TaxTMI Updates e-Newsletter
Apr 03,2018

Pro-rata transfer of land - part performance under Section 53A of the Transfer of Property Act, 1882 - possession as licencee versus transferee - incorporation of Section 53A into Section 2(47)(v) of the Income Tax Act, 1961 - taxability of capital gains on receipt of consideration - exemption under Section 54F rendered academic

Pro-rata transfer of land - Parties had agreed for pro rata transfer of land under the Joint Development Agreement (JDA) and consequent transactions evidenced by sale deeds. - HELD THAT: - The Court adopted the reasoning in C.S. Atwal's case that the JDA dated 25.02.2007 read with the sale deeds dated 02.03.2007 and 25.04.2007 demonstrate that the parties contracted for pro rata transfer of land. That factual and contractual arrangement was treated as the basis for assessing tax consequences insofar as portions of land in respect of which sale deeds were executed.

Agreement and sale deeds disclose pro rata transfer of specified portions of the land.

Part performance under Section 53A of the Transfer of Property Act, 1882 - incorporation of Section 53A into Section 2(47)(v) of the Income Tax Act, 1961 - The JDA did not amount to part performance under Section 53A so as to attract Section 2(47)(v) of the Income Tax Act because the essential ingredients, particularly registration where applicable, were not satisfied. - HELD THAT: - Relying on the prior decision in C.S. Atwal and the appellate treatment in Balbir Singh Maini, the Court held that the essential ingredients of Section 53A must be satisfied before a contract can be treated as a transfer under Section 2(47)(v). As the JDA executed after 24.09.2001 was not registered, it did not fall within Section 53A and therefore Section 2(47)(v) was not attracted.

Non registration of the JDA precluded its qualification as part performance under Section 53A and therefore Section 2(47)(v) did not apply.

Possession as licencee versus transferee - Possession, if delivered to the developer, was possession as a licencee for development and not possession in the character of a transferee under Section 53A. - HELD THAT: - The Court followed C.S. Atwal's conclusion that the nature of the possession and control exercised by the developer amounted to licence for development rather than possession evidencing a transfer as envisaged by Section 53A; accordingly that possession did not confer the protections or consequences of part performance transferring title.

Possession granted was of a licencee character and did not constitute transferee possession under Section 53A.

Taxability of capital gains on receipt of consideration - Capital gains were exigible only in respect of the portion for which consideration had been received and sale deeds executed; amounts actually received had been subjected to tax. - HELD THAT: - Following C.S. Atwal, the Court noted that the assessee had paid tax on amounts received and that where the JDA stood cancelled and no further consideration had been received, no additional capital gains could be treated as accrued for the remaining land. The authorities below were held to be incorrect in holding the assessee liable for capital gains on the unreceived consideration relating to cancelled portions.

Capital gains tax consequence arises in respect of portions where consideration was received and sale deeds executed; no tax on remaining land for which no consideration was received and JDA stands cancelled.

Exemption under Section 54F rendered academic - The question of claiming exemption under Section 54F did not survive once exigibility to capital gains was decided in favour of the assessee. - HELD THAT: - The Court observed that because the primary question of tax liability on capital gains was resolved in the assessee's favour (limited to amounts received), the issue of claiming exemption under Section 54F became academic and required no adjudication.

Section 54F exemption issue is rendered academic and need not be decided.

Reliance on precedent in identical controversy - The decisions in C.S. Atwal and the dismissal of the revenue's civil appeal in Balbir Singh Maini bind the outcome and govern the present appeal. - HELD THAT: - The Court held that the matter was not res integra; the earlier judgment of this Court in C.S. Atwal, and the subsequent dismissal of the revenue's appeal by the Apex Court, determine the legal principles and factual conclusions applicable here. The appellant revenue did not successfully distinguish or controvert those authorities, and therefore the Tribunal's order upholding deletion of the addition was sustained.

Prior decisions control the controversy; revenue's appeal is dismissed.

Final Conclusion: The substantial questions of law posed by the revenue were answered by applying the Court's earlier reasoning in C.S. Atwal and the Apex Court's dismissal in Balbir Singh Maini; the Tribunal's upholding of deletion of the capital gains addition is sustained and the revenue's appeal is dismissed.

Disallowance under section 14A read with Rule 8D - disallowance of interest under section 36(1)(iii) - commercial expediency doctrine - nexus between borrowed funds and tax exempt investment - computation under Rule 8D(2)(iii)

Disallowance of interest under section 36(1)(iii) - commercial expediency doctrine - diversion of borrowed funds - Deletion of addition made by AO under section 36(1)(iii) in respect of interest claimed on advances to sister concern - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that the advances to the sister concern were made as a measure of commercial expediency and for the purpose of the assessee's business, following the earlier ITAT decision in the assessee's own case for A.Y.2006-07 (which relied on the commercial expediency principle). The facts in the assessment year under appeal were held to be substantially the same as in A.Y.2006-07; consequently the AO's finding of diversion of interest bearing funds to non business purposes could not be sustained and the disallowance under section 36(1)(iii) was deleted. [Paras 9]

Addition under section 36(1)(iii) of Rs. 31,00,953/- deleted; CIT(A)'s order on this issue confirmed.

Disallowance under section 14A read with Rule 8D - nexus between borrowed funds and tax exempt investment - computation under Rule 8D(2)(iii) - Validity and quantum of disallowance under section 14A read with Rule 8D in respect of exempt income from investments - HELD THAT: - The Tribunal agreed with the CIT(A) that the AO was entitled to invoke section 14A read with Rule 8D, but that on the facts no disallowance under Rule 8D(2)(i) or (ii) was sustainable because the assessee had substantial paid up capital and reserves and no evidence showed that borrowed funds were used to acquire the investments. The only applicable computation was under Rule 8D(2)(iii), which prescribes disallowance at 1/2% of the average value of investments. The CIT(A) also corrected an error in the AO's use of total assets in calculation. Applying Rule 8D(2)(iii) to the investment figures in the balance sheet resulted in a reduced disallowance which the Tribunal found to be correct. [Paras 6, 10, 11]

Disallowance under section 14A read with Rule 8D confirmed only to the extent of Rs. 29,560/-; the remainder of the AO's disallowance vacated.

Final Conclusion: The Tribunal dismissed the revenue's appeal. The deletion of the interest disallowance under section 36(1)(iii) was affirmed, and the section 14A disallowance under Rule 8D was held sustainable only to the limited extent computed by the CIT(A) (confirmed).

Reopening of assessment and limitation under proviso to Section 147 - Failure to disclose fully and truly all material facts - Onus under Section 68 - identity, creditworthiness and genuineness - Assessment Officer's duty to verify and rebut evidence - Reliance on Investigation Wing information vis-a -vis application of mind by AO

Reopening of assessment and limitation under proviso to Section 147 - Failure to disclose fully and truly all material facts - Reliance on Investigation Wing information vis-a -vis application of mind by AO - Validity of reassessment notice issued after four years where original assessment was completed under Section 143(3). - HELD THAT: - The Tribunal found that the proviso to Section 147 requires, as a precondition to reopening beyond four years, (a) an express allegation in the reasons that income escaped assessment by reason of the assessee's failure to disclose fully and truly all material facts, and (b) objective examination of the assessment record to support that satisfaction. The reasons recorded by the AO merely reproduced information from the Investigation Wing and did not record any independent satisfaction or allegation of failure to disclose by the assessee. Mere receipt of information from the Investigation Wing without application of mind by the AO does not meet the twin conditions of the proviso and cannot overcome the four-year bar. For these reasons the reassessment was held to be barred by limitation and thus bad in law. [Paras 23]

Reopening of the assessment is barred by limitation and the cross-objection of the assessee is allowed.

Onus under Section 68 - identity, creditworthiness and genuineness - Assessment Officer's duty to verify and rebut evidence - Reliance on Investigation Wing information vis-a -vis application of mind by AO - Whether the addition of alleged undisclosed share capital under Section 68 was sustainable on merits. - HELD THAT: - On the merits the Tribunal recorded that the assessee produced contemporaneous documents from the two share applicants - confirmations, application forms, board resolutions, affidavits, audited balance-sheets, ITR acknowledgments and relevant bank statement extracts - sufficient to discharge the statutory onus as to identity, creditworthiness and genuineness. The AO conducted limited enquiry under Section 133(6) but did not bring any adverse material or point out deficiencies in the documents; instead he relied on the Investigation Wing information. Once the assessee discharged its onus, it was incumbent on the AO to obtain and place on record material to discredit the explanation; mere suspicion or untested information could not sustain an addition. Applying these principles and relevant precedents, the Tribunal upheld the CIT(A)'s finding that the addition was not justified. [Paras 26, 34]

Addition made under Section 68 is deleted and the CIT(A)'s order deleting the addition is upheld.

Final Conclusion: The reassessment notice issued after four years is quashed as barred by limitation; on merits the addition of Rs. 35,00,000 as share capital under Section 68 is deleted because the assessee discharged the onus and the AO failed to rebut or independently verify adverse material.

