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Monthly Digest of imp case law (Sept 11)
November, 02nd 2011

S. 2 (13): Adventure in nature of  trade-Investment in agricultural land.


A person makes investment in agricultural land within limits of town panchayats, and agricultural income was shown and declared year after year. Permission was sought to develop lands.  No further action, was taken for over 12 years till date of sale, and  entire land is sold after its value appreciated ,it would not become adventure in the nature of trade.


ITO v Chandar HUF ( 2011) 47  SOT  17 ( Chennai) (Trib).


S. 2 (14): Capital assets- Capital gains- Town Panchayat.


A Town Panchayat is notified for urban agglomeration, but it is not a municipality. Agricultural lands falling within said town panchayat would not fall within municipality , and hence is not a capital asset as per the definition under section 2 (14) (iii). (A.Y. 2006-07)


ITO v ChanderHUF ( 2011) 47 SOT 17 ( Chennai) (Trib).


S. 2(22)(e) : Deemed Dividend shares held in the name of partners of the firm- for purpose of S.2(22)(e) firm is considered as shareholder though shares held in names of partners


It was held that for s. 2(22)(e), a firm has to be treated as the shareholder even though it is not the registered shareholder. The first limb of s. 2(22)(e) is attracted if the payment is made by a company by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares. While it is correct that the person to whom the payment is made should not only be a registered shareholder but a beneficial share holder, the argument that a firm cannot be treated as a shareholder only because the shares are held in the names of its partners is not acceptable. If this contention is accepted, in no case a partnership firm can come within the mischief of s. 2 (22)(e) because the shares would always be held in the names of the partners and never in the name of the firm. This would frustrate the object of s. 2(22)(e) and lead to absurd results.


CIT v  National travel Service (Delhi)(High Court). (


S. 5: Income-Accrual-Fixed deposits in banks-Interest.


Assessee society held fixed deposits in banks for a term exceeding more than one year. It had not shown any interest income from said FDs during previous year on ground that income from FDs would be offered to tax on its receipt  from bank on maturity  on basis of certificate of  TDS issued by bank. Assessing Officer added interest at 10% on estimate basis .The Tribunal held that the assessee was not liable to declare interest income accrued but not due to it in relevant assessment year in view of fact that said sum was not acknowledged by bank or by assessee itself. ( A.Y. 2007-08).


Puri District Co-Op  Milk Producers Union Ltd v ITO (2011) 132 ITD 127 (Cuttack) (Trib).


S.9 (1) (vii): Income deemed to accrue or arise in India- Fees for technical services- DTAA-India-USA. (Art. 12).


Assessee running  business of  Hotel  making payments to US based interior  Landscaping  consultants M.  Work done by M is basically inspection of hotel, reviewing of the facilities , comparing the same with Ms standards and suggesting improvements / change wherever required to M standard , which did not amount to technical services and therefore no tax was deductible at source. Similarly , fees paid to UK company  A was also for work of design , documentation and did not fall under art 13 of Indo UK DTAA , likewise,  fees paid to Thailand company BD, for rendering services of landscape architectural consultancy  was not assessable in India.( A.Y. 2003-04 to 2005-06).


Asst CIT v Viceroy Hotels Ltd ( 2011) 60 DTR 1 ( Hyd) (Trib).


S.10B: Exemption-EOU- Job work done by sister concern.


Assessee, an EOU, approved by NEPZ authorities , being engaged in manufacture of articles and exporting the same cannot be denied  exemption under section 10B only because , it was getting some job work done from its sister concern. ( A.Y. 2003-04).


CIT v Continental Engines Ltd ( 2011) 60 DTR 40 ( Delhi)( High Court).


S.14A: Business expenditure- Exempted income-Investment in tax free income.


If the investment in tax free income yielding securities is made from interest free funds , no disallowance  can be made under section 14A.(A.Y. 2001-02).


CIT v LubiSummersibles Ltd ( ACAJ  Vol 35 Part 5 August-2011 P. 319)( Guj) (High Court) 


S. 14A: Business expenditure- Exempted income- Old investments-Own funds.


Investments in shares were made by the assessee from own funds , no disallowances were made in earlier years. No disallowance can be made for the relevant year. ( A.Y. 2005-06).


G.D. Metsteel (P) Ltd v Asst CIT ( 2011) 47  SOT  62 ( Mum) (Trib).


S. 14A : Business Expenditure Exempted Income No nexus between investment in tax-free securities and borrowed funds. No disallowance to made Disallowance under section  14A  cannot exceed exempt income.


In AY 2007-08, the assessee received dividend of in respect of investment in shares made in earlier years. No investments were made during the year. It was claimed that the investment in the earlier years was made out of reserves & surplus and that there was no expenditure incurred during the year to earn the dividend. The AO held that as in the earlier years, the assessee had borrowed funds, s. 14A applied. It was held that if there is no nexus between borrowed funds and investments made in purchase of shares, disallowance u/s 14A is not warranted.( A.Y.2007-08).


ACIT v Punjab state Coop & Mktg (Chandigarh)(Trib)(


S. 14A : Business Expenditure Rule 8D to be applied only after showing how assessees method is incorrect


It is a pre-requisite that before invoking Rule 8D, the AO must record his satisfaction on how the assessees calculation is incorrect. The AO cannot apply Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses. Further, the onus is on the AO to show that expenditure has been incurred by the assessee for earning tax-free income. Without discharging the onus, the AO is not entitled to make an ad hoc disallowance. A clear finding of incurring of expenditure is necessary. No disallowance can be made on the basis of presumptions


DCIT v Jindal Photo Limited (Delhi)( Trib) (


S.17(2) (iiia):Perquisites- Employees stock option-Equity warrant certificates.


Warrant issued in February 1999 and assesse exercising option in April 1999.


Perquisites arise and taxable in financial year 1999-2000 relevant to assessment year 2000-2001. Date of exercise of option is date of acquisition of shares and not date of certificate. (A.Y. 2000-01).


Dy CIT v Vijay Gopal  Jindal ( 2011) 11 ITR 451 (Delhi) (Trib).


S. 22: Income from house property- Annual value- Second property-Rent control Act.


Assessee having two self occupied properties.  In case of the second property, relevant provisions of the Rent control Act were applicable. The Assessing Officer is bound to determine the standard rent of the premises in accordance with provisions of Act. However ,where the standard rent has not been determined by the rent control authority , the Assessing Officer is duty bound to do the excise him self and determine the standard rent as per the provisions of the relevant Rent Control Act.


Jayantibhai Meghibhai v  Addl CIT (ACAJ Vol 35 Part 5. August 2011 P. 320) (Ahd) ( Trib)


S. 28(iv): Remission of loan liability- ( S. 41(1).


The tribunal held that since loan received was utilized for acquiring  capital assets , the amount remitted was not taxable under section 41 (1). As it was remission of liability section 28(iv) was also not applicable.


