Missive - Volume XXVI of May 2013


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Dear Patron

Here we are with the Twenty Sixth successive issue of our monthly ‘Missive’.

We trust you will enjoy reading this Missive, even while soaking in the contents. We would very much appreciate your feedback which consistently helps us in improving and upgrading the contents.

Thanks and regards,

Knowledge Management Team
S.P.Nagrath & Co.

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Missive - Volume XXVI of May 2013

  1. 1. MissiveVolume XXVI – May 2013
  2. 2. Dear PatronHere we are with the Twenty Sixth successive issue of ourmonthly ‘Missive’.We trust you will enjoy reading this Missive, even while soakingin the contents. We would very much appreciate your feedbackwhich consistently helps us in improving and upgrading thecontents.Thanks and regards,Knowledge Management TeamTopics PageNoFEMA 1Income Tax 2Transfer Pricing 5Transactions that made headlines 8Never hold your head high with pride or ego, even thewinner of a gold medal gets his medal only when he putshis head down!!!
  3. 3. 1 | P a g eFEMAA.P. (DIR Series) Circular No. 96 Dated April 5, 2013Memorandum of Instructions governing money changing activitiesThe RBI, on a review, has decided that Authorised Money Changers (AMCs) maysell Indian rupees to foreign tourists /visitors against International Credit Cards/ International Debit Cards and should take prompt steps to obtainreimbursement through normal banking channels.All the other instructions shall remain unchanged.A.P. (DIR Series) Circular No. 98 April 9, 2013Trade Credits for Imports into India – Review of all-in-cost ceilingOn a review, the RBI has decided that the all – in – cost ceiling of Trade Creditsfor imports into India, as specified in A.P. (DIR Series) Circular No. 28 datedSeptember 11, 2012 will continue to be applicable till June 30, 2013. All otheraspects of Trade Credit policy remain unchanged.A.P. (DIR Series) Circular No. 100 April 25, 2013Overseas Direct Investments – ClarificationThe RBI has observed that eligible Indian parties are using overseas directinvestments (ODI) automatic route to set up certain structures facilitatingtrading in currencies, securities and commodities. It has come to the notice ofthe Reserve Bank that such structures having equity participation of Indianparties have also started offering financial products linked to Indian Rupee (e.g.non-deliverable trades involving foreign currency, rupee exchange rates, stockindices linked to Indian market, etc.).The RBI has clarified that any overseas entity having equity participationdirectly / indirectly shall not offer such products without the specific approvalof the Reserve Bank of India given that currently Indian Rupee is not fullyconvertible and such products could have implications for the exchange ratemanagement of the country. Any incidence of such product facilitation wouldbe treated as a contravention of the extant FEMA regulations and wouldconsequently attract action under the relevant provisions of FEMA, 1999.
  4. 4. 2 | P a g eIncome TaxCIT vs. Rajarani Exports Pvt Limited (Calcutta High Court) (ITAT No 49of 2013) dated 24th April, 2013.The Calcutta High Court upheld the stand of the Assessee on the grounds thateven if the amount of Commission of Rs 1.28 crores paid to Alia Transportationwere actually kickbacks (bribery) to Iraqi regime, it would not attractExplanation to s. 37(1). It was pointed out that while the transactions betweenAlia and the Iraqi regime may be contrary to the UN sanctions, the transactionsbetween the Assessee and Alia were not against the UN sanctions and hencethere was no specific violation of law by the Assessee, It was also held thatwhat the recipient of the payment does is not important because the Assesseehas no control over the matter. Keeping in view of the above facts the HighCourt therefore, dismissed the appeal.Vijay Rameshbhai Gupta vs. ACIT (Gujarat High Court) (17207 of 2012)dated 4th March 2013.The Gujarat High Court held that u/s 147 reopening of an assessment has to bedone at the sole discretion, opinion and reasonable belief of the AO and not onthe basis of some other authority. The AO cannot blindly follow the opinion ofan audit authority for the purpose of reopening of any assessment u/s 148.However, if the AO acts under compulsion of the audit