Nangia & Co : TAX & REGULATORY Newsletter for July 16-31, 2015
Nangia & Co : TAX & REGULATORY Newsletter for July 16-31, 2015
Published on: Mar 3, 2016
Transcripts - Nangia & Co : TAX & REGULATORY Newsletter for July 16-31, 2015
July 16-31, 2015
1. Offshore supply of equipment, designs and drawings not
taxable in India
2. Telecommunication traffic and restoration services are not
taxable as Fee for Technical Services
3. Service income held not taxable as Fee for Technical
Services and also not attributable to a Dependent Agency
4. ITAT deleted the additions made on account of disallowance
of deduction under Section 10A of the Income-tax Act,
1961: Held that mere placing reliance on transfer pricing
documentation is not sufficient to conclude that the
Appellant is earning excessive profits
5. The Tribunal did not consider the Safe Harbour Rules for
determining the nature of expenses/ income to be
operating/ non operating; Held that the computation of
arm’s length price for non-charging or under-charging of
interest on non realization of debt outstanding beyond
allowed credit period
6. A quasi-capital loan or advance is not a routine loan
transaction; nevertheless, the arm’s length price for the
same could not be NIL.
7. CBEC issues circular on manual scrutiny of service tax
1. Offshore supply of equipment, designs and
drawings not taxable in India
Outotec GmbH [‘the taxpayer’] is a
tax resident of Germany, engaged
in the business of providing
innovative and environmentally
sound solutions for a variety of
customers in the metals and
minerals processing industry. The
taxpayer earned revenue from
offshore supply of equipment to
seven Indian companies (relating
to the steel industry) during the
relevant assessment year.
The Assessing Officer [‘AO’], in his draft order, held that the income
earned by the taxpayer from offshore sale of equipment accrued or
arose in India and was taxable under the Act and the tax treaty and
calculated a taxable profit at 10 per cent of consideration from
offshore sale of equipment. Further, the income earned from supply
of designs and drawings was considered as taxable as royalty. In
relation to income from supervisory services, the attribution
percentage was enhanced to 27.5% of the gross revenue, from the
17.93% offered by the taxpayer.
The Dispute Resolution Panel [‘DRP’] concurred with the AO and
confirmed all the additions made by the AO.
Aggrieved, the taxpayer preferred an appeal before the Income Tax
Appellate Tribunal which observed and ruled as under –
Sale of Equipment
All activities relating to design, fabrication and manufacturing of
equipment took place outside India. The sale of Equipment to
unrelated Indian customers was done from outside India on a
principal-to-principal basis at arm’s length, and consideration
was also received outside India. The fact was also confirmed by
the documents and clauses of the agreement which clearly
stated that the equipment was sold directly by the taxpayer on
an export sale basis, and the title/ ownership of equipment was
transferred outside India.
With regard to the acceptance tests, the Tribunal held that if the
test failed, it could result only in payment of liquidated damages
by the taxpayer, which were hence nothing but warranty
provisions and remedial measures. These could not be construed
to mean that all contracts could be clubbed together.
Reliance was placed on the decisions in the case of LG Cable [237
CTR 438], Motorola Inc. [95 ITD 269] and of the AAR in Hyosung
Corp [314 ITR 343]. Deferred payment relating to an acceptance
test did not have any impact on sale of goods, which was
supported by the definition of “sale” mentioned under section
2(g) of the Central Sales-tax Act, 1956.
Revenue’s contention that the contract was a composite
contract, and taxability could not be split into separate parts, was
not accepted by the Tribunal based on the SC decision in
Ishikawajma-Harima Heavy Industries Limited [288 ITR 408].
Revenue’s reliance on the AAR decision in Alstom Transport SA
[349 ITR 292] was no longer valid as it had been overruled by the
Delhi HC in Linde AG, Linde Engineering Division [365 ITR 1].
The Tribunal concluded that the sale of equipment took place
outside India, and hence no portion of the receipts from the sale
could be taxed in India.
Income from Supply of Design and Drawings
It was clear that the entire work relating to designs and drawings
was done outside the territory of India. Sale was affected outside
India and the consideration was also received outside India in
foreign currency. Since the taxpayer supplied the designs and
drawings for setting up plants in India, in light of the decision of
the Supreme Court in the case of Scientific Engineering House P.