Cessation of liability - deemed income under section 41(1) - unrealized pay slips - unidentified deposits / sundry deposits - amortization of premium on HTM investments - allowability of amortized premium as revenue expenditure - revised return - admission by appellate authority - disallowance under section 14A read with Rule 8D - investment depreciation reserve - remand for fresh adjudication

Unrealized pay slips - cessation of liability - deemed income under section 41(1) - Deletion of addition made under section 41(1) in respect of amounts shown as unrealized pay slips. - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that mere non-presentation of issued pay slips (lying unrealized for less than six months) did not establish that the bank's liability had ceased. The Assessing Officer had relied on presumption without producing positive evidence to prove cessation of liability; when the assessee continued to show the amounts as outstanding under "other creditors" the heavy onus lay on the revenue to disprove that claim. In absence of such evidence and having regard to coordinate Tribunal decisions in the assessee's own case for other years, the addition under section 41(1) could not be sustained. [Paras 7, 13, 14]

Addition on account of unrealized pay slips deleted; revenue's ground dismissed.

Unidentified deposits / sundry deposits - cessation of liability - deemed income under section 41(1) - Deletion of addition made under section 41(1) in respect of unidentified/sundry deposits. - HELD THAT: - The Tribunal agreed with the CIT(A) that amounts deposited with wrong account numbers/titles represented an ascertained liability for which the bank was custodian and were payable on demand; the Assessing Officer's addition was founded on presumption of cessation without positive evidence. Given the bank's accounting of these sums as outstanding liabilities and absence of evidence to the contrary, the addition could not be upheld, consistent with coordinate Tribunal decisions. [Paras 8, 15, 16]

Addition in respect of unidentified deposits deleted; revenue's ground dismissed.

Amortization of premium on HTM investments - allowability of amortized premium as revenue expenditure - revised return - admission by appellate authority - Admission by CIT(A) of claim for amortization of premium on HTM government securities and allowance of the amortized premium as deductible business expenditure. - HELD THAT: - Although the claim was not in the original or time barred revised return before the Assessing Officer, the Tribunal agreed that the A.O. correctly declined to admit it in view of Goetze (supra). However, appellate authorities may admit additional claims borne out by the record. On facts the CIT(A) found (i) investments were statutory SLR holdings purchased as per RBI guidelines; (ii) such securities were classified HTM; and (iii) CBDT Instruction required premium on HTM securities to be amortised. The CIT(A) concluded, and the Tribunal concurred, that amortization of premium on HTM government securities was an ascertained business loss not expressly disallowed by the Act and therefore allowable as revenue expenditure. [Paras 10, 17]

CIT(A)'s admission of the claim and allowance of amortized premium upheld; revenue's ground dismissed.

Disallowance under section 14A read with Rule 8D - Sustaining of disallowance under section 14A read with Rule 8D(2)(iii) in respect of expenses attributable to exempt dividend income. - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that, notwithstanding the dividend being directly credited, the assessee had substantial investments in the exempt-yielding fund and common expenses (salaries, management, miscellaneous) would be attributable to both business operations and maintaining the investment portfolio. On evidence and in exercise of Rule 8D(2)(iii), the disallowance of Rs.1,00,000 was sustained. [Paras 9, 21]

Disallowance under section 14A r.w. Rule 8D upheld; assessee's ground dismissed.

Investment depreciation reserve - remand for fresh adjudication - Remand of the claim for deduction on account of investment depreciation reserve to the Assessing Officer for fresh adjudication. - HELD THAT: - The claim for investment depreciation reserve was not raised before the A.O and did not appear from the record; the CIT(A) found no material placed by the assessee to establish the claim. The Tribunal observed that the matter involves questions covered by a relevant High Court decision (CIT v. Bank of Baroda) relied upon by the assessee but, since the claim was not previously adjudicated on facts, the proper course is to restore the issue to the A.O for fresh consideration in light of that precedent, allowing the assessee opportunity to substantiate the claim. [Paras 11, 22]

Issue remanded to the Assessing Officer for fresh adjudication; assessee's ground allowed for statistical purposes.

Final Conclusion: The revenue appeal is dismissed in respect of additions under section 41(1) for unrealized pay slips and unidentified deposits and in respect of contest over amortization of premium on HTM government securities; the disallowance under section 14A r.w. Rule 8D is sustained against the assessee; the claim for investment depreciation reserve is remanded to the Assessing Officer for fresh adjudication.

Reference to Transfer Pricing Officer under Chapter X and requirement of recording satisfaction - grant of personal hearing before reference to TPO where jurisdiction under Chapter X is challenged - selection of the most appropriate method for determination of arm's length price and requirement of consistency in method - preferability of Comparable Uncontrolled Price (CUP) where internal CUP is available - benchmarking of corporate guarantee and adjustment to naked bank guarantee rates - disallowance under section 14A read with Rule 8D in relation to exempt income - certification requirement for weighted deduction under section 35(2AB)

Reference to Transfer Pricing Officer under Chapter X and requirement of recording satisfaction - grant of personal hearing before reference to TPO where jurisdiction under Chapter X is challenged - Validity of the Assessing Officer's reference to the Transfer Pricing Officer without a prior opportunity of being heard - HELD THAT: - The Tribunal examined section 92CA and relevant authorities including Vodafone India Services and CBDT Instruction No.15/2015. The Court recorded that section 92CA permits the AO to refer computation of ALP to the TPO where he 'considers it necessary or expedient'. The Bombay High Court has read into this provision a requirement to grant a personal hearing before reference only where the assessee objects to the applicability of Chapter X or challenges jurisdiction to tax under Chapter X. The CBDT instruction identifies specific situations where an opportunity must be given (absence or qualification in Form 92E etc.). In the present case the assessee did not contend that the transactions were not international transactions nor that Chapter X was inapplicable, and did not show that its facts fell within the situations enumerated in the CBDT instruction. On these facts the Tribunal found no infringement of section 92CA in making the reference without a prior hearing. [Paras 11, 12, 13, 14, 15]

Additional ground alleging invalid reference to the TPO is dismissed; no violation of section 92CA is found on the facts of these cases.

Selection of the most appropriate method for determination of arm's length price and requirement of consistency in method - preferability of Comparable Uncontrolled Price (CUP) where internal CUP is available - Whether the Transfer Pricing Officer and DRP were justified in rejecting the consistently applied TNMM and making an upward adjustment to export sales by applying CUP - HELD THAT: - The Tribunal noted that the assessee had consistently applied TNMM in earlier years and that the TPO initially proceeded under TNMM and sought updated comparable margins. The updated data still showed the assessee's PLI to be at arm's length. The TPO thereafter preferred CUP, treating internal sales to non-AE as CUP, but neither the TPO nor the DRP furnished cogent reasons showing a change in law or facts justifying departure from the consistently applied TNMM. The Tribunal reiterated that the choice of the most appropriate method must be exercised having regard to Rule 10C/10B factors and that a consistent method can be changed only on cogent grounds (change in facts or law or demonstrable error). Because no such justification was shown and the TNMM computation on updated comparables supported ALP, the Tribunal set aside the adjustments made by the authorities below and allowed the appeal on this issue without entering into the detailed merits of the CUP computations. [Paras 23, 25, 27, 28, 29]

Orders of the TPO and DRP rejecting TNMM and making the export-sales addition are set aside; issue decided in favour of the assessee.

Benchmarking of corporate guarantee and adjustment to naked bank guarantee rates - Validity of the DRP's determination of an arm's length corporate guarantee rate (reduction to 1.5%) - HELD THAT: - The Tribunal reviewed facts that the assessee provided a corporate guarantee enabling AE to obtain a loan and that DRP applied established precedents and OECD guidance to treat guarantee provision as an international transaction. The DRP followed the approach of adjusting naked bank guarantee quotes downward and, after considering relevant authorities (including local ITAT and High Court decisions), fixed an arm's length rate of 1.5%. The Tribunal found the DRP's examination to be reasoned and acceptable on the record and declined to interfere with that conclusion. [Paras 31, 32, 33, 34, 35]

DRP's conclusion on the corporate guarantee rate is upheld.

Disallowance under section 14A read with Rule 8D in relation to exempt income - Disallowance under section 14A/Rule 8D in respect of investments and whether no disallowance is warranted when no exempt income has been earned or foreign dividends are taxable under special provision - HELD THAT: - The Tribunal observed that several High Courts have held no disallowance under section 14A is required where no exempt income has been earned. The assessee contended it had not received dividend from Indian subsidiaries and that dividends from foreign subsidiaries are taxable under section 115BBD. The Tribunal determined that the factual claims concerning absence of exempt income and taxability of foreign dividends require verification. Consequently, rather than deciding the disallowance on the papers, the Tribunal remitted the issue to the Assessing Officer to examine the veracity of the assessee's factual contentions and grant relief as per law. [Paras 36, 37, 38, 39]

Issue remitted to the Assessing Officer for fresh verification and decision on section 14A/Rule 8D disallowance.

Certification requirement for weighted deduction under section 35(2AB) - Allowability of weighted deduction under section 35(2AB) in absence of statutory certificates Form 3CL/Form 3CM and permissibility of filing belated certificate - HELD THAT: - The Assessing Officer denied weighted deduction on the ground that the prescribed certificates (Form 3CL/Form 3CM) from the DSIR were not on record. The DRP sustained the denial noting statutory requirement that Form 3CL must be issued and furnished. The assessee produced additional submissions and sought to place a belated certificate on record before the Tribunal. The Tribunal held that the additional material and factual claim require consideration at the AO level and accordingly remitted the issue for fresh adjudication by the Assessing Officer in light of the assessee's further submissions and any documentary proof. [Paras 42, 43, 44, 45, 46]

Issue remitted to the Assessing Officer for fresh consideration in light of the assessee's additional submissions and evidence.

