INCOME TAX REPORTS (ITR)
Non-resident --Income deemed to accrue or arise in India--Fees for technical services--Meaning of technical services--Commission for procuring export orders--No fees for technical services--Amount could not be deemed to accrue or arise in India--Income-tax Act, 1961, s. 9(1)(vii)-- DIT (International Taxation) v. Panalfa Autoelektrik Ltd. (Delhi) . . . 34
Reassessment --Notice--Limitation--Condition precedent for reassessment--Valid notice before limitation--Notice must give reasons--Notice after four years must have prior sanction under section 151--Notice issued prior to limitation which were not valid--Valid notice issued after limitation--Reassessment proceedings not valid--Income-tax Act, 1961, ss. 147, 148, 151-- Lal Chand Agarwal v. CIT (All) . . . 48
Search and seizure --Block assessment--Undisclosed income--Reasonable explanation for amounts discovered--Additions could not be made in block assessment--Income-tax Act, 1961-- CIT v. Rakesh Goyal (All) . . . 60
Housing project --Special deduction--Change of law with effect from April 1, 2005--Benefit restricted to cases where area utilised for shops and commercial establishments does not exceed 5 per cent. of aggregate built-up area of housing project or 2,000 sq. feet, whichever was less--Not to apply to projects where approval of local authority granted prior to April 1, 2005--Even if project completed thereafter--Income-tax Act, 1961, s. 80-IB(10)-- CIT v. Sarkar Builders . . . 392
Income-tax --General principles--Principle that law as on first day of assessment year applies--Not absolute--Exception by express or necessary implication possible-- CIT v. Sarkar Builders . . . 392
Advance tax --Interest--Assessee following project completion method of accounting for its building projects--Assessee for earlier assessment year accepting that income derived from parking charges assessable--Assessee not filing return and not paying advance tax for parking charges--Interest payable by assessee--Income-tax Act, 1961, s. 234B-- Sudhir G. Borgaonkar v. Asst. CIT (Bom) . . . 322
Appeal to Commissioner (Appeals) --Powers of Commissioner (Appeals)--Power to conduct further inquiry--Income-tax Act, 1961, s. 250-- CIT v. Jansampark Advertising and Marketing P. Ltd. (Delhi) . . . 373
Business expenditure --Capital or revenue expenditure--Fluctuation in price of foreign currency--Increase in price of raw material--Extra amount paid deductible as revenue expenditure--Income-tax Act, 1961-- CIT v. Tony Electronics
Ltd. (Delhi) . . . 431
Ltd. (Delhi) . . . 431 Cash credits --Share application money--Effect of section 68--Burden of proof--Burden on assessee to prove identity of creditor, its creditworthiness and genuineness of transaction--Assessing Officer finding that burden had not been discharged--Commissioner (Appeals) and Tribunal not conducting proper enquiry--Addition by Assessing Officer could not be deleted--Matter remanded--Income-tax Act, 1961, s. 68-- CIT v. Jansampark Advertising and Marketing P. Ltd. (Delhi) . . . 373
--Share application money--Effect of section 68--Burden of proof--Burden on assessee to prove identity of creditor, its creditworthiness and genuineness of transaction--Assessing Officer finding that burden had not been discharged--Commissioner (Appeals) and Tribunal not conducting proper enquiry--Addition by Assessing Officer could not be deleted--Matter remanded--Income-tax Act, 1961, s. 68-- CIT v. Jansampark Advertising and Marketing P. Ltd. (Delhi) . . . 373 Depreciation --Finding that assessee was manufacturing articles--Assessee entitled to depreciation--Income-tax Act, 1961, s. 32-- CIT v. Tony Electronics Ltd. (Delhi) . . . 431
Housing project --Special deduction--Development of housing--Scope of section 80-IB(10)--Assessee undertaking housing projects allotted by Railway Welfare Organisation and Delhi Development Authority--Entitled to special deduction under section 80-IB(10)--Income-tax Act, 1961, s. 80-IB-- CIT v. VRM India Ltd. (Delhi) . . . 414
Income --Diversion of income by overriding title--General principles--Salary or pension received by member of religious congregation--Rules of religious congregation obliging members to vow of poverty--Consequent handing over of amount to religious congregation--Obligation based on personal law--Religious congregation would not usually have legal right to receive amount--Amount not diverted at source--Direction to deduct tax at source on payments of salary or pension to member of religious congregation--Valid--Income-tax Act, 1961-- Fr. Sabu P. Thomas v. Union of India (Ker) . . . 352
of salary or pension to member of religious congregation--Valid--Income-tax Act, 1961-- Fr. Sabu P. Thomas v. Union of India (Ker) . . . 352 Income from undisclosed sources --Alleged suppression of sales--Finding by Commissioner (Appeals) and Tribunal that there was no suppression of sales--Deletion of addition justified--Income-tax Act, 1961-- CIT v. Tony Electronics Ltd. (Delhi) . . . 431
