Missive Volume XXVI – May 2013

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

Topics Page No

FEMA 1

Income Tax 2

Transfer Pricing 5

Transactions that made headlines 8

Never hold your head high with pride or ego, even the winner of a gold medal gets his medal only when he puts

his head down!!!

1 | P a g e

FEMA

A.P. (DIR Series) Circular No. 96 Dated April 5, 2013

Memorandum of Instructions governing money changing activities

The RBI, on a review, has decided that Authorised Money Changers (AMCs) may

sell Indian rupees to foreign tourists /visitors against International Credit Cards

/ International Debit Cards and should take prompt steps to obtain

reimbursement through normal banking channels.

All the other instructions shall remain unchanged.

A.P. (DIR Series) Circular No. 98 April 9, 2013

Trade Credits for Imports into India – Review of all-in-cost ceiling

On a review, the RBI has decided that the all – in – cost ceiling of Trade Credits

for imports into India, as specified in A.P. (DIR Series) Circular No. 28 dated

September 11, 2012 will continue to be applicable till June 30, 2013. All other

aspects of Trade Credit policy remain unchanged.

A.P. (DIR Series) Circular No. 100 April 25, 2013

Overseas Direct Investments – Clarification

The RBI has observed that eligible Indian parties are using overseas direct

investments (ODI) automatic route to set up certain structures facilitating

trading in currencies, securities and commodities. It has come to the notice of

the Reserve Bank that such structures having equity participation of Indian

parties have also started offering financial products linked to Indian Rupee (e.g.

non-deliverable trades involving foreign currency, rupee exchange rates, stock

indices linked to Indian market, etc.).

The RBI has clarified that any overseas entity having equity participation

directly / indirectly shall not offer such products without the specific approval

of the Reserve Bank of India given that currently Indian Rupee is not fully

convertible and such products could have implications for the exchange rate

management of the country. Any incidence of such product facilitation would

be treated as a contravention of the extant FEMA regulations and would

consequently attract action under the relevant provisions of FEMA, 1999.

2 | P a g e

Income Tax

CIT vs. Rajarani Exports Pvt Limited (Calcutta High Court) (ITAT No 49

of 2013) dated 24th April, 2013.

The Calcutta High Court upheld the stand of the Assessee on the grounds that

even if the amount of Commission of Rs 1.28 crores paid to Alia Transportation

were actually kickbacks (bribery) to Iraqi regime, it would not attract

Explanation to s. 37(1). It was pointed out that while the transactions between

Alia and the Iraqi regime may be contrary to the UN sanctions, the transactions

between the Assessee and Alia were not against the UN sanctions and hence

there was no specific violation of law by the Assessee, It was also held that

what the recipient of the payment does is not important because the Assessee

has no control over the matter. Keeping in view of the above facts the High

Court 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 be

done at the sole discretion, opinion and reasonable belief of the AO and not on

the basis of some other authority. The AO cannot blindly follow the opinion of

an 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 not

independently, the action of re-opening would be vitiated. It was clearly

established that the AO was under compulsion from the audit party to issue

notice for reopening the assessment. Hence it was held that the sec 148 notice

issued 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 of

Fatima Bai & Rajesh Kumar Jalan, upheld the stand of the Assessee & opined

that the benefit of tax exemption on long Term Capital Gain would be available

as long as the taxpayer made the new investment within the time line of filing

tax return u/s 139 of the Act. The same shall be allowed even if any belated

return is filed by the assesse within the time limit. Hence it was held that the

tax payer had acquired the new residential house within the extended period of

filing 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 tax

payer is eligible for exemption from tax on LTCG u/s 54F.

3 | P a g e

ITO 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/s

5(2)(b) “Income accrue or arise in India” and held that the servers of Google

and Yahoo are not located in India so there is no PE in India. In the absence of

any business connection the second limit of sec 5(2) (b) ‘’Income deemed to

accrue or arise in India’’ also does not applies. The tribunal considered that the

advertising revenues are not assessable as royalty u/s 9(1) (vi) and the same

does not qualify for Managerial, Consultancy & technical services as these

involves a human element. The Tribunal appreciated that search engines such

as Yahoo and Google provided advertisement services in a purely automated

manner using algorithms and codes without any human intervention. The

services rendered by the search engines are a wholly automated process &

does not involve any human touch at all. Consequently, the receipts in respect

of online advertising on Google and Yahoo cannot be brought to tax in India

under 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,

2013

On appeal to the Tribunal, it noted that as per the amended provisions of

Section 80-IA (2), an option was given to the Assessee for claiming deduction

for any 10 years out of 15 years in which the business begins to operate. The

Tribunal held that the taxpayer has an option to choose the initial Assessment

Year. Hence u/s 80(IA) (5), only the losses of the year starting from the initial

Assessment Year alone are to be b/f and set off. The Tribunal distinguished the

decision relied on the by the CIT in the case of Goldmine shares & Finance Pvt

Ltd as the same was based on the erstwhile definition of ‘Initial AY’).The

Tribunal set aside the order of the CIT u/s 263 since the order of the AO could

not be termed as erroneous in law.

