For transfer pricing adjustment, assessee should take same class of transa

For transfer pricing adjustment, assessee should take same class of transactions for comparing profit with comparables

Income-tax : When the comparables are not licensee manufacturers of the similar commodity then it would not satisfy the requirement of the law as well as the rules prescribed under the Statute for comparing profit with comparables [Section 92C of the Income-tax Act, 1961 - Transfer Pricing] - [2011] 10 taxmann.com 125 (Mum. - ITAT)

Section 194H is not applicable where agreements between assessee-manufactur

Section 194H is not applicable where agreements between assessee-manufacturer and distributors was on principal to principal basis - [2011] 10 taxmann.com 115 (Delhi).

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263, Revision by Commissioner of Income Tax

Whether when assessee lends colour of business income to dividend declared as 'income from other sources' in previous year, and AO allows set-off of brought forward losses, it is a fit case for CIT to invoke revisionary powers - YES: Delhi HC

NEW DELHI, MAY 20, 2011: THE issue before the High Court is - Whether when assessee lends colour of business income to dividend income declared as 'income from other sources' in the previous year and AO allows set off of brought forward losses against such income, it is a fit ground for CIT to invoke revisionary powers u/s 263. YES is the HC's answer.

Facts of the case

CIT rightly initiated proceedings u/s 263 for setting off of brought forward business loss against the income from other sources by the AO, without giving the reason by the AO in the assessment order as to how the dividend income was given the character of business income for the purpose of set off under Section 72 of the Act though the dividend income was assessed as income from other sources, as it was prejudicial to the interest of revenue and erroneous.

Assessee is a non-banking company registered with the Reserve Bank of India, and is engaged in the business of investment in shares, securities, other debt instruments and financing loans and providing guarantees. Assessee claimed dividend income received as business income and set off the brought forward business losses. AO treated the dividend income as income from other sources as was itself shown by the assessee in the preceding years and allowed set off of losses. CIT observed that the AO had wrongly allowed the set off of business losses of preceding years against the income from other sources which was not permissible under section 72(1). Accordingly CIT initiated proceedings u/s 263 stating that the AO did not bestow any consideration or applied his mind leading to escapement of income as setting off of brought forward business losses had resulted in the assessment which was erroneous and prejudicial to the interest of revenue. In reply to the show cause notice issued by CIT, the assessee contended that assessee was engaged in the business of investment and was holding the shares of other companies of the same group. Investment was meant for control and management of investee companies. The shares constituted the business asset of the company and dividend earned from such investment was in nature of `business income' and this income was eligible for set off against the brought forward business losses. CIT set aside the order of the AO for fresh consideration stating that the investments were held as long-term investment and no part of the investment was considered stock-in-trade by the assessee. Therefore, the AO failed to conduct the required enquiry and also failed in application of the provisions of S. 72(1). ITAT allowed the appeal of the assessee and set aside the order of CIT observing that the said income could be treated as business income as dividend was earned from the shares and securities held in the other companies in the same group – the view of the AO was a plausible view and it could not be said that the AO had not applied his mind.

After hearing both the parties, the High Court held:

++ that it would be immaterial as to under what head specified under Section 14 of the Act that the income is computed. Even when it is not computed under the head 'income from profession and business', the commercial character of that income could still be taken into account. If it is found that the particular income was derived from the business of the assessee, for the purposes of set off, it can be taken as business income;

++ that in the assessment order, the AO recorded that even a dividend income in question was shown as business income by the assessee. The AO did not agree with the same, as in the previous years this income was shown as dividend income. After saying so, the AO straightaway allowed the set off of this income against the carry forward losses. The assessment order is totally silent and there is no discussion as to how this dividend income was to be given the character of business income for the purpose of set off under Section 72 of the Act. It was for this reason that the CIT held that the AO had not conducted any inquiry. ITAT did not appreciate that the AO had not even taken any view on this issue, it could not be said that the AO had not applied his mind;

++ that the Tribunal failed to appreciate the limited scope of appeal before it, viz., the validity of the order passed by the CIT exercising his revisionary power under Section 263 of the Act. The CIT recorded that the Assessing Officer had failed to conduct the required enquiry and also had failed in application of the provisions of Section 72 (1) of the I.T. Act. This rendered order passed by the AO erroneous and prejudicial to the interest of Revenue to that extent. The Tribunal was, thus, supposed to adjudge the validity of such an order and not to go beyond when the challenge before it was limited to the said order passed by CIT in exercising the powers under Section 263 of the Act.