Final Conclusion: The appeals are partly allowed: the TPO reference challenge is dismissed; the adjustments to export sales made by the TPO/DRP by rejecting TNMM in favour of CUP are set aside and decided for the assessee; the DRP's benchmarking of the corporate guarantee (rate of 1.5%) is upheld; the section 14A/Rule 8D disallowance and the claim under section 35(2AB) are remitted to the Assessing Officer for fresh verification and decision.

Revision under section 263 - Non-application of mind - Accounting Standard 16 - Capitalization of borrowing costs - When two views are possible - Cessation of capitalization when substantially all activities are complete - Revenue neutrality of timing of capitalization

Revision under section 263 - When two views are possible - Accounting Standard 16 - Capitalization of borrowing costs - Non-application of mind - Revenue neutrality of timing of capitalization - Whether the Principal Commissioner could invoke revisionary powers under section 263 to direct capitalization of interest expenses where the Assessing Officer had enquired, the assessee relied on Accounting Standard 16 and the AO adopted a view that the project was substantially complete and interest need not be capitalized. - HELD THAT: - The Tribunal examined the scope of revision under section 263 in light of the principle that where two views are possible and the Assessing Officer has adopted one view, revision cannot be exercised merely because the Principal Commissioner prefers another view. The Assessing Officer had specifically queried the assessee about non-capitalization of interest and the assessee replied relying on Accounting Standard 16, explaining that capitalization ceases when substantially all activities necessary to prepare the asset for intended use or sale are complete. The record did not show that the Principal Commissioner controverted the factual premise that the project was substantially complete or that AS 16 had been misapplied. The Tribunal further observed that treating the interest as revenue in the impugned year and capitalizing it as work in progress would only defer the charge to the subsequent year (opening stock adjustment), making the treatment overall revenue neutral; there was no suggestion of tax evasion or mala fide treatment. Applying the Max India principle, the Tribunal concluded that the Assessing Officer had applied one permissible view after enquiry and therefore the order could not be held to be erroneous or prejudicial so as to warrant revision under section 263. [Paras 11, 12, 13, 14]

The revision under section 263 was unjustified; the order under section 263 directing disallowance and capitalization of interest is quashed and set aside.

Final Conclusion: The Tribunal allowed the appeal, quashed the Principal Commissioner's order passed under section 263 directing disallowance and capitalization of interest, holding that the Assessing Officer had made the requisite enquiry, adopted a permissible view under Accounting Standard 16, and that revision under section 263 was not warranted.

Penalty under section 271(1)(c) - notice under section 274 r.w.s. 271(1)(c) - concealment of particulars of income - furnishing inaccurate particulars of income - non-application of mind - principles of natural justice

Penalty under section 271(1)(c) - notice under section 274 r.w.s. 271(1)(c) - non-application of mind - principles of natural justice - concealment of particulars of income - furnishing inaccurate particulars of income - Validity of penalty proceedings and penalty imposed where the initiating notice reproduced both limbs of section 271(1)(c) without striking off the irrelevant limb and the Assessing Officer recorded inconsistent bases for levy. - HELD THAT: - The Tribunal found that the notice issued for initiation of penalty proceedings reproduced both limbs of section 271(1)(c) (concealment of particulars of income and furnishing inaccurate particulars of income) without striking off the irrelevant limb, and that the Assessing Officer in the assessment and penalty orders recorded inconsistent statements as to the basis for levy. This factual matrix demonstrates that the Assessing Officer had not crystallised the charge and thus failed to apply his mind when issuing the notice. Quasi criminal penalty proceedings under section 271(1)(c) must comply with principles of natural justice by giving the assessee clear notice of the specific charge so as to enable a proper defence. In these circumstances, and following the reasoning of the coordinate benches and higher courts cited in the order, the notice suffered from the vice of non application of mind and consequent non compliance with natural justice, rendering the penalty untenable. Since the penalty was deleted on this preliminary ground, other contentions were not adjudicated. [Paras 4, 6]

The penalty levied under section 271(1)(c) is deleted because the notice initiating proceedings reproduced both limbs without striking off the irrelevant one, reflecting non application of mind and breach of principles of natural justice.

Final Conclusion: Appeal allowed; penalty under section 271(1)(c) deleted on the ground that the notice initiating penalty proceedings failed to strike off the irrelevant limb and thus evidenced non application of mind and breach of natural justice.

Fees for technical services - transfer of goods versus rendering of services - cost of acquisition of plant and machinery - services inextricably linked to sale of goods - tax deduction at source under section 195 - application of DTAA and permanent establishment

Fees for technical services - services inextricably linked to sale of goods - cost of acquisition of plant and machinery - tax deduction at source under section 195 - Payment made to the non-resident supplier for supply of designs and drawings (D&D) was not chargeable as fees for technical services but constituted part of the cost of acquisition of the CDQ plant and hence was not taxable as FTS in India for the purpose of deduction under section 195. - HELD THAT: - The Tribunal examined the contractual matrix and factual matrix showing that the D&D were supplied to enable completion, installation, operation and maintenance of an integrated CDQ plant and that the D&D were essential for installation such that the plant could not have been installed or commissioned without them. Applying the principle that services intrinsically connected to the sale of goods cannot be treated as separate technical fees, the Tribunal relied on authoritative precedents holding that consideration for engineering drawings, installation-related documentation or technology-transfer fees forming part of a supply/installation package are to be treated as part of the sale price of the product and not as personal technical services taxable as FTS. Reference was made to Ishikawajima-Harima Heavy Industries Ltd and Andrew Yule & Co (as discussed in the order), and to tribunal decisions such as Outotec GmbH and Prasad Production Limited which support treating the engineering package embedded in the plant supply as part of business income outside the scope of FTS in India. The Tribunal noted that the assessee was designated as purchaser in the D&D agreement, that intellectual property rights remained with the non-resident, and that the D&D were not commercially exploited by the assessee beyond enabling acquisition and commissioning of the plant. On these facts, the character of the consideration was held to be part of the cost of acquisition of plant and machinery rather than remuneration for rendering managerial, technical or consultancy services taxable as FTS, and therefore the FAA's conclusion that the payment was FTS was reversed.

Disputed payment for D&D treated as part of cost of acquisition of the CDQ plant and not as fees for technical services; appeal allowed.

Final Conclusion: The Tribunal reversed the CIT(A)'s order and held that the amount paid for designs and drawings formed part of the cost of acquisition of the plant and was not taxable as fees for technical services in India; the assessee's appeal is allowed.

Reopening of assessment under Section 147 - reassessment not permissible on mere change of opinion - deemed transfer on entry into joint development agreement under Section 2(47)(v) - part performance under Section 53, Transfer of Property Act, 1882 - taxability of capital gains in the year of entering into development agreement - retrospective application of Section 45(5A) - determination of period of holding for capital gain classification - computation of full value of consideration for capital gains (valuation date and method)

Reopening of assessment under Section 147 - reassessment not permissible on mere change of opinion - Validity of reopening the assessment for AY. 2009-10 - HELD THAT: - The Tribunal found that the AO acquired tangible information about the development agreement as a result of survey proceedings u/s. 133A in the case of the developer which brought the matter to the AO's notice; the return initially filed did not disclose the development agreement or any capital gain. Applying the principles relied upon by the CIT(A) and analysing the material, the Tribunal held that reopening under Section 147 was properly invoked and was not a mere change of opinion. The grounds challenging the reopening were therefore rejected. [Paras 6]

Reopening of assessment under Section 147 is valid and upheld.

Deemed transfer on entry into joint development agreement under Section 2(47)(v) - part performance under Section 53, Transfer of Property Act, 1882 - taxability of capital gains in the year of entering into development agreement - Whether capital gains arise in AY. 2009-10 on account of the development agreement entered on 12-05-2008 - HELD THAT: - The Tribunal examined the development agreement and facts showing that the assessee permitted the developer to enter the premises, carry out construction and hand over flats; some allottees sold flats during the project while others retained them. Finding that there was part performance of the contract within the meaning of Section 53, the Tribunal held that Clause (v) of Section 2(47) attracted and the deemed transfer occurred on entering into the development agreement, giving rise to capital gains in the year under consideration. The Tribunal agreed with the CIT(A) and AO on levy of capital gains for the said year. [Paras 6]

Capital gains are taxable in AY. 2009-10 on account of deemed transfer under Section 2(47)(v).

Retrospective application of Section 45(5A) - Applicability of the Finance Act, 2017 amendment (new Section 45(5A)) to defer capital gains to year of project completion - HELD THAT: - The Tribunal noted that the new provision introduced by the Finance Act, 2017 is substantive and operates w.e.f. 01-04-2018. It held that Section 45(5A) cannot be given retrospective effect to affect assessments for AY. 2009-10 and therefore cannot be applied to the development agreement entered earlier. Consequently, the contention based on Section 45(5A) was rejected. [Paras 6]

Amendment by Finance Act, 2017 (Section 45(5A)) is not retrospectively applicable; contention rejected.

Determination of period of holding for capital gain classification - Whether the property is a short-term or long-term capital asset (holding period to be determined) - HELD THAT: - The Tribunal observed that AO treated the date of registration as the date of acquisition for computing holding period, but material on payments, possession and earlier events indicated that ownership/possession might have arisen earlier than registration. The AO did not examine these aspects. In the interest of justice the Tribunal restored the issue to the AO for fresh consideration of facts (payments made, possession, permissions obtained) with opportunity to the assessee, so as to decide whether the asset is short-term or long-term. [Paras 6]

Issue of holding period restored to AO for fresh examination and decision.

