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    In this bulletin, we bring to our readers, certain important and significant judicial precedents pronounced by various high courts which would determine the future course of Transfer Pricing litigation. We wish the readers shall be benefited from the following judgments.

     

    1. Pr CIT v Ameriprise India (P)Ltd –Delhi High Court

     

    The Court upheld Tribunal’s order considering foreign exchange gain/loss arising out of revenue transactions(i.e. ITES services) as an item of operating revenue/cost.

     

    1. Toluna India Pvt Ltd – Delhi High Court

     

    HC upholds ITAT’s exclusion of 4 comparables viz. Infosys Technologies Ltd, KALS Information Systems Ltd, Tata Elxsi Ltd and Wipro Ltd for assessee providing software development and marketing support services to AE for AY 2008-09 and 2009-10; Notes that ITAT, while directing AO to exclude these comparables, had followed order passed in assessee’s own case for AY 2007-08 and such order did not appear to have been challenged by Revenue; On merits, HC holds that “given the scale of operations of the above entities, their exclusion from the list of comparables for the purposes of determination of ALP appears justified”; Accordingly, HC holds that no substantial question of law arises and dismisses Revenue’s appeal.

     

    1. Yum Restaurants(India) Pvt Ltd v ITO – Delhi High Court

     

    The Court held that the TPO was incorrect in presuming the existence of an international transaction between the assessee and its AEs, on the basis that the assessee allegedly made a contribution towards AMP expenditure to its wholly owned Indian subsidiary on behalf of its AEs and the fact that the assessee had incurred a loss in the relevant segment and therefore concluding that it was not adequately compensated by the AEs for the creation of marketing intangibles. The Court held that there would be a need for a detailed examination of the operating agreement between the assessee, its Indian subsidiary and the AEs to ascertain if any part of the AMP expenses was for the purpose of creating marketing intangibles for the AE of the assessee and only after an international transaction between the assessee and its AE in relation to AMP expenses was shown to exist, could the question of determining ALP of such international transactions arise.

     

    1. CIT v Thyssen Krupp IndustriesIndia (P)Ltd – Bombay High Court

     

    The Court held that where a substantial part of revenue of a comparable company in execution of turnkey projects arose out of executing projects of public sector undertakings, it could not be considered to be comparable to assessee-company providing turnkey services to its AE as contracts between Public Sector undertakings were not driven by profit motive alone but other consideration also weigh in such as discharge of social obligations etc.

     

     

    1. CIT v Goldstar Jewellery Design Pvt Ltd – Bombay High Court

     

    The Court held that the TPO was unjustified in applying the base of capital employed under the TNMM method without segregating the capital employed in respect of AE and Non-AE transactions. Further, it held that where the assessee entered into both international as well as domestic transactions, the Tribunal was justified in restricting the adjustment only to international transactions.

     

    1. CIT v ITC Infotech India Ltd – Calcutta High Court

     

    The Court held that where in respect of marketing and administrative services provided to third party customers, the assessee adopted a revenue sharing model whereby it kept 75 percent of the revenue and paid 25 percent to its subsidiaries who provided support services for transactions where the customers directly contracted with either the assessee or its subsidiaries, the TPO was incorrect in determining the remuneration to subsidiaries at 15 percent, where the customers directly contracted with the assessee, since there was no difference in the functions performed by either the assessee or its subsidiaries as compared to cases where customers directly contracted with the subsidiaries.

     

    1. Honda Cars India Ltd v DCIT – Delhi High Court

     

    The Court held that where the Petitioner was not a foreign company and the TPO did not propose any variation to income returned by petitioner, neither of two conditions of section 144C of the Act were satisfied and therefore the petitioner was not an ‘eligible assessee’. Consequently, the Assessing Officer was not competent to pass draft assessment order under section 144C(1) of the Act and therefore the said draft assessment order was quashed.

     

    1. International Air Transport Association – Bombay High Court

     

    The Court set aside the final assessment order passed under section 143(3) of the Act without passing a draft assessment order as mandated by Section 144C(1) of the Act which applied to the assessee. It observed that the DRP did not entertain the assessee’s objections absent the draft assessment order and therefore the rights made available to the assessee under section 144C of the Act were rendered futile by directly passing final order under section 143(3) of the Act.

     

    Concluding Remarks:

     

    Irrespective of the fact that most of the issues in Transfer Pricing are attaining finality through the judgements of the Tribunals, there are still certain conflicting views on various issues which are being cleared by the High Courts. However, the Tribunals and the Transfer Pricing Officers have been following their respective views stating that some of these High Court Judgements are not Jurisdictional High Courts pronouncements.

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    Chapter X of Finance Act, 2016 provides for the scheme. The Scheme come into force on 1st July, 2016. The declaration may make declaration on or before 31st December, 2016.

     

    The declarant (as defined in the scheme) has to file a declaration in relation to ‘tax arrear’or ‘specified tax’ in respect of which appeal is pending.

     

    Tax Arrear means the amount of tax, interest or penalty determined under the Income Tax Act or Wealth Tax Act in respect of which appeal is pending before CIT(A) or CIT(W) as on the 29th February, 2016.

     

    Specified Tax means tax determined in consequence of or is validated by an amendment made with retrospective effect in Income Tax Act, 1961 or Wealth Tax Act,1957 and relates to a period prior to the date on which the Act amending the Income Tax Act or Wealth Tax Act, as the case may be, received the assent of the President.