Revenue's appeal allowed.

ASPECT THEORY & INTERPRETATION OF TAX

ASPECT THEORY ; INTERPRETATION OF TAX
By: Dr. Sanjiv Agarwal :

Any subject which is one aspect and one purpose fall within particular legislature may in another aspect and for another purpose fall within another legislative power. They might be overlapping, but that should be in law. Same transaction may involve two or more taxable events in its different aspects, but the fact that there is overlapping does not detract from the distinctiveness of aspects [Shilpa Color Lab v. CCE, Calicut 2006 -TMI - 1022 – (CESTAT,BANGALORE)].

Entry 60 of list II states that "taxes as professions, trade, callings and employment." Entry 60 is a taxing entry. It is not a general entry. Tax on professions etc. has to be read as a levy on professions, trade, callings, etc, as such. Therefore, entry 60 which refers to professions cannot be extended to include services. This is what is called as an "aspect theory" [All India Federation of Tax Practitioners v. Union of India 2007 -TMI - 1556 – (Supreme Court)]

In Imagic Creative Pvt. Ltd. v. Commissioner of Commercial Taxes 2008 -TMI - 2576 – (Supreme Court of India) it was held that while interpretating tax statutes involving applicability of Article 246 of Constitution of India read with Seventh Schedule thereof, court should take various theories including `aspect theory' while interpreting such statutes.

Extracts from judgment in Subh Timb Steels Ltd v Union of India (2010) 20 STR 737; (2010) 29 STT 479 ( P & H)

15. Aspect theory has been subject-matter of several decisions. In Federation of Hotel & Restaurant Assn. of India v. Union of India 1989 -TMI - 40104 – (SUPREME Court), the levy considered was expenditure tax under Central law with reference to the conten­tion that the same was in substance tax on luxury under Entry 62 of List II. Stand of the Central Government was that expenditure aspect was different from luxury aspect and expenditure aspect could be held to be excluded from the luxury aspect. The plea was upheld. It was observed :­-

"26.... Wherever legislative powers are distributed between theUnionand the States, situations may arise where the two legislative fields might apparently overlap. It is the duty of the courts, however difficult it may be, to ascertain to what degree and to what extent, the authority to deal with matters falling within these classes of subjects exists in each Legislature and to define, in the particular case before them, the limits of the respective powers. It could not have been the intention that a conflict should exist; and, in order to prevent such a result the two provisions must be read together, and the language of one interpreted, and, where necessary modified by that of the other.

27. The Judicial Committee in Prafulla Kumar Mukherjee v. Bank of Commerce AIR 1947 PC 60, referred to with approval the following observations of Sir Maurice Gwyer 'C.J.' in Subrahmanyan Chettiar case:

"It must inevitably happen from time to time that legislation, though purporting to deal with a subject in one list, touches also on a subject in another list, and the different provisions of the enactment may be so closely intertwined that blind observance to a strictly verbal interpretation would result in a large number of statutes being declared invalid because the Legislature enacting them may appear to have legislated in a forbidden sphere. Hence the rule which has been evolved by the Judicial Committee, whereby the impugned statute is examined to ascertain its 'pith and substance', or its 'true nature and character', for the purpose of determining whether it is legislation with respect to matters in this list or in that."

28. This necessitates as an "essential of federal Government the role of an impartial body, independent of general and regional Governments", to decide upon the meaning of division of powers. The court is this body.

