument that there is a CBDT has notified amendment to Rule
nor assessable in the hands of the HO.
“general recession” in the interna- 31 and inserted tow new information to
On appeal by the assessee, HELD re-
tional market and so an adjustment be provided by every deductor of tax in
versing the Special Bench:
should be made is not acceptable its quarterly statement of tax deduction.
because the comparables adopted (i) As regards deductibility of the inter-
Under Rule 31, every person responsi-
by the TPO takes into considera- est in the hands of the PE, though
ble for deduction of tax under Chapter
tion the general factor available to a branch and the HO are the
XVII-B, are required to submit quarterly
the assessee vis-à-vis to the com- “same person” in general law, Arti-
statement of tax. Sub Rule 4 of Rule
parable in the market. No ad-hoc cles 5 & 7 of the DTAA provide that
31A prescribes what information are
separate adjustment can be made the PE shall be assessable as a
required to be given . Till 31s March
for the general conditions of the separate entity. Under Article 7(3)
2011 , the Sub Rule 4 was as under
market at the relevant point of time; (b) payment of interest by a bank’s
PE to its HO is allowed as a deduc- (4) The deductor at the time of prepar-
(g) The benefit of +/- 5% adjustment is
tion. The result is that the interest ing statements of tax deducted shall,-
not a ‘standard universal deduc-
paid by the PE to the HO is de-
tion’. This option is available only (i) quote his tax deduction and collec-
ductible in computing the PE’s
when assessee is computing the tion account number (TAN) in the
profits (Betts Hartley Huett 116 ITR
ALP and not when the AO/TPO is statement;
425 (Cal) distinguished);
computing the ALP.
(ii) quote his permanent account num-
(ii) As regards taxability in the hands
ABN AMRO Bank NV vs. CIT ber (PAN) in the statement except
of the HO & obligation for TDS u/s
(Calcutta High Court)(ITA No. 458 of in the case where the deductor is
195, in accordance with the princi-
2005) an office of the Government;
ples of apportionment of profits
Interest paid by a branch of a For- between the PE & the HO as laid (iii) quote the permanent account num-
eign Bank to its HO is deductible in down in Hyundai Heavy Industries ber of all deductees;
the hands of the branch. Such inter- 291 ITR 482 (SC) & Morgan (iv) furnish particulars of the tax paid to
est is not taxable in the HO’s hands Stanley 162 TM 165 (SC), only the the Central Government including
The assessee, a Netherlands Bank, PE is to be taken as the assessee book identification number or
carried on banking business through a and not the HO. As the interest challan identification number, as
PE in India. The PE borrowed funds was not chargeable to tax in the the case may be.
from its HO on which interest was paid. hands of the HO, the PE was un-

