For Bombay Chartered Accountants Society

1. For Bombay Chartered Accountants Society “Recent Important Issues In Corporate Taxation including Domestic Transfer Pricing” 12 June 2013 Rajan Vora

2. Issues in Corporate taxation - Outline • Budget Impact • Implications of increase in tax rate of royalty and FTS – Sec 115A • Implications of amendment pertaining to Real estate transactions – Sec 43CA, 56(2)(vii)(b), 194LA • Taxability of buy back of shares of unlisted companies • Deduction for wages paid to new workmen – Sec 80JJA • Investment allowance – Sec 32CA • Amendment in definition of Capital Asset -Sec 2(14) • Amendment in Section 43(5) – Speculative Transaction Commodity Transaction Tax • Others – Recent judicial precedents on various issues

3. Budget 2013 • Direct Tax amendments Budget 2013 I

4. Taxation of Income by way of Royalty or FTS [S.115A] [W.e.f AY 2014-15] • Section 115A amended to step up tax rate from 10% to 25% plus surcharge, in respect of all agreements effected after 1976 • Taxpayers may not have any impact • If recipient is entitled to treaty benefit in terms of coverage or rate • If treaty is governed by FIS concept • If payment is by non Indian concern (as S.115A is limited in its application to payments by Indian Concern) • Impact will be substantial in cases where. • there is no treaty with country of recipient • treaty benefit is denied for any reason (say, TRC is not available etc) • There is unintended coverage due to wide scope of definition of FTS and royalty in domestic law, compared to Treaty defination • contract is ‘net of tax’ (tax protected contract), the effective rate of tax would be (25% + S.C. + E.C.) or (33% + S.C. + E.C.) • TDS default leads to disallowance u/s. 40(a), levy u/s 201/201(1A) etc • S.206AA may require TDS @20% where PAN is not furnished (Question for consideration will be same even if it is with treaty country?)

5. Taxation of Income by way of Royalty or FTS [S.115A] [W.e.f AY 2014-15] • Justification for amendment by FM in his Speech on 28 Feb 2013 “Another case is the distribution of profits by a subsidiary to a foreign parent company in the form of royalty. Besides, the rate of tax on royalty in the Income-tax Act is lower than the rates provided in a number of Double Tax Avoidance Agreements. This is an anomaly that must be corrected. Hence, I propose to increase the rate of tax on payments by way of royalty and fees for technical services to non-residents from 10 percent to 25 percent. However, the applicable rate will be the rate of tax stipulated in the DTAA.” • Two inaccurate assumptions of FM are • the rate of tax on royalty in the Income-tax Act is lower than the rates provided in a number of DTAAs • There are cases of profit repatriation by a subsidiary to a foreign parent company in the form of royalty. i.e. Low rate of 10% is being misused by companies to repatriate dividend in the form of royalty or FTS • Assumption is inconsistent asTP provisions, are quite stringent to take care of this • It would be interesting to note that very same Finance Minister had reduced the rate of tax for these type of payments, from 30% to 20% in AY 1997-98 and to 10% in AY 2005-06, how could it be recommended to increase rate of tax to 25%.

6. Summary of Royalty/FTS rates in current treaties Royalty FTS * This is without considering impact of MFN Clause

7. Fictional taxation of business income for transfer of immovable property in certain cases S. 43CA (w.e.f. 1st April 2014) • Fictional taxation of business income where there is transfer of land and/ or building held as stock in trade or current asset for consideration less than stamp duty(SD) value • SD value to be treated as full value of consideration for computation of business income • Taxable as per method of accounting followed by the taxpayer • Similar to S.50C as applicable for capital gains computation • Applies to land or building or both (other than capital asset) • Will include, land, commercial units, residential house, etc. • Continuing controversy on scope of ‘Land or building’ e.g .whether extends to transfer of development rights FSI, TDR, Leasehold/Tenancy rights, etc. • In case of difference in date of agreement to transfer and date of registration ,value determination w.r.t. date of agreement can be adopted if : • consideration or part thereof received on or before date of agreement by any mode other than cash