Industrial undertaking --Special deduction--Special deduction under sections 80HH, 80-I and 80-IA--Condition precedent--Manufacture of article--Assembling of cassettes from finished components amounts to manufacture--Assessee entitled to special deductions--Income-tax Act, 1961, ss. 80HH, 80-I, 80-IA-- CIT v. Tony Electronics Ltd. (Delhi) . . . 431
Loss --Business loss- Accounting--Rejection of accounts--Accounts could not be rejected merely because trial production could not be proved--Allowance of loss based on facts--Justified--Income-tax Act, 1961-- CIT v. Tony Electronics Ltd. (Delhi) . . . 431
--Rejection of accounts--Accounts could not be rejected merely because trial production could not be proved--Allowance of loss based on facts--Justified--Income-tax Act, 1961-- CIT v. Tony Electronics Ltd. (Delhi) . . . 431 Reassessment --Notice--Condition precedent--Reason to believe income has escaped assessment--Notice not stating that income had escaped assessment--Notice to verify details--Not valid--Income-tax Act, 1961, ss. 147, 148-- Nivi Trading Ltd. v. Union of India (Bom) . . . 308
Ltd. v. Union of India (Bom) . . . 308 Salary --Profits in lieu of salary--Scope of section 17--Industrial drives system--Restrictive covenant--Assessee with specialised knowledge forming private limited company--Joint venture between private limited company and foreign company--Foreign company paying consideration to assessee under non-competition agreement--No relation of master and servant between foreign company and assessee--Amount received under non-competition agreement not assessable as profit in lieu of salary--Income-tax Act, 1961, s. 17-- G. Raveendran v. CIT (Mad) . . . 326
Scientific research expenditure --Weighted deduction--Denial of deduction by Assessing Officer on ground machinery required to be installed and commissioned before expiry of relevant previous year--Not proper--Income-tax Act, 1961, s. 35(2AB)-- CIT (LTU) v. Biocon Ltd. (Karn) . . . 306
S. 17 --Salary--Profits in lieu of salary--Scope of section 17--Industrial drives system--Restrictive covenant--Assessee with specialised knowledge forming private limited company--Joint venture between private limited company and foreign company--Foreign company paying consideration to assessee under non-competition agreement--No relation of master and servant between foreign company and assessee--Amount received under non-competition agreement not assessable as profit in lieu of salary-- G. Raveendran v. CIT (Mad) . . . 326
system--Restrictive covenant--Assessee with specialised knowledge forming private limited company--Joint venture between private limited company and foreign company--Foreign company paying consideration to assessee under non-competition agreement--No relation of master and servant between foreign company and assessee--Amount received under non-competition agreement not assessable as profit in lieu of salary-- G. Raveendran v. CIT (Mad) . . . 326 S. 32 --Depreciation--Finding that assessee was manufacturing articles--Assessee entitled to depreciation-- CIT v. Tony Electronics Ltd. (Delhi) . . . 431
Ltd. (Delhi) . . . 431 S. 35(2AB) --Scientific research expenditure--Weighted deduction--Denial of deduction by Assessing Officer on ground machinery required to be installed and commissioned before expiry of relevant previous year--Not proper-- CIT (LTU) v. Biocon Ltd. (Karn) . . . 306
on ground machinery required to be installed and commissioned before expiry of relevant previous year--Not proper-- CIT (LTU) v. Biocon Ltd. (Karn) . . . 306 S. 68 --Cash credits--Share application money--Effect of section 68--Burden of proof--Burden on assessee to prove identity of creditor, its creditworthiness and genuineness of transaction--Assessing Officer finding that burden had not been discharged--Commissioner (Appeals) and Tribunal not conducting proper enquiry--Addition by Assessing Officer could not be deleted--Matter remanded-- CIT v. Jansampark Advertising and Marketing P. Ltd. (Delhi) . . . 373
and genuineness of transaction--Assessing Officer finding that burden had not been discharged--Commissioner (Appeals) and Tribunal not conducting proper enquiry--Addition by Assessing Officer could not be deleted--Matter remanded-- CIT v. Jansampark Advertising and Marketing P. Ltd. (Delhi) . . . 373 S. 80HH --Industrial undertaking--Special deduction--Special deduction under sections 80HH, 80-I and 80-IA--Condition precedent--Manufacture of article--Assembling of cassettes from finished components amounts to manufacture--Assessee entitled to special deductions-- CIT v. Tony Electronics Ltd. (Delhi) . . . 431
