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Category: In the High Courts: Part A-Reported Decisions

Transfer pricing: A. Y. 2006-07: The Assessing officer cannot substitute the method of ‘cost plus mark up’ with the method of ‘cost plus mark up on FOB’ value of exports without establishing that assessee bear significant risks or AEs would enjoy geographical benefits

46. Transfer pricing: A. Y. 2006-07: The Assessing officer cannot substitute the method of ‘cost plus mark up’ with the method of ‘cost plus mark up on FOB’ value of exports without establishing that assessee bear significant risks or AEs would enjoy geographical benefits:

Li and Fung India (P.) Ltd. vs. CIT; [2013] 40 taxmann.com 300 (Delhi):

The assessee, ‘LFIL’, entered into an agreement with its associate enterprise (‘AE’) for rendering sourcing support services for the supply of high volume, time sensitive consumer goods, for which it was remunerated at cost plus mark-up of 5 %.; During the course of Transfer Pricing assessment, the assessee contended that such a transaction was at Arm’s Length Price (‘ALP’) on an application of the TNM method. The Transfer Pricing Officer (‘TPO’) observed that assessee was performing all critical functions, had assumed significant risks and it had used both tangible and unique intangibles developed by it over a period of time, which had given an advantage to the AE in form of low cost of product, quality and had enhanced the profitability of AE. Thus, it held that the compensation of cost plus mark up of 5 % was not at ALP and applied a mark-up of 5 % on the FOB value of exports made by the Indian manufacturer to overseas third party customers. Therefore, the Assessing Officer made addition on the basis of order passed by TPO, which was further affirmed by the Tribunal

On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under:

“i) The impugned order had not shown how and to what extent assessee bore significant risks, or that the AE enjoyed such location advantages, so as to justify rejection of the Transfer pricing exercise undertaken by assessee.

ii)    Tax authorities should base their conclusions on specific facts, and not on vague generalities, such as ‘significant risk’, ‘functional risk’, ‘enterprise risk’, etc., without any material on record to establish such findings. If such findings are warranted, they should be supported by demonstrable reasons, based on facts and the relative evaluation of their weight and significance.

iii)    Where all elements of a proper TNMM are detailed and disclosed in the assessee’s reports, care should be taken by the tax administrators and authorities to analyse them in details and then proceed to record reasons why some or all of them are unacceptable;?

iv)    The impugned order, upholding the determination of certain margin over the FOB value of the AE’s contract, was an error in law. Therefore, the TPO’s addition of the cost plus 5 % markup on the FOB value of exports was without foundation and was to be deleted.”

Educational Institution: Exemption u/s. 10(23C)(iiiad): A. Ys. 2000-01 to 2005-06: The assessee society running 25 educational institutions claimed exemption u/s. 10(23C)(iiiad) in respect of institutions satisfying the conditions: Denial of exemption on the ground that the aggregate receipts of all institutions exceeded limit of Rs. 1 crore: Denial of exemption not proper: Assessee entitled to exemption:

35. Educational Institution: Exemption u/s. 10(23C)(iiiad): A. Ys. 2000-01 to 2005-06: The assessee society running 25 educational institutions claimed exemption u/s. 10(23C)(iiiad) in respect of institutions satisfying the conditions: Denial of exemption on the ground that the aggregate receipts of all institutions exceeded limit of Rs. 1 crore: Denial of exemption not proper: Assessee entitled to exemption:

CIT vs. Childrens Education Society; 358 ITR 373 (Karn):

The assessee society was running around 25 educational institutions. In the relevant assessment years the assessee claimed exemption u/s. 10(23C)(iiiad) of the Income-tax Act, 1961 in respect of the educational institutions which satisfied the relevant conditions. The Assessing Officer denied exemption on the ground that the aggregate of the receipts of all the institutions run by the assessee was more than Rs. 1 crore which is the condition prescribed u/s. 10(23C)(iiiad) of the Act. The Tribunal allowed the assessee’s claim and held that the assessee was entitled to exemption us. 10(23C)(iiiad) for each of the institutions the annual receipts of which were less than Rs. 1 crore.  

On appeal by the Revenue, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“The Tribunal was correct in holding that the exemption in terms of the provisions of section 10(23C)(iiiad) was available to the assessee as annual receipt of each of the institutions of the assessee was less than the prescribed limit under the provision.”

Turnover and value of stock adopted by Sales Tax Authorities is binding on Income-tax Authorities: Addition merely on basis of statement of third parties is not proper:

20. Assessment:  A.  Y.  1998-99  to  2002-03:

Turnover and value of stock adopted by Sales Tax Authorities is binding on Income-tax Authorities: Addition merely on basis of statement of third parties is not proper:

CIT vs. Smt. Sakuntala Devi Khetan: 352 ITR 484 (Mad):

The assessee was a trader in turmeric. For the relevant assessment years the Assessing Officer made additions on the basis statement of third parties. The Tribunal directed the Assessing Officer to adopt the figures of turnover finally assessed by the Sales Tax Authorities and apply the GP rate accordingly.

On appeal by the Revenue, the following question was raised before the Madras High Court:

“Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in holding that the turnover and profit of the assessee for the assessment year under consideration could not be computed in the reassessment on the basis of information received in the course of search conducted in certain cases on the sole ground that the Sales Tax Authorities have accepted the assessee’s purchases, sales and closing stock?”

The High Court upheld the decision of the Tribunal and held as under:

“i)    Unless and until the competent authority under the Sales Tax Act differs or varies with the closing stock of the assessee, the return accepted by the Commercial Tax Department is binding on the Income -tax Authorities and the Assessing Officer has no power to scrutinise the return submitted by the assessee to the Commercial Tax Department and accepted by the Authorities. The Assessing Officer has no jurisdiction to go beyond the value of the closing stock declared by the assessee and accepted by the Commercial Tax Department.

ii)    The assessee had placed the sales tax returns before the Assessing Officer in respect of the A. Ys. 1998-99 to 2001-02. Therefore, sufficient materials were placed before the Assessing Officer in respect of those assessment years and accepted by the Authorities.

iii)    The Tribunal rightly found that the Department could not have made the addition merely on the basis of the statement of third parties and, consequently, set aside the order of the Commissioner (Appeals) and directed the Assessing Officer to adopt the figures of turnover finally assessed by the sales tax authorities and apply the gross profit rate accordingly.”