Terra Agro Technologies vs. ACIT, ITA No.1503/Mds./2010, Dt.09-06-2011, A.Y.2004-05, BCAJ September 2011, pg. 23, Vol. 43-A, Part 6


S. 32: Depreciation- Building- Landscaping expenses- Hotel-Storage tank.


Since the assessee is in Hotel  business its building is not merely a structure of four walls but includes all such things as are necessary to give the building better look and is a matter of attraction for the customers, therefore Landscaping done by assessee in its hotel is to be treated as building and depreciation is allowable.


Payments made by assessee to NDMC  for unauthorized occupation , construction of diesel storage tanks and fire fighting tanks and covering sanitary lines without approval in respect of the hotel acquired by it from the Central Government formed part of purchase consideration as these payments were made to perfect the title of the assessee in the property and  the amount being capitalized the assessee is entitled for depreciation.( A.Ys 2003-04 to 2007-08)


Dy CIT v Hotel Excelsior Ltd (2011) 60 DTR 450/141 TTJ 248 (Delhi)( Trib).


S. 32 (1) (ii): Depreciation-Discontinuance of business.


Assessee company did not do any hotel business after its hotel building was washed away in floods in September, 1995. However, assessee company being a juristic entity incorporated under the Companies Act, did not cease to exist. Since it has to fulfill its obligations imposed by Companies Act till it is would up some, staff has to be maintained. Therefore, once the assessee company is in existence, it is entitled to depreciation though it has discontinued its business.( A.Ys 1998-99 to 2002-03).


CIT v Kirti Resorts (P) Ltd ( 2011) 60 DTR 138/243 CTR 341  (HP) (High Court). 


S. 32 (1(ii) : Depreciation-Non compete fee.


Non compete fee is not in the nature of knowhow, patents copy right , trade marks , licenses or franchises within the meaning of section 32 (1) (ii), depreciation is not allowable.


Sharp Business Systems ( India) Ltd v Dy CIT ( 2011) 59 DTR 385 ( Delhi) (Trib).  


S. 32 : Depreciation- Unabsorbed- Carry forward and set off.


Provisions of section 32 (2) as amended w.e.f. 1st April ,1997 permit set off of brought forward unabsorbed  depreciation firstly against the business profits and then against income  under any other head in Asst Year 1997-98   and subsequent assessment years for a period of eight years ,therefore unabsorbed depreciation for the period up to assessment year 1996-97 could be brought forward and set off  against income chargeable under the head income from other sources. ( A.ys 1989 to 2002-03).


CIT v Kirti Resorts ( P ) Ltd ( 2011) 60 DTR 138 /243 CTR 340( HP) (High Court).


S. 36(1) (iii): Business expenditure- Interest on borrowed capital-Investment in sister concern-Shares of subsidiary- Control over the company.


Investment made by the assessee company out of bank overdraft in the shares of its subsidiary company to have control over that company being an integral part of its business ,interest paid by the assessee which is attributable to said borrowings is allowable as deduction under section 36 (1) (iii).


CIT v Phil Corporation (2011) 61 DTR 15 (Bom) (High Court).


S. 37 (1): Business expenditure- Capital or revenue- Non compete fees-Deferred revenue expenditure.


Expenditure incurred  by the assessee to ward off the competition for a period of seven years during which any company  could have set up its products and reputation in the market , expenditure can not be allowed as revenue expenditure. As non compete fee is held to be capital expenditure , claim for treating it as revenue expenditure entitled to deduction for seven years is also not allowable.  ( A.Y.2001-02).


Sharp Business Systems ( India) Ltd v Dy CIT ( 2011) 59 DTR 385 ( Delhi ) (Trib).


S. 37 (1): Business expenditure- Capital or revenue- Expenditure on software.


Expenses incurred  by the assessee for obtaining license to use software are to be treated as revenue expenditure.(A.Ys 2003-04, 2004-05 & 2006-07)


ST Microelectronics (P) Ltd v CIT ( 2011) 61 DTR 1 (Delhi) ( Trib).


S. 40 (a) (ia): Expenses or payments not deductible- Interest- Form no 15G.


Depositors having submitted form no 15G to the assessee well in  time ,interest paid to them without deduction of tax at source cannot be disallowed under  section 40(a)(ia) simply because the said forms could not be submitted to the AO the with in the time stipulated in the Act , once the same were available to  the AO while framing the assessment. ( A.Y. 2006-07).


Shyam Sunder Kailash Chand v ITO ( 2011) 60 DTR 270 (Jaipur) (Trib).


S. 40(a) (ia).Expenses or payments not deductible- Commission- Non-resident-Agent- Service rendered out side India. ( S. 9 (1) (i), 195).


Commission paid to non resident agent for services rendered out side India not being chargeable  to tax in India could not be disallowed under section 40(a) (ia). (A.Ys 2001-02 to 2004-05).


Dy CIT v Devi s Laboratories Ltd ( 2011) 60 DTR 210 ( Hyd) (Trib) / 140 TTJ 746. 


S. 40 (a) (i): Amounts not deductible-Deduction of tax at source- Non resident-A Fee for user of name and accreditation not taxable as royalty.(S.195)


The assessee, engaged in manufacture of tooth paste etc paid Rs 11,71,826 as accreditation panel fees to British Dental Health Foundation UK without deduction of tax at source. The AO disallowed the sum u/s 40(a)(i) on the ground that the sum was taxable as royalty and tax had not been deducted at source u/s 195(1). The CIT(A) deleted the disallowance. Before the Tribunal, the department argued that since the assessee derived valuable advantage from the accreditation by BDHF and used the same as a marketing tool, the amount constituted royalty. HELD dismissing the appeal:


(i) The obligation to deduct tax u/s 195(1) arises only if the payment is chargeable to tax in the hands of non-resident recipient. If the recipient of the income is not chargeable to tax, the vicarious liability on the payer is ineffectual. As the AO had not established how the recipient was liable to pay tax, he was in error in disallowing u/s 40(a)(i) . 


(ii) On merits, though the accreditation fees permitted the assessee the use of name of British Dental Health Foundation, it did not constitute royalty under Article 13 of the India-UK DTAA because it did not allow the accredited product to use, or have a right to use, a trademark, nor any information concerning industrial, commercial or scientific experience so as to fall within the definition of the term. The purpose of the accreditation by a reputed body was to give certain comfort level to the end users of the product and to constitute the USP of the product. The term royalty cannot be construed as per its normal connotations in business parlance but has to be construed as per the definition in Article 13. The amount constituted business profits and as the recipient did not have a PE in India, it was not taxable in India.


ACIT v Anchor Health and Beauty Care Pvt. Ltd. (Mum) (Trib).


S. 40A (3): Amounts not deductible- Block Assessment- Profit estimated. (S.158BB).


Provisions of section 40A (3)  cannot be invoked in block assessment with respect to the purchases found as per seized material and unrecorded in the regular books of account , especially , when the profit from the unrecorded transactions has been estimated and declared.


Kirti Foods Ltd v Asst CIT ( 2011) 60 DTR 96 (Pune ) (Trib).