29. The position in the present case assumes a slightly different complexion. It is not any part of the petitioners' case that expenditure tax is one of the taxes within the States' power or that it is a forbidden field for the Union Parliament. On the contrary, it is not disputed that a law imposing "expenditure tax" is well within the legislative competence of Union Parliament under Article 248 read with Entry 97 of List I. But the specific contention is that the particular impost under the impugned law, having regard to its nature and incidents, is really not an "expenditure tax". at all as it does not accord with the economists' notion of such a tax. That is one limb of the argument. The other is that the law is, in pith and substance, really one imposing a tax on luxuries or on the price paid for the sale of goods. The crucial questions, therefore, are whether the economists' concept of such a tax qualifies and conditions the legislative power and, more importantly, whether "expenditure" laid out on what may be assumed to be "luxuries. or on the purchase of goods admits of being isolated and identified as a distinct aspect susceptible of recognition as a distinct field of tax legislation.

30. In Lefroy's Canada's Federal System the learned Author referring to the "aspects of legislation" under sections 91 and 92 of the Canadian Constitution ie. British North America Act, 1867 observes that "one of the most interesting and important principles which have been evolved by judicial decisions in connection with the distribution of for one purpose fall within the power of a particular Legislature may in another aspect and for another purpose fall within another legislative power". Learned Author says:

"... that by 'aspect' must be understood the aspect or point of view of the legislator in legislating the object, purpose, and scope of the legislation that the word is used subjectively of the legislator, rather than objectively of the matter legislated upon."

In Union Colliery Co. ot British Columbia v. Bryden 1899 AC 580, Lord Haldane said:

"It is remarkable the way this Board has reconciled the provisions of section 91 and section 92, by recognizing that the subjects which fall within section 91 in one aspect, may, under another aspect, fall under section 92."

31. Indeed, the law "with respect to" a subject might incidentally "affect" another subject in some way; but that is not the same thing as the law being on the latter subject. There might be overlapping; but the overlapping must be in law. The same transaction may involve two or more taxable events in its different aspects. But the fact that there is an overlapping does not detract from the distinctiveness of the aspects. Lord Simonds in Govemor-General-in-Council v. Province otl Madras AIR 1945 PC 98 in the context of concepts of Duties of Excise and Tax on Sale of Goods said:

"... The two taxes, the one levied on a manufacturer in respect of his goods, the other on a vendor in respect of, his sales, may, as is there pointed out, in one sense overlap. But in law there is no overlapping. The taxes are separated and distinct imposts. If in fact they overlap, that may be because the taxing authority, imposing a duty of excise, finds it convenient to impose that duty at the moment when the excisable article leaves the factory or workshop for the first time on the occasion of its sale…"

32. Referring to the "aspect" doctrine Laskin's Canadian Constitutional Law states:

"The 'aspect' doctrine bears some resemblance to those just noted but, unlike I them, deals not with what the 'matter' is but with what it 'comes within',... (p. 115)

"….it applies where some of the constitutive elements about whose combination \ the statute is concerned (that is, they are its 'matter'), are a kind most often met with in connection with one class of subjects and others are of a kind mostly dealt with in connection with another. As in the case of a pocket gadget compactly assembling knife blade, screwdriver, fishscaler, nailfile, etc., a description of it must mention everything but in characterizing it the particular use proposed to be made of it detenpines what it is. (p. 116)

I pause to comment on certain correlations of operative incompatibility and the 'aspect' doctrine. Both grapple with the issues arising from the composite nature of a statute, one as regards the preclusory impact of federal law on provincial measures bearing on constituents of federally regulated conduct, the other to identify what parts of the whole making up a 'matter' bring it within a class of subjects………" (p. 117).

16. By way of instance of different aspects of the same matter, illustration was also given of tax on property under the State law and tax on income under the Central law.

.38. Indeed, as an instance of different aspects of the same matter, being the topic of legislation under different legislative powers, reference may be made to the annual letting value of a property in the occupation of a person for his own residence being, in one aspect, the measure for levy of property tax under State law and in another aspect constitute the notional or presumed income for the purpose of income tax".

[(Also see Tata Sky Ltd v State of Punjab (CWP No 10992 of 2010 dated 25.10.2010)].

