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Year: 2017

18. Transfer Pricing – Once comparable companies have been found functionally non comparable – then the same should be excluded – the same cannot be include merely on the basis of assessee’s inclusion in the transfer pricing study report – There cannot be estoppel against correct procedure of law and principles solely on account of acquiescence or mistake of the assessee

Commissioner of Income Tax vs. M/s. Tata Power Solar
Systems Ltd. [ Income tax Appeal no 1120 of 2014 dt : 16/12/2016 (Bombay High
Court)].

[M/s. Tata Power Solar Systems Ltd v Dy. CIT. [ ITA NO.
6657/MUM/2012;  Bench : K ; dated
15/01/2014 ; A Y: 2008-09. Mum.  ITAT ]

The Assessee is engaged in design, development and
manufacture and sale of Solar Modules and Systems. During the year, the
Assessee had reported International Transaction with its Associated Enterprises
(AE). In the Transfer Pricing Study submitted by the Assessee to the Revenue,
it had included M/s. Indowind Energy Ltd. and B. F. Utilities Ltd. in the list
of two comparables for the purpose of arriving at Arms Length price (ALP) in
respect of its transactions entered into with its AE. However, before the Transfer
Pricing Officer (TPO) itself, the Assessee sought to withdraw the two companies
from the list of comparables. This, inter alia on the ground of
functional differences. However, the same was not permitted by the TPO and was
taken into consideration while determining the ALP. This resulted in a draft
Assessment Order based on ALP arrived at on a comparability study inclusive
of  the two companies.  The Draft Resolution Panel (DRP) on an
application made to it by the Assessee did not disturb the said inclusion  among the list of comparables to determine
the ALP as reflected in the draft Assessment Order. This was essentially on the
ground that the Assessee had itself relied upon the two companies as
comparables. Therefore, it was not permissible for the Assessee now to withdraw
the two companies from comparability analysis. 

The Tribunal allowed the Assessee’s appeal. The Tribunal
found that the ultimate aim of the transfer pricing provisions is to determine
the appropriate ALP, which can be done only by bench marking with the proper
comparables based on FAR analysis and under the prescribed methods. If in the
course of the proceedings, it is found that certain comparables do not stand
the test of functional analysis or for some reason, then the same should be
excluded and  they should not continue to
be included simply because the assessee had included the same initially. If the
cogent reasons have been given by the assessee for excluding the same, the same
should be considered. The initial onus or duty is cast upon the assessee to
carry out the selection of proper comparables based on FAR analysis and by
adopting suitable transfer pricing method and then analyse its transaction to
show the correct arm’s length result. Thereafter, it is axiomatic that the
taxing authorities / TPO, should scrutinise the assessee’s report on arm’s
length result and the entire process of arriving at the ALP, whether they are
based on transfer pricing principles and statutory provisions or not. If he
himself finds some irregularity or mistake in any of the process or the steps
undertaken, then he is bound to correct in accordance with the settled
principles and law.

If the assessee points out some mistake or any irregularity
in the arm’s length result, then it is incumbent upon the TPO to examine and
consider the same and if the assessee’s contentions are found to be correct or
tenable, then he has to accept the same. There cannot be estoppel against
correct procedure of law and principles solely on account of acquiescence or mistake
of the assessee. The TPO is required under law to analyze every comparableand
then only determine the correct ALP based on proper comparability analysis.
Thus, there is no  merit in the
contention of the Revenue that simply because the assessee has included these
two companies then the assessee is debarred from objecting to the same, if
there are strong and cogent reasons.

It was observed  that
the  two companies Indo Wind Energy Ltd.
and B.F. Utilities Ltd. are engaged in the business of generation of Wind
Energy Ltd., whereas the assessee is Tata Power Solar Systems Ltd. engaged in
the business of manufacture and sale of solar cells, photo voltaic modules and
systems which are used for solar energy. The assessee is not into generation of
energy. These two functions are 
different. The assessee before the TPO / DRP has placed the key
difference between the functions carried out by the assessee and the functions
required for generation of wind energy. These have not been rebutted either by
the TPO or by the DRP but have been rejected mainly on the ground that the
assessee has included the same initially in its transfer pricing study report.
It is also seen from the record that in the subsequent year, the TPO has
specifically issued a show cause notice for inclusion of these two companies,
however, on the assessee’s objection based on functional difference, the TPO
has excluded these two companies.

Thus, accordingly, Indo Wind Energy Ltd. and B.F. Utilities
Ltd., were to be excluded from the list of final comparables.

Being aggrieved, the Revenue carried the issue in appeal to
the High Court. The High Court observed that the Transfer Pricing Mechanism
requires comparability analysis to be done between like companies and
controlled and uncontrolled transactions.

This comparison has to be done between like
companies and requires carrying out of FAR analysis to find the same. Moreover,
the Assessee’s submission in arriving at the ALP is not final. It is for the
TPO to examine and find out the companies listed as comparables which are, in
fact comparable. The impugned order has on FAR analysis found that the two
companies are not comparable. They are in a different area i.e. wind energy
while the Assessee is in the field of solar energy. The issue raised herein is
concluded against the Revenue and in favour of the Assessee by the decision of
this Court in CIT vs. Tara Jewellers Pvt. Ltd., 381 ITR 404. In
view of the above, Appeal of the revenue was 
dismissed.

17. TDS – The liability to deduct tax at source arose – when the amount payable stood credited in the books of Assessee – Even in respect of services received earlier : There can be no estoppel against the statute

Commissioner of Income Tax vs. Underwater Services Company
(Dissolved). [ Income tax Appeal no 1240 of 2014, dt : 20/12/2016 (Bombay High
Court)].

[Underwater Services Company (Dissolved). vs. Assistance
Commissioner of Income Tax,. [ITA No. 
5828/MUM/2012;  Bench : F ; dated
30/07/2012 ;  Mum.  ITAT ]

The Assessee was engaged in providing underwater services,
such as diving, towing, salvaging, underwater marine repair and maintenance.
For the aforesaid purpose, it chartered two vessels belonging to M/s.Samsung
Maritime Ltd. (a sister concern) and claimed charter hire expenses for the year
at Rs.441.37 lakh. The same was liable for deduction of tax at source u/s.
194-I of the Act. The recipient/payee of the hire charges i.e. M/s. Samsung
Maritime Ltd. had applied to the department for waiver of tax deducted at
source u/s. 197 of the Act. The Income Tax Officer (TDS) by a communication
dated 7th May, 2008 granted a certificate u/s. 197(1) of the Act and
directed the Assessee that charter hire paid or credited to M/s.Samsung
Maritime Ltd. would be after deduction of tax at the rate of 2.02% (net) instead of 10%.

During the assessment proceedings, the assessee  urgedthat the amounts on account of charter
hire charges were paid and also credited to the account of M/s.Samsung Maritime
Ltd. after 7th May, 2008. Thus the deduction of tax was at the
concessional rate of 2.02%. Without prejudice it was pointed that the amount
which could be disallowed at the highest was Rs.86.40 lakh on account of
services received prior to 7th May, 2008. The AO passed the order
and disallowed the amount of Rs.86.40 lakh which according to him was an amount
payable prior to date of certificate dated 7th May, 2008. This on
the ground that the certificate was operative only from the date of issue i.e.
7th May, 2008 and coupled with his undertaking that the assessee has
itself offered the disallowance of Rs.86.40 lakh. 