party and notindependently, the action of re-opening would be vitiated. It was clearlyestablished that the AO was under compulsion from the audit party to issuenotice for reopening the assessment. Hence it was held that the sec 148 noticeissued by the AO had to be squashed.CIT vs. Jagtar Singh Chawla (P&H High Court) (ITA No 71 of 2012)dated 20th March, 2013.The Punjab & Haryana High court on the basis of the rulings in the case ofFatima Bai & Rajesh Kumar Jalan, upheld the stand of the Assessee & opinedthat the benefit of tax exemption on long Term Capital Gain would be availableas long as the taxpayer made the new investment within the time line of filingtax return u/s 139 of the Act. The same shall be allowed even if any belatedreturn is filed by the assesse within the time limit. Hence it was held that thetax payer had acquired the new residential house within the extended period offiling tax return (here 31.3.2008) i.e.by the end of the assessment year,relevant to the previous year in which the asset was sold. Therefore the taxpayer is eligible for exemption from tax on LTCG u/s 54F.
  5. 5. 3 | P a g eITO vs. Right Florists Pvt Ltd (ITAT Kolkata) (ITA No 1336/Kol/2011)dated 12th April, 2013.The Tribunal held dismissing the appeal. The tribunal considered the fact u/s5(2)(b) “Income accrue or arise in India” and held that the servers of Googleand Yahoo are not located in India so there is no PE in India. In the absence ofany business connection the second limit of sec 5(2) (b) ‘’Income deemed toaccrue or arise in India’’ also does not applies. The tribunal considered that theadvertising revenues are not assessable as royalty u/s 9(1) (vi) and the samedoes not qualify for Managerial, Consultancy & technical services as theseinvolves a human element. The Tribunal appreciated that search engines suchas Yahoo and Google provided advertisement services in a purely automatedmanner using algorithms and codes without any human intervention. Theservices rendered by the search engines are a wholly automated process &does not involve any human touch at all. Consequently, the receipts in respectof online advertising on Google and Yahoo cannot be brought to tax in Indiaunder the provisions of the Act or the India US and India Ireland tax treaty.M/s Shieve Exports v. JCIT [ITA No. 321/Mum/2012] dated 10th April,2013On appeal to the Tribunal, it noted that as per the amended provisions ofSection 80-IA (2), an option was given to the Assessee for claiming deductionfor any 10 years out of 15 years in which the business begins to operate. TheTribunal held that the taxpayer has an option to choose the initial AssessmentYear. Hence u/s 80(IA) (5), only the losses of the year starting from the initialAssessment Year alone are to be b/f and set off. The Tribunal distinguished thedecision relied on the by the CIT in the case of Goldmine shares & Finance PvtLtd as the same was based on the erstwhile definition of ‘Initial AY’).TheTribunal set aside the order of the CIT u/s 263 since the order of the AO couldnot be termed as erroneous in law.NotificationC B D T vide. Notification NO.34/2013 [F.NO.142/5/2013-TPL]/SO 1111(E),dated 1-5-2013 released new Income Tax Return Forms for the AY 13-14 withfew amendments. It shall come into force w.e.f 1.04.2013.Certain importantamendments have also been made in the forms which are as follows:-
  6. 6. 4 | P a g e Return in ITR 1 can’t be filed if Assessee incurs losses under the Head“Income from Other Sources” Return in ITR 1 can’t be filed if Assessee claims tax relief or has anyincome which is exempt under chapter III. Return in ITR 4S can’t be filed if Assessee claims tax relief or has anyincome which is exempt under chapter III. E-filing of Audit Reports u/s 44AB in respect of books of accounts, 92Ein respect of international transactions and 115JB in respect of MATcomputation have been made mandatory. Mandatory E-filing of return if income for every person(not being acompany or a person filing return in ITR 7) whose total incomeexceeds Rs. 5,00,000 or Assessee claims tax relief u/s 90, 90A or 91.CircularCBDT via Circular No. 04/2013 [F. No. 275/34/2011-IT(B)], dated 17thApril,2013 stated that the TDS certificate in Form 16 issued by a Deductor on anafter 1.4.12 shall contain two parts viz. Part A & Part B(Annexure).Part Acontains details of tax deduction and Part B (Annexure) contains