8. Fictional taxation of business income for transfer of immovable property in certain cases S. 43CA (w.e.f. 1st April 2014) • Where taxpayer objects to SD value, he can seek valuation by DVO • In case, DVO’s valuation is lower than SD, tax authority is bound by DVO’s such lower valuation. However, where DVO’s valuation is higher than SD, taxation will be w.r.t. SD value. • Valuation can be challenged in appeal proceedings • Provision may not apply to following cases : • Case of transfer of business undertaking, on slump basis as there is no identifiable consideration paid in respect of land or building • Case of contribution of stock in trade to partnership firm, since arguably, consideration is indeterminable in view of ratio of Sunil Siddharthbhai v. CIT (1985) 156 ITR 509 (SC)] - section 45(3) applies only to “Capital asset”. Issues: • Can a builder, as per fiction of S.43CA, make an entry that consideration has become due, but, he writes it off as bad debt (to the extent not receivable) and claim deduction or claim it as business loss

9. Taxability of inadequate consideration for receipt of immovable property [S. 56(2)(vii)(b)](w.e.f. 1st April 2014 • Section expanded to cover cases of receipt of immovable property by individual or HUF for inadequate consideration (i.e. for consideration lower than SD value by more than INR 50,000) • Difference between the SD value and agreed consideration to be taxed as income from other sources • In case of difference in date of agreement to transfer and date of registration ,value can be determination w.r.t. date of agreement if : • consideration or part thereof received on or before date of agreement by any mode other than cash • Reincarnation of provision sought to be introduced vide Finance (No. 2) Bill, 2009 and • Withdrawn by Finance Act 2010 with retrospective date

10. Taxability of inadequate consideration for receipt of immovable property [S. 56(2)(vii)(b)](w.e.f. 1st April 2014) • On account of existing exemption provisions dealing with gift taxation, the receipt of property from relatives or on occasion for marriage etc. will continue to be protected • Cost step up available to transferee w.r.t. value which is taken into account for determining taxability under S.56(2)(vii)(b)[Refer, S.49(4)] • Where taxpayer objects to SD value, he can seek valuation by DVO, provisions similar to provisions of section 43CA.

11. TDS on Immovable property transaction (S.194IA)(w.e.f. 1 June 2013) • Tax withholding @1% on payment by transferee to resident transferor by way of consideration for transfer of immoveable property • Intent is to collect tax at the earliest and to secure reporting of transactions • S.206AA may require TDS @20% if seller does not furnish PAN • Similar proposal in Finance Bill 2012 was withdrawn at enactment stage, due to additional compliance burden issue • Applies only if consideration payable is INR 50 L and above • Litigation prone to contend that the limit be tested qua each co-owner • Immovable property is defined to mean land (other than agricultural land) or building or part of building • Immovable property could be commercial units, residential house, etc. • Applies also to property sold as stock in trade by developer. • Continuing controversy on scope of ‘Land or building’ such as: • whether extends to transfer of leasehold/tenancy rights, FSI, TDR? • whether covers transactions involving shares in a co-op. society or shares in company giving right of occupancy?

12. TDS on Immovable property transaction (S.194IA)(w.e.f. 1 June 2013) • ‘Transferee’ includes individual, firms, company, HUF, builder as purchaser, etc. • In case of joint transferee, each co-owner is liable. • Transfer between relatives and family members also covered • Applies also to NR buyer or an agriculturist who is a buyer • Provisions “may” not apply to cases: • Case of transfer of business undertaking on slump basis as there is no identifiable consideration paid in respect of immovable property • TDS with respect to actual consideration – though, seller may have implication under S.50C or S.43CA or even where seller has exempt capital gains • Controversy – If the value of consideration for agreement is higher as per stamp duty, will purchaser have to deduct at that price?

13. TDS on Immovable property transaction (S.194IA) (w.e.f. 1 June 2013) Trigger event is credit or payment of consideration on or after 1 June, 2013 – may apply to payment of balance installments, even where purchase of property accomplished prior to June 2013 Applicability of provisions of section 203A- obtaining TAN • Sub-section (3) has been inserted in section 194-IA to provide that provisions of section 203A containing the requirement of obtaining TAN, shall not apply to a person required to deduct tax in accordance with the provisions of section 194-IA.