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Closing stock of an erstwhile firm converted into stock-in-trade by a propr

IT : Closing stock of an erstwhile firm converted into stock-in-trade by a proprietorship concern will have to be valued at the market value

Income-tax : On dissolution of a firm closing stock has to be valued on the basis of real value i.e., market value, which is independent of the fact whether or not the erstwhile partners of a dissolved firm continue to do business with assets received on dissolution [Section 145 of the Income-tax Act, 1961 - Method of accounting - Valuation of stock] - [2011] 10 taxmann.com 126 (Delhi)

Inclusion of non-operating income and non-exclusion of the non-operating ex

IT : Inclusion of non-operating income and non-exclusion of the non-operating expenses would definitely affect net margin of operating profits of comparable company

Income-tax : The comparison has to be between likes and on the equitable grounds of indicators of comparison and therefore, only income derived from operation of relevant business activity are to be considered for making adjustments in transfer pricing [Section 92C of the Income-tax Act, 1961 - Transfer Pricing] - [2011] 10 taxmann.com 161 (Bang. - ITAT)

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Loan given by an educational society to another educational society

Loan given by an educational society to another educational society does not violate section 13(1)(d) read with section 11(5)

Income-tax : Benefit of section 11 cannot be denied to an educational society on ground that it has given loan to another society in violation of section 13(1)(d) read with section 11(5) as the same is neither an investment nor a deposit for purpose of invoking said provisions [Section 13 of the income-tax Act, 1961 - Charitable or religious trust - Denial of exemption] - [2011] 10 taxmann.com 100 (Luck. - ITAT)

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Payment made to a New Zealand company for rendering liaison & coordinating

Payment made to a New Zealand company for rendering liaison ; coordinating services qua DNA testing at USA does not fall within ambit of royalty ; FTS

Income-tax : Nature of payment made by assessee to New Zealand company is of liaisoning and coordinating to ensure that blood samples collected by assessee is properly received at US and reports are received in time and as per terms fixed by US Embassy; neither of these services can be termed as services in nature of managerial, technical or consultancy nature; it is also not providing services of technical or other personnel; therefore, it also cannot be said that such services fall within term `fee for technical services.' as contemplated by Article 12 [Section 195 of the Income-tax Act, 1961 - Deduction of tax at source - Payment to non-resident - Indo - New Zealand DTAA - Article 12 (Royalties ; Fees for Technical Services)] - [2011] 10 taxmann.com 123 (Delhi - ITAT)

Transfer Pricing principles on use of multi-year data, adjustment to operating

Transfer Pricing principles on use of multi-year data, adjustment to operating p

Haworth (India) Pvt Ltd vs. DCIT (ITAT Delhi)

Transfer Pricing principles on use of multi-year data, adjustment to operating profits +/- 5% adjustment

The assessee adopted the TNMM and claimed that (i) as its operations were for a part of the year, an adjustment to the margins on account of `capacity utilisation' should be made, (ii) the pre-operative expenditure should be excluded, (iii) multi-year data should be used to determine comparables, (iv) if only one comparable is left, the entire exercise should be carried out afresh and (v) even if there was only one comparable, the +/- 5% adjustment should be made. The AO & DRP rejected the claim. On appeal to the Tribunal, HELD:

(i) The rejection of comparables on the ground of non-availability of current year's financial data is proper because under Rule 10B(4), only the current year's financial data is relevant for determination of ALP except where it is shown that the data of the earlier two years reveals facts which could have an influence on the determination of the transfer price;

(ii) A selected comparable should be functionally comparable. A company which is majorly dealing in other segments cannot be accepted as functionally comparable;

(iii) The argument of the assessee that if there is only one comparable, the ALP cannot be determined and a fresh search of comparables should be conducted is not acceptable. There is no principle of law that if only one comparable remains, the entire exercise would fail;

(iv) The argument that expenses incurred prior to the commencement of manufacturing activity hence should be excluded from operating expenses under Rule 10B(1)(e)(i) is not acceptable because operational expenses is that which is incurred to earn that income. Expenses with nexus with revenue have to be considered as operational expenses and cannot be excluded only on the ground that the date of occurrence of the revenue is later and expenses have been incurred prior to that;