S. 40A (9): Amounts not deductible- Corporation- State Act-Contribution- For statutory corps as their Service Regulations have force of law-


 The assessee, a corporation set up under a State Act, made a contribution of Rs. 16.77 lakhs, in its capacity as employer and as per the service regulations, to the MSW Karmachari Welfare Fund. The AO & CIT (A) took the view that the payment, being to a fund, was hit by s. 40A (9) and not allowable as a deduction. In the appeal to the Tribunal, the assessee claimed that its service regulations had the force of law and s. 40A (9) did not apply. HELD allowing the appeal:


 S. 40A(9) provides that no deduction shall be allowed in respect of any sum paid by the assessee as an employer as contribution to any fund except where such sum is so paid as required by or under any other law for the time being in force. In the case of statutory corporations, the regulations providing for the terms and conditions of employment and conditions of service have the force of law. There is no distinction in principle between a person directly under the employment of the Government and a person under the employment of a statutory corporation. Consequently, the service regulations framed by the assessee by which it agreed to make payment to the Fund carried statutory force and fell within the expression as required by or under any other law for purposes of s. 40A(9).


Maharashtra state Warehousing Corporation v ACIT ( Pune)( Trib).


S. 41 (1):Profits chargeable to tax-Income-Liabilities outstanding more than three years.


Out standing liabilities of the assessee can not be said to have ceased to exist merely because the relevant accounts have become non operational or period of three years have expired and , therefore such liabilities can not be charged to tax by invoking the provisions of section 41(1) , more so when the assessee has not written back such liabilities in its profit and loss account.( A.Ys 2003-05 to 2007-08).


Dy CIT v Hotel Excelsior Ltd ( 2011) 60 DTR 450/141 TTJ 448 ( Delhi) (Trib).


S. 43B: Business disallowance- Actual payment- Bonus to employees- Before due date of filing of return.


Bonus payment made before due date of filing of return no disallowance can be made. ( A.Y. 2005-06).


G.D.Metsteel ( P) Ltd v Asst CIT ( 2011) 47 SOT 62 ( Mum) (Trib). 


S. 44BB:Business of exploration of mineral oil-Royalties Fees for technical services-DTAA-India- Norway.


Service  of conducting seismic surveys and providing onshore seismic data acquisition and other associated services  are taxable under special provision .Entire receipts are subjects to deeming provision under section 44BB, income can not be split.


Bergen Oilfield Services AS, Norway ( 2011) 337 ITR 167 ( AAR).


S. 45: Capital Gains Investment in shares- High volume  and  short holding period Gains to be considered  as short term capital gains.( s. 28)


In the instant case the Tribunal recorded the finding that in a number of cases the assessee had held the LTCG shares for more than 10 years and that the purchase and sale of shares within a period of one year had been offered as STCG.  The same was accepted in the preceding assessment year. It was held that it is open to an assessee to trade in the shares and also to invest in shares. When shares are held as investment, the income arising on sale of those shares is assessable as LTCG/STCG. Accordingly, the decision of the Tribunal in holding that the income arising on sale of shares held as investment were liable to be assessed as LTCG/STCG cannot be faulted.


CIT v Naishadh V. Vachharajani (Bombay High Court). (


S. 45: Capital gains-Shares- Purchase and sale Short time.


Mere fact that the shares were sold  in a short span of time of acquisition due to steep and unanticipated rise in stock market does not mean that the intention was not to hold them for long period of time or deal in them . Profit on sale of shares with in short span of 7 to 10 months held to be capital gains and not as business income.( A.Y.2005-06).


CIT v Consolidated Finvest and Holding Ltd (2011) 337 ITR 264 (Delhi) (High Court).   


S. 45. Capital loss-Loss on pro-rata reduction of share capital is Notional. In absence of consideration, capital gains provisions do not apply


The assessee invested Rs.24.84 crores in equity shares of Times Guarantee Ltd. Pursuant to a scheme of reduction u/s 100 of the Companies Act, the face value of Times Guarantee shares was first reduced to Rs. 5 from Rs. 10 and thereafter two equity shares of Rs.5 each were consolidated into one equity share of Rs.10. The result was that the assessees investment was reduced to Rs.12.42 crores. The assessee, claimed that the reduction in face value was a transfer and that it had suffered a long-term capital loss of Rs.22.21 crores after indexation. The AO disallowed the claim on the ground that (i) there was no transfer and (ii) there was no consideration and the machinery provisions of s. 48 cannot apply. The issue was referred to the Special Bench. Held by the majority


(i) First the face value of each share was reduced from Rs. 10 to Rs. 5 and then two shares of Rs. 5 each were consolidated into one share of Rs. 10 each. If the argument is that earlier shares were replaced or substituted by new shares, then there is no transfer but it is merely a case of substitution of one kind of share with another kind of share


(ii) Assuming that a reduction of shares in the manner done by the assessee amounts to a transfer, s. 45 is not attracted because there is no consideration received by the assessee for the transfer. Unless and until a particular transaction leads to computation of capital gains or loss as contemplated by s. 45 & 48, it cannot attract capital gain tax. On facts, the assessee had not received any consideration for reduction of share capital. While the number of shares held by the assessee has reduced to 50%, nothing had moved from the side of the company to the assessee. 


(iii) Further, by the reduction, the assessees rights had not been extinguished because it continued to hold the same percentage in the holding of Times Guarentee as it did before the reduction. There was no change in the intrinsic value of his shares and even his rights vis--vis other shareholders as well as vis--vis company remained the same. The concept of capital gains has to be understood as in the commercial world and there was no loss that can be said to have actually accrued to the shareholder as a result of reduction in the share capital. Also, there would be no change even in the cost of acquisition of shares by virtue of s. 55(v).


Minority view is that, 


(i) On the point of transfer, a reduction of share capital u/s 100 of the Companies Act can take place either by paying excess capital to the shareholders or by cancelling lost capital. While the first method amounts to a transfer  the other method (adopted by the assessee) results in an extinguishment of rights in the shares which is also a transfer .Consequently, a reduction of capital by cancellation of shares results in a transfer;


 (ii) On the point that a capital loss cannot be computed if there is no consideration, while it is true that the failure of the computation provisions results in a failure of the charging provisions . there is a distinction between a case where the computation provision is incapable of ascertainment and a case where it is ascertained as zero or Nil. In the present case, the consideration received by the assessee was Nil. It was not a case where the consideration was incapable of ascertainment;


(iii) On the point that there is no loss, the argument that as with the reduction of capital, there is a corresponding increase in the net worth per share and the assessees interest in TGL remains unaffected on an overall basis is not acceptable because after the reduction, the assessee is left with lesser number of shares. The fact that the book value has increased has no effect. An increase or decrease in the market value of shares is of no consequence if the shares are held as investment;


(iv) the apprehension that the assessee would derive a double advantage by claiming the loss now and the entire cost at the time of sale is unfounded because (a) the assessees books shows the investments at the reduced amount and (b) u/s 55(2)(iv)(v), the cost of acquisition of the remaining consolidated shares will be the reduced amount.