Being aggrieved, the Assessee had filed an appeal before the
CIT (A). The CIT (A) dismissed the assessee’s appeal. It upheld the
disallowance of Rs.86.46 lakhs for non deduction of tax at the rate of 10% as
done by the AO.

Being aggrieved, the Assessee carried the issue in appeal to
the Tribunal. The Tribunal held that amount payable for month of April 2008 in
respect of two vessels taken on hire from M/s. Samsung Maritime Ltd. stood
credited in the books of Assessee only after 7th May, 2008 and
admittedly paid thereafter. In the above view the Tribunal  held that the liability to deduct tax at
source only arose post 7th May, 2008 even in respect of services
received earlier. Consequently, the tax deducted on such credit/payment would
be on lower rate of 2.02% (net) as allowed by the certificate u/s. 197(1) of
the Act. The Tribunal also relied upon its earlier order for the Assessment
Year 2007-08 which accepted the Assessee’s contention, that is, as date of
credit and date of payment were as in the present facts both after the issuance
of certificate u/s. 197(1) of the Act the tax will be deducted at lower rate.

The grievance of the Revenue before High Court is two fold,
one that the Assessee has itself accepted the liability to deduct tax at the
rate of 10% prior to 7th May, 2008 and offered to disallow
expenditure of Rs.86.40 lakh. Therefore, it is not now open to the Assessee to
urge before the Appellate Authorities that the amount of Rs.86.40 lakh cannot
be disallowed as now contended. Secondly, it is submitted that entries are made
in the books by the Assessee only to circumvent the provisions of Act coupled
with the fact that the payee M/s. Samsung Maritime Ltd. and Assessee belong to
same group. Therefore, the Assessee’s claim made before and allowed by the
Tribunal is incorrect. 

The High Court noted that the Tribunal  on examination of the ledger account of the
Assessee noted that the date of credit for the charter hire charges payable to
its sister company M/s.Samsung Maritime Ltd. was credited only after 7th
May, 2008. The payment was also made by the Assessee after crediting of the
amount in its books of account. Moreover, the ledger account was produced
before the Tribunal as the same was produced even before the AO. Moreover,
there can be no estoppel against the statute. Therefore, even if it is
assumed that the Assessee had suggested that Rs.86.40 lakh be disallowed for
not deducting tax at 10% then the same would be contrary to the deduction of
tax to be done u/s. 197 of the Act. The Authorities under the Act were obliged
to apply the law to the facts existing and grant relief to the Assessee
wherever available. In view of above, the view taken by the Tribunal in the
impugned order on the available facts is a possible view. Appeal of revenue was
dismissed.

16. Business set up – when the business is established and is ready to commence the business – there may be an interval between the setting up of the business and the commencement – Section 3 of the Act

CIT vs. M/s. Conde Nast (India) Pvt. Ltd. [ Income tax
Appeal no 1083 of 2014, dt : 16/12/2016 (Bombay High Court)].

[M/s. Conde Nast (India) Pvt. Ltd. vs. DCIT. [ITA
No.1819/MUM/2013; Bench: SMC; dated: 04/09/2013;  A Y: 2007- 2008. MUM.  ITAT ]

The assessee was engaged in the business of printing,
publishing, circulating, marketing and distributing publications. During the
assessment proceeding, the AO noticed that the assessee had claimed that its
business had been set up w.e.f. 20-11-2006 and expenditure incurred after
20-11-2006 had been claimed as revenue expenditure at Rs.3,56,33,431/-.The
assessee was asked to substantiate its claim with necessary evidence. After
considering various details, the AO found that the business of the assessee has
not been set up as the assessee has appointed only executives along with
editors. No issue of the magazine is published during the year. The AO found
that the magazines have been published in FY: 2007-08 relating to AY: 2008-09.
Accordingly, he held that the business was not set up in the year under
consideration. Hence, he disallowed the claim of expenditure.

The assessee preferred appeal before the CIT(A). It was
submitted that the editor, who is at the helm of affairs in the editorial
department in publishing organisation, decides what shall and what shall not go
into his publication on the basis of what he conceives to be the publications
mission and philosophy. Thereafter the functions of the editorial as well as
the activities taken by the assessee during the year under consideration were
filed and explained  before him. The Ld
CIT(A) noted that the first issue of the magazine, namely, VOGUE, published by
the assessee, came on October, 2007 and accordingly the business was set up
only on October, 2007 and not during the year under consideration. Accordingly,
the  CIT(A) confirmed the order of the
AO.

The Tribunal observed that there is a well-marked distinction
between a business being set up and the commencement of the business. It is the
setting up of the business that has to be considered and not the commencement.
It is only when the business is set up that the previous year for that business
commences and expenses incurred prior to the setting up are not a permissible
deduction. It has further observed  that
when the business is established and is ready to commence the business, then it
can be said that the business is set up. Before the assessee is ready to
commence business, the business is not set up. There may be an interval between
the setting up of the business and the commencement thereof and all expenses
incurred during the interval would be permissible deductions.

The Tribunal after going through the chart and  various details along with supporting
evidence, observed that  it is amply
proved that major activity has started during the year under consideration.
Some orders have been placed, photographer is engaged, some technical staff
were also employed, business premises has been taken from where all these
activities are conducted. Even trial production was also started. From all
these facts, it is seen that the assessee has started its activity for
publishing its magazines. The question is not generating of revenue, the
question comes for consideration as to whether any activity has been started or
not. The Tribunal relied on the decision 
of HSBC Securities India Holdings Pvt. Ltd. dated 20th
November, 2001 (ITA No.3181/M/1999). The Tribunal held  that the business of the assessee was set up,
therefore, the expenditure incurred by the assessee are allowable. However,
since the nature of expenditure was not examined therefore, to this limited
purpose the matter was remanded back to the file of the AO to examine the
genuineness of the expenditure and then allow them as per provision of law. In the
result, appeal of the assessee was allowed.

On appeal by the revenue before the High Court
it was observed that the impugned order of the Tribunal had relied on an order
of its Coordinate Bench in HSBC Securities India Holdings Pvt. Ltd.,
decided on 20th November, 2001 (ITA No.3181/M/1999). The impugned
order finds that the test laid down by the Tribunal in HSBC Securities (India)
Holdings (P) Ltd., to determine whether or not the Assessee’s business has been
set up, were satisfied on the present facts. It was found  from the record of the High Court that the
order of the Tribunal in HSBC Securities India Holdings Pvt. Ltd., (supra)
has been accepted by the Revenue as the memo of appeal does not indicate any
challenge by the Revenue to the above order. It is also not disputed in the
memo of appeal that the order in HSBC Securities (India) Holdings (P) Ltd., (supra)
applies to the present facts. Thus, no grievance is made in respect of the
impugned order following the order of the Coordinate Bench in HSBC Securities
(India) Holdings (P) Ltd., (supra). Thus the Court held that the
question as framed did not give rise to any substantial question of law.
Accordingly, Appeal of revenue was dismissed.

