ADIT v. Reliance Infocomm Ltd. – It is held that the assessee would be entitled to interest on the refund under the provisions of clause (b) of section 244A(1) of the Income-tax Act, 1961 if the refund became due under an order passed in any appeal or any other proceeding, as referred to in section 240 of the Act.
The taxpayer, a manufacturer and exporter of chemicals had more than 97.5 percent of its sales to its associated enterprise (“AE”). It benchmarked the sales to AEs under the Comparable Uncontrolled Price (“CUP”) method based on the average price charged by the AEs to the customers. The Revenue observed that the non-AEs who purchased the chemicals paid a higher price and adopted the price charged to the non-AEs as the CUP. The taxpayer stated that the AEs operated in the insulation industry and that the non-AEs were in the aerospace sector, which also resulted in the difference in pricing. It also contended that the AE came into existence for the reason that its ultimate customers required long term warranties on the product and were more comfortable dealing with an American firm than directly with the taxpayer. It was also pointed out that the ALP determined by the Revenue turned out to be higher than even the price ultimately charged to the buyers by the AEs. It also stated that the sale to non-AEs were in small quantities and non-recurrent, which cannot be compared directly with the sales to the AEs. However, the Revenue rejected taxpayer’s contentions after considering various aspects concerning the comparability of sales to non-AEs including differences in turnover, quantity, customer profiles and geography. On appeal, the Tribunal accepted the contentions of the taxpayer and ruled that there was no case for the Revenue in making the adjustments and accordingly, the sales to the AEs were held to be at arm’s length.
The Mumbai bench of Income-tax Appellate Tribunal (the Tribunal) in the case of Kishori Sharad Gaitonde v ITO (ITA No. 1561/M/09) held that for attracting the provisions of Section 50C of the Income-tax Act, 1961 (the Act) a capital gains should arise from the sale of land or building or both. However, since in the present case the taxpayer earned capital gains from the transfer of tenancy right which is not a capital asset, being land or building or both, the Tribunal held that Section 50C of the Act was not applicable to the instant case.
In a recent ruling in the case of ACIT v. Fiat India Pvt. Ltd. [2010-TII-30-ITAT–MUM-TP], the Mumbai Bench of the Income-tax Appellate Tribunal, while deciding the case in favour of the assessee, accepted various adjustments made while determining arm’s length price, as they had been sufficiently explained and evidenced by the assessee. The Tribunal also ruled that for an asset intensive industry, the appropriate Profit Level Indicator (“PLI”) shall be Profit Before Interest and Tax and not Profit before Depreciation Interest and Tax
The Mumbai Bench of the Income Tax Appellate Tribunal (‘the Tribunal’), in the case of ITO v. Zydus Altana Healthcare Pvt. Ltd. [2010-TI I-29-ITAT–MUM-TP], while deciding the case in favour of the assessee, ruled that the determination of arm’s length price should be based on the functional and asset profile of a company and profit margins earned by comparable companies should be adjusted for functional differences between the tested party and the comparables. The Tribunal also ruled that in case an assessee’s income is exempt from tax (and taxable in the overseas jurisdiction), this factor should be considered by the revenue authorities while undertaking a tax assessment since in such a situation, there is no benefit to the assessee in charging its associated enterprise a lower mark-up.
In a recent ruling in the case of Nimbus Communications Ltd v. ACIT [2010–TI1-21-ITAT-MUM-T9, the Mumbai Bench of the Income Tax Appellate Tribunal (“the Tribunal”), while deciding the case in favour of the assessee, ruled that for determination the of arms’ length price (“ALP”), any one of the methods as prescribed in section 92C(1) of the Income Tax Act, 1961 (“the Act”) must be followed. The Tribunal also ruled that levying interest on outstanding trade balances is different from interest charged on loans and cannot be compared.
ADIT (Int. Tax) v. Bank International Indonesia – ITAT held that provision made for doubtful debts will be required to be added back to the net profit as per the profit and loss account while computing the Book Profit for the purpose of determination of Minimum Alternate Tax , subsequent to the amendment to Explanation 1 to section 115JB of the Income-tax Act, 1961 , with retrospective effect from 1 April, 2001.
The Tribunal ruling has reiterated the principle of ‘bona fide difference of opinion’ arising in the context of application of most appropriate transfer pricing method. The Tribunal has ruled that any addition to income arising as a result of bona fide difference of opinion cannot be used as a basis for levy of penalty.
This is an important decision of the Tribunal, which brings out the importance of a Double Taxation Avoidance Agreement (Treaty), that where thin capitalization rules are not in the domestic law/Treaty, there can be no artificial disallowance of interest paid on borrowings.
When the assessee is prevented from deducting tax u/s 195, the question of his not performing the obligation under law does not arise and thus he cannot be held a defaulter. The assessee cannot be held to be an assessee in default in terms of section 201 and 201(1A) of the Act. This is a case of impossibility of performance and the assessee is released from the obligation and hence the assessee is not an assessee in default.