Notification

C 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 with

few amendments. It shall come into force w.e.f 1.04.2013.Certain important

amendments have also been made in the forms which are as follows:-

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 any

income which is exempt under chapter III.

Return in ITR 4S can’t be filed if Assessee claims tax relief or has any

income which is exempt under chapter III.

E-filing of Audit Reports u/s 44AB in respect of books of accounts, 92E

in respect of international transactions and 115JB in respect of MAT

computation have been made mandatory.

Mandatory E-filing of return if income for every person(not being a

company or a person filing return in ITR 7) whose total income

exceeds Rs. 5,00,000 or Assessee claims tax relief u/s 90, 90A or 91.

Circular

CBDT via Circular No. 04/2013 [F. No. 275/34/2011-IT(B)], dated 17th

April,

2013 stated that the TDS certificate in Form 16 issued by a Deductor on an

after 1.4.12 shall contain two parts viz. Part A & Part B(Annexure).Part A

contains details of tax deduction and Part B (Annexure) contains details of

income. It further added that Part A of Form 16 shall be issued by all the

deductors, (including Government deductors), only by generating it through

TRACES Portal and after duly authenticating and verifying it. Part B (Annexure)

of Form 16 shall be prepared manually and shall be issued to the deductee

after due authentication and verification along with Part A of Form 16. Form 16

should be issued by 31st May of the financial Year immediately following the

financial year in which income was paid and tax deducted. The Director General

of Income-tax (Systems) shall specify the procedure, formats and standards for

the purpose of download of Part A of Form No. 16 from the TRACES Portal and

shall be responsible for the day-to-day administration in relation to the

procedure, formats and standards for download of Part A of Form No. 16 in

electronic form. It is also clarified that Form 16 issued in accordance with the

circular, shall only be treated as valid compliance.

5 | P a g e

Transfer Pricing

Automatic RBI approval means transaction is at Arm’s Length

Price

ThyssenKrupp Industries India Pvt. Ltd vs. ACIT (ITA NO.

6460/Mum/2012)

The ITAT in its judgment held that when the rate of royalty payment and

fee for drawings etc. has been approved or deemed to have been

approved by the RBI, then such payment has to be considered at ALP.

Scope of +/- 5% tolerance adjustment to ALP explained

IHG IT Services (India) Pvt. Ltd vs. ITO (ITA No. 5890/Del/2010)

It was held that the benefit of tolerance margin would be available only

if the variation is within the tolerance margin. Once the variation

exceeded the tolerance margin, then there would be no benefit even up

to tolerance margin.

Foreign AE cannot be the tested party. TP additions can exceed

overall group profits

Onward Technologies Limited vs. DCIT (ITA No. 7985/Mum/2010)

The Tribunal held that there is no question of substituting the profit

realized by the Indian enterprise from its foreign AE with the profit

realized by the foreign AE from the ultimate customers for the purposes

of determining the ALP of the international transaction of the Indian

enterprise with its foreign AE. Further, the contention of the Assessee

that the authorities cannot go beyond the overall profit of the group of

AEs in determining the ALP of the international transaction is also not

acceptable because it will constitute a new method/ yardstick for

determining the ALP.

6 | P a g e

DRP entitled to enhance by questioning very existence of

transaction

Hamon Shriram Cottrell Pvt. Ltd vs. ITO (ITA No. 7982/Mum/2011)

The Explanation to section 144C(8) has widened the DRP’s power of

enhancement to all the matters arising out of the assessment

proceedings irrespective of whether they were raised or not by the

Assessee. With this amplification of the power, even the matters not

agitated by the Assessee before the DRP can also be considered for the

purposes of enhancement.