Ltd. [157 ITR 86], such designs and drawings partook the
character of a product and accordingly, the income arising from
supply of such designs and drawings was in the nature of
The designs and drawings sold by the taxpayer amounted to the
use of a ‘copyrighted article’ rather than use of a ‘copyright’ and
was therefore in the nature of business income. Reliance was
placed on Commentary on Double Tax Conventions by Klaus
Vogel and various observations made in the OECD Model
convention of 2010 on Article 12 dealing with Royalties and Fee
for Technical Services as well as the ruling in the case of
Geoquest Systems B.V. [327 ITR 1] and Dassault Systems K.K.
[322 ITR 325]. It was clear that the restriction on intellectual
property would not make any difference since the designs and
drawings sold by the taxpayer were used by the Indian
customers for their internal purpose of setting up plants and not
for commercial exploitation.
The basic engineering packages sold by the taxpayer to the Indian
customers have been largely designed on the basis of standard
technologies available with them. Since the work was done outside
India and sale took place outside India, such income was not
taxable either under the provisions of the Act or under the tax
treaty. Retaining intellectual property in designs and drawings is
similar in nature to retaining of patented rights in any
goods/machinery. Restriction on intellectual property in designs
and drawings sold by the taxpayer for the purpose of setting up a
plant in India does not change the character of the transaction from
sale of the product to the use of a licence/know-how.
Accordingly, the designs and drawings sold by the taxpayer
tantamount to the use of copyrighted article rather than use of a
copyright and therefore it was in the nature of business income.
Income from Supervisory Activities
The Settlement Commission, in the taxpayer’s own case for earlier
years, had held a profit rate of 27.5% applicable for attributing
income from supervisory services. As no reason was provided by
the taxpayer to deviate from this decision, the Tribunal had
confirmed the rate of 27.5%.
2. Telecommunication traffic and restoration
services are not taxable as Fee for Technical
Flag Telecom Group Limited [‘the
taxpayer’], a company
incorporated in Bermuda, had
built a submarine fiber optic
telecommunication cable to link
telecom traffic amongst Western
Europe, Middle East, South Asia,
South East Asia and Far East. The
capacity in the said cable system
had been sold to various landing
parties, which are mostly national telecommunication companies
belonging to different nations. In India, Videsh Sanchar Nigam Limited
[‘VSNL’] was one of the original landing parties in the FLAG cable
For the purpose of selling the capacity in the cable system to various
landing parties, including VSNL, a Capacity Sales Agreement (CSA) and a
Construction and Maintenance Agreement (C&MA) which provided the
entire procedure for the ownership of capacity in the cable system and
also for providing standby maintenance activities contained in the
separately entered between the parties. Under the terms of the C&MA,
the FLAG cable system is to be jointly operated and maintained for an
efficient working condition along with the taxpayer and landing parties
signatories. During the year under consideration, the taxpayer had
received the payment from VSNL on account of provision of standby
maintenance activities, as in the earlier years.
Further during the year under consideration the taxpayer had
entered into an arrangement with certain telecom cable operator
[‘SMW3’] to provide restoration of traffic to their customers in the
event of disruption in the traffic on their cable system. Under these
arrangements, if there is disruption in the traffic on a particular
segment of the cable operator, the taxpayer provides the alternative
telecommunication link route through its own capacity in the cable.
For this purpose, the taxpayer had entered into a ‘Restoration
Agreement’ with SMW3 Cable Network. During the year under
consideration, the taxpayer received payment for restoration
The Assessing Officer [‘AO’] held that receipts from standby
maintenance services/charges and restoration services were in the
nature of Fee for Technical Services [‘FTS’] within the meaning of
Section 9(1)(vii) and hence it was to be taxed in India. The
Commissioner of Income-tax (Appeals) [‘CIT(A)’] held that payment
for restoration activities was to be assessed as business income and
was taxable in India under Section 9(1)(i) of the Act and estimated
the Indian income from restoration activity at 10 per cent of the
The Income Tax Appellate Tribunal, in due course of appeal,
observed and ruled as under –
Taxability of standby maintenance services/charges
It was not in dispute that the standby charges is a fixed annual
charge, which is payable not for providing or rendering services
albeit for arranging standby maintenance arrangement, which is
required for a situation whenever some repair work on the
under-sea cable or terrestrial cable is actually required to be
performed or rendered. It was a facility or infrastructure
maintained for ready to use for rendering technical
services or for repairing services, if required. There was no actual
rendering of the services qua the standby maintenance charges.