Accounting for MAT

The Finance Bill 2017 sets out the requirement of determining how Ind AS will impact Minimum Alternate Tax (MAT) on first time adoption (FTA) and on an ongoing basis.  This article discusses a few issues with respect to MAT implications on FTA.

FINANCE BILL 2017 PROVISIONS ON MAT IMPACT ON FTA OF Ind-AS

The broad provisions are set out below:

1.    Ind AS adjustments in reserves/ retained earnings (RE) are included in 115 JB book profit equally over 5 years beginning from the year of Ind AS adoption, except:

–    Other Comprehensive Income (OCI) items recyclable to P&L are included in book profits, when those are recycled to P&L

–    Adjustments to capital reserve, securities premium and equity component of compound financial instruments are excluded from book profit

–    Use of fair value as deemed cost exemption for PPE/ Intangible Asset will be MAT neutral
•    To be ignored for computing book profit
•    Depreciation is computed ignoring the amount of fair value adjustment
•    Gains/ losses on transfer/realisation/disposal/ retirement are computed ignoring fair value adjustment (as per Memorandum to the Finance Bill)

–    Gains/losses on investments in equity instruments classified as fair value through other comprehensive income (FVTOCI) will be included in
book profit on realisation/disposal/transfer of
investment
–    Use of fair value as deemed cost exemption for investments in subsidiaries, associates and joint ventures will be MAT neutral. Gains/ losses to be included in book profit on realisation/disposal/ transfer of investment

–    Use of option to make Indian GAAP Foreign Currency Translation Reserve (FCTR) Zero will be MAT neutral
•    To be included in book profit at the time of disposal of foreign operation.

2.    FTA adjustments made at transition date (TD) are trued up for any changes upto the end of the comparative year. For example, for a phase 1 Company the TD will be 1 April 2015. The FTA adjustments on 1st April 2015 will be trued up for any changes upto the end of the comparative year end, i.e., 31st March 2016. This is illustrated below.

3.    Consider a company that has only one adjustment at TD. The investments in mutual fund were measured at cost less impairment (assume INR 100) on an ongoing basis under Indian GAAP. On TD the company will have to measure the investments in mutual funds at fair value (assume INR 180). At 1st April, 2015, the company has included the fair value uplift INR 80 in RE. At 31st March, 2016, the fair value of the mutual fund was INR 240. For purposes of section 115 JB book profits, the company will include INR 28 each year for the next 5 years (INR 140 in aggregate), starting from the financial year 2016-17.

MAT IMPACT ON FTA OF Ind-AS
On the TD to Ind AS, the company makes adjustments to align Indian GAAP accounting policies with Ind AS. The impact of these items may end up in different adjustments being made. An asset or liability is recorded or derecognised or measured differently and the corresponding impact is directly adjusted in either:
(a)    RE or reserves
(b)    Another asset or liability
(c)    OCI
(d)    Capital reserve
(e)    Equity

(I)    Corresponding Adjustment made to RE or Reserves
Some examples of adjustment in this category and the corresponding impact on MAT are as follows:

Adjustments

Impact on MAT

Property, Plant
and Equipment (PPE) or Intangible Assets is fair valued on TD, as the new
deemed cost under Ind AS.  The
corresponding impact is recorded in RE on the TD

This is MAT
neutral.

Investment in
subsidiaries, associates and joint ventures is fair valued on TD, as the new
deemed cost under Ind AS.  The
corresponding impact is recorded in RE on the TD

This is MAT
neutral.

The amount of
deferred tax asset or liability (DTA/DTL) is changed due to TD adjustments of
various assets and liabilities. The corresponding debit or credit impact is
recorded in RE on the TD

While the
Memorandum to Finance Bill states that it should be MAT neutral, the text of
the Finance Bill 2017 does not contain any such clause.
Hence, based on the text of the Finance Bill 2017, one may argue that for
purposes of determining book profits the debit or credit adjustment in RE
after true-up impact will be recognized over 5 years.

Receivables are
provided for based on Expected Credit Loss (ECL). The corresponding debit
impact is recorded in RE on the TD

For purposes of
determining book profits the debit adjustment in RE after true-up impact will
be recognized over 5 years.

Fair value gains
on derivative assets were not recognized under Indian GAAP.  On TD a derivative asset is created with a
corresponding impact on RE

For purposes of
determining book profits the credit adjustment in RE after true-up impact
will be recognized over 5 years.

With respect to
Service Concession Arrangements, the Intangible assets were recorded at cost
under Indian GAAP.  Under Ind AS these
are recorded at fair value (cost plus margin).  On TD, the amount of Intangible Assets will
be increased with a corresponding impact on RE.

For purposes of
determining book profits the credit adjustment in RE after true-up impact
will be recognized over 5 years.

Under Indian
GAAP, Investments in mutual fund is measured at cost.  Under Ind AS at each reporting date it is
fair valued with gains/losses recognized in the P&L account. On TD, the
amount of Investments will be increased or decreased for fair value gains/losses
with a corresponding impact on RE.

For purposes of
determining book profits the credit or debit adjustment in RE after true-up
impact will be recognized over 5 years.

(II)   Corresponding Adjustment made to another
Asset or Liability

Some examples of adjustment in this category and the corresponding
impact on MAT are as follows:

Adjustments

Impact on MAT

(a)   A
day before the TD the parent issues to a bank a financial guarantee (FG) on
behalf of its subsidiary.  The parent
will not cross charge the subsidiary for the FG.  On TD the parent will record a FG liability
(INR 100) and a corresponding investment in the subsidiary.

(b)   Indian
GAAP book value of investment is INR 250. 
The Company uses fair value of INR 400 as deemed cost on TD.  The investment is sold after four years at
INR 700.

(a)   No
Impact on MAT since an asset and a liability is recorded with no
corresponding impact on RE or reserves. However, true-up impact will have to
be adjusted.

(b)   The
fair value uplift of INR 50 (400-(250+100)) is MAT neutral.  When the investment is sold, the profit of
INR 300 (700-400) + the fair value uplift INR 50, will be included in book
profits for MAT purposes.

 

(a)   Two
years before the TD the parent issues to a bank a FG on behalf of its
subsidiary for a 5 year period.  The
parent will not cross charge the subsidiary for the FG.  Under Ind AS, on the date of issue of the
FG the parent will record a FG liability and a corresponding investment in
the subsidiary.  Assuming the
subsidiary is financially capable and the bank does not have to invoke the
FG, the FG would be amortized over a 5 year period with a corresponding
credit to the profit and loss.  On TD,
the FG would be amortized for a two year period with a corresponding credit
to RE.

(b)   Indian
GAAP investment value is INR 100. 
Assume the FG liability on initial recognition is INR 20, and that the
entity uses previous GAAP carrying value (INR 100) on TD for investment.

(a)   For
purposes of determining book profits u/s 115 JB the credit adjustment in RE
on account of FG amortization after true-up impact will be recognized over 5
years.