Bennett Coleman & Co. Ltd. v ACIT (Mum)(Special Bench)(Trib)


S. 45 : Capital Gains PMS Fees not deductible against capital gains -  Despite dissenting orders, reference to Special Bench not necessary


Whether an earlier order should be followed or a reference to the Special Bench be made depends on whether the Bench is satisfied or not about the correctness of the earlier order and not on the view point of the aggrieved party. It is only when a subsequent Bench finds itself unable to endorse the earlier view that it may make reference for the constitution of the Special Bench. The aggrieved party cannot compel the later Bench to either take a contrary view or make a reference for the constitution of the Special Bench.


Homi K. Bhabha v ITO  (Mum)( Trib)(


S. 48: Capital  gains- Fees paid for Portfolio Management services- Cost of acquisition-Diversion of income.


Fees paid by assessee for PMS was not inextricably linked with particular instance of purchase and sale of shares and securities and sale of shares and securities so as to treat the same as expenditure incurred wholly and exclusively in connection with cost of  acquisition, improvement, of shares and securities so as to be eligible for deduction in computing  capital gains under section 48. Payment of fees by assessee for PMS did not amount to diversion of income by an overriding title ( A.Y. 2004-05)


Devendra Motilal  Kothari v Dy CIT ( 2011) 132  ITD 173 ( Mum) (Trib).    


S. 48: Capital gains- Computation- Indexation- Preference shares.


Once shares are specifically covered  by indexation of costs ,and unless there is a specific exclusion clause for preference shares  ,it can not be open to Assessing Officer to decline indexation benefits to preference shares.(  A.Y. 2005-06).


G.D. Metsteel  (P) Ltd  v Asst CIT ( 2011) 47  SOT 62 ( Mum) (Trib).


S. 68: Cash Credit- Share application money- Identity of shareholders.


Assessee having established identity of shareholders , addition under section 68 could not be made on the ground that assessee failed to explain the source of credit . Department was free to proceed against shareholders in accordance with law. (A.Y. 1992-93).


Hindustan Links & Resins Ltd v Dy CIT (2011) 60 DTR 18 (Guj)( High Court). 


S.69: Income from undisclosed source- Statement in the course of search-Retraction [ S. 132 (4) ]


Merely on the basis of statement made under section 132 (4),in respect of loans , addition under section 69 as income from undisclosed source  can not be made when the said statement was retracted and evidence to show the genuineness of loan was filed. The court also referred the Circular of CBDT No F.NO.286/2/2003 IT (Inv) dt 10th March 2003.          (A.Y.1994-95)


M. Naranan & Bros v  Asst CIT (2011)60 DTR 233 ( Mad) (High Court).


S.80IA: Deduction-Industrial undertaking Developing, operating and maintaining industrial park-Withdrawal of approval- Writ maintainable. (Art 226).


As per the scheme, what was required to be done by the petitioner was to provide for infrastructural facilities before last date envisaged under the scheme. There after there was no obligation on the part of the petitioner to ensure that industrial units on such plots must also come into existence and commence their production activities , therefore impugned show cause notice for withdrawal of approval of assessees Industrial Park was quashed and the CBDT was directed to notify the same. Ordinarily Courts do not encourage litigation at the show cause notice state but where the show cause notice is based on premise which is legally not sustainable, writ petition held to be maintainable.


Ganesh Housing Corporation Ltd v Padam Singh Under secretary( 2011) 61 DTR 1 (Guj) ( High Court).


S. 80IA:Deduction- Industrial undertaking- Generation and supply of power-Deemed generation of power.


Assessee entered into agreement for supply of power. Agreement providing that if power not required, compensation charges to be paid. Amount received for deemed generation of power is entitled to deduction under section 80IA as the compensation has direct nexus with the business of generation of power. (A.Y.2004-05).


Magnum Power Generation Ltd v Dy CIT ( 2011) 11 ITR 493 (Delhi)( Trib). 


S.80 IB: Deduction-Manufacture- Production- Assembling of different parts of windmill.


Different parts of windmill when assembled get transformed in to an ultimate product which is commercially known as a windmill which amounts to manufacture or production with the meaning of section 80 IB (2) (iii).( A.Y.2005-06).


CIT v Chiranjeevi Wind Energy  Ltd ( 2011) 243 CTR 195 ( Mad) (High Court).


S.80IB : Deduction-Manufacture-Production- Water purification system-Out sourcing- Twenty or more workers.


Assessee himself is making the final product  ie. ,water purification system , it can not be said that he  is not engaged in manufacture merely because , some material is readily purchased from the market and some raw material is got manufactured by outsourcing , assessee having employed twenty or more workers during the major part of the year , there is  substantial compliance of the condition  of employment of minimum number of workers and ,therefore assessee is entitled for deduction under section 80IB ,  more so when similar deduction  has been allowed in the preceding years.( A.Y. 2001-02).


P.L.Patel v ITO (2011) 60  DTR 53 ( Mum) (Trib).


S.80IB: Deduction-Profits and gains from Industrial undertakings other than infrastructure development undertakings- Job work charges-Apportionment of receipts.


Assessee HUF was engaged in manufacturing of moulds for ball pens and, supplying same to ball pen manufacturing concerns. It also provided services to buyers by way of repair and  maintenance of moulds sold to them and charged job work charges ,which included receipt on account  of sale of spare parts and repair and  maintenance charges. The Tribunal held that income earned by assessee could not be from repairs and maintenance  charges could not be equated at par with income from manufacturing and hence not eligible deduction in terms of section 80IB. Since in the absence of record of assessee it was not possible to decide how much was for repairs and how much for was job charges  it was estimated at 50% of receipt as job work charges on which the assessee would entitled deduction under section 80IB and balance 50% as receipt on account of repair and maintenance charges on which the assessee would not be entitled to get deduction under section 80IB .( A.Y.2005-06).


Dy CIT v Rajesh  kr. Drolia ( 2011) 132 ITD 23 (Kolkata)( SB) (Trib).


S.80IB(10):Deduction-Housing project- Commercial area 8.8%.


Commercial area of the residential plus commercial project did not exceed 8.8% of total area, further, deduction is eligible to housing project approved by the local authority as such or as residential plus commercial project having residential as well as commercial units to the extent permitted under the DC Rules .Assessee is entitled to deduction under section 80 IB (10).( A.Y.2004-05).


Bhumiraj Homes Ltd v Dy CIT ( 2011) 60 DTR 65 ( Mum) (Trib). 


S. 80IB (10): Deduction-Housing project- Sale of pair of flats in the name of family members exceeding 1000 square feet- Amendment with effect from 1-4-2010 is prospective in nature.