14. Additional tax on buyback of shares of unlisted companies Section 115 QA – Any amount of distributed income on buy-back of shares ( not listed in a recognized stock exchange) in accordance with section 77A of the Companies Act, 1956 from a shareholder: • shall be payable by the company as an additional income-tax @ 20% and shall not be treated as capital gain and shall not be included in the hands of shareholder. • on the distributed income, being the consideration paid by the company on buy-back of shares as reduced by the amount which was received by the company for issue of such shares. • Payment to be made within 14 days of payment to the shareholder and the tax shall be the final payment of tax on the income. • No credit shall be available in respect of the tax paid, no deduction allowed in respect of the distributed income or tax thereon to the company or the shareholder (no capital gains tax exemptions or no set off of losses in hands of shareholder)

15. Additional tax on buyback of shares of unlisted companies • This will apply, not only to non-resident shareholders but also to domestic shareholders. This will be applicable even to Public Company (other than listed companies) Amendment is to supersede some of the favourable decisions and is seen as back door fast forwarding of GAAR. Amendment is not in sync with Shome Committee recommendation on the treatment to be accorded to buy-back. Legal Angle • The charging section (Section 4) has not been amended • There is no amendment to the definition of income • The quantum of distributed income has no linkage with the size of accumulated profit or size of profit or income earned by the company till the date of payment of consideration • Transaction of buy-back which, is otherwise than under section 77A of Companies Act is treated differently (like capital reduction pursuant to Court order under section 100 of the Companies Act, 1956)

16. Areas of concern on interpretation • Possible disputes on resolution of the expression “amount received by the company at the time of issuance of shares”. Consider following cases : • Debentures converted into equity • Buy-back of shares issued as bonus shares • Consideration may have been received by predecessor entity pre-merger, whereas buy-back is by successor • Share premium paid at the time of acquisition of shares component ought to qualify as cost of shares • Will Interest on funds borrowed for buy back qualify for deduction u/s 36(1)(iii) or u/s 37 of the Act? • S. 2(22) and S. 46A will continue to apply to transactions other than those covered by S. 115QA

17. Deduction in respect of employment of new workmen (S.80JJAA substituted w.e.f. 1 April 2014) • Explanatory Memorandum clarifies that intent of section 80JJAA was to provide incentive only for ‘blue collared’ employees in “manufacturing sector” • Purpose is to exclude “Service Sector” or “software industry” or “BPO/ KPO industry” • Applicable only to Indian company (I Co). Income of I Co to include profits and gains derived from “manufacture of goods” in factory (as defined in Factories Act, 1948) • Deduction @ 30% of additional wages for 3 years (i.e year of employment and subsequent two years) • No deduction if running factory acquired due to hive off, amalgamation, transfer • Scope is now restricted to taxpayer who manufactures goods in factory; erstwhile section covered manufacture or production of article or thing • Possible view was that development of software amounts to 'production' of an article or thing. • Amendment primarily to overrule the decision of Bangalore Tribunal in case of Texas Instruments Pvt Ltd [115 TTJ (Bang) 976] which granted deduction for additional wages paid to new software engineers.

18. Areas of concern / interpretation • Substitution being prospective, arguable though, highly litigation prone that deduction perfected in terms of old section 80JJAA for and upto AY 2013-14 should be available for residual years even in absence of specific grandfathering

19. Investment allowance on new plant and machinery (Sec. 32AC w.e.f. 1 April 2014) • Applicable only to a company taxpayer engaged in the manufacture or production of any article or thing. • Construction activities not likely to qualify. • Neutral as to description of article - could be priority or non priority item • Company should acquire and install new assets of aggregate value more than Rs 100 Crores after 31 March 2013 but before 1 April 2015 (specified period). • Acquisition may or may be not be in existing business • Assets acquired before the specified period and installed during the specified period may not qualify for benefit • Installation may be enough - but, dispute may arise if it is unused and installation is equated with usage. • Dispute may arise on eligibility of assets acquired under a finance lease

20. Investment allowance on new plant and machinery (Sec. 32AC w.e.f. 1 April 2014) • Allowance is independent of depreciation claim and computation of WDV • There is no MAT mitigation • It is not necessary to create or maintain reserve, along the lines of investment allowance reserve, or like • Allowance may be forfeited and withdrawn if there is transfer within 5 years, except upon merger or demerger • New Asset defined to mean any plant and machinery excluding ships, aircrafts, computers or computer software, vehicle etc • Assets which are depreciable @ 100% do not qualify for relief • Tax holiday units eligible for investment linked incentive would not qualify for allowance • There is no specific reference to “Intangible” assets • Non eligible assets do not enter calculation of ‘100 crores’ mark