Computation of full value of consideration for capital gains (valuation date and method) - Correct method and date for determining full value of consideration for computing capital gains - HELD THAT: - The Tribunal found AO's valuation flawed in taking the completed-project construction value (or later survey value) and applying it to the date of the agreement. Since only 50% of the land was transferred, and the agreement was entered in May 2008, the Tribunal directed AO to consider either the SRO value of the relevant 50% land on the date of agreement or the probable cost of construction as of May 2008 for computing full value of consideration. The order of AO and CIT(A) on this aspect was set aside and remitted to the AO for fresh computation, giving assessee opportunity to be heard. [Paras 6]

Valuation and full value of consideration remanded to AO for re-computation using values as on date of agreement (or SRO land value), and for consideration that only 50% was transferred.

Final Conclusion: All appeals are partly allowed: the reopening under Section 147 and taxation of capital gains in AY. 2009-10 on entry into the development agreement are upheld; the contention based on Section 45(5A) is rejected as not retrospective; however, issues of classification as short-term or long-term and the correct valuation/full value of consideration are set aside and remanded to the Assessing Officer for fresh examination and computation with opportunity to the assessees.

Arm's length price - Comparable Uncontrolled Price (CUP) method - fair market value - valuation by independent expert - Section 14A and Rule 8D - disallowance in relation to exempt income - allowability of depreciation @60% for computer peripherals and UPS

Arm's length price - Comparable Uncontrolled Price (CUP) method - fair market value - valuation by independent expert - Deletion of transfer-pricing adjustment made by TPO by rejecting the assessee's chartered-engineer valuation and substituting a formulaic residual-life based valuation. - HELD THAT: - The Tribunal held that under the CUP method the ALP must reflect the price that would be paid in a comparable uncontrolled transaction and that a valuation by an independent qualified expert certifying the fair market value of used machinery can be treated as indicative of the price payable by an independent party in the open market. The TPO rejected the assessee's chartered-engineer certificate without conducting an independent valuation and applied an unrecognised formula using manufacturing year and residual life to compute a markedly lower value. The CIT(A) had noted that the TPO's method is not prescribed by law, that the TPO did not undertake an independent valuation, and that in the subsequent year the same chartered-engineer valuation was accepted. Having regard to the principles governing CUP and the factors relevant to valuation of used machinery (usage, maintenance, obsolescence, change of ownership, model, market), the Tribunal found no basis for the TPO's adjustment and endorsed the deletion of the TP addition. [Paras 8, 9, 10]

The transfer-pricing adjustment was unjustified and the addition was deleted.

Section 14A and Rule 8D - disallowance in relation to exempt income - disallowance of interest and administrative expenses - Validity of disallowance under Section 14A read with Rule 8D in respect of dividend income and whether interest-bearing funds were used for investment. - HELD THAT: - The Tribunal recorded that the assessee's investments in mutual fund units were made from own equity (supported by the balance data) and no interest-bearing funds were diverted to fund the investments. On that basis the CIT(A) correctly deleted the disallowance of interest computed under Rule 8D. The indirect administrative expenditure component, worked out under Rule 8D and confirmed by the CIT(A), was not appealed by the assessee and therefore not disturbed. The Tribunal sustained the CIT(A)'s conclusion that interest disallowance could not be upheld where no interest-bearing funds were used. [Paras 11, 13, 14]

The disallowance of interest under Section 14A read with Rule 8D was deleted; indirect expenditure disallowance remained as not appealed.

Allowability of depreciation @60% for computer peripherals and UPS - Allowability of depreciation at 60% on UPS claimed by the assessee instead of 15% applied by the Assessing Officer. - HELD THAT: - The Tribunal followed the CIT(A)'s reliance on the decision of the Hon'ble Delhi High Court and a judicial line that treats computer accessories and peripherals (including UPS) as integral parts of the computer system and therefore eligible for depreciation at the higher rate of 60% under the rules. The Assessing Officer's reduction of depreciation to 15% on the ground that UPS is not part of computer was rejected in light of authoritative precedent and prior Tribunal decisions which were applied by the CIT(A). [Paras 15, 16, 17]

The claim for depreciation on UPS at 60% was allowed and the addition deleted.

Final Conclusion: The revenue's appeal is dismissed and the CIT(A)'s order deleting the transfer-pricing addition, deleting interest disallowance under Section 14A (Rule 8D) and allowing depreciation on UPS at 60% is upheld for Assessment Year 2007-08.

Applicability of 5% range under the second proviso to section 92C(2) - Arm's length price as the base for tolerance band, not arm's length profitability - Remand for verification of 5% computation by the Assessing Officer - Adjustment of closing stock and corresponding adjustment to opening stock under the provisions of section 145A

Applicability of 5% range under the second proviso to section 92C(2) - Arm's length price as the base for tolerance band, not arm's length profitability - Remand for verification of 5% computation by the Assessing Officer - Whether the 5% tolerance under the second proviso to section 92C(2) is to be applied to the arm's length price of the international transaction (and not to arm's length profitability), and the appropriate consequential direction. - HELD THAT: - The Tribunal found that the Transfer Pricing Officer had determined an arm's length price for the disputed international purchase transaction by making a downward adjustment to the price shown by the assessee. A plain reading of the second proviso to section 92C(2) shows that the 5% range is to be applied to the arm's length price and not to arm's length profitability, and the Commissioner (Appeals) erred in treating the tolerance band as applicable to profitability. Given the factual position on record that the arm's length price so determined appears to fall within 5% of the price shown by the assessee, the Tribunal directed the Assessing Officer to verify the assessee's computation of the 5% band; if the computation is found correct, no transfer pricing addition should be made. The Tribunal therefore allowed the ground for statistical purposes while remanding factual verification to the Assessing Officer. [Paras 10, 11]

The 5% tolerance applies to arm's length price (not to arm's length profitability); matter remitted to the Assessing Officer to verify the 5% computation and, if correct, to delete the transfer pricing addition.

Adjustment of closing stock and corresponding adjustment to opening stock under the provisions of section 145A - Consequence of earlier year's closing stock alteration on current year's opening stock - Whether the Commissioner (Appeals) was justified in directing the Assessing Officer to increase the value of opening stock in the impugned assessment year consequent to an addition made to closing stock of the earlier year. - HELD THAT: - The Tribunal noted that the Assessing Officer had disallowed unutilized MODVAT credit in the earlier year and adjusted it to closing stock. Following the jurisdictional High Court's decision and the Tribunal's precedent, any change in closing stock at the end of a year must be correspondingly reflected in the opening stock of the next year under the principles embodied in section 145A. The Commissioner (Appeals) directed the Assessing Officer to increase the opening stock value in the impugned year accordingly. The Tribunal found this conclusion to be in consonance with section 145A and relevant judicial precedents and declined to interfere with the Commissioner (Appeals)'s direction. [Paras 14, 15]

The Commissioner (Appeals)'s direction to increase opening stock in the impugned year is upheld; Revenue's ground is dismissed.

Final Conclusion: Assessee's appeal is allowed for statistical purposes by holding that the 5% tolerance in the second proviso to section 92C(2) applies to arm's length price (not profitability) and remitting verification of the 5% computation to the Assessing Officer; Revenue's appeal concerning opening stock adjustment under section 145A is dismissed and the Commissioner (Appeals)'s direction is sustained.

Maintainability of appeal before the Tribunal where final assessment order is not passed pursuant to directions of the Dispute Resolution Panel - statutory appellate route to the Commissioner of Income Tax (Appeals) for assessment orders passed after remand by the Tribunal - obligation to follow the procedure under Section 144C on remand and its bearing on appellate jurisdiction

Maintainability of appeal before the Tribunal where final assessment order is not passed pursuant to directions of the Dispute Resolution Panel - statutory appellate route to the Commissioner of Income Tax (Appeals) for assessment orders passed after remand by the Tribunal - Appeal before the Tribunal is not maintainable against a final assessment order that was not passed pursuant to directions of the Dispute Resolution Panel; the remedy lies before the CIT(A). - HELD THAT: - The Tribunal held that an appeal under section 253(1)(d) lies to the Tribunal only where the assessment order has been passed in pursuance of directions of the DRP under the Section 144C scheme. Where the Tribunal had earlier set aside the transfer pricing adjustments and remanded the matter to the AO/TPO, any fresh assessment giving effect to that remand is to be treated as an assessment for which the statutory first appeal lies to the Commissioner (Appeals) in terms of sections 246/246A. Consequently, even if the AO passed a final assessment without following the DRP route or the draft-order procedure under Section 144C, the appellate remedy against that fresh assessment is the first appeal to the CIT(A), and not an appeal directly to the Tribunal. In the present case the Tribunal found that the impugned appeal was filed before it contrary to the statutory appellate scheme, and therefore was not maintainable and had to be treated as infructuous; the assessee was left free to pursue the statutory first appeal before the CIT(A) or other remedies as available. [Paras 8, 10, 11]

Appeal dismissed in limine as not maintainable; assessee permitted to file first appeal before the CIT(A).

Final Conclusion: The Tribunal dismissed the appeal as not maintainable because the impugned final assessment order was not passed pursuant to DRP directions; the assessee is at liberty to file the statutory first appeal before the Commissioner (Appeals).