Under pre amended section as long as   a residential unit has less than specified area , is as per duly approved plans and is capable of being used for residential purposes on stand alone basis , deduction under section 80IB (10), can not be declined in respect of same merely because end user , by buying more than one such unit in name of family members has merged those residential units in to a larger residential unit of a size which is in excess of specified size. Amendment  ,made to section 80IB (10)  with effect from 1-4-2010, is prospective in nature.( A.Y. 2004-05).


Emgeen Holdings (P) Ltd v Dy CIT ( 2011) 47 SOT 98 ( Mum) (Trib).


S. 92C : Avoidance of Tax Transfer Pricing- Sale of IPRs Important Principles of Law Explained.


There is nothing in s.92CA that requires the AO to first form a considered opinion before making a reference to the TPO. It is sufficient if he forms a prima facie opinion that it is necessary and expedient to make such a reference. The making of the reference is a step in the collection of material for making the assessment and does not visit the assessee with civil consequences. There is a safeguard of seeking prior approval of the CIT. Moreover, by virtue of CBDTs Instruction No.3 of 2003 dated 20.5.2003 it is mandatory for the AO to refer cases with aggregate value of international transactions more than Rs.5 crores to the TPO


The argument that the Excess Earning Method adopted by the TPO is not a prescribed method is not acceptable. A sale of IPR is not a routine transaction involving regular purchase and sale. There are no comparables available. The Excess Earning Method is an established method of valuation which is upheld by the U.S Courts in the context of software products. The Excess Earning Method method supplements the CUP method and is used to arrive at the CUP price i.e. the price at which the assessee would have sold in an uncontrolled condition.


Tally Solutions Pvt. Ltd. v DCIT (Bang) (Trib)(


S. 92C : Avoidance of Tax Transfer Pricing Principles of Comparable Uncontrolled Transaction explained.


Under Rule 10B(1)(e)(ii), the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transaction is computed having regard to the same base.  The term uncontrolled transaction is defined in Rule 10A(a) to mean a transaction between enterprises other than associate enterprises, whether resident or non-resident. The result is that in applying the TNMM, the net profit margin realized from a comparable uncontrolled transaction is to be taken into consideration. The conditions require that a case should not only be comparable but also have uncontrolled transactions. These twin conditions need to be cumulatively satisfied. If a case is only comparable but has controlled transactions or vice-versa, it falls outside the ambit of the list of comparable cases;


The fact whether the comparable has a higher or lower profit rate has not been prescribed as a determinative factor to make a case incomparable. This is because profit is not a factor in itself, but a consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in rule 10B (2) read with sub-rule (3), that such case shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of comparables;


DCIT v BP India Service Pvt. Ltd.(Mum)(Trib) (


S.92C: Avoidance of tax- Transfer pricing-Computation-Selection of comparables.


Held that in the absence of any perversity in the finding of the Tribunal in the selection of a different set of comparables for determination of ALP and recomputation of ratio of operating profit/total cost at 21.97% as against 35.26% adopted by TPO, no interference is warranted.


The High court further upheld the decision of the Tribunal of allowing depreciation on administrative assets for determining the operating profits while computing the ALP.




CIT v Rakhra Technologies ( P) Ltd ( 2011) 243 CTR 505 (P &H) (High Court).


S. 92A : Avoidance of Tax Transfer Pricing Associated Enterprises De facto control of an unrelated party unrelated parties  also considered associated enterprises.


If one enterprise controls the decision making of the other or if the decision making of two or more enterprises are controlled by same person, these enterprises are required to be treated as associated enterprises. Though the expression used in the statute is participation in control or management or capital, essentially all these three ingredients refer to de facto control on decision making


The argument, based on Quark Systems 38 SOT 307 (SB), that exceptionally high and low profit making comparables are required to be excluded from the list of TNMM comparables is not acceptable. Merely because an assessee has made high profit or high loss is not sufficient ground for exclusion if there is no lack of functional comparability. While there is some merit in excluding comparables at the top end of the range and at the bottom end of the range as done in the US Transfer Pricing Regulations, this cannot be adopted as a practice in the absence of any provisions to this effect in the Indian TP regulations. (Benefit of +/- 5% adjustment as directed in UE Trade Corporation 44 SOT 457 to be given);


 The adjustment made by the TPO with regard to the advertisement expenditure incurred by the assessee was without jurisdiction because the AO had not made any reference on this issue to the TPO. As the reference to the TPO is transaction specific and not enterprise specific, the TPO Officer has no power to go into a matter which has not been referred to him by the AO. Even the CBDT Instructions are clear on this (3i Infotech Ltd 136 TTJ 641 followed)( A.Y.2006-07).


Diageo India Pvt. Ltd v ACIT (2011) 47 SOT 252 (Mum) (Trib)


S. 92C : Avoidance of Tax Transfer Pricing Methods of computing ALP -  Important Principles of Cost Plus, CUP & TNMM Explained


The assessee, engaged in the business of manufacture and export of studded diamond and gold jewellery, imported & exported diamonds and exported jewellery to associated enterprises. For transfer pricing purposes, the ALP of the imported & exported diamonds was evaluated using the Comparable Uncontrolled Price (CUP) method while the exports of jewellery was evaluated using the Cost Plus Method (CPM). The TPO & AO rejected both methods on the ground that adequate material to support it was not available and instead adopted the TNMM and made an adjustment. On appeal, the CIT(A) upheld the adoption of CPM on the imports & exports of diamonds on the ground that total cost details were maintained and the average margin earned from AE transactions was higher than that earned from non AE transactions. However, he did not deal with the ALV on export of jewellery. On appeal by the department, HELD reversing the CIT(A):


(i) As regards the CPM, it had not been correctly applied. The application of CPM provides for (a) ascertaining the direct and indirect costs of property transferred, or services rendered, to the AE; (b) ascertaining the normal mark up of profit over aggregate of costs in respect of similar property or services to unrelated enterprises and (c) adjusting the normal mark up for differences, if any, in the material factors such as risk profile, credit period etc. While the benchmark gross profit can be set by taking into account several transactions with unrelated enterprise on a global basis, the benchmark cannot be applied on a global basis but has to be on a transaction basis. Eg. if the benchmark GP is 20% and the assessee charges a mark-up of 2% in one transaction with AE and 38% in another transaction with the AE, both transactions, will meet the ALP test resulting in an incongruity. On facts, while the normal mark up has been computed at 16.31%, and the average of mark up on sales to AEs has been taken at 17.08% and all AE transactions taken to be at ALP, there are individual instances which are less than the benchmark. This is not the correct way to apply the CPM. Also, the costs of inputs have not been verified and it is not shown that the terms of sale to the AEs and all other relevant factors are materially similar to the transactions with independent enterprises. Also, the CPM has been applied by comparing gross profit on sales, whereas the method requires comparison of mark up on costs on transactions with AEs vis--vis mark up on costs on transactions with non AEs (matter remanded to CIT (A) for de novo consideration);


(ii) As regards the CUP for import & export of diamonds (which was not decided by the CIT (A)), the assessee ought to have produced evidence to show that the transactions are at prevailing market prices;