(v) The assessee's argument that the margins have to be recomputed after claiming adjustment of capacity utilization is not acceptable. Under the TNMM, the net profit margin actually realized has to be considered and there is no room for any assumption for taking the profit margin. It is not permissible to deviate from the book results on the ground of capacity utilization. Under Rule 10B(3)(ii), there cannot be any deviation in the net profit shown in the books of account and the adjustment, if any, can be made to the same to eliminate the material affects to such differences to the extent of these adjustments are reasonably accurate. As no credible and accurate information with regard to capacity utilization was furnished, adjustment was not allowable;

(vi) The Proviso to s. 92C which gives the assessee the option to adjust the ALP by +/- 5% is applicable only where more than one price is determined by the most appropriate method. In a case where only one price is determined by the most appropriate method, the benefit of +/- 5% is not available to the assessee.

Related Judgements
1.TNT India Private Limited vs. ACIT (ITAT Bangalore) In respect of FY 2001-02, the assessee used data pertaining to AYs 1999-2000 & 2000-01. While the argument that at the time of TP study, the data relating to relevant comparable for FY 2001-02 is acceptable, the assessee has to adopt the data available for the TP study at…

2.Marubeni India Private Ltd vs. ACIT (ITAT Delhi) Even if interest on surplus funds is assessed as "business income", it has to be excluded in computing the `operating profits' because if it is included, one is computing the "return on investment" which is an inappropriate profit level indicator for a service provider. As the PLI is the…

3.ACIT vs. UE Trade Corporation (India) (ITAT Delhi) Under the Proviso to s. 92C(2) (pre-amendment w.e.f. 1.10.09) the option to the assessee to choose a price which may vary from the arithmetical mean by an amount not exceeding five per cent is available only where more than one price is determined and not where there is only…

Sec 260A - Can assessee raise a new question of law, not framed ear

Income tax - Sec 260A - Can assessee raise a new question of law, not framed earlier, at time of final hearing - YES, says HC

SHIMLA, AUG 11, 2010: THE issue before the High Court is - Whether as per the provisions of section 260A which are pari materia to section 100 of the Civil Procedure Code it is permissible to raise a new question of law, not framed earlier, at the time of final hearing. And the answer is YES.

Facts of the case

Assessee filed appeal against the decision of ITAT. At the time of admission, a question of law in relation to conversion of stock in trade into capital asset and nature of income thereof was framed. However at the time of final hearing the counsel for the assessee raised a new question of law in which he challenged the action of the AO apropos section 148. The Counsel for the revenue objected to this.

However the High Court after referring to the decision of Apex Court in the case of Kondiba Dagadu Kadam vs. Savitribai Sopan Gujar and others, held that,

++ the law is very well settled that the onus is on the assessee to show that his investment is a long term investment. Whether a particular holding of shares is by way of long term investment or is a stock in trade is a matter solely within the knowledge of the assessee who holds the shares. Normally, it is the assessee alone who would be in a position to produce evidence whether he has maintained any distinction between those shares, which are stock in trade, and those shares, which are long-term investment. Another important principle of law is that the initial intention of the assessee as to whether he holds the shares as stock in trade or his investment is relevant and has to be taken into consideration while deciding the nature of holding of the assessee.

++ it is apparent that due to issuance of bonus shares and splitting of shares the value of the shares of Information Technology rose sharply and realizing that the company would be liable to pay 30% tax, the assessee started claiming the profits realized from sale of these shares as long term capital gains. After going through the entire record the revenue authorities have come to the conclusion that the shares of Information Technology was purchased by the assessee not by way of assessment but by way of trading. This is a pure finding of fact and not of law. It is true that the principles of law have to be applied and the question as to whether certain shares had been purchased by way of trade or by way of investment may be a mixed question of fact and law but if the authorities have properly considered the legal position then the resultant finding is basically a finding of fact. In the present cases, we find no error in the orders of the revenue. Therefore, we answer the second question against the assessee and in favour of the revenue.

Assessee's appeal dismissed.