Allowability of expenditure as revenue expense under section 37(1) - deductibility of provisions and year-end accruals on mercantile basis - transfer pricing - arm's length price and comparability analysis under TNMM - exclusion of government/public sector undertakings as comparables - imputation of income for domestic transactions / non charging of mark up - credit for Tax Deducted at Source after verification of documentary proof - consequential interest and penalties - applicability and premature initiation

Allowability of expenditure as revenue expense under section 37(1) - Deductibility of security deposit forfeited on termination of lease agreement as a revenue/business loss - HELD THAT: - The Tribunal accepted that the security deposit paid for taking office premises on lease and subsequently forfeited on termination of the agreement arose in the course of the assessee's business. Applying precedent of the coordinate Bench and the High Court, the Tribunal found no enduring benefit to the assessee and no factual dispute as to genuineness; therefore the loss is in the revenue field and allowable under section 37(1). The addition made by the AO/DRP on this account was deleted. [Paras 9]

Addition of Rs. 45,90,000 on account of forfeited security deposit deleted

Imputation of income for domestic transactions / non charging of mark up - Whether the assessee was liable to be taxed for not charging mark up on support service charges billed to a domestic associated enterprise - HELD THAT: - The Tribunal held that transfer pricing provisions as amended to cover domestic transactions applied only prospectively (w.e.f. April 1, 2013) and that, between two resident profit making entities, terms of their contract (including absence of mark up) cannot be disregarded by Revenue unless unlawful or specially barred. Revenue failed to controvert invoices, payment details and commercial rationale; no tax advantage accrued from charging cost to cost. The finding of TPO/DRP to impute mark up was not sustainable. [Paras 13, 16]

Addition for non charging of mark up deleted

Deductibility of provisions and year-end accruals on mercantile basis - Allowability of year end accruals recorded by the assessee as deductible business expenditure - HELD THAT: - The Tribunal noted that the assessee follows mercantile accounting, had substantiation for about 95% of the accruals by invoices/payments, and that substantial reversals were recorded in subsequent years. Applying the test in Rotork Controls (present obligation, probable outflow, reliable estimate) and relevant coordinate Bench authority, the Tribunal found the accruals constituted properly estimated liabilities and therefore were allowable; no error was shown in the assessee's computation. [Paras 25, 26]

Addition of Rs. 56,15,035 on account of year end accruals deleted

Transfer pricing - arm's length price and comparability analysis under TNMM - exclusion of government/public sector undertakings as comparables - Appropriateness of comparables used by the TPO and directive to verify and exclude government undertakings from the final comparable set for benchmarking Network Support Services - HELD THAT: - The Tribunal observed that the TPO did not dispute the assessee's functions or use of TNMM. Relying on precedents, the Tribunal held that government/public sector undertakings often receive preferential treatment and are not driven solely by profit motive, making them unsuitable comparables. The Tribunal directed the AO to verify which government undertakings in the TPO's final set obtain preferential/parental benefits and to exclude such entities before re benchmarking the Network Support Services transactions. Consequently, grounds 4-4.12 were determined in favour of the assessee, subject to the directed verification. [Paras 27, 33]

Comparables comprising government undertakings to be examined and, if driven by non commercial considerations, excluded; TP adjustments set aside subject to verification

Credit for Tax Deducted at Source after verification of documentary proof - Claim for full TDS credit as per revised return - HELD THAT: - The assessee filed a revised return with documentary details supporting the higher TDS claim. The Tribunal found that the AO erred in granting a lesser TDS credit when the assessee produced complete details. The AO was directed to verify the facts and grant the full TDS credit as claimed in the revised return. [Paras 34]

AO directed to allow full TDS credit of Rs. 6,57,84,537 after verification

Consequential interest and penalties - applicability and premature initiation - Levy of interest under sections 234B and 234C and initiation of penalty proceedings under section 271(1)(c) - HELD THAT: - The Tribunal treated the contention on interest under sections 234B and 234C as consequential and observed no specific independent finding was necessary at this stage. Proceedings for penalty under section 271(1)(c) were held to be premature and did not require adjudication in the present appeal. [Paras 35, 36]

Interest issues left as consequential; penalty initiation held premature and not adjudicated

Final Conclusion: The appeal is allowed for statistical purposes: the forfeited security deposit, year end accruals and the addition for non charging of mark up were deleted; transfer pricing adjustments were set aside with directions to verify and exclude unsuitable government comparables before re benchmarking; the AO is directed to grant full TDS credit after verification; interest issues are consequential and penalty proceedings are premature.

Transfer pricing adjustment - Comparable companies selection - Functional comparability - Exclusion of product companies from comparable set - Inclusion of non-persistent loss making concerns as comparables - Risk adjustment for differences in functional and risk profiles - Transactional Net Margin Method (TNMM) and PBIT-to-cost as PLI - Applicability of +/- 5% variation from mean

Transfer pricing adjustment - Transactional Net Margin Method (TNMM) and PBIT-to-cost as PLI - Grounds Nos.1 and 2 (general challenge to transfer pricing adjustment and use of single year data) and Grounds Nos.10 and 11 (claim under section 10A and penalty/interest challenge) dismissed. - HELD THAT: - The Tribunal recorded that ground No.1 was general in nature and ground No.2 was not pressed. Grounds No.10 (claim relating to tax holiday under section 10A) and No.11 (penalty and interest) were held to be not pressed or premature and accordingly dismissed. The substantive benchmarking exercise remains governed by application of TNMM with PBIT-to-cost as the profit level indicator and the remittal directions provided in the order. [Paras 3]

Grounds Nos.1, 2, 10 and 11 are dismissed.

Comparable companies selection - Functional comparability - Exclusion of product companies from comparable set - Inclusion of non-persistent loss making concerns as comparables - Final composition of comparable set for benchmarking international software development services - certain comparables excluded and certain others directed to be included. - HELD THAT: - Applying the parity of reasoning in earlier Tribunal orders, the Bench held that entities engaged significantly in software products or mixed product/service operations cannot be treated as comparable where segmental details are absent and the assessee is a pure service provider; exceptional years (corporate restructuring/hiving off) justify exclusion. Accordingly, Bodhtree Consulting Ltd., eZest Solutions Ltd., Helios & Matheson Information Technology Ltd. and KALS Information Systems Ltd. were excluded from the final set of comparables for being product/mixed companies or not meeting turnover filters. E-Infochips Ltd. was held to be predominantly a software development/services concern (hardware sales being under 4% of turnover) and therefore included. CG VAK Software & Exports Ltd. and SIP Technologies & Exports Ltd. were held not to be persistent loss-making concerns (loss in the year under consideration did not amount to consistent losses) and were directed to be included. Thinksoft Global Services Ltd. (software testing/verification/validation activities) was held to be functionally comparable and directed to be included. The Assessing Officer was directed to draw the final list of comparables accordingly and re-benchmark the international transactions. [Paras 23, 24, 29, 30, 33]

Exclude Bodhtree Consulting Ltd., eZest Solutions Ltd., Helios & Matheson Information Technology Ltd. and KALS Information Systems Ltd.; include E-Infochips Ltd., CG VAK Software & Exports Ltd., SIP Technologies & Exports Ltd. and Thinksoft Global Services Ltd.; AO to re-draw final comparable set and re-compute benchmarking.

Risk adjustment for differences in functional and risk profiles - Claim for economic (risk) adjustment between the captive/risk-mitigated assessee and risk-bearing comparables allowed and directions given for recomputation. - HELD THAT: - Relying on precedent of the Delhi Bench (Sony India Pvt. Ltd.) and earlier decisions of the Pune Bench (Applied Micro Circuits India Pvt. Ltd. and MSC Software Corporation India Pvt. Ltd.), the Tribunal accepted that a captive service provider remunerated on cost-plus basis merits a risk adjustment when comparables are full fledged risk-bearing entities. The Tribunal directed the Assessing Officer to allow the risk adjustment (following the methodology applied by the cited precedents), re-compute the margins of comparables accordingly and determine any transfer pricing adjustment. [Paras 35, 36]

Allow risk adjustment; AO to re-work comparable margins per the Tribunal's cited approach and recompute any TP adjustment.

Applicability of +/- 5% variation from mean - The +/- 5% range around the mean is to be applied consequentially when assessing whether any adjustment is required. - HELD THAT: - The Tribunal recorded that the assessee contends its margins are within the +/-5% range of the mean of comparables. The applicability of the 5% variation is treated as consequential to the recomputation directed (after inclusion/exclusion of comparables and allowance of risk adjustment) and the Assessing Officer was directed to verify the assessee's stand and pass appropriate orders. [Paras 36]

Applicability of the +/-5% variation to be considered consequentially by the AO after recomputation; AO to verify and decide.

Final Conclusion: The appeal is partly allowed: the Tribunal directed exclusion of certain product/mixed companies and inclusion of specified comparables, allowed a risk adjustment for the captive service provider, and remitted the matter to the Assessing Officer to re-draw the final comparable set, re-compute margins (including the directed risk adjustment) and determine any transfer pricing adjustment, with the +/-5% range to be applied consequentially.

Transfer pricing adjustment - Advertisement, marketing and promotion (AMP) expenses - credit notes as reimbursement - selling expenses versus AMP expenses - exclusion of selling expenses from AMP base - effect of non-payment of royalty on transfer pricing - characterisation of software expenses as capital or revenue - application of Special Bench ratio in LG Electronics - remand for fresh determination

Credit notes as reimbursement - transfer pricing adjustment - Whether credit notes issued by the associated enterprise constituted reimbursement of AMP expenses or discounts on sale price - HELD THAT: - The Tribunal examined the credit notes and accompanying narration which referred to purchase transactions and to adjustment of transfer price for the period. The documents on record show that the credit notes were issued in respect of goods sold by the foreign associated enterprise to the assessee and were not linked to reimbursement of expenses incurred by the assessee. The asserted global policy did not alter the documentary reality. Accordingly, the authorities below were correct in treating the credit notes as discounts on sale price and not as reimbursement of AMP expenses. [Paras 5, 6]

Credit notes are discounts on the sale price of goods and not reimbursement of AMP expenses; the authorities below were right to so hold.