8

INDIRECT TAXES / OTHER LAWS
Circular / Notifications
SNK
However, from 01/04/2011, two new of Rule 14 of CENVAT Credit class of companies to file balance
clause to sub-rule 4 are being added. Rules, 2004, interest cannot be sheets and profit and loss account for
These are claimed from the date of wrong the year 2010-11 onwards by using
availment of credit. It is required XBRL taxonomy. The Financial State-
(v) furnish particulars of amount paid
to be paid from the date it is ments required to be filed in XBRL
or credited on which tax was not
wrongly utlilized. format would be based upon the Tax-
deducted in view of the issue of
onomy on XBRL developed for the
certificate of no deduction of tax 3. The matter has been examined. It
existing Schedule VI, as per the exist-
under section 197 by the Assess- is observed that the issue has
ing, (non converged) Accounting
ing Officer of the payee; now been conclusively settled by
Standards notified under the Compa-
the Apex Court in the departmen-
(vi) furnish particulars of amount paid nies (Accounting Standards) Rules,
tal appeal against the above men-
or credited on which tax was not 2006. The said Taxonomy is being
tioned judgment of P&H High
deducted in view of the compli- hosted on the website of the Ministry
Court. The Apex Court vide its
ance of provisions of sub-section at www.mca.gov.in shortly. The Fre-
judgment dated 21.02.11 in Civil
(6) of section 194C by the payee." quently Asked Questions (FAQs)
Appeal No. 1976 of 2011 has set
Please note that Rule 28AA is also about XBRL have been framed by the
aside the aforesaid order of
being substituted which provides for Ministry and they are being annexed
Hon’ble High Court. The Apex
‘certificate for deduction at lower rates as Annexure I with this circular for the
Court has ruled that “If the afore-
or no deduction of tax from income information and easy understanding
said provision is read as a whole
other than dividends’. of the stakeholders.
we find no reason to read the
INDIRECT TAXES word “OR” in between the expres- Coverage in Phase I
sions ‘taken or utilized wrongly or
Circulars / Notifications 2. The following class of companies
has been erroneously refunded’
have to file the Financial State-
Circular No. 942/03/2011-CX dated as the word “AND”. On the hap-
ments in XBRL Form only from
the 14th March, 2011 pening of any of the three circum-
the year 2010-2011:-
stances such credit becomes re-
Liability of interest where CENVAT
coverable along with interest.” In (i) All companies listed in India and
credit was wrongly taken but re-
effect, therefore, the view taken their subsidiaries, including over-
versed by assessee before utiliza-
by the Board in circular dated seas subsidiaries;
tion- Circular No. 942/03/2011-CX
03.09.09 has now been endorsed (ii) All companies having a paid up
Attention is invited to the Board’s Cir- by the Apex Court. capital of Rs. 5 Crore and above
cular No. 897/17/2009-CX dated
4. Immediate action may be taken to or a Turnover of Rs. 100 crore or
03.09.09, wherein it was clarified that
safeguard revenue in light of the above .
in light of clear and unambiguous pro-
judgment of Apex Court. Additional Fee Exemption
visions of Rule 14 of the CENVAT
Credit Rules, 2004, the interest shall OTHER LAWS 3. All companies falling in Phase -I
be recoverable when credit has been are permitted to file upto 30-09-
COMPANY LAW
wrongly “taken”, even if it has not 2011 without any additional fil-
been utilized. General Circular No. 09/2011, dated
ing fee.
31.03.2011
2. References have been received to Training Requirement
re-examine the issue in light of Compulsory Filing of Balance
Sheet and profit and Loss Account 4. Stakeholders desir-
judgment of P&H High Court in
in extensible Business Reporting ous to have train-
the case of Ind-Swift Labs. V/s
Language (XBRL) mode ing on the XBRL or on taxon-
UOI [2009(240)ELT328(P&H)].
omy related issues, may contact
The said judgment of P&H High It has been decided by the Ministry of
the persons as mentioned in An-
Court held that under provisions Corporate Affairs to mandate certain
nexure II.

9

OTHER LAWS
Company Law
SNK
Company Law : Companies (Name Partnerships (LLPs) already 4. Where, the proposed name is
Availability) Rules, 2011 registered or the names al- containing more than one word,
ready approved. there will be an option in the e-
In exercise of the power conferred by
form 1A for certification by the
clause (a) of sub-section (1) of section (ii) the proposed name(s) is/are
practicing Chartered Account-
642 read with sections 20 and 21 of not infringing the registered
ants, Company Secretaries and
the Companies Act, 1956 (1 of 1956), trademarks or a trademark
Cost Accountants, who will cer-
the Central Government hereby which is subject of an applica-
tify that he has used the search
makes the following Rules: tion for registration, of any
facilities available on the portal
other person under the Trade
1. (i) These Rules may be called of the Ministry of Corporate
Marks Act, 1999;
“Companies (Name Availability) Affairs (MCA) i.e.,
Rules, 2011”; (iii) the proposed name(s) is/are www.mca.gov.in/MCA21 for
not in violation of the provisions checking the resemblance of
(ii) It shall come into force on such
of Emblems and Names the proposed name(s) with the
date as the Central Government
(Prevention of Improper Use) companies and Limited Liability
may, by notification in the Official
Act, 1950 as amended from Partnerships (LLPs) already
Gazette, appoint.
time to time; registered or the names al-
2. As per provisions contained in
ready approved and the search
section 20 of the Companies Act,
report is attached with the ap-
1956, no company is to be regis-
plication form. The professional
tered with undesirable name. A
will also certify that the pro-
proposed name is considered to
posed name is not an undesir-
be undesirable if it is identical with
able name under the provisions
or too nearly resembling with:
of section 20 of the Companies
(i) Name of a company in exis- Act, 1956 and also is in confor-
tence; or mity with Companies (Name
(iv) The proposed name is not of- Availability) Rules, 2011 and
(ii) A registered trade-mark or a
fensive to any section of peo- Guidelines made therein.
trade mark which is subject of an
application for registration, of any ple, e.g., proposed name does 5. (i). Where e-form 1A has been
other person under the Trade not contain profanity or words certified by the professional in the
Marks Act, 1999. or phrases that are generally manner stated at ‘4’ above, the
considered a slur against an name will be made available by
3. After notification of these Rules,
ethnic group, religion, gender the system online to the applicant
while applying for a name in the
or heredity; without backend processing by the
prescribed e-form-1A, using Digi-
(v) he has gone through all the Registrar of Companies (ROC).
tal Signature Certificate (DSC),
prescribed guidelines, given in This facility is not available for ap-
the applicant shall be required to
these Rules, understood the plications for change of name of
furnish a declaration to the effect
meaning thereof and the pro- existing companies.
that:
posed name(s) is/are in confor- (ii) Where a name has been made
(i) he has used the search facili-
mity thereof; available online on the basis of
ties available on the portal of
(vi) he undertakes to be fully re- certification of practicing pro-
the Ministry of Corporate Af-
sponsible for the conse- fessional in the manner stated
fairs (MCA) i.e.,
quences, in case the name is above, if it is found later on that
www.mca.gov.in/MCA21 for
subsequently found to be in the name ought not to have
checking the resemblance of
contravention of the prescribed been allowed under provisions
the proposed name(s) with the
guidelines. of section 20 of the Companies
companies and Limited Liability
Act read with these Rules, the