(b)   With
respect to investment, for purposes of determining book profit u/s 115 JB, RE
will be debited by INR 20 which after true up impact will be recognized over
5 years

 

A day before the
TD the entity enters into a long term service arrangement, which has an
embedded lease.  The entity is a lessee
and lease is finance lease.  On TD the
entity will record an asset and a corresponding lease liability of equal
amount.

No Impact on MAT
since an asset and a liability is recorded with no corresponding impact on RE
or reserves. However, true-up impact during the comparative period will be
recognized over 5 years.

Two years before the TD the lessee entity enters into a 30 year long
term service arrangement, which has an embedded lease. The entity is a lessee
and lease is finance lease.   Under Ind
AS the entity will record an asset and a corresponding lease liability of
equal amount on the date of entering into a lease arrangement. On TD the
amount of asset and lease liability recognized would not be equal because the
asset depreciation and the loan amortization will happen at different
amounts.  Therefore on TD, there would
be a debit or credit adjustment to RE.

For purposes of
determining book profits u/s 115 JB the debit or credit adjustment in RE
after true-up impact will be recognized over 5 years.

(III) Corresponding Adjustment made to OCI

Adjustments

Impact on MAT

The entity
applies hedge accounting under Indian GAAP, which is fully aligned with the
Ind AS principles.  On that basis it
has recorded a cash flow hedge reserve in OCI.  Under Ind AS it will continue with the
hedge accounting, therefore, the cash flow hedge reserve recorded under
Indian GAAP will be continued as it is.

This is MAT
neutral, i.e, the consequences under Indian GAAP and Ind AS will be the
same.  The cash flow hedge reserve will
be included in book profits u/s. 115 JB as and when the hedge reserve is
recycled to the P&L account.

Adjustments

Impact on MAT

The Company has a
foreign branch.  It recognizes a FCTR
on translation of foreign branch.  The
Company chooses the FTA option of restating the FCTR to zero under Ind AS.  Subsequently the FCTR is accumulated afresh

This is MAT
neutral, i.e, the consequences under Indian GAAP and Ind AS will be the
same.  The Indian GAAP FCTR and the
fresh accumulated Ind AS FCTR is recognized when the branch is finally
disposed off.

Adjustments

Impact on MAT

The entity
applies hedge accounting under Indian GAAP, which is fully aligned with the
Ind AS principles.  On that basis it
has recorded a cash flow hedge reserve in OCI.  Under Ind AS it will continue with the
hedge accounting, therefore, the cash flow hedge reserve recorded under
Indian GAAP will be continued as it is.

This is MAT
neutral, i.e, the consequences under Indian GAAP and Ind AS will be the
same.  The cash flow hedge reserve will
be included in book profits u/s. 115 JB as and when the hedge reserve is
recycled to the P&L account.

Adjustments

Impact on MAT

The Company has a
foreign branch.  It recognizes a FCTR
on translation of foreign branch.  The
Company chooses the FTA option of restating the FCTR to zero under Ind AS.  Subsequently the FCTR is accumulated afresh

This is MAT
neutral, i.e, the consequences under Indian GAAP and Ind AS will be the
same.  The Indian GAAP FCTR and the
fresh accumulated Ind AS FCTR is recognized when the branch is finally
disposed off.

(IV) Corresponding Adjustment made to Capital
Reserves

Adjustments

Impact on MAT

Prior to the TD
the Company has applied acquisition accounting for a common control
transaction.  The consideration paid
was lower than the fair value of assets and liabilities taken over.  The difference was recorded as capital
reserves. The Company chooses to restate the accounting of the common control
transaction on the TD in accordance with Ind AS 103.  Under Ind AS the assets and liabilities in
a common control transaction are recorded at book value, and the excess of
book values over the consideration is recorded as capital reserves.  Whilst in both Indian GAAP and Ind AS, a
capital reserve is recorded, the amount of capital reserve recognized is
different.

Any adjustment to
capital reserves is MAT neutral.

Prior to the TD
the Company has applied acquisition accounting for a common control
transaction and recognized goodwill in accordance with Indian GAAP.  The Company chooses to restate the
accounting of the common control transaction on the TD in accordance with Ind
AS 103.  Under Ind AS common control
transaction does not lead to recognition of goodwill.  The said amount is adjusted against RE.

For purposes of
determining book profits u/s. 115 JB the debit adjustment in RE will be
recognized over 5 years.

(V)   Corresponding Adjustment made to Equity

Adjustments

Impact on MAT

A day prior to
the TD the Company has issued a compound financial instrument that is
classified as liability under Indian GAAP. 
On TD under Ind AS, the Company does split accounting and records the
instrument partly as a liability and partly an equity.  The equity represents the option under the
instrument to convert to shares at a future date and at a fixed predetermined
ratio.

Equity component
of compound financial instruments is MAT neutral.

Two
years prior to the TD the Company has issued a compound financial instrument
that is classified as liability under Indian GAAP.  On TD under Ind AS, the Company does split
accounting and records the instrument as a liability and an equity amount. 

The
equity component is MAT neutral. 
However, subsequent to the issue of the compound financial instrument,
the liability would have under gone a change under Ind AS due to the
amortization effect. RE would be debited to the extent of the amortization
for the two year period prior to TD. 

Adjustments

Impact on MAT

The equity
represents the option under the instrument to convert to shares at the end of
5 years at a fixed predetermined ratio.

The debit
adjustment to the RE after true-up impact, would be allocated over 5 years
for the purposes of determining book profits u/s 115 JB.

       QUESTION
As explained above, the Finance Bill 2017 requires FTA adjustments in specific cases to be included in determining book profits under section 115 JB over a period of 5 years.  For such adjustments that are not MAT neutral and have a MAT impact over a period of 5 years, would a provision for MAT liability or a credit for MAT asset be required on TD under Ind AS 12 Income Taxes?

RESPONSE
As a first step a company determines it’s income tax liability based on normal income tax provisions.  However, this is subject to the provisions of section 115 JB of the Income tax Act, which requires a company to pay atleast a minimum tax on the basis of the book profits as determined under Indian GAAP or Ind AS as applicable.  If a company pays higher tax during any financial year due to applicability of MAT, the excess tax paid is carried forward for offset against tax payable in future years when the company will be paying normal income tax.

As per the current Income-tax Act, the MAT credit can be carried forward for set-off for ten succeeding assessment years from the year in which MAT credit becomes allowable. The Finance Bill 2017 proposes that credit in respect of MAT paid u/s. 115JB can be carried forward upto fifteen succeeding assessment years.  MAT is an additional tax payable to authorities based on the comparison of book profit and taxable profit for the year, albeit the company may be required to make certain adjustments (additions or deductions) to accounting profit for arriving at the 115 JB book profit.

For accounting purposes, the author believes that a MAT provision or a MAT asset should not be created on TD adjustments for the following reasons:

–    The trigger for MAT is a higher book profit compared to a lower income computed under normal income tax computation provisions.  The relationship between future book profits and income computed under normal income tax provisions will determine the MAT in future periods.  Therefore MAT is like a current tax liability/asset that is accounted in each year.  The possibility of the future book profits being higher or lower due to TD adjustments, is not a relevant factor for creating a MAT liability or MAT asset for TD adjustments.  In other words, MAT is a current tax based on book profits in each year, and the liability for MAT arises only once the financial year commences.  MAT is not triggered by FTA adjustments, though those are taken into consideration for determining MAT book profits for the relevant year.

