| 2016-TII-INSTANT-ALL-400 | 07 December 2016 |
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CIT Vs ALCATEL LUCENT FRANCE: SUPREME COURT OF INDIA (Dated: December 6, 2016) Income Tax - Sections 9(1)(vii) - India-France DTAA - Article 13(3). Keywords - Embedded software - process - royalty - supply of software. The assessee is a tax resident of France. The AO observed that the assessee supplied hardware and software to various entities in India. Software licenced by the assessee embodied the process which was required to control and manage the specific set of activities involved in the business use of its customers. Thus, AO concluded that the consideration of supply of software amounted to royalty u/s 9(1)(vi) and made additions. On appeal, CIT(A) allowed assessee to furnish additional evidence u/r 46A and reduced the quantum of additions. Upon further appeals, both Tribunal and High Court upheld CIT(A)'s order. Aggreived, Revenue applied for condonation of delay and special leave to defend. Having heard the parties, the Supreme Court allowed the application for exemption from filing certified copy of the impugned order and directed to issue notice on the application for condonation of delay as well as special leave petition. Revenue's SLP admitted PR CIT Vs IHG IT SERVICES INDIA PVT LTD: PUNJAB AND HARYANA HIGH COURT (Dated: December 5, 2016) Income tax - ITES provider - outsourcing activity & wages to sales margin The Revenue preferred the appeal challenging the order, whereby the ITAT had excluded the cases of M/s Nucleus Netsoft & GIS India Ltd. and M/s Vishal Information Technologies Ltd. from the set of comparables, for determining ALP of International Transaction entered into by the assessee with its AE. On appeal, the HC held that, Whether huge differences in the wages to sales ratio of an ITES industry, can be ignored while selecting comparables - NO: HC + As far as Vishal Information Technologies Limited is concerned, there is no difficulty whatsoever for the Tribunal to come to a clear finding of fact that it outsourced about 44.81% of its business. For instance, it was observed that Vishal Information Technologies Limited has a low employee cost of 1.25% of operating revenue. The Tribunal also observed that the TPO had himself referred to the NASSCOM survey that the average wages and salaries to sales ratio of IT/ITES industry in India was 46.1%. The assessee's wages to sales is 53% which is not comparable to Vishal Information Technologies Limited whose wages to sales is 1.25%. This is a finding of fact and there is nothing to indicate that the same is erroneous much less perverse; Whether finances of the company that outsources a major part of its business can be compared to one that does not - NO: HC + The only contention regarding the exclusion of Nucleus Netsoft and GIS (India) Limited is that there is no reasoning. This, however, is not even a ground taken in the appeal filed before this court. In any event, it is found from the perusal of the 22nd Annual Report for the year 2005-2006 of Nucleus Netsoft and GIS (India) Limited, that the data processing charges are Rs. 1.04 crores out of the total operating & other expenses of about Rs. 2.41 crores. Thus, an amount of over 40% is outsourced. The finding of the Tribunal, therefore, cannot be held to be perverse. Therefore, following the judgement of Commissioner of Income Tax, Faridabad Vs M/s Mercer Consulting (India) Pvt. Ltd. Gurgaon 2016-TII-61-HC-P&H-TP, it is held that the finances of the company that outsources a major part of its business cannot be compared to one that does not. Revenue's appeal dismissed CIT Vs PREMIER EXPLORATION SERVICES PVT LTD: DELHI HIGH COURT (Dated: November 25, 2016) Income Tax - Section 260A Keywords - condonation of dealy - comparables The revenue had filed this appeal u/s 260A together with application for condonation of delay. Having heard the parties, the High Court held that, Whether an application for condonation of delay deserves to be dismissed when there is no sufficient cause for delay - YES: HC Whether appeal u/s 260A is liable to be dismissed if it involves only factual appreciation of the matter and does not give rise to any question of law - YES: HC + the appeal was filed on 23.07.2014 but appears to have been kept objected to. The Income Tax Department does not seem to have any clue about the filing of the appeal or the objections raised by the registry. It referred to the re-organisation of its panel of counsel and cite the pendency of large number of appeals marked defective. The reasons cannot be considered as sufficient cause to condone the delay. Even on merits, the findings with regard to the exclusion of the comparables were based only on the factual appreciation and thus do not call for any interference. Accordingly, both