Accordingly, following the earlier years’ precedence, it was held that the
receipt on account of standby maintenance charges was not chargeable
as FTS within the scope of Section 9(1)(vii) of the Act.
Taxability of restoration services
In the present case restoration activity did not fall within the nature
of ‘managerial’ or ‘consultancy services’, because there was no
rendering or managing by direction, regulation, administration or
supervision of activities by the taxpayer to VSNL. The taxpayer does
not provide any advisory services for arranging of restoration
activities to VSNL. The taxpayer already had a cable system network
in which it had spare capacity, which was provided to VSNL on
behalf of SMW3 in case of disruption in SMW3 cable network. There
was no transfer of technology is involved nor have any technical
services been rendered. VSNL only received end to end connectivity
for a temporary period till the cable of SMW3 was restored for the
In the present case, the existing cable with its spare capacity with
the taxpayer was being allowed to be used for transmitting data.
Simple use of sophisticated technical equipment for providing the
capacity in the cable to VSNL ipso facto did not lead to any inference
that any technical service was being provided by the taxpayer to
VSNL. Therefore, it cannot be held that for providing such a
standard facility through its cable system, the taxpayer is rendering
any kind of technical services to VSNL, so as to fall within the ambit
of FTS under Section 9(1)(vii) of the Act.
For rendering of technical services there had to be delivery of
technical skills through human element or there was a constant
human endeavor in providing technical service or advice or make
available such a technical skills or services. But if any technical
equipment developed by a human has been put to operation
automatically, then usage of such technology per se could not be
held as rendering of technical services. Reliance was placed on the
Madras High Court ruling in the case of Skycell Communications Ltd.
[119 Taxmann 496]. On perusal of the restoration agreement, it could
not be inferred that there was any actual rendering of technical
services by the taxpayer. Nothing was suggestive of the fact that
under the restoration agreement some kind of technical skill,
technical services are being provided, except for the kinds of
restorations which can be undertaken and terms thereof for the
connectivity and payment.
Accordingly, such a standard facility for transmission of data and
telecommunication traffic by cable operators cannot be termed
as rendering of technical services and therefore it was held that
consideration received from restoration activities was not taxable
as FTS under Section 9(1)(vii) of the Act.
Taxability as business income
A portion of the cable length fell within the territorial waters of
India from where it connected to Mumbai and from there it again
went to other countries. In case of sale of the capacity, the
landing parties become the complete owner of the capacity to
the exclusion of the taxpayer as held in earlier years. However,
the spare capacity which lied in the cable belongs to the
taxpayer, through which it had provided the restoration network
to VSNL. The portion of the asset i.e. cable, through which
restoration activity was provided also had connection in India in
as much as it lied within the territorial waters of India.
Accordingly, it can be held that income had accrued to the
taxpayer from an asset in India and hence it was deemed to be
business income arising in India.
However, all the business operations of the taxpayer were not
carried out in India, therefore reasonable attribution of income
from such operations has to be done. In such a situation,
Explanation 1A to Section 9(1)(i) provides that, in case of a
business of which all operations are not carried out in India, then
the income of the business shall be deemed to accrue or arise in
India only such part of the income, which can be reasonably
attributable to the operations carried out in India.
In the present case the most appropriate basis for identifying the
income, which could be reasonably attributable to India would be
on the basis of fraction of the length of the entire cable system in
the cases where restoration services have been provided in
respect of the cable segments connected to India in its territorial
waters. The territorial waters extend upto 12 nautical miles in
India and hence only 12 nautical miles of the cable system ought
to be considered for attributing the income to India.
The taxpayer had provided the chart of segments on which the
restoration activities have been undertaken by way of connection
to the cable landing station in the territorial waters in India, which
was from Fujairah to Mumbai, Miura to Mumbai and Mumbai to
Singapore. The taxpayer had also filed a statement showing the
details of restoration charges over the years giving the details of
segments on which the restoration had been provided; length of
the segment, length of the cable in territorial waters of India and
apportionment of revenue to India.