–    Absent tax holidays and few tax exempt income/ expenses, differences between the normal tax and the MAT are primarily due to deductible and taxable temporary differences. Those temporary differences result in deferred taxes being recognized on the basis that they will eventually reverse subject to application of prudence for recognition of DTA. Thus, the MAT is effectively a mechanism to bridge/ reduce gap between the carrying amount and tax base of assets and liabilities. On its own the MAT does not create any new differences. Since Ind AS 12 requires an entity to recognise DTA/ DTL for temporary differences between the carrying amount and tax base of assets and liabilities, it may be argued that MAT itself should not result in recognition of any new/ additional DTA/ DTL.  Else, it may be tantamount to double counting.  This is explained with the help of a small example.

EXAMPLE
The Company enjoys an accelerated depreciation under the Income-tax provisions, but charges lower depreciation for accounting purposes.  This has resulted in the Company being subjected to MAT.  The Company has created a DTL for the accelerated depreciation at normal income tax rates.  The Company also records a MAT liability in the financial year.

On TD the Company records the fixed assets at Indian GAAP carrying value and also creates a provision for decommissioning liability of INR 100 with a corresponding adjustment to RE.  For 115 JB book profits the RE adjustment will be spread over 5 years.

As a result of recording the decommissioning liability in Ind AS, the DTL amount will also correspondingly reduce on TD.  It would be inappropriate to record a MAT asset on TD, for the RE credit of INR 100, since that would tantamount to double counting.

MAT is effectively a mechanism to bridge/ reduce gap between the carrying amount and tax base of assets and liabilities. On its own the MAT does not create any new differences. Since Ind AS 12 requires an entity to recognise DTA/ DTL for temporary differences between the carrying amount and tax base of assets and liabilities, it may be argued that MAT itself should not result in recognition of any new/ additional DTA/ DTL

Considering the above arguments, MAT payment is only an event of the relevant period, viz., the period during which MAT obligation arises under the Income-tax Act. Hence, it should be recognised in the relevant period and no upfront DTA/ DTL should be created towards amount to be adjusted in book profit of future years.  The ICAI may issue appropriate guidance on the matter.

Right to Live Yes – Right to Die?

The month of March 2017, is possibly a landmark month in Indian history. The election results of five states were declared and the ruling party recorded a stunning success. Barring the lone state of Punjab it has come to power in four states. While these results have given the party a boost, the responsibility to deliver on its promises has also increased. The Goods and Services Tax (GST), promising to be a game changer has cleared virtually all hurdles and will come into force from 1st July 2017, some months before the September 2017 deadline. Finally, possibly for the first time since independence the Finance Bill for the ensuing financial year has been passed in the preceding financial year itself.

Amidst all the excitement, two events have not received as much public attention from the public as they deserve. These are passing of the Mental Health Care Act, 2016 which in terms of a specific provision decriminalises an attempt to commit suicide. The second is the Supreme Court declining to permit a mother to terminate the pregnancy although the foetus had a severe abnormality. The woman had completed 27 weeks of pregnancy. The current Medical Termination of Pregnancy Act does not permit termination of pregnancy beyond 20 weeks. Seemingly unconnected events, but both relate to right to live which should include a right to die!

For long, activists have been pleading that, when a person attempts to take his own life, it is an extreme step. Such a person could either be mentally ill or under such severe stress that he/she does not feel it worthwhile to live. After having suffered the trauma of having taken such a step, to prosecute the person under the Indian Penal Code (IPC) was really inhuman to both the person concerned as well as his/her close relatives. Section 115 of the Mental Health Care Act presumes a state of severe mental stress in case of a person who makes an attempt to commit suicide, and prohibits any action under section 309 of the IPC. It is true that there would be unscrupulous elements who may try to take unwarranted advantage of such a provision. However, not to legislate due to the possible misuse by a few was incorrect and the government has taken a positive step. One hopes that apart from this welcome provision, the other sections of the Act are also put to good use so that mentally ill persons get medical attention that they deserve and are treated with dignity by the society.

As far as the second event is concerned, there needs to be a debate in public fora. Given the medical infrastructure that our country has, it is extremely difficult to detect a severe abnormality of a foetus, in the early stages of pregnancy. That being the case, if such an abnormality is detected late, there should be some remedy available to the unfortunate parents. I am deeply conscious of a large number of ethical, moral issues involved and there is really no definite answer to a number of questions that may arise. One can only imagine the predicament of the doctor if such a child with a severe abnormality is born alive. There should be a healthy public debate in regard to these situations and the condition of such a child, and the emotional trauma of the parents must receive due consideration.

Finally, there is the issue of euthanasia. Every day we witness, a number of persons who are terminally ill and the chances of their medical condition improving are virtually nil. In such a situation whether they should have the right to decline medical treatment is a very contentious issue. In this case as well there will be a number of ethical and moral issues involved. I am reminded of the case of the nurse – Aruna – who was sexually assaulted and thereafter lay comatose for nearly four decades. While one salutes the dedication of those nurses and doctors who took care of her for this entire period, one wonders what decision the patient would have taken if she had been in the mental state to take one. Today, the concept of a living will is gaining ground where a person while in possession of his mental faculties puts down in writing his decision should a medical condition of his being terminally ill arise.

There is no point in putting the onus on the judiciary in the situations contemplated above. Courts have to deal with the law as legislated. It is true that in situations like the medical condition of an unborn child, or a terminally ill patient one must tread with extreme care. When one is dealing with life, and yes death of a person the decision is irreversible. Therefore, there must be a continuous public debate on these aspects and one must move forward for reaching a consensus on an acceptable legislation. That much we owe to those who suffer in silence!

From Darkness to Light

It was our annual vacation – this time to the French Riviera and around, beginning from Seville in Spain to Capri Islands in Italy.

We had had a great time and Capri was to be the best part of our trip. Travelling from Naples by ship to reach Capri was an experience in itself. Once settled in the advantageously perched hotel at Marina Piccola, plans were made to visit the Blue Grotto next day morning.

Blue Grotto is a cave opening, about a meter in height leading you to darkness for a fraction of a second, which instantly turns to azure blue light on the water surface caused by sunlight entering the caves through the small opening. As you appear to float on water, the crystal blue waters give silver reflections from the tiny bubbles on the surface of the objects underwater.

The next day, we left the hotel at around 10 am for the jetty from where we were to be ferried to Blue Grotto which was about 45 minutes away. A number of ferries were making trips carrying groups of eager and excited tourists.

As all of us got our turn to step on to the ferry, the excitement mounted as each one of us was looking to have a memorable experience. After having braved the Sun for an hour or so, we were near the location.

Once there, we disembarked into smaller boats which could accommodate about four of us at a time. There were boats already lined up, each waiting for their two minutes of exhilarating experience. The Sun made the wait look like eternity. Time always seems to stop when you are anxious or expectant. Stop, it did.