21. Investment allowance on new plant and machinery (Sec. 32AC w.e.f. 1 April 2014) • The aggregate amount of actual cost of new asset during specified period should exceed 100 crores. • Foreign currency fluctuation gains/losses can be factored in terms of S.43A • Deduction @ 15% shall be as below: • For assets used up to 31st March 2014, depreciation (including additional depreciation) admissible in FY year 2013-14, even if allowance is deferred

22. Amendment in definition of Capital Asset [S. 2(1A), 2(14)(iii) of ITA & 2(ec) of WTA](w.e.f. 1st April 2014) • At present Agricultural land in “rural area” is not a capital asset but agricultural land situated within municipal limits as well as within certain specified limits from municipal limits may be a capital asset, if there is a notification to that effect. • Land situated within the jurisdiction of the Municipality or Cantonment Board (CB) continues to be urban land • By way of modification, following lands1 considered as urban land and included as capital asset without any need for notification in that behalf 1 By doing this, many lands have been exempted from definition of ‘capital assets’)

23. Amendment in definition of Capital Asset [S. 2(1A), 2(14)(iii) of ITA & 2(ea) of WTA](w.e.f. 1st April 2014) Amendment under Wealth Tax Act • Amendments to Finance Bill, 2013 include additional exclusion from the definition of urban agricultural land for wealth tax purposes. Land classified as agricultural land in Government records and used for agricultural purposes excluded from wealth tax

24. Commodities Transactions Tax (New Chapter VII) • Commodities Transactions tax (CTT) is proposed to be levied on seller of commodity derivatives in respect of commodities other than agricultural commodities traded in recognized associations @ 0.01% of value of the transaction. • CTT paid is deductible expenditure u/s 36(1)(xvi) for computing business income • Amendment has been made to the effect that eligible transactions in respect of trading in commodity derivatives carried out through recognized associations shall not be treated as speculative transactions, provided it complied with certain conditions. • The conditions are comparable to those currently applicable to derivative transactions of shares and securities

25. Issues in Corporate taxation - Outline • Recent judicial precedents on: • Taxation of intangibles • CBDT Circular on gifts and freebies by Pharma Companies to doctors and recent judicial rulings • Taxability of amounts paid to search engines for online advertising services • Taxability of lease transactions/ finance transactions/ sale and lease back transactions • Section 14A • Penalty • Stay of demand

26. Depreciation on goodwill and other intangible assets Supreme Court decision in case of Smifs Securities Ltd [348 ITR 302] In this case, SC was concerned with claim of depreciation on goodwill made by the amalgamated company. As part of amalgamation, the taxpayer had paid excess value over net assets of the amalgamating company. Such excess was claimed to be consideration towards reputation which the amalgamating company enjoyed in order to retain existing clientele. Basing itself on the factual finding of the ITAT that taxpayer had acquired a capital asset in the form of ‘goodwill’ pursuant to amalgamation, the SC in a brief order observed that “the words `any other business or commercial rights of similar nature' in clause (b) of Explanation 3 to S. 32 indicates that goodwill would fall under the expression `any other business or commercial right of a similar nature'. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). In the circumstances, we are of the view that `Goodwill' is an asset under Explanation 3(b) to Section 32(1) of the Act.”

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30. CBDT Circular on gifts and freebies by Pharma Companies to doctors and recent judicial rulings Medical Council of India (MCI ) had issued Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (Regulations) in April 2002 laying down code of medical ethics to be followed by medical practitioners and framed rules for medical practitioners The aforesaid Regulations were amended in December 2009 to further provide guidelines for professional conduct, etiquette and ethics for medical practitioners The CBDT noticed that some pharmaceutical and allied health sector industries were providing freebees to medical practitioners and their professional associations in violation of the Regulations and, therefore, instructed the Tax Authority through the Circular no 5/2012 dated 5 August 2012 that claim for any expense in providing freebees in violation of Regulations as amended from 10 December 2009 is not admissible as business expense deduction under the provisions of Act

31. CBDT Circular on gifts and freebies by Pharma Companies to doctors and recent judicial rulings • Furthermore, the Circular stated that the value of above referred freebees enjoyed by the medical practitioner or professional associations is taxable as business income or income from other sources in the hands of medical practitioner depending upon the facts of each case. • The validity of the above CBDT Circular was challenged by way of Writ Petition in case of Confederation of Indian Pharmaceutical Industry (Taxpayer) before the Himachal Pradesh High Court (HC). • The HC in its order [353 ITR 388], while dismissing the Taxpayer’s Writ Petition, held that the CBDT Circular is aligned to the provisions of the Act and, hence, cannot be regarded as illegal or beyond the provisions of law. • The HC upheld validity of the CBDT Circular on the following grounds: • ► The CBDT Circular merely reiterates the provisions of the law. • ► It clarifies tax treatment of freebees enjoyed by medical practitioners. • ► If the taxpayer satisfies the Tax Authority that the expenditure incurred is not in violation of Regulations then the taxpayer can legitimately claim deduction for such expenditure.