     

    Salient Features of the Scheme:

     

    Declaration is to be filed before the Designated Authority in Form 1 and shall be signed by the declarant or any person competent to verify the return of income on his behalf in accordance with the provisions of section 140 of the Income Tax Act, 1961. Form 2 has to be filed along with Form 1 stating that the declarant has agreed to waive his/her rights towards appeals and other related matter on opting to this scheme.

     

    As per section 204(1) of Chapter X of the Finance Act, 2016 the designated authority shall within a period of 60 days from the date of receipt of declaration determine the amount payable by the declarant in accordance with the provisions of the schemevide Form 3.

     

    The declarant shall pay sum determined by the designated authority within in 30 days of date of receipt of the certificate and intimate the fact of such payment to the designated authority along with the proofvide Form 4.

     

    On verification of the payment challan and other related documents, the authorities shall issue an order vide Form 5, if disclosed amount is ‘tax arrear’and Form 6, if disclosed amount is ‘specified tax’. Such order shall be the order of full and final settlement of tax amounts and shall guard the declarant from all other prosecutions and related issues.

     

    Every order passed under section 204(1) determining the sum payable under the scheme shall be conclusive as to the matters stated there in and no matter covered by such order shall be re- opened in any proceeding under the Income Tax Act or Wealth Tax Act or under any law for the time being in force or as the case may be under any agreement, whether for protection of investment or otherwise, entered in to by India with any other country or territory outside India.

     

     

    Immunity (benefit):

     

    In case of Tax Arrear-

     

    1. If disputed tax up to Rs 10 Lakh– Immunity from100% penalty;

     

    1. If disputed tax exceeds Rs10Lakh–Immunity to the extent of 75% of minimum penalty;

     

    1. If appeal pending related penalty– Immunity to the extent of 75% of minimum penalty.

     

    In case of Specified Tax-

     

    1. 100% Immunity form payment of interest and penalty.

     

    Note:

     

    Disputed Tax means tax determined under the Income Tax Act or Wealth Tax Act which is disputed by the assessee or the declarant.

     

    Immunity from instituting any proceedings in respect of any offence under the Income Tax Act or Wealth Tax Act as the case may be.

     

    Any amount paid in pursuance to declaration shall not be refundable under any circumstances.

     

    Non- applicability of Scheme:

     

    Section 205 of the Finance Act, 2016 provides that the scheme shall not be applicable in the cases relating to:

    1. Assessment made pursuant to search;
    2. Assessment made pursuant to survey conducted by the department;

     

    1. Assessment in respect of which prosecution proceedings have been instituted on or before the date of filing the declaration;

     

    1. Tax liability relating to undisclosed income from a source located outside India or undisclosed asset located outside India;

     

    1. Assessment or reassessment made on the basis of information received by the Government of India under the agreement for exchange of information with any other country;

     

    1. In the case of a person in respect of whom an order of detention has been passed under Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 and the order has not been revoked or set aside by the competent Court;

     

    1. In case of a person in respect of whom prosecution has been instituted on or before filing of declaration or such person has been convicted of any offence punishable under the provisions of Indian Penal Code, The Unlawful Activities (Prevention) Act, 1967, The Narcotic Drugs and Psychotropic Substances Act, 1985, The Prevention of Corruption Act, 1988 or for enforcement of any civil liability;

     

    1. In case of a person notified u/s. 3 of The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

     

    Withdrawal of Litigation:

     

    In accordance with Section 200(2) of the Act, where a declaration has been filed in respect of tax arrears appeal pending before CIT(A) or CWT(A), as the case may be, relating to disputed income or disputed wealth shall be deemed to have been withdrawn.

     

    In a case relating to specified tax, the assessee is required to firstly withdraw such appeal or writ pending before any appellate authority or the court and has to furnish proof of such withdrawal along with the declaration to be filed. In a case where the assessee has initiated any proceedings for arbitration, conciliation or mediation or has given any notice thereof under any law, he has to withdraw such proceedings or notice or claim, and proof of such withdrawal has to be submitted along with the declaration to be made. The assessee has also to make a declaration waiving his right to seek or pursue any remedy or any claim in relation to the specified tax which may be available to him under any law for the time being in force.

     

    It has also been provided in sub-section (6) of Section 200 that no Appellate Authority or Arbitrator, conciliator or mediator shall proceed to decide any issue relating to specified tax mentioned in the declaration and in respect of which an order has been passed by the Designated Authority or the sum payable under the scheme has been determined.

     

    Effect of False Declaration:

     

    Section 200(5) of the Act, provides that where any material particular furnished in the declaration is found to be false or the declarant violates any of the conditions of the scheme or the declarant acts in a manner which is not in accordance with the undertaking given by him under sub-section (4) of Section 200, it shall be presumed that as if the declaration was never made under the scheme and all the consequences under the Income-tax Act or Wealth-tax Act, as the case may be, will follow and appeal or other proceedings shall be deemed to have been revived.

     

    Forms:

     

     

     

    Form

     

    Remarks

     

     

     

     

     

     

     

     

     

     

    1

    Form of Declaration

     

     

     

     

     

     

     

     

     

     

    2

    Undertaking for waiving of all rights, remedies etc.,

     

     

     

     

     

     

     

     

     

     

    3

    Certification of Intimation of amount of tax arrear or specified tax by the designated authority

     

     

     

     

     

     

     

     

     

     

    4

    Intimation of Payment of amount specified in Form 3

     

     

     

     

     

     

     

     

     

     

    5

    Order of full and final settlement of Tax Arrear

     

     

     

     

     

     

     

     

     

     

    6

    Order of full and final settlement of Specified Tax

     

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