In principle, the Tribunal upheld the method of attribution of
revenue as given in the said statement, however the AO was
directed to determine the income of the taxpayer which was to be
3. Service income held not taxable as Fee for
Technical Services and also not attributable to
a Dependent Agency Permanent Establishment
ABB Inc. [‘the assessee’] is a
company incorporated and fiscally
domiciled in the USA and is
engaged, inter alia, in providing
business development, market
services and other support
services to its Indian associated
enterprises [‘AE’s] i.e. ABB Limited
and ABB Global Industries &
Services Limited. During the
taxable as FTS under DTAA. However, the AO rejected the assessee’s
contentions and as regards to assessee’s contentions on "make
available" clause observed that a person without technical knowledge
cannot provide these services on the reasoning that once Indian AEs
have withheld taxes on the payments made to the assessee, then the
assessee could not take a different view in its tax return.
On appeal, the DRP confirmed the AO’s stand and also held, without
prejudice to the taxability of FTS, that the Indian AE was a dependent
agency permanent establishment [‘DAPE’] of the assessee on account
of purchase and sale of certain products. The DRP also noted that the
continuing commercial relationship between the assessee and the
Indian company established business connection for the assessee in
India and thus, profits attributable to the assessee’s operations in India
had to be brought to tax. Further, the DRP held that the licensing fee
paid by the Indian company to the assessee had to be attributed to the
assessee and taxed as business income. Consequently, AO proceeded to
bring to tax the income in question as FTS and business profits
respectively. Aggrieved the assessee filed an appeal before the Income
Tax Appellate Tribunal [‘ITAT”].
The Income Tax Appellate Tribunal observed and ruled as under -
The law in relation to the connotation of 'make available' clause in
the definition of FTS was settled and a condition precedent for
invoking this clause was that the services should enable the
recipient of services to apply technology contained therein.
Reliance was placed on the Karnataka HC judgment in CIT vs. De
Beers India (P.) Ltd. [TS-312-HC-2012(KAR)] .
The ITAT thus held that unless there was a transfer of technology
involved in technical services extended by the assessee, the 'make
available' clause was not satisfied and, accordingly, the
taxed in India after apportioning the revenue on the basis of length
of the cable in the territorial waters in India on the segments on
which restoration has been provided.
[Source: ITA No. 2255/Mum/2006 and others]
relevant tax year, the assessee earned fees towards support services
provided to its AEs which was claimed to be taxable exclusively in the
USA in view of Article 12(4)(b) of the Indo-US Double Taxation
Avoidance Agreement [‘DTAA’].
During the course of assessment proceedings, the assessee was called
upon to explain why the said fees was not taxable in India to which the
assessee submitted that the said services did not “make available” any
technical knowledge, experience,skill etc to ABB India and hence, not
consideration for such services could not be taxed under Article
12(4)(b) of DTAA as these services did not involve enabling the recipient
of the services to utilize the knowledge or know-how on his own in
future without the aid of the service provider.
With regards to DRP’s order of regarding assessee’s Indian AE as its
DAPE, the ITAT observed that it was difficult to understand, much
less approve, such logic. The DAPE has been justified on the ground
that its Indian affiliates, to which the services were rendered, were
involved in purchase and sale of 'Harmony' products of the assessee
company but the taxability was held to be in respect of the fees for
technical services rendered to these very entities. It was only
elementary even if a permanent establishment existed and the
assessee carried on business through the PE, under Article 7(1) of
the Indo US tax treaty, the profits of the assessee may be taxed in
the source jurisdiction but only so much of them as were
attributable to (a) that permanent establishment; (b) sales in the
other State of goods or merchandise of the same or similar kind as
those sold through that permanent establishment; or (c) other
business activities carried on in the other State of the same or
similar kind as those effected through that permanent
Based on the facts of the case, when the PE is in respect of trading
transactions only, no part of the earning from rendering of services
to the AEs could be related to the nature of PE’s activities and be
brought to tax in the source jurisdiction i.e. India.
On the question of taxability DAPE’s profit in the hands of the
assessee, ITAT ruled that even if there was a DAPE on the facts of
the case, it would have no taxable profits in the hands of the
assessee in the absence of the finding that the DAPE has been paid
a remuneration less than arm's length remuneration. Reliance was
placed on the legal position in the case of SET Satellite (Singapore) Pte
Ltd vs DOlT [(2009) 307 ITR 205 (Bom)].