32. CBDT Circular on gifts and freebies by Pharma Companies to doctors and recent judicial rulings • Judicial pronouncements on this issue, wherein the HC’s have held that such an expenditure is not an allowable business expenditure: • Kap Scan & Diagnostic Centre Pvt. Ltd. [(2012) 344 ITR 476 (P&H)] wherein it was concluded that ‘Commission paid by the assessee to the doctors for soliciting business could not be allowed as business expenditure since the same is unethical, against public policy and forbidden by law.’ • Pt. Vishwanath Sharma [(2009) 316 ITR 419 (Allahabad)], wherein it was held that ‘Amount paid by way of commission to Government doctors for prescribing medicines manufactured by assessee being illegal gratification, which is an offence punishable under the Prevention of Corruption Act, 1988, is hit by Explanation to s. 37(1), hence not an allowable business expenditure.

33. Taxability of amounts paid to search engines for online advertisement services • Kolkata Tribunal decision – Right Florists Pvt Ltd (ITA No. 1336 of 2011, dated 12 April 2013) • Facts • The Taxpayer, a florist and an Indian company, used the search engines of Google/Yahoo for advertising its business. Payments were made to search engine companies, Google Ireland (Google) and Yahoo US (Yahoo), for displaying the Taxpayer's advertisement when certain key terms were used on such search engines. • The above service were provided without human intervention. • The Taxpayer was of the view that the payment was not taxable in India in the hands of the search engine companies and, hence, no taxes were withheld on such payments. • The payments were disallowed by the Tax Authority as well as CIT(A) on the ground that the taxes ought to have been withheld at source. Furthermore, the Taxpayer should have approached the Tax Authority to determine the appropriate withholding tax rate before making a foreign remittance.

34. Taxability of amounts paid to search engines for online advertisement services Issue • Whether the payments made to search engines such as Google & Yahoo for providing online advertising services can be held taxable under provisions of the Income Tax Act or under the respective Double Tax Avoidance Agreements (Tax treaties)? Ruling • The Tribunal ruled that the payments would not be considered as “royalty” or “fees for technical services” (FTS) under the Act, as well as under the relevant tax treaties. • Furthermore, the Tribunal also held that a website, per se, would not constitute a Permanent Establishment (PE) in India under the basic fixed place PE rule. This conclusion was based on the Commentary to the OECD Model Convention (OECD MC).

35. Taxability of amounts paid to search engines for online advertisement services • Additional decisions: • Pinstorm Technologies Pvt Ltd (50 SOT 74) • Yahoo India Pvt Ltd (140 TTJ 195) • Point for consideration • Will this decision be still valid, after amendment in Section 9(1)(vi)/(vii) by insertion of explanation (iv) and (v) by Finance Act 2012 with retrospective effect from 1.6.1976 or it will be applicable only wherein treaty benefit is available.

36. Taxability of lease transactions/ finance transactions/ sale and lease back transactions Entitlement of depreciation in case of finance lease transaction Essentially two conditions have to be satisfied for grant of depreciation allowance on any plant or machinery: It should be owned by the assessee. It should be used for the purpose of business As regards condition (ii), it is now well settled that if taxpayer is engaged in business of leasing, the asset given on lease can be regarded as used for purpose of taxpayer s leasing business (Refer CIT v. Shaan Finance Private Limited (1998) 231 ITR 308 (SC) and I.C.D.S. v. CIT (2013) 350 ITR 527 (SC)). The controversy effectively, therefore, surrounds whether lessor in a finance lease can be regarded as owner of the leased asset for tax purposes.