If more than one price is determined by the most appropriate

method, the ALP has to be the arithmetical mean of such prices

CIT 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) is

explicit that where more than one price is determined by most

appropriate method, the arm’s length price shall be taken to be the

arithmetical mean of such prices. Further, it was held that fresh search

can be conducted by TPO under section 92C (3) which stipulate four

situations where under the AO/ TPO may proceed to determine the ALP

in relation to an international transaction.

Important principles on “turnover filter” & comparison explained

Capgemini India Private Limited vs. ACIT (ITA No. 7861/Mum/2011)

Tribunal held the following:-

A comparison of margin between the Assessee and the comparables

has to be made under identical conditions, for the purpose of

making proper comparison of the margin, onetime cost incurred by

the Assessee has to be excluded.

Only standalone results should be adopted for the purpose of

comparison of margins as the consolidated results which include

profit from different overseas jurisdictions having different

geographical and marketing conditions will not be comparable

The concept of economy of scale is relevant to manufacturing

concerns, which have high fixed assets and, therefore, with the rise

in volume, cost per unit of the product decreases, which is the

reason of increase in margin as scale of operations goes up but the

7 | P a g e

same is not true in case of service companies, which do not require

high fixed assets.

It would not be appropriate to apply turnover filter for the purpose

of comparison of margins. However, for the purpose of comparison,

the turnover would be relevant only from the limited purpose to

ensure that the comparable selected is an established player

capable of executing all types of work as the Assessee is also an

established company in the field.

RBI approval has no relevance on issue of Arm’s Length Price

SKOL Breweries Ltd vs. ACIT (ITAT Mumbai) (ITA No. 6175/Mum/2011)

Tribunal held that Press Note no.9 of 2000 issued by the Ministry of

Commerce and Industry in respect of FDI policy and prescribing the

percentage of royalty to the sales allowed under automatic route

cannot substitute as ALP to be determined under the provisions of the

Act and Rules. FDI policy permitting certain percentage of payment of

royalty is only for remittance of the amount in foreign exchange and

therefore, such permission given in an entirely different context and

purpose cannot be considered as relevant for determination of the ALP

under I. T. Act.

ALP should be determined on segment-wise profits & not

at an entity level. Adjustment cannot be made to the entire entity

turnover/ profits

Sandoz Private Limited vs. DCIT (ITAT Mumbai) (ITA No.

6922/Mum/2012)

The tribunal held that the correct approach under TNMM should be to

determine the ALP of each of the segments by comparing with the

corresponding comparables involved in similar lines of functioning after

proper FAR analysis

ALP of loan transaction has to be determined as per CUP & LIBOR

Cotton Naturals (I) Pvt. Ltd vs. DCIT (ITAT Delhi)(ITA No.

5855/Del/2012)

CUP is the most appropriate method for ascertaining the arm’s length

price of an international transaction of lending money. Where the

transaction is of lending money in foreign currency to its foreign

subsidiaries, the comparable transactions have to be of foreign currency

lent by unrelated parties. In such a situation, domestic prime lending

rate would have no applicability and the international rate fixed being

8 | P a g e

LIBOR should be taken as the benchmark rate for international

transactions.

No notional interest addition for delayed payments by AE

Evonik Degussa India P. Ltd vs. ACIT (ITAT Mumbai) (ITA No.

7653/Mum/2011)

The T.P. adjustment cannot be made on hypothetical and notional basis

until and unless there is some material on record that there has been

under charging of real income. Consequently, an addition an account of

notional interest relating to alleged delayed payment in collection of

receivables from the A.Es is uncalled for as there is no such agreement

whereby interest is to be charged on such a delayed payment.

Transactions that made headlines

Mahindra Holidays acquires 49% stake in Dubai-based Arabian

Dreams Hotel Apartments

TCS to acquire French IT firm Alti for $97.5M

Pearson buys Educomp’s 50% stake in vocational education JV

IndiaCan

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

This publication is intended as a service to clients and associates and to provide them with details of the important Transaction updates. It has

been prepared for the general guidance on matters of interest only, and does not constitute professional advise. No person shall act upon the

information contained in this publication without obtaining specific professional advise. Due care has been taken while compiling the

information , however, no representation (express or implied) is given as to the accuracy or completeness of the information contained in this

publication

Our guiding philosophy is “To carry out every professional assignment

effectively and efficiently, while upholding the virtues of independence

and 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 –110024

Tel: +91-11-4980-0000

Fax: 91-11-4980-0029

Email: sanjoli@spnagrath.com www.spnagrath.com

For any professional advice regarding alerts in this newsletter, we welcome your queries

©Copyright S P Nagrath & Co. , All rights reserved