details ofincome. It further added that Part A of Form 16 shall be issued by all thedeductors, (including Government deductors), only by generating it throughTRACES Portal and after duly authenticating and verifying it. Part B (Annexure)of Form 16 shall be prepared manually and shall be issued to the deducteeafter due authentication and verification along with Part A of Form 16. Form 16should be issued by 31st May of the financial Year immediately following thefinancial year in which income was paid and tax deducted. The Director Generalof Income-tax (Systems) shall specify the procedure, formats and standards forthe purpose of download of Part A of Form No. 16 from the TRACES Portal andshall be responsible for the day-to-day administration in relation to theprocedure, formats and standards for download of Part A of Form No. 16 inelectronic form. It is also clarified that Form 16 issued in accordance with thecircular, shall only be treated as valid compliance.
  7. 7. 5 | P a g eTransfer PricingAutomatic RBI approval means transaction is at Arm’s LengthPriceThyssenKrupp Industries India Pvt. Ltd vs. ACIT (ITA NO.6460/Mum/2012)The ITAT in its judgment held that when the rate of royalty payment andfee for drawings etc. has been approved or deemed to have beenapproved by the RBI, then such payment has to be considered at ALP.Scope of +/- 5% tolerance adjustment to ALP explainedIHG IT Services (India) Pvt. Ltd vs. ITO (ITA No. 5890/Del/2010)It was held that the benefit of tolerance margin would be available onlyif the variation is within the tolerance margin. Once the variationexceeded the tolerance margin, then there would be no benefit even upto tolerance margin.Foreign AE cannot be the tested party. TP additions can exceedoverall group profitsOnward Technologies Limited vs. DCIT (ITA No. 7985/Mum/2010)The Tribunal held that there is no question of substituting the profitrealized by the Indian enterprise from its foreign AE with the profitrealized by the foreign AE from the ultimate customers for the purposesof determining the ALP of the international transaction of the Indianenterprise with its foreign AE. Further, the contention of the Assesseethat the authorities cannot go beyond the overall profit of the group ofAEs in determining the ALP of the international transaction is also notacceptable because it will constitute a new method/ yardstick fordetermining the ALP.
  8. 8. 6 | P a g eDRP entitled to enhance by questioning very existence oftransactionHamon Shriram Cottrell Pvt. Ltd vs. ITO (ITA No. 7982/Mum/2011)The Explanation to section 144C(8) has widened the DRP’s power ofenhancement to all the matters arising out of the assessmentproceedings irrespective of whether they were raised or not by theAssessee. With this amplification of the power, even the matters notagitated by the Assessee before the DRP can also be considered for thepurposes of enhancement.If more than one price is determined by the most appropriatemethod, the ALP has to be the arithmetical mean of such pricesCIT vs. Mentor Graphics (Noida) Pvt. Ltd (Delhi High Court) (ITA No.1114/2008)High Court in its judgment referred that the proviso to section 92C(2) isexplicit that where more than one price is determined by mostappropriate method, the arm’s length price shall be taken to be thearithmetical mean of such prices. Further, it was held that fresh searchcan be conducted by TPO under section 92C (3) which stipulate foursituations where under the AO/ TPO may proceed to determine the ALPin relation to an international transaction.Important principles on “turnover filter” & comparison explainedCapgemini India Private Limited vs. ACIT (ITA No. 7861/Mum/2011)Tribunal held the following:- A comparison of margin between the Assessee and the comparableshas to be made under identical conditions, for the purpose ofmaking proper comparison of the margin, onetime cost incurred bythe Assessee has to be excluded. Only standalone results should be adopted for the purpose ofcomparison of margins as the consolidated results which includeprofit from different overseas jurisdictions having differentgeographical and marketing conditions will not be comparable The concept of economy of scale is relevant to manufacturingconcerns, which have high fixed assets and, therefore, with the risein volume, cost per unit of the product decreases, which is thereason of increase in margin as scale of operations goes up but the