37. Taxability of lease transactions/ finance transactions/ sale and lease back transactions • In terms of AS-19, a finance lease is characterized as a finance transaction leading to recognition of asset in the books of the lessee, while recording receivable in the books of the lessor. • CBDT Circular No. 2 of 2001 dated 9 February 2001 (referring to CBDT Instruction • No. 1978 dated 31 December 1999) clarified that the circumstance whether the lease is classified as operating or finance lease in books of account in terms of AS-19 is not relevant for income tax purposes. • Controversial rulings on this issue: • Asea Brown Boveri Ltd. v. Industrial Finance Corpn. of India (154 Taxmann 512) (SC) • Association of Leasing & Financial Service Companies v. UOI (2010) (46 DTR 209) (SC) • IndusInd Bank Ltd. v. Addnl. CIT (2012) 135 ITD 165 (Mum.) (SB) • This controversy over eligibility of depreciation to lessor seems to be resolved to a certain extent by way of Supreme Court decision in case of ICDS (2013) (350 ITR 527) (SC)

38. Taxability of lease transactions/ finance transactions/ sale and lease back transactions • I.C.D.S. (2013) (350 ITR 527) (SC) • The Taxpayer in the business of leasing, claimed depreciation on trucks purchased by it (registered in the name of lessees as per Motor Vehicle Act) and leased to customers. • It claimed depreciation at higher rates on leased trucks on the basis that (a) it owned the trucks (b) the trucks were put to use for business purpose since they were leased out and lease rent was offered as business income and (c) the trucks were used in the business of running them on hire by leasing to customers. • The issue before the Supreme Court was whether lessor, engaged in leasing business, is entitled to depreciation on assets leased to lessees. • The SC held that where taxpayer’s business is of leasing assets, the twin requirements of ‘ownership’ and ‘use’ are satisfied on lease of assets to the lessee and it is not necessary that the taxpayer itself should use the asset to be entitled to depreciation allowance. Further, the test of ‘ownership’ is one of legal right over the asset against the rest of the world, to be ascertained contextually. In case lease agreement provides for exclusive ownership of lessor during lease term, (a) lessor’s right to repossess the asset in case of default by lessee (b) obligation on lessee to return the asset at end of lease and (c) lessor’s right to inspect the asset during lease term, the lessor satisfies the test of legal ownership over the asset and is entitled to depreciation thereon.(including higher rate, wherever prescribed.)

39. Taxability of lease transactions/ finance transactions/ sale and lease back transactions • Controversy over taxability of sale and lease back transactions • Whether the lessor is entitled to claim depreciation in the case of a “sale and lease back” transaction? • Yes, in a recent decision in case of Sicom Ltd [ITA No 7901 of 2003, dt 22 May 2013] and DCB Ltd [ITA No.3006/Mum/ 2001, ITA No. 4892/Mum/2003 dt 20 Mar 2013], Mumbai Tribunal after considering various judicial decisions on this issue, held that assessee, a lessor, was entitled to claim depreciation. • Following are judicial precedents relied on by assessee wherein it was held that, the lessor is eligible to claim depreciation. • Cosmo Films Ltd. (2011) 338 ITR 266 (Delhi High Court) • KotakMahindra Finance (2009) 317 ITR 236 (Bombay High Court) • Tribunal observed that Special Bench in case of Indus Ind Bank 135 ITD 165 (Mum) (SB) in fact supports the view that in genuine sale and lease back transactions, lessor is entitled to claim depreciation.

40. Taxability of lease transactions/ finance transactions/ sale and lease back transactions • In the following decisions relied upon by tax authority, where it was held that the lessor is not eligible to claim depreciation, were distinguished. • MidEast Portfolio Management Ltd. (2003) 87 ITD 537 (Mum) (SB) • IndusInd Bank Ltd. (2012) 135 ITD 165 (Mum) (SB),

41. Section 14A – Recent judicial rulings • Section 14A read with rule 8D not applicable on the facts of the case – As no satisfaction recorded by AO on correction of assesseesuomoto disallowance • AshishJhunjhunwala (ITA No. 1809/Kol/2012) AY 2009-10 dated 14 May 213 (Kol) • JK Investors (Bombay) Ltd. (ITA No.7858/Mum/2011) AY 2008-09 dated 13 March 2013 (Mum) • Justice Sam P Bharucha (AY 2008-09 ITA No. 3889/Mum/2011) dated 25 July 2012 (Mum) • Priya Exhibitors (P) Ltd. AY 2008-09 [54 SOT 356 (Mum)] • M/s. Auchtel Products Ltd. (AY 2007-08 and 2008-09 ITA No. 3183/Mum/2011) dated 30 April 2012 (Mum) • Siva Projects Engineering and Enterprises Ltd. (AY 2008-09 ITA No. 1896/Mads/11) dated 17 February 2012 (Chn) • RelaxoFootwears Ltd. AY 2008-09 [50 SOT 102 (Del)] • Jindal Photo Ltd. (ITA No. 814/D/11) AY 2008-09 dated 23 September 2011 (Del) • Multi Commodity Exchange of (India) Limited (ITA No. 1050/M/10) AY 2008-09 dated 5 August 2011 • Godrej & Boyce Mfg. Co. Ltd. 328 ITR 81 (Bom)