Selling expenses versus AMP expenses - exclusion of selling expenses from AMP base - application of Special Bench ratio in LG Electronics - remand for fresh determination - Whether various expenditure items ought to be characterised as selling expenses (to be excluded) or AMP expenses (forming part of international transaction) and the consequent determination of transfer pricing adjustment - HELD THAT: - Following the Special Bench ratio in LG Electronics, expenses for promotion/brand building must be distinguished from expenses incurred directly in connection with sales. The TPO did not undertake a sufficiently granular examination of each item to determine its true nature. In the absence of minute details, the Tribunal could not characterise the disputed items itself and therefore set aside the impugned order and remitted the issue to the AO/TPO for fresh determination. The AO/TPO is directed to examine each item, exclude genuine selling expenses from the AMP base and recompute ALP in accordance with the Special Bench ratio and the Tribunal's earlier directions, allowing the assessee an opportunity of hearing. [Paras 7, 8, 12]

Impugned transfer pricing addition on account of AMP expenses is set aside and remitted to the AO/TPO for fresh determination, with selling expenses to be excluded from AMP base after detailed examination.

Transfer pricing adjustment - Advertisement, marketing and promotion (AMP) expenses - application of Special Bench ratio in LG Electronics - Whether the AO/TPO could reopen and decide afresh the preliminary question (raised by the assessee) that AMP expenses are not an international transaction contrary to the Tribunal's remit - HELD THAT: - The Tribunal had restored the AMP issue to the AO/TPO specifically to be decided in the light of the Special Bench decision and with particular directions; it thereby proceeded on the premise that AMP excess was an international transaction. The lower authorities were bound by that remit and could not entertain a fresh contention de hors the Tribunal's order that AMP expenses are not an international transaction. Such a contention must be pursued before the High Court if the assessee wishes to challenge the Tribunal's mandate. [Paras 9, 10]

The AO/TPO rightly declined to entertain fresh contention that AMP expenses are not an international transaction, being bound by the Tribunal's remit.

Effect of non-payment of royalty on transfer pricing - application of Special Bench ratio in LG Electronics - remand for fresh determination - Whether the non-payment of royalty to the associated enterprise should be considered in determining the transfer pricing adjustment in relation to AMP expenses - HELD THAT: - The Tribunal had specifically directed the TPO to consider the impact of the assessee's non-payment of royalty in determining AMP-related transfer pricing adjustments in the light of the Special Bench decision. The TPO failed to examine this factor in the fresh proceedings. Given the specific earlier direction, the matter must be reconsidered by the AO/TPO to assess the effect, if any, of non-payment of royalty on the ALP determination. [Paras 11, 12]

Issue remitted to the AO/TPO for fresh consideration of the effect of non-payment of royalty on the transfer pricing adjustment.

Characterisation of software expenses as capital or revenue - remand for fresh determination - Whether computer software expenses aggregating to the amount in dispute are capital in nature or revenue expenditure - HELD THAT: - The Tribunal had remitted the question to the AO for determination in the light of the Special Bench direction, which requires examination of bills and the period over which benefit accrues. The assessee failed to furnish complete bills/details to the AO in the fresh proceedings; accordingly the AO treated the amount as capital and allowed depreciation. Given the absence of full documentary material, the Tribunal set aside the impugned order and remitted the matter to the AO to examine the nature of the software expenses afresh. The assessee is directed to produce the bills/details as called for; if it fails to do so again, the AO may draw adverse inferences. [Paras 13, 14]

Matter remitted to the AO for fresh examination of whether software expenses are capital or revenue; assessee must produce relevant bills and, failing that, AO may draw adverse inference.

Final Conclusion: The Tribunal partly allows the appeal for statistical purposes: the transfer pricing addition on account of AMP expenses is set aside and remitted to the AO/TPO for fresh determination in accordance with the Special Bench ratio and the Tribunal's directions (with credit notes held to be discounts and not reimbursements; selling expenses to be excluded after detailed scrutiny; and the effect of non-payment of royalty to be considered). The characterization of software expenses is also remitted to the AO, subject to production of bills by the assessee; adverse inference may be drawn if the assessee fails to produce required documents.

Customs Valuation - transaction value - sequential application of valuation rules - opportunity to rebut - assessment per consignment - burden on the proper officer - DEEC scheme obligations

Customs Valuation - transaction value - sequential application of valuation rules - opportunity to rebut - burden on the proper officer - DEEC scheme obligations - Validity of reassessment rejecting the declared transaction value of imported aluminium ingots and the consequent enhancement made by the original adjudicating authority - HELD THAT: - The original authority confronted the declared value being about 10% below published London Metal Exchange prices and recorded detailed findings under rule 12 of the Customs (Determination of Value of Imported Goods) Rules, 2007, rejecting the transaction value after examining contractual justifications and finding them not credible. However, the reassessment relied on contemporaneous bills of entry and purported higher import prices without affording the importer an opportunity to rebut those materials; that omission renders the rejection incomplete and without legal sanction. The first appellate authority noted the absence of adequate justification for computing an assessable value, applied the legal tests in the cited Supreme Court decisions regarding substitution of declared value and the burden on the proper officer, and observed that the importer operated under the DEEC scheme where quantitative and value obligations affect import entitlement; enhancement of value without establishing any breach or contingency affecting scheme obligations would be an academic exercise. Subsequent events did not demonstrate the contingency relied upon by the original authority, and the grounds of appeal did not supply the missing adjudicative opportunity or evidence. In these circumstances the appellate conclusion setting aside the enhancement was held to be lawful and proper. [Paras 3, 4, 5, 6, 7]

Revenue's appeals are dismissed and the reassessment/enhancement made by the original authority is not sustained.

Final Conclusion: The Tribunal affirmed the appellate finding that the reassessment rejecting the declared transaction value was legally infirm because the importer was not given an opportunity to rebut the materials forming the basis of enhancement and because no contingency under the DEEC scheme warranting recovery was established; accordingly Revenue's appeals are dismissed.

Classification of milk products and whey - assessment on retail selling price - transaction value under section 14 of the Customs Act, 1962 - mechanics of ascertainment of assessable value - confiscation and penalty consequences of misdeclaration

Classification of milk products and whey - classification of flavored whey, casein, glutamine powder and creatine - Flavoured whey and allied products imported by the assessee are classifiable under Chapter 4 (heading 0404) and not as edible preparations under heading 2106. - HELD THAT: - The Tribunal applied established principles governing classification of milk products with additions, following precedent which holds that products consisting of natural milk constituents with permissible stabilizers, sweetening or flavouring remain within Chapter 4. The characteristics imparted by stabilizers or permitted additives that maintain consistency or shelf life do not convert a milk product into an edible preparation of another chapter. The description of 'whey' under heading 0404 and the exposition in the cited precedent led the Tribunal to conclude that the attempt to reclassify the goods under heading 2106 lacked merit and the adjudicating authority properly dropped that portion of the show cause proceedings.

Proposal to reclassify the goods from heading 0404 to heading 2106 is rejected; goods remain classifiable under heading 0404.

Assessment on retail selling price - transaction value under section 14 of the Customs Act, 1962 - mechanics of ascertainment of assessable value - confiscation and penalty consequences of misdeclaration - The adjudicating authority lacked legal basis under the Customs Act, 1962 to re-determine the 'retail selling price' for levy of additional duty of customs; consequently the redetermination, recovery, and related confiscation/penalty orders could not be sustained on that ground. - HELD THAT: - The Tribunal held that the statutory machinery for ascertainment of assessable value is governed by section 14 of the Customs Act, 1962 and associated rules, and that those provisions do not expand to confer authority to alter or re-determine the 'retail selling price' introduced for certain duties. Although additional duties paralleling central excise levy on retail selling price exist in the Customs Tariff Act, the procedural and valuation mechanics under the Customs Act were not intended to empower re-fixation of retail selling price at the import stage. The Tribunal also noted that any change in retail selling price post-import that would amount to manufacture or attract central excise consequences falls within the enforcement machinery of the Central Excise Act, 1944 rather than being remediable by re-determination under the Customs Act. On these legal grounds the Tribunal found that the adjudicating authority's exercise to discard declared retail selling prices and to recover differential duties was without legal backing.

Redetermination of retail selling price and consequent recovery, confiscation and penalties under the Customs Act, 1962 are not legally supportable and are set aside.

Final Conclusion: Revenue's appeal is dismissed; the importer's appeal is allowed: the goods remain classifiable under heading 0404 and the re-determination of 'retail selling price' under the Customs Act, 1962 (and consequential recoveries/penalties) is held unsupported by law.