  9. 9. 7 | P a g esame is not true in case of service companies, which do not requirehigh fixed assets. It would not be appropriate to apply turnover filter for the purposeof comparison of margins. However, for the purpose of comparison,the turnover would be relevant only from the limited purpose toensure that the comparable selected is an established playercapable of executing all types of work as the Assessee is also anestablished company in the field.RBI approval has no relevance on issue of Arm’s Length PriceSKOL Breweries Ltd vs. ACIT (ITAT Mumbai) (ITA No. 6175/Mum/2011)Tribunal held that Press Note no.9 of 2000 issued by the Ministry ofCommerce and Industry in respect of FDI policy and prescribing thepercentage of royalty to the sales allowed under automatic routecannot substitute as ALP to be determined under the provisions of theAct and Rules. FDI policy permitting certain percentage of payment ofroyalty is only for remittance of the amount in foreign exchange andtherefore, such permission given in an entirely different context andpurpose cannot be considered as relevant for determination of the ALPunder I. T. Act.ALP should be determined on segment-wise profits & notat an entity level. Adjustment cannot be made to the entire entityturnover/ profitsSandoz Private Limited vs. DCIT (ITAT Mumbai) (ITA No.6922/Mum/2012)The tribunal held that the correct approach under TNMM should be todetermine the ALP of each of the segments by comparing with thecorresponding comparables involved in similar lines of functioning afterproper FAR analysisALP of loan transaction has to be determined as per CUP & LIBORCotton Naturals (I) Pvt. Ltd vs. DCIT (ITAT Delhi)(ITA No.5855/Del/2012)CUP is the most appropriate method for ascertaining the arm’s lengthprice of an international transaction of lending money. Where thetransaction is of lending money in foreign currency to its foreignsubsidiaries, the comparable transactions have to be of foreign currencylent by unrelated parties. In such a situation, domestic prime lendingrate would have no applicability and the international rate fixed being
  10. 10. 8 | P a g eLIBOR should be taken as the benchmark rate for internationaltransactions.No notional interest addition for delayed payments by AEEvonik Degussa India P. Ltd vs. ACIT (ITAT Mumbai) (ITA No.7653/Mum/2011)The T.P. adjustment cannot be made on hypothetical and notional basisuntil and unless there is some material on record that there has beenunder charging of real income. Consequently, an addition an account ofnotional interest relating to alleged delayed payment in collection ofreceivables from the A.Es is uncalled for as there is no such agreementwhereby interest is to be charged on such a delayed payment.Transactions that made headlines Mahindra Holidays acquires 49% stake in Dubai-based ArabianDreams Hotel Apartments TCS to acquire French IT firm Alti for $97.5M Pearson buys Educomp’s 50% stake in vocational education JVIndiaCan Spanish firm Ebro Foods buying Olam’s Indian rice mill unit for$14.5M KKR to take controlling stake in Alliance Tire in leveraged buyout Tata Technologies acquires US-based Cambric for $32.5M Bharti Airtel to acquire Warid Telecom Uganda
  11. 11. This publication is intended as a service to clients and associates and to provide them with details of the important Transaction updates. It hasbeen prepared for the general guidance on matters of interest only, and does not constitute professional advise. No person shall act upon theinformation contained in this publication without obtaining specific professional advise. Due care has been taken while compiling theinformation , however, no representation (express or implied) is given as to the accuracy or completeness of the information contained in thispublicationOur guiding philosophy is “To carry out every professional assignmenteffectively and efficiently, while upholding the virtues of independenceand integrity, without compromising on the creativity and quality of work,so as to provide utmost satisfaction to our clients ”A-380, Defence Colony,New Delhi –110024Tel: +91-11-4980-0000Fax: 91-11-4980-0029Email: sanjoli@spnagrath.comwww.spnagrath.comFor any professional advice regarding alerts in this newsletter, we welcome your queries©Copyright S P Nagrath &Co. , All rights reserved