S. 80-I --Industrial undertaking--Special deduction--Special deduction under sections 80HH, 80-I and 80-IA--Condition precedent--Manufacture of article--Assembling of cassettes from finished components amounts to manufacture--Assessee entitled to special deductions-- CIT v. Tony Electronics Ltd. (Delhi) . . . 431
S. 80-IA --Industrial undertaking--Special deduction--Special deduction under sections 80HH, 80-I and 80-IA--Condition precedent--Manufacture of article--Assembling of cassettes from finished components amounts to manufacture--Assessee entitled to special deductions-- CIT v. Tony Electronics Ltd. (Delhi) . . . 431
S. 80-IB --Housing project--Special deduction--Development of housing--Scope of section 80-IB(10)--Assessee undertaking housing projects allotted by Railway Welfare Organisation and Delhi Development Authority--Entitled to special deduction under section 80-IB(10)-- CIT v. VRM India Ltd. (Delhi) . . . 414
S. 80-IB(10) --Housing project--Special deduction--Change of law with effect from April 1, 2005--Benefit restricted to cases where area utilised for shops and commercial establishments does not exceed 5 per cent. of aggregate built-up area of housing project or 2,000 sq. feet, whichever was less--Not to apply to projects where approval of local authority granted prior to April 1, 2005--Even if project completed thereafter-- CIT v. Sarkar Builders (SC). . . 392
prior to April 1, 2005--Even if project completed thereafter-- CIT v. Sarkar Builders (SC). . . 392 S. 147 --Reassessment--Notice--Condition precedent--Reason to believe income has escaped assessment--Notice not stating that income had escaped assessment--Notice to verify details--Not valid-- Nivi Trading Ltd. v. Union of India (Bom) . . . 308
Ltd. v. Union of India (Bom) . . . 308 S. 148 --Reassessment--Notice--Condition precedent--Reason to believe income has escaped assessment--Notice not stating that income had escaped assessment--Notice to verify details--Not valid-- Nivi Trading Ltd. v. Union of India (Bom) . . . 308
S. 234B --Advance tax--Interest--Assessee following project completion method of accounting for its building projects--Assessee for earlier assessment year accepting that income derived from parking charges assessable--Assessee not filing return and not paying advance tax for parking charges--Interest payable by assessee-- Sudhir G. Borgaonkar v. Asst. CIT (Bom) . . . 322
tax for parking charges--Interest payable by assessee-- Sudhir G. Borgaonkar v. Asst. CIT (Bom) . . . 322 S. 250 --Appeal to Commissioner (Appeals)--Powers of Commissioner (Appeals)--Power to conduct further inquiry-- CIT v. Jansampark Advertising and Marketing P. Ltd. (Delhi) . . . 373
A transaction in which the buyers and sellers of a product act independently and have no relationship to each other. The concept of an arm's length transaction is to ensure that both parties in the deal are acting in their own self interest and are not subject to any pressure or duress from the other party.
Under Companies Act, 2013 define Arm's Length Transactions for the purpose of Section 188(1), the expression Arm's Length Transaction means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.
Under Income Tax Act, 1961 Section 92F define Arm's Length Price is the price applied (or proposed to be applied) when two unrelated persons enter into a transaction in uncontrolled conditions.
Unrelated Persons; Section 92A, the persons said to be unrelated if they are not associated or deemed to be associated enterprise.
Uncontrolled Conditions; are that conditions which are not controlled or suppressed or moulded for achievement of a predetermined results.
Main ingredients of Arm's Length Price;
- The price should be applied or proposed to be applied in a transaction.
- A transaction will be between two unrelated or persons; and
- The transaction should be in uncontrolled conditions.
If an international transaction includes only outgoings such as expenses, interest, allowances or other then these are also decided or valued on the basis of Arm's Length Price [Section 92(1)]. Income includes losses and it will be net of expenses as decide in case of UOI v. A Sanyasi Rao (1996) 219 ITR 330(SC).
Note: Section 92 is not applicable to a Non-resident whose income is not taxable as per provisions sections 5 and 9 of the Income Tax Act, 1961.
Section 9 provides for income which is deemed to accrue or arise in India.
Section 5 provides " that non residents is liable to tax in respect of income which is received or deemed to be received in India by him or on his behalf or which accrue or arises or deemed to accrue or arises in India during previous year.
Note: if certain policies of government restrict free play and free movement of transactions in the market then the Arm's Length Price will be computed after considering these conditions and restrictions.