The ITAT thus declined the need to examine the aspect regarding
existence of the DAPE and ruled for the deletion of additions in
respect of income under Article 12(4)(a) as FTS and also in respect of
income under Article 7(1) as business income.
4. ITAT deleted the additions made on account
of disallowance of deduction under Section 10A
of the Income-tax Act, 1961: Held that mere
placing reliance on transfer pricing
documentation is not sufficient to conclude
that the Appellant is earning excessive profits
Facts of the case
Aquila Software Services
Hyderabad Private Limited
(“Aquila” or “the Appellant”) is
engaged in the business of
software development and related
During FY 2007-08 (i.e. the year under review), the Appellant
exported software developed by it to its Associated Enterprise (“AE”)
i.e. M/s Login Soft Inc., USA.
During the course of assessment proceedings, following were the
findings of the Assessing Officer (“the AO”):
AO observed that Appellant, in its transfer pricing (“TP”)
documentation, had adopted Transactional Net Margin Method
(“TNMM”) to benchmark the aforesaid international transaction
and determined the average profit margin earned by the
comparable companies to be 15 percent. Whereas, the
Appellant earned a profit margin of 50 percent on export of
software to its AE;
The AO further noticed that as per Section 92C(2) of the Income
Tax Act, 1961 (“the Act”), the deviation up to 5 percent from the
arithmetic mean can be allowed. The AO, therefore, considered
20 percent to be the Arm’s Length Price (“ALP”) and disallowed
the 30 percent of the profits of the Appellant on account of
being excess profit claimed by under Section 10A of the Act.
Aggrieved the Appellant filed an appeal before the Commissioner of
Income Tax (Appeals) [“CIT(A)”]. CIT(A) observed that as per proviso
to Section 92C(4), deduction under section 10A of the Act can be
denied only to the extent of enhanced income computed after TP
adjustment u/s 92C(4). Since, there is no enhancement of income;
no disallowance can be made u/s 10A of the Act. Consequently, the
addition made by the AO was deleted.
Aggrieved by the order of CIT(A), revenue preferred an appeal
before Income Tax Appellate Tribunal (“ITAT”/ “the Tribunal”). The
ITAT observed that CIT(A) did not considered the provisions of
section 10A(7) of the Act [that in-turn also refers to section
80IA(10) and 80IA(8) of the Act] which are applicable to the facts of
the case and therefore, directed CIT(A) to look at the same and pass
a speaking order.
CIT(A) noticed that the provisions 80IA(10) are clearly applicable as
there is close connection between Appellant and its AE and the
Appellant is earning profits higher than the average profit margin of
the comparables. Accordingly, he confirmed the disallowance of
deduction made by AO.
Appellant’s Contention before ITAT
The Appellant contended that even if provisions of sections
10A(7) are applicable, still AO is bound to satisfy the conditions
of section 80IA(1) which stipulates that there has to be an
arrangement between the Appellant and the AE in respect of
business transacted between them, which has produced more
than ordinary profits to the Appellant. The AO cannot compute
the deduction under section 10A of the Act without fulfilling
such conditions laid therein. In support of its contention, it
relied on the various adjudications viz. AT Kearney India Pvt.
Ltd. vs. Add. CIT (Delhi ITAT1
; CIT Vs. Schmetz India Pvt. Ltd.
(Bombay High Court)2
; and Javata India Pvt. Ltd., Vs. ITO3
Revenue’s Contention before ITAT
The department representative contended that since the
Appellant and its AE are related parties and facts and materials
on record indicate that profit earned by the Appellant is much
more than the average profit earned by comparable companies,
the disallowance u/s 10A(7) of the Act is justified and
[(2014) 41 CCH 418]
254 CTR 504
141 ITD 456
i.e. 50 percent is not reasonable. The Tribunal placed its reliance on
the ITAT ruling in case of Tweezmen India Pvt. Ltd. Vs ACIT4
wherein the Chennai bench held that provisions of section of
80IA(10) do not give arbitrary power to AO to fix the profits of the
Appellant. Based thereon, the ITAT held that addition made by the
AO is unwarranted and hence should be deleted.