(iii) As regards the TNMM, International transactions with AEs have three significant areas of impact on the overall profitability i.e. sales of finished goods to AEs, sales of raw materials to AEs and purchase of raw materials of AEs), and if the ALP cannot be reasonably determined by CUP or any other direct method (i.e. CPM and RPM) in respect of even one of these areas, the application of TNMM or other indirect method ( i.e. profit split method) is inevitable. On a conceptual note, when ALP of the transactions with AEs cannot be reasonably ascertained, the profit earned by the assessee entering into these transactions is to be estimated, and that is precisely what TNMM does. When TNMM is applied in the context of sales of finished goods to AEs, it is this figure which is taken as variable figure and it bears the impact of higher margins, and when TNMM is applied in the context of purchases of raw materials from AEs, it is the figure of purchases of raw material from AEs which is taken as variable figure and it bears the impact of higher margins. Beyond that, the cause of invoking TNMM does not make much material difference (point whether TNMM has to be applied to the transactions and not on overall profits left open);


(iv) The argument, relying on Indo American Jewellery Ltd 41 SOT 1, that no ALP adjustment can be made as the assessee enjoys s. 10A tax benefits and has no motive to avoid tax is not acceptable because those observations are obiter dicta without binding force and in view of Aztech Software 107 ITD SB 141 where it was held that tax avoidance motives need not be shown before invoking transfer pricing provisions.


ACIT v Tara Ultimo Private Limited (Mum)(Trib) (


S.92C : Avoidance of tax- Transfer pricing-Computation-Data-Selection of comparable-5% Adjustments.


The expression shall has been used in  rule 10B (4) which makes it abundantly clear that only current year data of an uncontrolled transaction is to be used for the purpose of comparability while examining the international transactions with AE s , unless the case is covered by the proviso i.e. if the data of preceding two years reveals facts which could have an influence on the determination of transfer price. Assessee company being engaged in producing semiconductor integrated circuits is a complex product requiring skilled workforce. TPO  was justified in treating it as high end service provider for the purpose of selection of  comparables. The fact that the assessees role is only 2 to 3 percent of the overall operations performed by the group is not at all relevant for deciding whether it is high end performer or low end performer. Assessee having submitted a TP report every year by using different filters for selecting comparables are commensurate to the result declared by it . TPO was justified in rejecting the same and selecting new comparables by applying quantitative as well as qualitative filters. Tolerance band provided in the proviso to section 92C(2) is not to be construed as a standard deduction. If the arithmetic mean of comparables falls with in range of said tolerance band , no adjustment is required , if it exceeds then the ultimate adjustment is not required to be computed after reducing the arithmetic mean by 5 percent.( A.Ys 2003-04 , 2004-05, 2006-07)


ST  Microelectronics (p) Ltd v CIT ( 2011) 61 DTR 1 ( Trib) ( Delhi).


S.94:Avoidance of tax-Transaction in securities-Tax free dividend-Loss on sale of units. (S. 10(33).


Assessee had purchased certain units of UTI from P on 29-5-1989 at rate of Rs 14.75 per unit, at the same time assessee entered in to an irrecoverable commitment to sell back those units to P  at rate of Rs 13 per unit on 31-7-1989. The assessee received dividend at the rate of 18 percent on those units. The assessee incurred loss. The assessing officer disallowed the loss holding that the same was predetermined. The High court held that even if it was assumed that transaction was a pre planned one, there was nothing to impeach genuineness of transaction and therefore, assessee was entitled to claim the loss on said transaction. (A.Y. 1990-91)


Evereaday Industries Ltd v CIT ( 2011) 201 Taxman 278 ( Cal) (High Court).


S.115F: Capital gains- Foreign exchange assets-Non resident-Bonus shares.


The assessee acquired the original shares by investing in convertible foreign exchange and therefore ,it can not be said that the bonus shares are acquired in isolation without taking in to consideration the original shares acquired by the assessee. Therefore bonus shares were held to be covered by section 115C (b) of the Act and the same are eligible for benefit under section 115F. ( A.Y. 2006-07).


Sanjay Gala vs. ITO, ITA No.2989/Mum/2008, Dt.15-07-2011, A.Y.2005-06, BCAJ September 2011, pg. 20, Vol. 43-A, Part 6




S.115H:Non resident- Income from foreign exchange asset.-Coverable foreign exchange (S. 115E.).


If the original source of the deposit is convertible foreign exchange ,the transfer of such foreign exchange asset , namely from one bank to another will not affect its identity as a foreign exchange asset , assessee was entitled to concessional rate of tax on the interest earned from NRNR deposits under section 115H read with section 115E.


CIT v M. C. George (2011) 60 DTR 166/243CTR 404 (Ker) (High Court).


S.115JA: Book profit-  Company-Brought forward business loss.( S. 154).


In order to allow deduction of brought forward business loss or unabsorbed depreciation in the computation of book profit under section 115JA , both should be available as per the accounts of the assessee . Since nothing is left after setting off brought forward  business loss up to 1994-95 against profit , assessee was not entitled to any relief under clause (b) of Explanation (iii) of section 115JA for assessment year 1997-98 .Rectification order passed under section 154 held to be valid. ( A.Y.1997-98).


CIT v  Carbon & Chemicals India  Ltd ( 2011) 59 DTR 396 ( Ker) (High Court).   


S.119: Circulars- Binding nature-Conflict in law laid down by High Court or Supreme Court.


If a circular is in conflict with the law laid down by High Courts or Supreme court ,the revenue authorities while acting quasi judicially , should ignore such circular in discharge of their   quasi judicial functions.(A.Y.1998-99)


Bhartia Industries Ltd v CIT (2011) 243 CTR 328 (Cal) (High Court).


S. 144C: Disputes Resolution panel- Direction.


Direction given by the Dispute Resolution Panel to the Assessing Officer to reconsider petitioners claim for deduction under section 10A  after verifying the income from engineering and design services and examining whether the same qualified for deduction or not giving liberty to Assessing Officer to decide the issue , after hearing the petitioner,is not violative of sub section (5) and (8) of section 144C.(A.Y.2006-07).


GE India Technology Centre (P) Ltd v DY CIT ( 2011) 242  CTR 462 / 60 DTR 322( Kar) ( High Court).


S. 145 : Method of Accounting Despite s. 209(3) of the Cos Act, company can follow cash system for tax purposes


As per Sec. 209(3) of the Cos Act, a company is obliged to follow the mercantile system and that is its regular method for purposes of s. 145.   It was held that the assessee has regularly employed the cash system of accounting in recording its day to day business transactions. It is not a case where the assessee has been maintaining its accounts of day to day business under the mercantile system of accounting and thereafter prepares accounts in accordance with cash system of accounting for income tax purposes. Section 209(3) of the Companies Act, 1956 does not override s. 145 of the Income-tax Act. There was also no valid basis for the AOs action in rejecting the books of account and system of accounting followed by the assessee. Further, since the department has accepted the assessees system for the past several years, the principles of consistency apply and there should be finality and certainty in litigation in the absence of fresh facts to show that the assessees system of accounting is arbitrary or perverse.