42. Section 14A – Recent judicial rulings • Share held as stock in trade in books of account cannot be considered for applying section 14A read with rule 8D: • Gulshan Investments Co. Ltd. (ITA No. 666/Kol/2012) dated 11 March 2013 (Kol) • Ethio Plastics Private Limited. (ITA No. 848/Ahd/2012) dated 10 December 2012 (Ahd) • Ganjam Trading Co. Pvt. Ltd. (ITA No. 3724/Mum/2005) dated 20 September 2012 (Mum) • M/s. India Advantage Securities Ltd. (ITA No. 6711/Mum/2011) dated 14 September 2012 (Mum) • Esquire Private Limited (ITA No. 5688/Mum/2011) dated 29 August 2012 • CCI Ltd. 71 DTR 141 (Karnataka HC) • ShriApoorvaPatni (ITA No. 239/PN/2011) dated 21 June 2011 (Pune) • Yatish Trading Co. (P) Ltd. 129 ITD 237 (Mum) • Smt. LeenaRamachandran 339 ITR 296 (Kerala HC)

43. Section 14A – Recent judicial rulings • Rule 8D cannot be invoked while computing book profit under section 115JB of the Act • Spray Engineering Devices Ltd. 53 SOT 70 (Chandigarh) • M/s. EssarTeleholdings Ltd. (ITA No. 3850/Mum/2010) dated 29 July 2011 (Mum) • Quippo Telecom Infrastructure Ltd. (ITA No. 4931/Del/2010) dated 18 February 2011 (Del) • Goetze (India) Ltd. 32 SOT 101 (Del) • No interest can be disallowed as own funds used for investment / stock in trade • Hindustan Paper Corporation Ltd. (ITA No. 47/Kol/2012) dated 28 September 2012 (Kol) • P N Writer (ITA No. 4388/M/10) dated 14 October 2011 • Shopper’s Stop Ltd. (ITA No. 1448 & 4475/M/2010) dated 30 August 2011 (Mum. Trib) • K. Raheja Corporation P. Limited (ITA No. 1260 of 2009) dated 8 August 2011 (Bombay HC) • M/s BalarampurChini Mills Ltd. (ITA No. 504/Kol/2011) AY 2008-09 dated 29 July 2011 (Kol. Trib)

44. Section 14A – Recent judicial rulings • No disallowance under section 14A in case investment are made in subsidiary or strategic investments • HSBC securities & Capital Markets (ITA No. 3186/M/2008) dated 18 March 2011 • Zensar Technologies (ITA No. 4538/M/2005) dated 15 December 2010 • Balchandra S Sule (ITA No. 3684/M/2005) dated 29 October 2010 • Disallowance of administration related expenditure at certain % of Dividend or Administrative Expense • Vatican Commercial Ltd. (ITA No. 880/Kol/2011) dated 30 August 2011 (Kol) • M/s Philips Carbon Black (ITA No. 566/Kol/2009) dated 10 June 2011 (TM) • Zensar Technologies (ITA No. 4538/M/2005) dated 15 December 2010

45. Penalty • Whether penalty can be levied for bonafide inadvertent error in the Return of Income (ROI) • PWC - Supreme Court [348 ITR 306] • The SC deleted levy of penalty and held that the Taxpayer had committed bonafide inadvertent error in computation of income by not disallowing an inadmissible expenditure though it was reported in the Tax Audit Report. • Hence there was no attempt to conceal income or furnish inaccurate particulars to justify levy of penalty. • The SC further held that caliber and expertise of a taxpayer has nothing to do with inadvertent mistake, as any person can be prone to such human error. • Below are the rulings wherein it is held that no penalty can be levied due “bona fide/ inadvertent/ human error” • Somany Evergreen Knits Ltd (Bom) (High Court) Income Tax Appeal No. 1332 of 2011, dt 21 March 2013 • Bennett Coleman and Co. Ltd.(Bom) (High Court) [Income Tax Appeal (Lod) No.2117 of 2012, dt 26 February 2013] • Ms. SaniaMirza (Andhra Pradesh High Court) I.T.T.A. No.526 of 2011 dt 09-02-2012]