Source: Aquila Software Services Hyderabad Private Limited Vs
DCIT [ITA No. 423/Mum/2014]
133 TTJ 308
The Tribunal’s Ruling
The ITAT observed that section 10A(7) of the Act is applicable to
the Appellant as accepted by both the parties. Further, section
10A(7) of the Act refers to section 80IA(8) and 80IA(10) of the
Act. Section 80IA(10) of the Act provides for two conditions to
be fulfilled which are as follows:
There must be close connection between the Appellant
carrying on the eligible business and the other person; and
The business between the two should be so arranged that such
business produces more than ordinary profits to Appellant
carrying on eligible business.
The Tribunal further noticed that the first condition is met as
both the parties to the transactions are related to each other.
With regard to second condition, it is evident from the
assessment order that AO has merely relied on the TP document
wherein it is stated that average profit margin of comparables is
15 percent as against 50 percent earned by the Appellant and
has concluded that the profit so earned by the Appellant is not at
The ITAT further ruled out that the AO should have
demonstrated that whether the earning of excess profit is as a
result of business arrangement between the parties. Even the
CIT(A) could not provide place any factual finding on records in
The Tribunal also held that excess profits can be generated on
account of various factors and without analyzing such factors, it
cannot be said that only because average profit earned by
comparables is 15 percent, the profit earned by the Appellant
5. The Tribunal did not consider the Safe
Harbour Rules for determining the nature of
expenses/ income to be operating/ non
operating; Held that the computation of arm’s
length price for non-charging or under-charging
of interest on non realization of debt
outstanding beyond allowed credit period
Facts of the Case
Techbooks International Pvt. Ltd.,
[“the taxpayer”], is engaged in the
development of customized
electronic data. It converts data
from hard copy or files into
electronic form, i.e.
XML/SGML/HTML for CD-ROM
A. Regarding the nature of income/ expenses to be considered as
operating or non operating
The ITAT observed the following:
During Assessment Year [“AY”] 2010-11, the taxpayer entered into
international transactions pertaining to ‘Provision of IT enabled data
conversion services’ with its Associated Enterprise [“AE”]. The taxpayer
benchmarked its international transaction using Transactional Net
Margin Method [“TNMM”] as the most appropriate method.
During the course of the assessment proceedings the Transfer Pricing
Officer [“TPO”] accepted TNMM but rejected use of multiple year data
as considered by the taxpayer in its detailed TP report. After
considering the TP report, the TPO shortlisted nine comparables with
their arithmetic mean of the Profit Level Indicator [“PLI”] of Operating
Profit/Operating Cost [“OP/OC”] at 33.71% and accordingly, made an
addition of INR 20.48 crore.
While doing so, the TPO treated For-ex Fluctuation Gain/Loss, Bank
Charges and Provision for Doubtful Advances of the taxpayer as
operating in nature.
In addition to the above, the TPO credit period of 150 days allowed by
the taxpayer to its AE. In this relation, the TPO considered the credit
period to be allowed to the AEs should have been 60 days. Based
thereon, the TPO further held that an interest @ 15% per annum
should be charged on the realization of receivables which were
outstanding beyond 60 days. Thus, he worked out the total TP
adjustment on account of imputed interest to be charged on non-
realization of exports proceeds at INR 5.86 crore.
Aggrieved with the actions of TPO, the taxpayer filed its objections
before the Dispute Resolution Panel [“DRP”] wherein the DRP rejected
the same and upheld the TP adjustments made by the TPO.
Aggrieved with actions of DRP/ TPO, the taxpayer filed an appeal before
the Income Tax Appellate Tribunal [“ITAT”].
International Transactions TPO’s actions ITAT’s ruling
Foreign Exchange Fluctuation
Treated as operating in nature.
ITAT held that when foreign
exchange gain directly results
from the consideration
received for rendering services
to AE, it should be considered
as an operating item.
Considered as operating in
ITAT observed that there has
been no bifurcation of such
expenses between “Bank
Interest” and “Bank Charges” in
case of the taxpayer.
Accordingly the ITAT directed
TPO to consider the same as
Provision For Doubtful
The TPO considered the same
as operating case of taxpayer
and non operating in case of
ITAT noted that taxpayer had
not created any excess
provision for ‘doubtful debts’.
It held that both provisions for
doubtful debts as well as
doubtful advances are in realm
of the operations of the
business. Thus, ITAT ruled in
favour of taxpayer and directed
TPO to treat Provision for
debts/advances as operating.