10

OTHER LAWS
Company Law
SNK
professional shall also be liable for name is identical with another, the conflict with the similar, properly
penal action under provisions of the following shall be disregarded: spelled words;
Companies Act, 1956 in addition to
(i) The words Private, Pvt, Pvt., (P), (ix) The addition of an internet related
the penal action under Regulations
Limited, Ltd, Ltd., LLP, Limited Li- designation, such as .COM, .NET,
of respective professional Insti-
ability Partnership; .EDU, .GOV, .ORG, .IN does not
tutes.
make a name distinguishable from
Where e-form 1A has not been another, even where (.) is written
certified by the professional, the as ‘dot’;
proposed name will be processed
(x) The addition of words like New,
at the back end office of ROC and
Modern, Nav, Shri, Sri, Shree,
availability or non-availability of
Sree, Om, Jai, Sai, The, etc. does
name will be communicated to the
not make a name distinguishable
applicant.
from an existing name such as
6. The name if made available, is li- New Bata Shoe Company, Nav
able to be withdrawn anytime be- (ii) The words appearing at the end of Bharat Electronic etc. Similarly, if it
fore registration of the company, if the names – company, and com- is different from the name of the
it is found later on that the name pany, co., co, corporation, corp, existing company only to the extent
ought not to have been allowed. corpn, corp.; of adding the name of the place,
However, ROC will pass an spe- the same shall not be allowed. For
(iii) The plural version of any of the
cific order giving reasons for with- example, ‘Unique Marbles Delhi
words appearing in the name;
drawal of name, with an opportu- Limited’ cannot be allowed if
nity to the applicant of being heard, (iv) The type and case of letters, spac- ‘Unique Marbles Limited’ is already
before withdrawal of such name. ing between letters and punctua- existing;
tion marks;
7. The name if made available to the Such names may be allowed only if
applicant, shall be reserved for (v) Joining words together or separat- no objection from the existing com-
sixty days from the date of ap- ing the words does not make a pany by way of Board resolution is
proval and further extension of name distinguishable from a name produced/ submitted;
thirty days with revalidation appli- that uses the similar, separated or
(xi) Different combination of the same
cation and fees. If, the proposed joined words;
words does not make a name dis-
company has not been incorpo- (vi) The use of a different tense or tinguishable from an existing name,
rated within such period, the name number of the same word does not e.g., if there is a company in exis-
shall be lapsed and will be avail- distinguish one name from another; tence by the name of “Builders and
able for other applicants.
(vii) Using different phonetic spellings Contractors Limited”, the name
8. Even after incorporation of the or spelling variations does not dis- “Contractors and Builders Limited”
company, the Central Government tinguish one name from another. should not be allowed;
has the power to direct the com- For example, J.K. Industries limited (xii) If the proposed name is an exact
pany to change the name under is existing then J and K Industries Hindi translation of the name of an
section 22 of the Companies Act, or Jay Kay Industries or J n K In- existing company in English espe-
1956, if it comes to his notice or is dustries or J & K Industries will not cially an existing company with a
brought to his notice through an be allowed. Similarly if a name con- reputation, e.g., Hindustan Steel
application that the name too tains numeric character like 3, re- Industries Ltd. will not be allowed if
nearly resembles that of another semblance shall be checked with there exists a company with name
existing company or a registered ‘Three’ also; ‘Hindustan Ispat Udyog Limited’;
trademark.
(viii)Misspelled words, whether inten-
9. In determining whether a proposed tionally misspelled or not, do not