DCIT v Stup consultants Pvt. Ltd. (Mum)( Trib)(


S. 147: Reassessment-Valuation of property- Inspectors report.


Merely because the stamp valuation authority has adopted certain valuation for payment of stamp duty on the property purchased by the assessee, the same cannot be the basis to conclude that  assessees income has escaped assessment ,particularly when no tangible material has been brought on record to suggest escapement of income except the inspectors report which could not be relied upon to ascertain the market value of property, hence reassessment  quashed by the CIT (A) was up held.(A.Y.2005-06).


ITO v Shiv Shakti Build Home ( P) Ltd ( 2011) 141 TTJ 123 ( Jodhpur) ( Trib).


S. 147: Reassessment : Assessing Officer  raised specific and pointed queries in s. 143(3) assessment, AO cannot be said to have formed any opinion if explicit opinion not recorded.


The question of change of opinion arises when the AO forms an opinion and decides not to make an addition and holds that the assessee is correct. Here, though the AO had asked specific and pointed queries there was no discussion, ground or reason why addition was not made in-spite of the assessees failure to furnish conformation and details to that extent. The argument that when the assessment order does not record any explicit opinion on the aspects now sought to be examined, it must be presumed that those aspects were present to the mind of the AO and had been held in favour of the assessee is too far-fetched a proposition to merit acceptance


The term failure on the part of the assessee is not restricted only to the income-tax return but extends also to the assessment proceedings. If the assessee does not disclose or furnish to the AO complete and correct information and details it is required and under an obligation to disclose, there is a failure on its part. 


Dalmia Pvt. Ltd. v CIT(Delhi) (High Court)(


S. 147: Reassessment- Housing project. ( S.80 IB (10).


As the reassessment proceedings are aimed at taxing the income which has escaped assessment , these cannot be taken as a tool for putting the assessee in a better position than in which it was before such proceedings.( A.Y.2004-05).


Bhumiraj Homes Ltd v Dy CIT ( 2011) 60 DTR 65 ( Mum) (Trib).


S.154: Rectification of mistakes- Book profit-Not considering the statutory provision. ( S. 115JA).


When original assessment is completed without reference to the statutory provision and in clear violation of the same , such assessment could be rectified under section 154.In order to allow deduction of brought forward business loss or unabsorbed depreciation in the computation of book profit under section 115JA , both should be available as per the accounts of the assessee . Since nothing is left after setting off brought forward  business loss up to 1994-95 against profit , assessee was not entitled to any relief under clause (b) of Explanation (iii) of section 115JA for assessment year 1997-98. (A.Y.1997-98).


CIT v  Carbon & Chemicals India  Ltd ( 2011) 59 DTR 396 ( Ker) (High Court).


S. 158BFA: Interest- Tax paid after due date of filing of return- Credit.


While calculating interest under section 158BFA (1) , credit can not be allowed for the tax paid  by the assessee on various dates after the due date of filing of return.


Kirti  Foods Ltd v Asst CIT ( 2011) 60  DTR 96 (Pune) (Trib).


S. 271 (1) (c ):Penalty- Concealment-Carry forward loss shown at a wrong figure-Mistake of consultant- Disallowance of deduction under section 80G.


Carry forward loss shown at  a wrong figure due to mistake of tax consultant would not attract penalty under section 271 (1) (c ), as the correct figure was available with Assessing Officer from the assessment of earlier years and the mistake was rectified on being pointed out before finalization of assessment. Recognition to donee trust under section 80G being available earlier, there was  bona fide belief to claim deduction under section 80G hence there was no case for levying penalty under section 271 (1) (c). (A.Y.2004-05)


Asst CIT v A.H.Wheeler& Co (P) Ltd ( 2011) 60 DTR 25 ( All) (Trib).


S. 271 (1) (c ):Penalty-Concealment- Search and seizure- Disclosure- Due date of filing of return-Explanation 5. ( S. 132 (4).


Assessee made disclosure under section 132 (4), and paid the tax. Time for filing of return has not expired . Penalty can not be imposed.( A.Y. 1989- 90.


CIT  v Bhandari  Silk Store ( 2011) 337 ITR 153 ( P& H) (High Court).


S. 271 (1)(c ) : Penalty ConcealmentNo penalty  can be levied  without  Assessing officers finding on Inaccurate Particulars.


Where there is no finding by the AO that the assessee furnished inaccurate particulars and that its explanation was not bonafide ,the imposition of penalty u/s 271(1)(c) was a complete non-starter. A mere erroneous claim made by an assessee, though under a bonafide belief that, it was a claim which was maintainable in law cannot lead to an imposition of penalty. The claim for deduction was made in a bona fide manner and the information with respect to the claims was provided in the return and documents appended thereto. Accordingly, there is no furnishing of inaccurate particulars. Making of an incorrect claim for expenditure does not constitute furnishing of inaccurate particulars of income


CIT v Mahanagar Telphone Nigam Ltd (Delhi) (High Court) (


S. 271(1)(c ): Penalty Concealment-Furnishing Inaccurate Particulars -  Despite disclosure of conversion of stock into investment and acceptance by the Assessing Officer  claim that gains is Long term capital gain penalty is leviable.


The assessee owned a plot of land which in the earlier years was treated as stock-in-trade. In the year of sale, the assessee converted the stock into investment and offered the gains as Long term capital gain . Penalty u/s 271(1)(c ) was levied. It was held that though the Assessing Officer  accepted the conversion, the assessees claim that the gains was a LTCG amounted to furnishing inaccurate particulars of income. The issue was not debatable as held by the Tribunal. When the order of the AO in quantum proceedings was sustained by all successive authorities and the High Court also dismissed the appeal at the admission stage, albeit after admitting the same, it cannot be said that the issue was debatable.


CIT v Splender Construction(Delhi) (High Court). (


S. 275(1)(a) :  Penalty Concealment-Bar of limitation on imposition -  limitation period not curbed by Proviso.,


The period of six months provided for imposition of penalty u/s 275(1)(a) starts running after the successive appeals from an assessment order have been finally decided by the CIT(A) or the ITAT. The proviso to s. 275(1)(a) extends the period for imposing penalty from six months to one year of the receipt of the CIT (A)s order after 1.6.2003. The proviso carves out an exception from the main section inasmuch as in cases where no appeal is filed before the ITAT the AO must impose penalty within a period of one year of the date of receipt of the CIT (A)s order. A proviso is merely a subsidiary to the main section and must be construed harmoniously with the main provision. The proviso to s. 275(1)(a) does not nullify the availability to the AO of the period of limitation of six months from the end of the month when the order of the ITAT is received.


CIT v. Mohir Investment & Trading Co. (Delhi) (High Court) (




S. 276B: Offences and Prosecution-Compounding of offences- Guidelines-Technical  offences.


Under the guidelines of September  30, 1994 , technical offences could be compounded by the Chief Commissioner or Director  General  on certain conditions. The court held that compounding is not possible after filing of complaint. (A.Y. 1982-83).