Time-limit under Regulation 20(5) of the Customs Broker Licensing Regulations, 2013 - mandatory nature of statutory time limits in disciplinary proceedings - vitiation of disciplinary proceedings for non-observance of prescribed time-limits - revocation of customs broker licence

Time-limit under Regulation 20(5) of the Customs Broker Licensing Regulations, 2013 - mandatory nature of statutory time limits in disciplinary proceedings - vitiation of disciplinary proceedings for non-observance of prescribed time-limits - Failure to comply with the 90-day period prescribed in Regulation 20(5) for submission of the inquiry report vitiates the disciplinary proceedings leading to revocation of the Customs House Licence. - HELD THAT: - Regulation 20(5) of the Customs Broker Licensing Regulations, 2013 requires the Inquiry Officer to submit the inquiry report within 90 days of appointment. In the present case the Inquiry Officer submitted the report after a delay of 360 days, which is materially beyond the prescribed period. The Tribunal, applying the principle that where a time-limit is mandated by the Regulations the term 'shall' is to be treated as mandatory, accepted the view in the cited Madras High Court decision that prescribed time periods in the CBLR are not directory. Given the substantial and unexplained breach of the statutory time-limit, the disciplinary proceedings culminating in revocation of the licence were held to be vitiated.

Impugned revocation order set aside and the appeal allowed.

Final Conclusion: The appeal succeeds: the revocation of the appellant's Customs House Licence was quashed on the ground that the inquiry report was filed well beyond the 90-day period mandated by Regulation 20(5) of the Customs Broker Licensing Regulations, 2013, rendering the disciplinary proceedings vitiated.

Confiscation for mis-declaration - valuation for export under DEPB scheme - acceptance of declared export value - preclusive effect of earlier adjudication

Preclusive effect of earlier adjudication - confiscation for mis-declaration - acceptance of declared export value - Whether the impugned adjudicating order imposing confiscation and reducing the declared value in respect of exports covered by 149 shipping bills is sustainable where earlier proceedings in respect of substantially the same consignments and evidence were decided in favour of the assessee - HELD THAT: - The Tribunal found that the present proceedings arose from the same investigations into export of the same commodity and were based substantially on the same evidence as earlier proceedings which had been finally decided in favour of the assessee. Both the Tribunal and the High Court had earlier held that the alleged mis-declaration was not justified and had accepted the declared value at Rs. 65/- per piece. The adjudicating authority in the impugned order itself observed that the proceedings in respect of the 149 shipping bills were founded on the earlier investigation. Since the earlier adjudications set aside the charge of mis-declaration and approved the declared value, the impugned order - which reinstates confiscation and reduces value on substantially identical evidence - could not be sustained. Applying the preclusive effect of the earlier decisions, the Tribunal found no justification to uphold confiscation or the reduction of declared value in the impugned order and therefore set it aside. [Paras 6, 7, 8, 9, 10]

Impugned order set aside; confiscation and reduction of value quashed and the earlier acceptance of the declared value at Rs. 65/- per piece affirmed.

Final Conclusion: Both appeals allowed; the adjudicating order imposing confiscation and reducing the declared export value is set aside in view of earlier decisions in favour of the assessee which accepted the declared value.

Jurisdiction of DRI officers to issue show cause notices - proper officer under Section 28 of the Customs Act - retrospective appointment of proper officers - conflicting High Court decisions and subjudice before the Supreme Court - remand for decision on jurisdiction pending Supreme Court - maintenance of status quo

Jurisdiction of DRI officers to issue show cause notices - proper officer under Section 28 of the Customs Act - conflicting High Court decisions and subjudice before the Supreme Court - remand for decision on jurisdiction pending Supreme Court - maintenance of status quo - Impugned orders set aside and matter remanded to original adjudicating authority to decide jurisdiction of issuing officers first and thereafter decide merits after resolution by the Hon'ble Supreme Court; interim status quo to be maintained. - HELD THAT: - The Tribunal noted that the preliminary controversy concerns whether officers of DRI/DRI linked organizations were proper officers empowered to issue show cause notices for notices issued prior to April 2011. Coordinate benches have recorded conflicting High Court decisions on the effect of the Supreme Court decision in Sayed Ali and subsequent legislative and executive measures (amendments and notification) that altered the appointment of proper officers. Given divergent High Court views and pending appeals before the Hon'ble Supreme Court (including Revenue appeals against the Delhi High Court decision in Mangali Impex), the Tribunal follows the approach adopted by co ordinate Benches: set aside the impugned orders and remand the matters to the original authority to decide the question of jurisdiction afresh after the Supreme Court disposes of the pending appeals, and thereafter on merits while ensuring the assessee is heard. In the interim, status quo is to be maintained.

Impugned orders set aside; appeals remitted to original authorities to first determine jurisdiction and thereafter decide merits after the Supreme Court's decision; status quo to be maintained meanwhile.

Final Conclusion: All impugned orders are set aside and the matters are remanded to the original adjudicating authorities to decide jurisdiction first and thereafter on merits after the Supreme Court disposes of the pending appeals; interim status quo is directed.

Violation of principles of natural justice in adjudication - Refund of accumulated CENVAT credit for exported services - Qualification of service as export under Rule 6A of the Service Tax Rules - Application of Board Circular No.120/01/2010 ST for exporters of 100% services - Interpretation and application of Notification No.5/2006 CE(NT) to refund claims

Violation of principles of natural justice in adjudication - The order rejecting the refund claim was passed without issuing a show cause notice or affording an opportunity of hearing and thereby violated principles of natural justice. - HELD THAT: - The Tribunal found that the Deputy Commissioner rejected the refund claim without issuing a show cause notice and without giving the appellant an opportunity of hearing. Such omission rendered the adjudication contrary to natural justice. In consequence the impugned order was held to be legally unsustainable and was set aside. [Paras 7]

Impugned order set aside for violation of principles of natural justice.

Refund of accumulated CENVAT credit for exported services - Qualification of service as export under Rule 6A of the Service Tax Rules - Application of Board Circular No.120/01/2010 ST for exporters of 100% services - Interpretation and application of Notification No.5/2006 CE(NT) to refund claims - Whether the appellant's services for the period April 2012 to June 2012 qualified as export of service and the refund claim was admissible on merits. - HELD THAT: - On merits the Tribunal held that the appellant had satisfied the conditions of Rule 6A of the Service Tax Rules for the services to qualify as exported services. The Tribunal further relied on Board Circular No.120/01/2010 ST which provides that service providers exporting 100% of their services should ordinarily be granted refund of CENVAT credit if otherwise in order, subject to a declaration of compliance with Notification No.5/2006. Applying these principles and Notification No.5/2006 as applicable to the relevant quarter, the Tribunal concluded that the refund rejection on the ground that proceeds were received later did not preclude recognition of the export turnover for the quarter and the refund was accordingly allowable. [Paras 7]

Appellant's services held to qualify as export for the period; refund claim allowable and appeal allowed on merits.

Final Conclusion: The appeal is allowed: the impugned order rejecting the refund is set aside for breach of natural justice and, on merits, the appellant's services for April 2012 to June 2012 are held to qualify as export entitling it to refund of accumulated CENVAT credit in accordance with Rule 6A, Notification No.5/2006 and Board Circular No.120/01/2010 ST.

Relevant date for refund claim in export of services - export of service qualifies only upon receipt of convertible foreign exchange - date of FIRC as proof of receipt of convertible foreign exchange - Indian rupees received through a foreign bank treated as convertible foreign exchange

Relevant date for refund claim in export of services - date of FIRC as proof of receipt of convertible foreign exchange - Period of one year for filing refund must be computed from the date of receipt of convertible foreign exchange (date of FIRC) and not from the date of invoice. - HELD THAT: - The Tribunal held that supply of service qualifies as export only when convertible foreign exchange is received by the service provider. Consequently, the statutory one year period for filing the refund claim runs from the date on which convertible foreign exchange is received and evidenced (date of FIRC) rather than from the invoice date or date of service. The respondent filed the refund claim within one year from the dates of FIRC; therefore the claim was held to be timely. [Paras 4]

Refund limitation period to be reckoned from date of receipt of convertible foreign exchange (date of FIRC); claim held timely.

Indian rupees received through a foreign bank treated as convertible foreign exchange - treatment of remittance through foreign bank - Remittance received in Indian rupees through a foreign bank is to be treated as receipt of convertible foreign exchange for purposes of qualifying a supply of service as export. - HELD THAT: - Relying on and applying the reasoning in Sun Area Real Estate Pvt. Ltd. (Tri.-Mumbai), the Tribunal observed that Indian rupees received through a foreign bank qualify as payment in convertible foreign exchange after considering the relevant RBI and FEMA provisions addressed in that precedent. On identical facts, the Tribunal held that such receipt satisfies the requirement of receipt in convertible foreign exchange and therefore the supply qualifies as export of service. [Paras 4]

Receipt of payment in Indian rupees routed through a foreign bank is to be treated as receipt of convertible foreign exchange; supply qualifies as export.

Final Conclusion: The impugned order of the Commissioner (Appeals) is upheld; the Revenue's appeal is dismissed and the stay application disposed of.

Voluntary Compliance Encouragement Scheme (VCES) - statutory time limit for deposit - no power to extend statutory deadline - rejection of VCES declaration for delay - condonation of delay

Voluntary Compliance Encouragement Scheme (VCES) - statutory time limit for deposit - no power to extend statutory deadline - rejection of VCES declaration for delay - condonation of delay - Whether the appellant's VCES declaration could be accepted despite a seven-day delay in depositing the 50% amount due on 31.12.2013, and whether the designated authority had power to condone or extend that statutory deadline. - HELD THAT: - The Tribunal held that the VCES prescribes 31.12.2013 as the time limit for payment of 50% of the declared amount and that the scheme contains no provision permitting extension or condonation of that statutory time limit. Consequently, the designated authority has no power to extend the deadline. The appellant's short payment and subsequent seven-day delay in making good the shortfall was a failure to comply with the statutory date, and unlike the cited authority where payment was prevented by a system fault, the present case involved a voluntary delay by the appellant. For these reasons the adjudicating authority's rejection of the VCES declaration and consequential directions for recovery were affirmed. [Paras 4, 5]

The rejection of the VCES declaration was upheld and the designated authority's inability to condone the seven-day delay was affirmed.