After some anxious waiting, it was announced that our turn would be next. We had by then realised that the trip was like a drop – here you go and there you come – all in a matter of a hundred seconds. The boatman instructed us to bend such that we do not hit the rocky ceiling. And, we got ready with our Camera – ready to capture memories.

The next two minutes was marked by exclamations – “wow…”, “beauty…”, “fabulous…” and the like.

And there we were back in the sunlight. The trip over, everybody had signs of happiness and amazement writ large on their faces. Each was trying to outclass the others in the description of the beauty they had just witnessed.

I wondered what was wrong. I had seen darkness all around. Were they being sarcastic? In fact, I was too embarrassed to share my experience with my friends. I did not want to be a spoil-sport.

My mind was so flooded with these contradictions that I did not even remember my trip back to Anna Capri. I kept wondering. Heavily disillusioned and disheartened with the experience, I climbed the stairs at the hotel and walked to my room.

Throwing the camera bag on to the bed, I wearily walked to the small room. As I looked up the mirror to study myself, I was shocked to say the least.

My sunglasses rested on my nose over my elegant pair of normal spectacles. And, it struck me like a lightening. I had ventured into Blue Grotto with my sun glasses on. It did not take rocket science for it to dawn on me that Blue Grotto did not appear blue to me as I was wearing dark sun glasses.

As if still to prove myself right, I hurried to the camera and retracted the clicks of those moments in the cave. Lo and behold!! They showed the Blue Grotto in all its blue splendour.
It was much after we returned to India that in one of our meetings, I gathered courage to explain my reality of that experience. In any case, I had reinforced the age old lesson for myself – “You have to eliminate all your filters of viewing -may they be of sunglasses or prejudices, biases, predispositions or the like”. Else, as the German philosopher, Arthur Schopenhauer, beautifully observed – “Every person takes the limits of their own field of vision for the limits of the world”.

54. Search and seizure- Block assessment- Sections 132 and 158BC – B P. 1990-91 to 2000-01 – Undisclosed income-corroborative evidence needed in case of statement- Finding that additions were not sustainable – Justified

CIT vs. Smt. S Jayalaxmi Ammal; 390 ITR 189 (Mad):

The assessee was a jeweler. On 29/12/1999, a search u/s. 132
of the Act, was conducted in the residential and business premises of the
assessee. Based on the materials collected during search, a notice u/s. 158BC
of the Act was issued. The assessee filed a Nil return. The Assessing Officer
completed the block assessment making the following additions (i) Rs. 31,00,000
being the value of immovable properties purchased in the name of daughter in
law of the assessee; (ii) Rs 80,000 towards excess stock of 215 gms. of gold
jewellery found in the business premises; (iii) Rs. 2,90,000 towards excess
stock of 39 kgs of silver articles; (iv) difference in cost of construction of
Rs. 83,700; (v) Rs. 3,00,000 towards inadequate drawings, and (vi) Surcharge of
Rs. 2,10,360 The Commissioner (A) substituted a figure of Rs. 5,00,000 in the
place of Rs. 31,00,000 and reduced the addition of Rs. 3,00,000 to Rs. 2,00,000
He deleted the additions of Rs 80,000 and Rs. 83,700 and confirmed the other additions.
The Tribunal held that in the absence of any material found during the course
of search operation the addition of Rs. 5,00,000 cannot be sustained as
undisclosed income. The Tribunal also upheld the deletion of Rs. 80,000 and Rs.
86,700 by the Commissioner (Appeals).

The Madras High Court dismissed the appeal filed by the
Revenue and held as under:

“i)   In case of a block assessment for deciding
any issue against the assessee, the authorities under the Income-tax Act, 1961
have to consider, whether there is any corroborative material evidence. If
there is no corroborating documentary evidence, then the statement recorded
u/s. 132(4) of the Income-tax Act, 1961 alone should not be the basis for
arriving at any adverse decision against the assessee.

ii)   On the facts and circumstances of the case, a
mere statement without any corroborative evidence, should not be treated as
conclusive evidence against the maker of the statement. The deletions of
additions by the Tribunal were justified.”

15. TS-896-ITAT-2016(Rjt)-TP WocoMotherson Advanced Rubber Technologies Limited vs. DCIT A.Y.s: 2006-07 to 2011-12, Dated: 29th September, 2016

Section 92CA of the Act – Provision for
technical assistance does not essentially require the technology to be owned by
the service provider for use of technology – AO has to examine as to how much
is the arm’s length consideration for such services – high tax jurisdiction or
low tax jurisdiction is not relevant for the purpose of determination of arm’s
length price – where group is able to reduce tax burden by locating their units
is not a relevant factor under Indian Transfer pricing provisions

Facts

The taxpayer, an Indian entity, was engaged
in manufacture of high quality rubber parts, rubber plastic parts, rubber metal
parts and liquid silicon rubber parts. The Taxpayer had entered into
international transactions with its Associated Enterprises (AEs) (FCo1 in
Sharjah and FCo2 in Germany). FCo2 had granted non-exclusive licence to the
Taxpayer to manufacture, use, exercise or sell the licensed products at NIL
royalty. FCo1 was to provide technical assistance services in relation to the
licensed products. The Taxpayer made payments to FCo1 in relation to the
technical services.

The Transfer Pricing Officer (TPO) objected
that though the Taxpayer paid technical service fees to FCo1, all the
intangibles associated with manufacturing process were owned by FCo2.
Accordingly, TPO conducted TP adjustment in hands of the Taxpayer considering
the FTS paid to FCo1 as NIL. Taxpayer argued that the technical service
agreement with FCo1 was for achieving operational and technical competencies
relating to know-how and technology licensed by FCo2. For rendering technical
assistance, the service provider need not require be the owner of the
technology.

The Taxpayer filed objections before Dispute
resolution panel (DRP). DRP rejected the same on the ground that the services
provided by FCo2 and FCo1 are not distinct; when the same services were
received by the Taxpayer from FCo2 without any consideration, transaction with
FCo2 was an internal CUP (Comparable Uncontrolled Price). Therefore, the
services received from FCo1 should have been benchmarked at NIL.

Aggrieved, the Taxpayer approached the
Tribunal.

Held

(i)   While agreement with FCo2
was for “use of knowhow and inventions”, the agreement with FCo1 was for
“provision for technical assistance required for use of technology”.The nature
of services under the two agreements was distinct even though somewhat
interconnected.

(ii)  Provision for technical
assistance required for use of technology did not require the technology to be
owned by the service provider for use of technology.

(iii)  It is undisputed that
FCo1 had the requisite expertise and skills available for rendition of
technical services. Once the rendition of services is reasonably evidenced, it
cannot be open to the TPO to disregard the same and come to the conclusion that
these services need not have been compensated for or ought to have been
rendered by FCo2 or some
other person.

(iv) In the course of
ascertaining the arm’s length price (ALP), all that the AO has to examine is as
to how much is the consideration that the Taxpayer would have paid for the
services in arm’s length situation, rather than sitting in judgment over
whether the Taxpayer should have incurred these expenses at all.