METHODS OF COMPUTATION OF ARM'S LENGTH PRICE SECTION 92C
Arm's Length Price can be computed by the following methods;
- Comparable Uncontrolled Price Method;
- Resale Price Method;
- Cost Plus Method;
- Profit Split Method;
- Transaction Net Margin Method;
- Such other methods as may be prescribed by the board.
Note: Where an assessee has entered into various types of international transactions basis with associated enterprises, arm's length price should be determined on a transaction by transaction basis not on an aggregate basis- Development Consultants (P.) Ltd. V. CIT.
1. COMPARABLE UNCONTROLLED PRICE METHOD(CUP);
Under this method;
i) Determined the price charged or paid for the property transferred or services provided in a comparable uncontrolled transaction.
ii) Such price is adjusted to account for differences, if any, between the International transaction and comparable uncontrolled controlled transactions or between the parties entering into such transactions, which could materially affect the price in the open market.
iii) The adjusted price arrived at under ii) is taken to be Arm's Length Price in respect of the property transferred or services provided in international transaction.
Note: CUP is applied when price is charged for a product or service. This is a comparison of prices charged for the property transferred or service provided in a controlled transaction to a price charged for property or services transferred in a comparable uncontrolled transaction.
2. RESALE PRICE METHOD;
Under this method,
i) The price at which property purchased or services obtained by the enterprise from an associated enterprise are resold or are provided to an unrelated enterprise, is identified.
ii) Such resale price is reduced by the amount of normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services in a comparable uncontrolled transaction, or a number of such transactions;
iii) The price so arrived at is further reduced by the expenses incurred by the enterprise inconnection with the purchase of the property or obtaining the services.
iv) The price so arrived at is adjusted to take into account the functional and other differencesincluding differences in accounting practices , if any , between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market;
v) The adjusted price arrived at iv) is taken to be arm's length price in respect of the purchase of property or obtaining of the services by the enterprise from the associated enterprise.
Note: This is applicable when property is purchased or services are obtained from associated enterprises and the same are sold to unrelated enterprises. This is based on the price of a property or service purchased or obtained from an associated enterprise and further resale of the same to unrelated enterprise.
3. COST PLUS METHOD;
Rule 10B prescribes the manner in which CPM can be applied. The text reads as follows:
(i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined;
(ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined;
(iii) the normal gross profit mark-up referred to in sub clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market;
(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii);
(v) the sum so arrived at is taken to be an Arm's Length Price in relation to the supply of the property or provision of services by the enterprise;"
Note: This method is applicable where some semi finished goods are sold between related parties or similar situations or in respect of joint facility agreements, long term buy and supply arrangements of provisions of services.
4. PROFIT SPLIT METHOD;
Under this method;
i) The combined net profit of the associated enterprises arising from the international transaction in which they are engaged, are determined;
ii) The relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances.
iii) The combined net profit is then split among the enterprises in proportion to their relative contributions, as evaluated under ii);
iv) The profit thus apportioned to the assessee is taken into account to arrive at arm's length price in relation to the international transaction.
Note: This method is applicable mainly in international transactions involving transfer of unique intangibles or in multiple international transactions which are so interrelated that they cannot evaluated separately for the purpose of determining the arm's length price of any one transaction.
5. TRANSACTIONAL NET MARGIN METHOD (TNMM)
Under this method;
i) The net profit margin realised by the enterprise from an international transaction entered into with an associate enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base;
ii) The net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same basis;
iii) The net profit margin referred to in ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences , if any between the international transaction and the comparable , uncontrolled transactions, or between the enterprises entering into such transactions , which could materially affect the amount of net profit margin in the open market;
iv) The net profit margin realised by the enterprise and referred in i) is established to be the same as the net profit margin referred in iii);
v) The net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.
Note: The TNMM requires establishing comparability level at a broad functional level. It requires comparison between net margin derived from operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operation.
Under this method, the net profit margin realised by an associated enterprise from an international transaction is computed in relation to a particular factor such as costs incurred, sales, assets utilized, etc. The net profit margin earned by an associate enterprise is compared with net profit margin of uncontrolled transactions to arrive at arm's length price.
The Arm's Length Price will be determined u/s. 92C (1) by using most appropriate method. The Most Appropriate Method is best suited method to the facts and circumstances of each particular transaction. If an enterprise entered into various transactions with different associated enterprises, then same method will not be applicable to all transactions. The Most Appropriate Method will be selected considering the facts and circumstances of each and every transaction to find out appropriate Arms' Length Price.
As held in case of Serdia Pharmaceuticals (India) (P.) Ltd. V. CIT [2011] 44 SOT 391(Mum), there is no particular order or priority of methods which the assessee must follow. No method can invariably be considered to be more reliable than others.
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