The ITAT also held to the same
to consider as operating in case
of comparables as well in to
B. Selection/ Rejection of Comparable Companies:
The taxpayer objected to inclusion of five companies and exclusion of
six companies selected by it in the list of comparables. ITAT analysed
the functional profile of these companies and ruled the following
Companies that were included by TPO:
Companies that were excluded by TPO:
Companies ITAT’s ruling
Accentia Technologies LTD.
Rejected – On account of extra-
ordinary financial event (i.e. Merger
with Asscent Infoserve Pvt. Ltd.)
TCS E-SERVE INTERNATIONAL LTD.
Rejected - ITAT emphasized on the
distinction between a company
providing software development
services and non-development
ITAT observed that the taxpayer
being a non -development software
services company cannot be
compared with this company as it is
a software development services.
TCS e-SERVE LTD.
Accepted- Functionally similar to the
profile of the taxpayer.
I-GATE GLOBAL SOLUTIONS
Rejected – On account of extra-
ordinary financial event
Rejected – On account of extra-
ordinary financial event (Acquisition
of another company)
Companies ITAT’s ruling
R. SYSTEMS INTERNATIONAL LTD.
JINDAL INTELICOM PVT. LTD; and
CALIBER POINT BUSINESS
Rejected - Different financial year
CG-VAK SOFTWARE & EXPORTS
Accepted - The company was
rejected by TPO due to its
turnover in its ITeS segment.
The ITAT observed that quantum
of turnover can be no reason for
exclusion of a company.
MICRO GENETICS SYSTEMS LTD.
Accepted - Following the
reasoning given for inclusion of
CG-VAK Software & Exports Ltd.,
the TPO was directed to consider
the same as comparable company.
AXIS IT & LTD.
Accepted - The company was
excluded by TPO as it failed the
export turnover filter. The ITAT
remitted the matter back to TPO
for examining the functional
similarity of the company.
C. Computation of the arm’s length price [“ALP”] of international
transaction of ‘debt arising during the course of business’-
Section 92B of Income-tax Act, 1961 [“the Act”]
In this regard, the ITAT referred to Sec 92B of the Act inserted with
retro effect from April 1, 2002 which gives meaning to the expression
that “any debt arising during the course of business” has also been
expressly recognized as an international transaction.
Further, the ITAT held that non-charging or under-charging of
interest on the realization of debt beyond the expiry of credit period
amounts to an international transaction and the ALP of such
transaction is required to be determined.
The ITAT stated that computation of ALP of the “debt arising during
the course of business” involves two ingredients viz. the amount on
which the interest should be charged; and the arm’s length rate at
which the interest should be charged. Discussing about the first
ingredient, the ITAT noted that TPO had erred in making adjustment
for a period in excess of 60 days as the taxpayer has allowed a credit
period of 150 days to its AEs and the effect of imputed interest on
non-realization of invoices up to 150 days was already factored in the
price charged for the services rendered by the taxpayer.
Accordingly, the interest should have been charged for the period in
excess of 150 days.
Regarding the determination of rate of interest to be considered in
this regard, the ITAT relied on the findings in case of Cotton Naturals
and noted that the same is required to be
determined on the basis of the currency in which the loan is to be
repaid. The ITAT thus, remitted the matter to TPO for fresh
determination of addition to be made in the instant case.
ITA No. 233/ 2104 (Delhi High Court)
At the outset, it is pertinent to highlight that the ITAT did not give
any weightage to the Safe Harbour Rules, 2013 in respect of deciding
the nature of certain items of income/ expenses to be considered as
operating or non-operating in the present case.
Further the contentions of the taxpayer for considering the imputed
interest cost in the price charged towards provision of services have
also been given a due consideration by the ITAT. Further, there has
been no specific discussion on the determination of interest to be
charged on realization of debt beyond the allowed credit period.
Source: Techbooks International Pvt. Ltd. Vs. DCIT [ITAT No.
6. A quasi-capital loan or advance is not a
routine loan transaction; nevertheless, the
arm’s length price for the same could not be
Facts of the Case
Soma Textile & Industries Limited
[“the Taxpayer”] is in the business
of manufacturing of textile cotton
fabrics. The taxpayer has
established its wholly owned
subsidiary, Soma Textiles FZE, in
During AY 2007-08, the taxpayer entered into international
transactions pertaining to subscription of share capital of INR 21.71
lakhs and also advanced INR 16.75cr [approx. USD 2.79mn] to its
Associated Enterprise [“AE”] i.e. Soma Textiles FZE. The advance is
out of the foreign exchange proceeds of taxpayer’s Global Depository
Receipts (“GDRs”) in the nature of “contribution towards quasi
capital of its AE”.