46. Penalty • Whether penalty can be levied for concealment where the High Court had admission of quantum appeal and whether admission of quantum appeal by High Court shows issue is debatable levy of penalty is not justified. • 1) Liquid Investment and Trading Co. (Delhi) (High Court) 5 October 2010 • 2) ShriYugalKishoreJajoo (ITA No. 272/Ind/2011) Dated 12 February 2013) • 3) ShriSurendra Singh (ITA No. 329/Ind/2012) 29 January 2013 • 4) Late Mohd.Anwar Khan (ITA NO. 343/Ind/2011) Dated 31 January 2013 • 5) ShriSudhakarM.Shetty (ITA. No. 6514/M/11) Dated 29 August 2012 • 6) DCIT vs Roger Enterprises (P) Ltd. (ITA No. 567/D/2006) Dated 7 September 2012 • 7) M/s Nayan Builders & Developers P. Ltd v. ITO (ITA. No.2379/Mum/2009) dated 18 March 2011 • 8) DCIT v. M/s Crisil Ltd (ITA No.941/Mum/2008) dated 14 July 2009 • 9) Sadhu Ram Goyal 128 ITD 436 (JP)(Trib) • 10) Dadra Nagar Haveli 134 ITD 624 (Ahd) • 11) RupamMercantiles Ltd. 91 ITD 237 (Ahd) (TM)

47. Penalty Whether any penal action u/s 271(1) (c) can be brought against the assessee as a result of any retrospective amendment in law Yahoo India Pvt. Ltd (ITA (LOD) No. 2014 of 2012, dt 8 March, 2013) – Bombay High Court In this case, the tax authority treaty the payments made by assessee for uploading and display of banner advertisement on its website portal as royalty income u/s 9(1) (vi) of the Act and accordingly, disallowed the same for non-deduction of tax at source u/s 40a(i). Further, penalty u/ 271(1) (c) for concealment or furnishing of inaccurate particulars of income was also imposed upon the assessee. The Tribunal deleted the disallowance and also the penalty. On appeal by the tax authority before the High Court, the Revenue sought to justify the disallowance and penalty by placing reliance on Explanation 5 introduced to Sec 9 of the Act by the Finance Act, 2012 with retrospective effect from 1st June, 1976 to tax royalty income. Dismissing tax authority's appeal, Bombay HC held that the very fact that the law has been amended with retrospective effect clearly shows that the issue was debatable and in the absence of any failure to disclose material facts necessary for the purpose of assessment, the deletion of penalty levied under Section 271(1)(c) of the Act cannot be faulted.

48. Stay of demand – recent judicial rulings • Recent Bombay High Court decisions on Stay of demand

49. Stay of demand • Whether direct Stay Application to Tribunal is maintainable? And is it not necessary that lower authorities must be approached first • Honeywell Automation India Ltd [ Pune Tribunal -138 TTJ 373] • Vodafone Essar Ltd. [Mumbai Tribunal - 138 TTJ 284] • DHL Express (India) (P) Ltd. [Mumbai Tribunal – 140 TTJ 38] • Reuters India (P) Ltd. [Delhi Tribunal - 84 TTJ 95]   • Financial status not itself a ground for refusing the stay of demand • In the following decisions it has been held that even if the assessee is financially sound and in a position to pay taxes will not in itself be a ground for refusing to exercise the discretion for stay of demand • UTI Mutual Fund (No 2) [Bombay High Court - Writ Petition (LODG.) NO.523 OF 2013, dt 6 Mar 2013] • JCT Ltd. v. ITAT & Ors [258 ITR 291 (Del HC)] • R. P. David v. Agricultural ITO [86 ITR 699 (Mad HC)] • ShriBalaji Trading Co. & Ors [175 ITR 428 (Mad HC)] • Reuters India (P) Ltd [84 TTJ 95 (Delhi ITAT)] • KEC International Ltd. [Mumbai Tribunal - 136 TTJ 60]

50. Domestic Transfer Pricing - Outline • Rationale for introducing transfer pricing • Brief background • Overview of the provisions • Implication of amendment • Challenges • Compliance requirements • Way forward