(v)  Whether or not the person
entering into transaction is in a high tax jurisdiction or low tax jurisdiction
is also not relevant for the purpose of determination of ALP

(vi) The base erosion, which is
sought to be checked by the transfer pricing provisions in India, is the tax
base in India. Indian transfer pricing cannot be, and is not, concerned with
whether entire Group, as a whole, has been able to reduce their tax burden by
locating their units rendering technical services outside Germany.

(vii)  Further,
even if the services rendered, or believed to have been rendered, by FCo2 are
the same as those rendered by FCo1, the same being an intra AE transaction,
cannot be treated as a valid internal CUP. It is only an uncontrolled
transaction, i.e. between the independent enterprises, which can be used as a
benchmark to ascertain ALP. Thus, a transaction between the AEs cannot be
considered as a valid input for application of CUP method. Relied on a rulings
in the cases of Skoda Auto India Ltd. vs. ACIT [(2009) 30 SOT 319 (Pune)] and
ACIT vs. Technimont ICB India Pvt. Ltd. [(2012) 138 ITD TM 23 (Mum)].

16. [2016] 161 ITD 527 (Pune Trib.) Knox Investments (P.) Ltd. vs. ITO A.Y.: 2007 – 08 Date of order: 26th August, 2016

Section
37(1) – Where assessee, a financial intermediary agent, enters into an
assignment agreement whereby liability of assignor is acquired by assessee at
its NPV, then difference between NPV of the said liability as at end of
relevant financial year and as at end of preceding financial year, till the
repayment of the liability commences, is allowed as finance charges.       

FACTS

The assessee-company was engaged in business
of financial intermediary agents and earned income by way of commission and
professional fees and followed mercantile system of accounting.

During the assessment proceedings, the AO
inquired about the nature of payment of Rs.44,71,126/-that the assessee had
debited as finance charges in its profit and loss account.

In response to the same, the assessee
submitted that Indian Seamless Steels and Alloys Ltd. (ISSAL) had availed
interest free sales-tax deferral Certificate of Entitlement from the Government
of Maharashtra under the Package scheme of Incentives,1988. As per the said
scheme, sales-tax liability of each year was required to be paid by ISSAL to
the Sales-Tax Department of Government of Maharashtra in five equal annual
instalments upon expiry of ten years from the date of availment i.e. to say the
sales tax collected for the financial year 1994-95 was required to be repaid in
five equal annual instalments beginning with financial year 2005-06 and so on.

As a part of financing activity, the
assessee vide agreement dated 9th April 2001, took over
liability of the ISSAL for repayment of sales-tax deferral amounting to Rs.
835.98 lakh (collected by ISAAL for the period 1st April 2000 to 31st
March 2001) for a consideration of  Rs.
268.79 lakh arrived at @10% NPV based on the repayment schedule. The said loan
was repayable by the assessee to Government in five equal instalments starting from
F.Y. 2011-12 and ending on F.Y.2015-16.

This NPV of liability amounting to Rs.
268.79 lakh as on 31.03.2001, got enhanced to 288.63 lakh as on 31.03.2002 and
the same was shown under the head ‘unsecured loans’ for the first time in the
balance sheet of the assessee as on 31.03.2002. The NPV of liability thus got
increased every year till the repayment would commence in the F.Y. 2011-12 and
the difference in NPV at the end of a particular financial year and the
immediately preceding year was claimed as expenditure under the head ‘finance
charges’ in the P&L account of that year.

Following the same method in this year, the
difference in NPV as on 31.03.2007 and as on 31.03.2006 amounting to Rs.
44,71,126/- was debited to the P&L account for the year under consideration
as expenditure under the head ‘finance charges’ and as it was not actually
paid, the said amount was also added to the existing outstanding liability and
shown under the head ‘unsecured loans’.

The AO was of the view that the amount so
debited was not a revenue expenditure as liability did not exist in praesenti
but was a contingent liability. He thus disallowed the claim of finance
charges.

The Commissioner (Appeals), endorsed the
action of the Assessing Officer.

On appeal before the Tribunal:

HELD

The judicial opinion of the various courts
is that a liability depending upon a contingency is not a debt in praesenti
or in futuro till the contingency happens. But if it is debt, the fact
that the amount has to be ascertained does not make it any less a debt if the
liability is certain and what remains is only a quantification of the amount.
The word ‘contingent’ in contrast, refers to possibility of an obligation or
liability to arise on occurrence or non-occurrence of one or more uncertain
future events.

An accrued
liability is an allowable deduction whereas a contingent liability is not an
allowable deduction for the purposes of determination of taxable income.
Therefore the pertinent question that arises for adjudication is whether,
difference in NPV of the liability at the end of a particular financial year
and the immediately preceding year claimed as expenditure under the head
‘finance charges’ in the P&L account of that year (i.e. Rs. 44,71,126/-
debited to P&L for relevant assessment year under consideration), is an
accrued liability or a contingent liability.

In terms of section 145 of the Income-tax
Act, 1961 read with section 211 of the Companies Act, 1956 – a company has to
mandatorily prepare its account on ‘accrual’ basis. The term ‘Accrual’ has been
defined by the Accounting Standard-1 and by section 145 of the Income-tax Act,
1961 as follows -.

‘Accrual’ refers to the assumptions that
revenues and costs are accrued, that is, recognized as they are earned or
incurred (and not as money is received or paid) and recorded in the final
statements of the periods to which they relate.

The Accounting Standard-1 further provides
that as a matter of prudent accounting policy, provisions should be made for
all known liabilities and losses even though the amount cannot be determined
with certainty and represents only the best estimate in the light of available
information. Under the Mercantile System of Accounting, the expenditure items
for which legal liability has been incurred are immediately debited even before
the amount in question is actually distributed.

In terms of section 28 read with section 145
of the Income Tax Act,1961 income chargeable under the head ‘profit and gains
of business or profession’ cannot be determined unless and until the expenses
or obligations which have been incurred are set-off against the receipts.
Therefore, in order to determine the true profits arising from business, the
expenditure actually incurred or liability in respect thereof accrued even
though it may have to be discharged at some future date has to be necessarily
accounted for.

In the present case, the assessee by virtue
of assignment agreement received certain amount which was to be replenished and
repaid by higher sum computed by applying Net Present Value method at a
discounting factor of 10%. The corresponding finance costs debited to profit
& loss account during the year represents incremental increase in the
liability with the efflux of time where the liability gets accrued as it inches
towards maturity. Thus, it was manifest that the incremental liability had
accrued to the assessee in praesenti with the efflux of time notwithstanding
the fact that increase in the liability was required to be actually discharged
on a future date. The gradual increase in liability is dependent on the time
horizon that has elapsed and therefore not an uncertain event by any stretch of
imagination. The liability has definitely accrued in praesenti against
future outflow of resources and the said liability can be determined with great
reliability.

In result, the appeal of the assessee is
allowed.

Section 92C, the Act – Since the Taxpayer had paid royalty fully and exclusively in course of business and even after paying the same, had earned gross profit at rate better than that earned by comparables, royalty payment was at arm’s length and addition was to be deleted.