Based on above, the taxpayer considered the arm’s length price
(“ALP”) of the transaction at NIL.
During the course of the assessment proceedings the Transfer Pricing
Officer [“TPO”] rejected the claim of the taxpayer on the basis that
commercial expediency of the transaction is not relevant and
determination of the arm’s length price [“ALP”] is essential. TPO
examined the agreement entered into between the taxpayer and its
AE which categorized it as a loan and not otherwise. The TPO relied
on plethora of judgments and proceeded to make an adjustment by
applying LIBOR + 2%.
Aggrieved by the findings of the TPO, taxpayer approached the
Commissioner of Income Tax (Appeals) [“CIT(A)”] who upheld the
findings of TPO and that no evidence was provided to show that the
intention was to treat the same as capital contribution.
Subsequently, the taxpayer approached the Tribunal to adjudicate
Contentions of the Taxpayer before the Tribunal:
The taxpayer contended the transaction pertaining to advance
given to its AE per se is not a loan transaction as it is in the
nature of contribution towards quasi capital.
The taxpayer also contended that entire amount of INR 16.75cr
is out of the foreign exchange proceeds of GDRs and the grant is
intended to be a long term investment in the subsidiary which
has a crucial role to play in its business plan.
On the other hand, the departmental representative (“DR”)
supported the TPOs stand.
The Tribunal duly considered the facts of the case and arrived at the
The Tribunal analyzed Rule 10B(1)(a) of Income Tax Rules, 1962
(“the Rules”) and observed that loan transactions should be
benchmarked on the basis of interest rate applicable and cannot
be compared with a transaction which is something materially
different like a non-refundable loan which is to be converted into
Tribunal further observed that the advances in such cases are
materially different than the loan transaction which is the
decisive factor for determination of ALP. The underlying
intention for which it is granted is irrelevant.
In addition, the fact that funds are out of GDR proceeds does not
justify extending the reason behind extending it to the AE as
interest free. Source of funds is immaterial.
Tribunal also noted that the taxpayer in subsequent assessment
years, the taxpayer himself has accepted ALP at LIBOR + 2%.
Tribunal confirmed the additions made by the lower authorities.
The order also talks about with other non-transfer pricing related
grounds which are not dealt with herein.
[Source: Soma Textile & Industries Limited; ITA No.
Scope of Scrutiny
Ensure correctness of the assessment made by the assessee which
shall include checking the taxability of the service, valuation, tax
rate, admissibility of an exemption, abatement, or exports, correct
availment/ utilization of Credit etc.
Selection of returns for detailed Scrutiny
Focus of detailed return scrutiny would be assessees whose total
tax paid (Cash+ CENVAT) for the FY 2014-15 is below Rs 50 lakhs
and not being audited.
The assessees who have been selected for audit or have been
audited in the past three years would not be taken up for detailed
7. CBEC issues circular on manual scrutiny of
Service Tax Returns
Central Board of Excise and
Customs (‘CBEC’) issues revised
guidelines for detailed manual
scrutiny of service tax returns (‘ST-
3 returns’) effective from 1 August
In certain cases, the Chief Commissioner may direct detailed
manual scrutiny of an assessee's return who has paid service
tax (Cash+ CENVAT) more than Rs 50 lakhs.
An assessee should not be subjected to both audit and detailed
Before return scrutiny is initiated, the assessee must be given
prior intimation of at least 15 days in the prescribed manner.
Information for scrutiny may be obtained from the ST-3 returns
filed in ACES without making any reference to the assessee.
Post compiling the information, a validation exercise would be
undertaken for reconciling the information furnished in the ST-3
return with ITR Forms/ 26AS and any third party information
In case any additional details are required, the same may be
obtained from the assessee through requisition rather than
through a visit.
The scrutiny process must be completed in a period not
exceeding 3 months.
Documentation of findings
The scrutiny officer must record his findings in the prescribed
In case pertinent, issues may be referred to audit or anti-evasion
In case where detailed scrutiny results into detection of service
tax defaults, the ST-3 returns of past period should be verified.
(Source: Circular 185/4/2015-Service Tax
dated 30 June 2015)
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