Anil  Batra v Chief CIT ( 2011) 337 ITR 251 ( Delhi) (High Court).


S.288 (2): Authorised Representative- Need not be a registered Income Tax practitioner.


Under rule 49 (a) , of the Income tax Rules ,1962 , an authorized income tax practitioner means any authorized representative as defined in clause (v) or clause (vi) or clause (vii) of section (2) of section 288 of the Income tax Act , 1961, for appearing before the Tribunal. It can not be read to mean that an authorized representative as defined in sub section (2) has to get him self registered as an authorized income tax practitioner. Section 288 (2) does not say that the authorized representative shall also be an authorized income tax practitioner registered under rule 54 and 55 of the Rules .The right given in this respect by the Act can not be diluted by the Rules nor can it be restricted , by specifying a procedure for registration. The right given to an assessee to appoint a qualified authorized representative can not be denied.


Vidya Sikshaa Educational and Charitable Trust v CIT ( 2011) 11 ITR ( Trib) 236 ( Chennai) (Trib).  


Wealth tax.


S. 35B :Offences and Prosecution- Willful failure to file return- Sanction-Criminal procedure Code S. 245(1). ( S. 35O ).


Sanction authority has sanctioned the prosecution, without application of mind ,there was no evidence that default was willful. The Court held that prosecution was  not valid.( A.Y. 1993-94).


J. Jayalaitha v Asst CIT ( 2011) 337  ITR 1 /60 DTR 169/ 243 CTR 467( Mad) (High Court).


Finance  Act ,1983- Wealth tax- Valuation-Land-Urban land Ceiling Act-Schedule III.


Assessees  land was declared as surplus under ULCRA  but possession was not taken over by authorities and in view of section 3  and  4 of repealed Act, 1999 ,the assessee continued to be owner of the land and its value was includible in net wealth. Land being subject to  ULCRA , the same has to be valued taking in to consideration restriction under ULCRA. ( A.Ys 1984-85 to 1989-90, 1991-92 & 1992-93).


CWT  v Chemsford Club Ltd ( 2011) 243 CTR 89 ( Delhi) (High Court)




Dependent Agent Permanent Establishment: Tests to determine Agents right to bind, & dependence on, principal


The assessee, a company registered in the Netherlands but resident in Ireland for tax purposes appointed Dell AS, a Norwegian company, as its commissionaire for sales to customers in Norway. Dell AS entered into agreements in its own name and its acts (under the commission agreement and Commission Act) did not bind the principal. The assessee claimed that it was not taxable in Norway in respect of the products sold through Dell AS on the ground that Dell AS was not its Dependent Agent Permanent Establishment (DAPE) under Article 5(5) of the Norway-Ireland DTAA on the ground that (a) the agent had no authority to enter into contracts in the name of the assessee and legally bind the assessee and (b) the agent was not a dependent agent. However, the income-tax department took the view that Dell AS constituted a PE under Article 5(5) of the DTAA and that 60 percent of Dell Products net profit on sales in Norway was attributable to the PE. This was confirmed by the Oslo District Court. On appeal by the assessee to the Court of Appeal, HELD dismissing the appeal:


(i) Under Article 5(5) of the DTAA, an agent is considered a permanent establishment for the principal if two conditions are fulfilled (i) the agent must be dependent on the principal and (ii) the agent must have the right to conclude contracts in the name of the principal. The question whether the agent has the authority to conclude contracts on behalf of the enterprise has to be considered, not from a literal sense whether the contracts are in the name of the enterprise, but from a functional sense whether the agent in reality binds the principal. The objective of Article 5 (5) is to protect the principle of source taxation, i.e. that the tax shall be due to the country where the revenue was created. This principle would be disregarded if only the commission relationship was considered despite the financial and legal attachment between the agent and the principal being strong. To ask if Dell AS in reality binds Dell Products is in accordance with the functional interpretation of Article 5 (5). The substance must prevail over the form. The fact that a commissionaire under the Commissionaire Act and the commission agreement does not bind the principal through his sales is not enough to rule out that a permanent establishment does not exist (Vienna Convention, OECD Model Convention Commentary, Commentaries by Klaus Vogel & ArvidSkaar considered, decision of the French SAT in Zimmer that as the commissionaire did not bind the principal, it was not a PE despite dependence on the principal not followed);


(ii) On facts, Dell Products was in reality bound by the contracts concluded by Dell AS because (a) all sales were made under the trademark Dell; (b) the sales were made on standard / approved conditions laid down by Dell Products; (c) in practice, all of the agents agreements were honoured by the principal and (d) there were no instances where the agents sales have not been accepted by the principal;


(iii) The question whether the agent is dependent on the principal has to be decided on the application of various tests such as the degree of instruction and control. On facts, Dell AS was dependent on Dell Products because (a) Dell AS was only allowed to sell permitted products on conditions of prices and guarantees determined by Dell Products, (b) there was an overlap of board members in the two companies and a board member of Dell Products was the general manager of Dell AS, (c) due to the integrated accounting system of the Dell companies Dell Products had full insight to the finances of Dell AS, (d) under the commission agreement, Dell Products had access to Dell AS premises, (e) Dell AS sold goods as a commissionaire only on behalf of Dell Products though it had the theoretical right to sell for others; (f) all business of Dell AS was done under the trademark Dell, its letterheads, agreements and advertisements had the logo Dell. Dell AS was thus branded identically as the rest of the Dell Group, but without owning the brand. All these facts made Dell AS fully dependent on the principal. Without the commission agreement, Dell AS may as well close down its operations. The fact that the agent acted independently in matters of staff hire, purchase and lease of assets and premises, etc was irrelevant because the big picture showed Dell AS to be dependent on Dell Products;


(iv) The determination of profits attributable to the PE has to be done as if the agent was independent of the principal. On the methods to be used, Article 7(2) of the DTAA provides for the direct method of allocating all costs and revenue between the HO and the PE while Article 7(4) provides for the indirect method of allocating only the net profits using keys such as sales, revenues, expenses, number of employees, capital structure or a combination of these factors. In Norway, the indirect method is in practice. This is practical because the accounts do not permit individual items of income and expenditure to be identified for allocation purposes and also because it gives a result which is in accordance with the arms length principle. While under Article 7(2), a two-step procedure has to be adopted by first determining a commercial remuneration for Dell AS and then a commercial profit for other functions performed by the PE, under Article 7(4) it is sufficient that the result to a reasonable degree corresponds to the arms length principle and requires that the PE should be allocated revenues in accordance with its functions, risk and assets used. On facts, the value creation occurred through sales made by Dell AS and it was the major value driver. Dell Products functions and contribution to the value creation was limited compared to the activity of Dell AS. Consequently, allocating 60% of Dell Products profits from sales in Norway to the PE was reasonable (over & above the assessment of commission in the agents hands). 


Dell Products vs Tax East (Norway Court of Appeal)



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