the application for condonation of delay and the appeal were dismissed. Revenue's appeal dismissed PR CIT Vs BESTSELLER UNITED INDIA PVT LTD: DELHI HIGH COURT (Dated: November 21, 2016) Income tax - differences in margin & selection of comparables The assessee AE is the parent company of an international organization engaged in the business of trading of clothes under its brand which are primarily manufactured in Asia and sold in Western Europe. The AE owns several wholesale entities around the world responsible for selling and distributing its goods in the domestic market. For the relevant A.Y, the assessee in its TP report claimed an OP/OC margin of 437%. During course of TP proceedings, t he TPO concluded that the comparables used were not appropriate having regard to the nature of the assessee's activities and risks it undertook. The TPO also took exception to the multi-year data used by the assessee in this case. On appeal, the DRP reduced the profit margin determined at 8.07% of the FOB value of the goods by the TPO, to 5%. On further appeal, the ITAT reversed the view of the DRP on the ground that the facts shown indicate that the assessee's margin of profit was correctly reported and secondly that the comparables used in the TP exercise by the TPO itself were inappropriate because all concerns were involved in manufacturing. On appeal, the HC held that, Whether an exhaustive analysis carried out by the ITAT to show vast differences between the margins of assessee and the comparables, requires no interference of HC - YES: HC + The counsel for Revenue reiterated that a close reading of TPO's order would show that the assessee undertook significant risks, such as the examination of samples, which had a high probability of being rejected. Besides, the counsel submitted that the assessee was involved in complex technical functions which included negotiation for procurement of raw-material and samples that ultimately had to be manufactured. In these circumstances the application of the comparables by the TPO i.e. as endorsed by the DRP were justified and could not have been upset. The ITAT examined the close commonalities between the facts in Li & Fung India Pvt. Ltd. and the present case and listed no less than 21 reasons to support this conclusion that the OP/TC of the assessee at 437% was much higher than 12.27% of the comparable companies which were involved. Such comparable companies were engaged in activities similar to or identical with that of the assessee and were not manufacturing comparables as in the case of TP/DRP's findings; + Having regard to the fact that the analysis carried out by the ITAT was both intensive and exhaustive and also in view of the fact that it held the ruling of this Court in Li & Fung India Pvt. Ltd. as against the TPO and DRP, who held the ruling of the ITAT in Li & Fung India Pvt. Ltd. which had been set aside by this Court, we are of the opinion that the impugned order is not erroneous. Revenue's appeal dismissed CIT Vs MITSUBISHI MOTORS CORPORATION : DELHI HIGH COURT (Dated: November 22, 2016) Income Tax - Sections 48 & 112(1) Keywords - exchange rate fluctuations - long term capital gains The assessee company was incorporated under the laws of Japan and is engaged in the business of development, design, manufacture, assembly, sales and purchase, importing and other transactions relating to automobiles and its component parts. The assessee sold shares of Eicher Motors Ltd. in a buy back arrangement resulting in long term capital gains. The assessee offered these to tax under the head "Capital gains" in terms of the proviso to Section 112(1). The AO turned down the assessee's claim and imposed a higher rate of tax @ 20%. The DRP held that the ruling of this Court in Cairn UK Holdings Ltd. v. Director of Income-tax was applicable and accordingly reduced the assessee's liability by applying the proviso to Section 112(1) of the Act. The ITAT confirmed that ruling. Having heard the parties, the High Court held that, Whether assessee would be barred from claiming benefit u/s 112(1) merly because it has already derived benefit from foreign exchange fluctuations - NO: HC + it was contended that proviso to Section 112(1) would apply and lower rate of taxation is attracted if and only if the assessee does not secure any advantage on account of foreign exchange fluctuations under first proviso to Section 48. It was further contended that in this case, assessee did benefit from the foreign exchange fluctuations and was therefore barred from claiming benefit u/s 112(1). However, the Court held that despite deriving foreign exchange benefit, the main benefit u/s 112(1) cannot be denied. Tribunal's order was upheld. Revenue's appeal dismissed. Revenue's appeal dismissed |
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