Final Conclusion: The appeal is dismissed and the impugned order rejecting the VCES declaration for non-compliance with the statutory deadline is upheld.

Principles of natural justice - opportunity of hearing - service of notice / pre-revision notice - retrospective cancellation of registration - reassessment / redo the assessment - restraint on coercive action

Principles of natural justice - opportunity of hearing - service of notice / pre-revision notice - Impugned assessment order was vitiated for not giving the assessee 15 clear days to submit objections and thereby violating principles of natural justice. - HELD THAT: - The pre-revision notice dated 11.06.2014 was not served and was returned. A subsequent notice dated 12.03.2015 was received by the petitioner's father on 16.03.2015; that date is to be excluded and the 15-day period commenced from 17.03.2015, expiring on 31.03.2015. The assessment order was passed on 31.03.2015 without affording the petitioner the clear 15 days mandated for making objections or seeking hearing. The absence of that reasonable opportunity rendered the assessment procedurally unfair and susceptible to being set aside. [Paras 4, 5, 6]

Assessment set aside; impugned proceedings to be treated as a show cause notice and the petitioner directed to submit objections within 15 days of receipt of this order, with an opportunity of personal hearing thereafter.

Retrospective cancellation of registration - reassessment / redo the assessment - Question whether purchases from the selling dealer were affected by a retrospective cancellation of that dealer's registration was not adjudicated and requires verification before completing assessment. - HELD THAT: - The petitioner was not afforded an opportunity to produce records to establish that the registration cancellation of M/s. Akash Modular Furnitures operated with retrospective effect. The Court directed that the respondent undertake necessary official verification as to the effective date and nature of the cancellation and consider the petitioner's grounds before redoing the assessment in accordance with law. [Paras 5, 6]

Respondent to verify whether the cancellation of the selling dealer's registration was with retrospective effect, consider the petitioner's submissions, and thereafter redo the assessment in accordance with law.

Restraint on coercive action - Respondent was restrained from initiating coercive action pending compliance with the directions to revisit the assessment. - HELD THAT: - In view of the setting aside of the assessment and the directions to treat the proceedings as a show cause notice, submit objections, afford hearing and verify the cancellation issue, the Court directed that no coercive action in respect of the quantified tax and penalties in the impugned order shall be initiated by the respondent. [Paras 7]

No coercive measures to be taken by the respondent in respect of tax and penalties specified in the impugned order until the reassessment process directed by the Court is completed.

Final Conclusion: Writ petition disposed by setting aside the impugned assessment; petitioner to be treated as having received a show cause notice and to submit objections within 15 days, respondent to afford personal hearing, verify the retrospective cancellation of the seller's registration and redo the assessment in accordance with law; respondent restrained from taking coercive action in the meantime.

Rejection of books of account - verification of purchases against vouchers - presumption of non-maintenance of regular books - assessment vitiated by arbitrariness and victimization - proceedings influenced by extraneous consideration - penalty under Section 13A(4) of U.P. Trade Tax Act, 1948 - remand for fresh consideration

Rejection of books of account - verification of purchases against vouchers - presumption of non-maintenance of regular books - Rejection of the assessee's books of account by the Tribunal was not sustainable where vouchers and documents verifying purchases were found to be available and the Assessing Officer's finding was perverse. - HELD THAT: - The Court examined the orders of the Assessing Officer, the Deputy Commissioner (Appeals) and the Tribunal. The Deputy Commissioner recorded that documents and vouchers verifying local purchases were available and found the Assessing Officer's assertion that books were not produced to be perverse and amounting to harassment. Despite these findings, the Tribunal upheld the rejection in a cursory manner by repeating the Assessing Officer's conclusion that transactions were not verified against books. Having regard to the Deputy Commissioner's contradictory findings that the purchase papers were available and the Assessing Officer's conduct was arbitrary, the Court concluded that the rejection of accounts and the consequential assessment could not be sustained. [Paras 5, 6, 7, 8]

Questions answered in favour of the revisionist and the rejection of accounts as sustained by the Tribunal set aside; the assessment cannot be sustained on the recorded material.

Proceedings influenced by extraneous consideration - assessment vitiated by arbitrariness and victimization - penalty under Section 13A(4) of U.P. Trade Tax Act, 1948 - Proceedings tainted by extraneous consideration, arbitrariness or victimization vitiate findings and render the resulting assessment and penalty unsustainable. - HELD THAT: - The Court found that the Assessing Officer's orders contained nonspeaking and perverse assertions of non-production of documents despite material on record; the first appellate authority itself noted exploitation and arbitrariness by the Assessing Officer. The Tribunal nevertheless proceeded without proper discussion and affirmed the impugned findings. Where an assessment or penalty order is rooted in such extraneous or arbitrary considerations, the Court held that those orders cannot stand and must be set aside. [Paras 4, 5, 6, 8]

Questions raised concerning extraneous consideration and vitiation of findings answered in favour of the revisionist; impugned orders set aside to the extent they rest on such considerations.

Remand for fresh consideration - Matters not finally decided by the Court are remanded to the Assessing Officer for fresh consideration in accordance with law. - HELD THAT: - The Court expressly left the remaining questions open and directed that the matter be remitted to the Assessing Officer for fresh adjudication in the light of the observations recorded. The authorities below are to examine the issues afresh and pass orders in accordance with law. [Paras 8, 9]

Impugned order set aside and the matter remanded to the Assessing Officer for fresh decision.

Final Conclusion: Both revisions allowed to the extent indicated; the Tribunal's order dated 26.12.2007 is set aside insofar as it sustained rejection and assessment founded on perverse or arbitrary findings, and the matter is remanded to the Assessing Officer for rehearing and fresh decision in accordance with law.

Interlocutory order - Section 19(3)(c) prohibition - inherent powers of the High Court - Section 482 Cr.P.C. exercised sparingly - Articles 226 and 227 jurisdiction subject to restraint - Madhu Limaye principle on intermediate orders - need for expeditious day-to-day trial - stay of proceedings to be exceptional and time-bound

Interlocutory order - Section 19(3)(c) prohibition - Madhu Limaye principle on intermediate orders - inherent powers of the High Court - Whether an order framing charge under the Prevention of Corruption Act is barred from challenge before the High Court and the scope of judicial review available - HELD THAT: - The Court held that an order framing charge is not to be treated as purely interlocutory in all cases; Madhu Limaye's principle that some orders are 'intermediate' between interlocutory and final continues to govern. Section 19(3)(c) of the PC Act imposes a statutory prohibition on stays of proceedings and on exercise of revisional powers in relation to interlocutory orders, but it does not oust the inherent powers of the High Court or the constitutional jurisdiction under Articles 226/227. The non obstante clause in Section 19(3) applies to the Code of Criminal Procedure and the legislative scheme (including day-to-day trial mandate) must be respected; nevertheless, where there is patent illegality, want of jurisdiction or abuse of process, the High Court may entertain challenges to framing of charge under Section 397(2), Section 482 CrPC or Articles 226/227, subject to strict limitations. Satya Narayan Sharma to the extent holding otherwise was overruled, and the Court reconciled V.C. Shukla and related precedents by reaffirming that inherent/constitutional jurisdiction survives but is to be exercised very sparingly and only in exceptional cases to secure ends of justice. [Paras 25, 26, 36]

High Courts retain jurisdiction in appropriate and exceptional cases to challenge an order framing charge, but such jurisdiction must be exercised sparingly to correct patent illegality, lack of jurisdiction or abuse of process.

Section 482 Cr.P.C. exercised sparingly - Articles 226 and 227 jurisdiction subject to restraint - need for expeditious day-to-day trial - stay of proceedings to be exceptional and time-bound - Whether stay of proceedings in Prevention of Corruption Act cases can be granted and the conditions governing exercise of stay and ancillary remedies - HELD THAT: - The Court emphasised Parliament's objective of expeditious, day-to-day trials under the PC Act (Sections 4(4) and 22) and construed Section 19(3)(b)-(c) as permitting stay only where error/omission/irregularity in sanction has resulted in failure of justice; clause (c) bars stays on all other grounds. Consequently, stays and invocation of inherent or constitutional jurisdiction are permissible only in the rarest of rare cases and not for re-appreciation of evidence or as a cloak for appeal. Where stay is granted it must be on a speaking order recording exceptional circumstances, the court must impose appropriate conditions, ensure day-to-day hearings and normally decide the challenge within two-three months. Further, to curb prolonged impediments to trial, existing and future stays will lapse after six months unless a specific speaking order extends them for exceptional reasons. [Paras 32, 33, 34, 35, 36]

Stay of proceedings in PC Act cases is permissible only in exceptional circumstances tied to patent illegality or failure of justice; any stay must be time-bound, conditional, supported by a speaking order and will ordinarily lapse after six months unless extended by a reasoned order.

Final Conclusion: The reference is answered by holding that an order framing charge under the Prevention of Corruption Act is not absolutely immune from High Court or constitutional scrutiny, but judicial intervention (under Section 397, Section 482 Cr.P.C. or Articles 226/227) and grants of stay must be rare, strictly limited to cases of patent illegality, abuse of process or failure of justice, and any stay must be time bound, on conditions, and ordinarily terminate within six months unless extended by a reasoned order.