11

OTHER LAWS
Others
SNK
The Queen vs. General Electric As the fee paid for the benefit was The incremental cost that the as-
Capital Canada Inc (Court of Ap- only 1%, it was at arms’ length. On sessee would have had to pay if it
peal, Canada)(2010 FCA 344) appeal by the department, HELD dis- did not have the explicit guarantee
missing the appeal: was valued at 1.83% and so the
Transfer Pricing: Despite “Implicit
guarantee fee was at arms length.
support” by holding company, sub- (i) In determining the arms length
sidiary entitled to pay holding com- price, all economically relevant M/s. Hyderabad Engineering v.
pany at arms’ length for “explicit factors (including the “implicit sup- State Of A.P. (Civil Appeal No. 3781
support” port” that the subsidiary enjoys of 2003)(SC)
from the holding company) have
The assessee, a wholly-owned sub- Goods transported to out-of-state
to be considered. The explicit
sidiary of General Electric Capital US depots otherwise than as a result
guarantee by the holding com-
(GECUS), was in the business of pro- of direct sale which would attract
pany also has a value to the sub-
viding financial services and took tax under Section 6 of the Central
sidiary (Para 1.6 of the OECD
loans for this purpose in the form of Sales Tax Act
Commentary on Transfer Pricing
commercial paper and unsecured de-
Guidelines for Multinational Enter- The SC dismissed the appeal ruling
bentures. Between 1988 and 1995,
prises and Tax Administrations that the transactions between several
GECUS provided to the assessee, at
referred). The question is how cities constituted inter-state sales, as
no cost, an explicit guarantee for its
much an arm’s length party, bene- contemplated under Section 3(a) of
debt issuances. From 1996, GECUS
fiting from the implicit guarantee the Central Sales Tax Act. The com-
began charging a fee equal to 1% of
would be willing to pay for the ex- pany was part of Jay Engineering
the face amount of the assessee’s
plicit guarantee; Works with head office in Delhi. It has
debt issuances for that same guaran-
other related companies with different
tee which amounted to about $135.4 (ii) The “yield method” can be
names in different states. The com-
million. The assessee’s claim for de- adopted which requires a com-
pany claimed exemption on a turnover
duction of the fee was denied by the parison between the credit rating
of Rs 8,87,75,643 towards goods
tax department u/s 69(2)/247(2) which an arm’s length party, in the
transported to out-of-state depots oth-
(transfer pricing provisions) on the same circumstances as the as-
erwise than as a result of direct sale
ground that as there was “implicit sup- sessee, would have obtained and
which would attract tax under Section
port” by GECUS to the assessee, the the credit rating which would have
6 of the Central Act. It argued, the
payment of the guarantee fee was been obtained without the explicit
transactions on which exemptions
“superfluous” and not at arms’ length. guarantee. On facts, it was shown
claimed cannot be regarded as sales
This was reversed by the Tax Court that the assessee would have en-
in the course of inter-state trade,
on the basis that by the explicit guar- joyed a lower credit rating without
chargeable to tax under the Central
antee from the holding company, the the explicit guarantee from the
Act. This contention of the assessee
assessee had a better rating and had holding company and would have
was rejected by the high court and the
to pay lower interest and received a had to pay a higher interest than it
SC.
benefit which was valued at 1.83%. did with the explicit guarantee.
Due Dates of key compliances pertaining to the month of April 2011:
10th April Excise Return ER1 / ER2 /ER6
15th April PF Contribution for March
th
20 April Excise return ER3 for quarter ended March

21st April ESIC Payment for March
th
25 April Half yearly return of service tax
30th April TDS payment for March (whether amount credit on 31st March or not)

The information contained in this newsletter is of a general nature and it is not intended to address specific facts, merits and circumstances of any indi-
vidual or entity. We have tried to provide accurate and timely information in a condensed form however, no one should act upon the information pre-
sented herein, before seeking detailed professional advice and thorough examination of specific facts and merits of the case while formulating business
decisions. This newsletter is prepared exclusively for the information of clients, staff, professional colleagues and friends of SNK.

12

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