22. [2017] 83 taxmann.com 165 (Delhi – Trib.) DCIT vs. Cornell Overseas (P.) Ltd. A.Y. 2003-04, Date of Order: 2nd May, 2017

Section 92C, the Act – Since the Taxpayer had paid royalty fully and exclusively in course of business and even after paying the same, had earned gross profit at rate better than that earned by comparables, royalty payment was at arm’s length and addition was to be deleted.

FACTS
The Taxpayer was engaged in the business of designer garments. During the relevant year, the Taxpayer entered into an agreement with its AE in USA for licensing designs from the AE. Under the agreement, the AE was to supply designs, provide technical know-how, permit use of logo, provide guidelines and expertise through visits of its personnel and access to the market. In consideration, the Taxpayer paid royalty @ 5% of sales of products.

The Taxpayer benchmarked its major international transaction of sale of garments on cost plus method. It earned gross profit of 19% whereas the comparables had earned between 12% to 16%. The Taxpayer considered that the transaction was at ALP since it had earned better net margins as compared to the comparables.

TPO disallowed royalty on the ground that the Taxpayer was a limited risk contract manufacturer. He thus held that payment of royalty did not conform to arm’s length principle. On appeal, the CIT(A) held that the royalty payment was included in the sale price of garments to its AE. Hence, it was automatically benchmarked. Further, since royalty and export transactions were clubbed to arrive at the gross profit margin, which was higher than the comparables, automatically each of the transactions was to be treated as being carried on at ALP.

HELD

  • The royalty paid by the Taxpayer was fully and exclusively incurred in the regular course of business. Even after paying royalty, the Taxpayer earned gross profit @19% which was better than GP of 12% to 16% in case of comparables.

  • Therefore, royalty payment was at arm’s length. The addition made by the AO was not justified and was rightly deleted by CIT(A).

10. Haryana and Another, VAT App. No. 73 Of 2011, Dated 27th October, 2016 (P&H).

10. Haryana and Another, VAT App. No. 73 Of 2011, Dated 27th October, 2016 (P&H).

VAT- Classification of Goods – Paper Napkins-Covered By Entry Paper, Entry 57 of Schedule C of The Haryana Value Added Tax Act, 2003.

Facts

The appellant engaged in the business of manufacture and sale of tissue paper, napkin, toilet paper rolls, kitchen wipes and facial tissues filed application u/s. 56(3) of the Haryana Value Added Tax Act,2003 to the State Government for clarification, as to under which Entry the aforesaid goods being manufactured by the appellant would fall and the rate of tax leviable thereon. The Financial Commissioner and Principal Secretary to the Government of Haryana, Excise and Taxation Department, vide order dated 18.1.2010, opined that the goods being manufactured by the appellant were not forming part of Entry 57 of Schedule ‘C’ of the Act. Hence, it would be taxable @ 12.5%, being unclassified goods. The order was challenged before the Tribunal. The Tribunal, vide order dated 29.7.2011, dismissed the appeal. The Company filed appeal before the Punjab and Haryana High Court against the impugned order of the Tribunal.

Held

Entry 57 in Schedule ‘C’ only prescribes ‘paper’, ‘paper board’ and ‘newsprint’. It does not provide for any inclusions or exclusions. It further does not provide for any user test. The word ‘paper’ used in the Entry is in generic form, which will include all types of paper, which has its essential characteristics. It is not in dispute that even the tissue paper, napkin, toilet paper rolls etc. retain the essential characteristics of paper. It is only that it is in different strength and is used for different purposes. There is no competing entry to find out whether product falls in entry ‘A’ or ‘B’. The residuary entry is to be invoked in case, with liberal construction to the specific entry, the product could not be found to be forming part thereof. Accordingly, the High Court allowed the appeal and held that the tissue paper, paper napkins etc. are covered by entry 57 of the Schedule C of the act within the expression paper and liable to 4% tax.

9. Commercial Tax Officer & Ors. vs. State Bank of India & Anr., Civil Appeal No. 1798 of 2005, dated 8th November, 2016 (SC).

9. Commercial Tax Officer & Ors. vs. State Bank of India & Anr., Civil Appeal No. 1798 of 2005, dated 8th November, 2016 (SC).

Purchase Tax – Purchase – Surrender of Exim Scrips – to SBI – Upon Cancellation – Not A Purchase, Section 4(6)(iii) of The Bengal Finance Act, 1941.

Facts

The State Bank of India, a body corporate constituted under the State Bank of India Act, 1955 for the extension of banking facilities in the country and for other public purposes. In March, 1992, the RBI took a policy decision to the effect that the unutilised Exim scrips in the hands of the holders who were willing to dispose of the same should be mopped up through specified branches of the SBI. The RBI, pursuant to the circular sent a letter on March 18, 1992 to the Chairman, State Bank of India, Bombay, authorising all designated branches of the said Bank to purchase Exim scrips from holders, who intended to dispose of the same at a premium of 20 % of the face value of the Exim scrips, from March 23, 1992, subject to certain terms and conditions. Thereafter, SBI purchased Exim scrips as directed by the RBI from various holders of Exim scrips. The department treated these as purchase of goods and levied purchase tax on 20 % premium paid to the holder of scrips who surrendered it to the Bank. The Calcutta High Court in writ petition filed by the Bank against the order of the Tribunal deleted the levy of purchase tax and hold surrender of Exim Scrips is not a purchase. The department filed appeal before the SC against the judgment of High Court.

Held

The replenishment licences or Exim scrips would be goods, when they are transferred or assigned by the holder/owner to a third person for consideration, they would attract sale tax. However, the position would be different when replenishment licences or Exim scrips are returned to the grantor or the sovereign authority for cancellation or extinction. In this process, as and when the goods are presented, the replenishment licence or Exim scrip is cancelled and ceases to be a marketable instrument. It becomes a scrap of paper without any innate market value. The SBI, when it took the said instruments as an agent of the RBI did not hold or purchase any goods. It was merely acting as per the directions of the RBI, as its agent and as a participant in the process of cancellation, to ensure that the replenishment licences or Exim scrips were no longer transferred. The intent and purpose was not to purchase goods in the form of replenishment licences or Exim scrips, but to nullify them. The said purpose and objective is the admitted position. The object was to mop up and remove the replenishment licences or Exim scrips from the market. Be it noted that the initial issue or grant of scrips is not treated as transfer of title or ownership in the goods. Therefore, as a natural corollary, it must follow when the RBI acquires and seeks the return of replenishment licences or Exim scrips with the intention to cancel and destroy them, the replenishment licences or Exim scrips would not be treated as marketable commodity purchased by the grantor. Further, the SBI is an agent of the RBI, the principal. The Exim scrips or replenishment licences were not goods, which were purchased by them. The intent and purpose was not to purchase the replenishment licences because the scheme was to extinguish the right granted by issue of replenishment licences. The ownership in the goods was never transferred or assigned to the SBI. Therefore, the SBI was not liable to levy of purchase tax under the Act. The appeal preferred by the Revenue was dismissed by the SC.