TaxTMI 
TaxTMI 
2014 (6) TMI 595
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....y filed a revised return of income on 22.08.2010 declaring the total taxable income at NIL after set off of carried forward losses. The case was subjected to scrutiny by the Assessing Officer, In course of assessment proceeding, the assessee-company produced its books of account and various other details as required by the Transfer Pricing Officer and Assessing Officer from time to time. The Transfer pricing officer has passed the order u/s. 92CA(iii) of the Income tax Act, 1961 on 30th April, 2010 determining the adjustments to Arms Length price at Rs. 38,34,39,496. Subsequently, the assessment was finally completed on 30.12.2010 determining the total income at Rs. 101,45,42,242. The order was served on 04.01.2011. 3. Brief facts relating to the disallowance are as follows: As per clause 4.1.6 of the shareholders agreement, the company has paid land compensation to the land owners i.e,, Andhra Pradesh Housing Board (APHB) an amount of Rs. 2,200 per sq. yard for the land transferred by APHB to the company. The land compensation of Rs. 2,200 per sq. yard Is termed as guaranteed compensation in the said agreement. Further, the land compensation is considered at Rs. 1,400 as a land c....
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....r the agreed price. Since, the 500 LIG houses were sold to the land owner, the land pertaining to the said houses need not be transferred to the Assessee and again re transfer the same to the land owner. The assessing officer has disallowed the land cost attributable to the 500 LIG houses an amount of Rs. 1,92,19,200. 3.6 As per clause 4.1.6 of Section 4 of the development and shareholders agreement, the assessee has handed over 500 LIG houses consisting of 450 sq. ft. each at a total consideration of Rs. 9 Crores. The said transaction is done by the Assessee absolutely as per the contractual agreement. The assessing officer has disallowed the cost of construction in excess of Rs .9 Crores at an amount of Rs. 18,06,75,000. 3.7 The Assessee company awarded development of township work to IJMII. On such development work, some of the work bills submitted by the IJMII were paid belatedly. On such belated payments, the assessee has paid interest to the IJMII as per the minutes of the meeting drawn between the parties. The assessing officer disallowed an amount of Rs. 2,21,95,301. 3.8 The assessing officer had added a sum of Rs 38,34,39,486 based on the order of the TPO as per details....
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....o be paid u/s. 155-O of the Act and confirmed the disallowance. Regarding disallowance of incentive paid at Rs. 18,59,85,000, it was observed that it is unreasonable and confirmed the disallowance. Regarding disallowance of interest at Rs. 55,77,852 the DRP observed that the assessee had already disallowed the same in its computation of income and the Assessing Officer made further addition which resulted in double addition. Accordingly, the DRP directed the Assessing Officer to delete the same. Regarding the disallowance of delay in handing over charges at Rs. 7,74,36,597, since no proof is adduced, the disallowance is confirmed. Regarding disallowance o cost of land relating to land sold by the APHB on 500 LIG houses at Rs. 1,92,19,200 and with regard to disallowance of cost of construction of houses handed over to APHB at Rs. 18,06,75,000, it was observed by the DRP that it is a diversion of profit and confirmed the disallowance. With regard to disallowance of interest paid to IJMII at Rs. 2,21,95,301 it is observed that preferential treatment has been given to the contractor cum shareholder and no interest is charged. Accordingly, it was disallowed. Against these findings of t....
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....is to be made in respect of the above payment. The addition made is to be deleted in entirety. 5. I The learned Deputy Commissioner of Income tax, Circle 3(3), Hyderabad has erred in making addition of Rs. 1,92,19,200 in respect of cost of land attributable to houses handed over to APHB. On facts and in the circumstances of the case and law applicable, the addition made by the assessing officer in respect of the above payment is to be deleted in entirety. 6.1 The learned Deputy Commissioner of Income tax, Circle 3(3), Hyderabad has erred in making addition of Rs. 18,06,75,000 in respect of cost of construction of houses handed over to APHB. On facts and in the circumstances of the case and law applicable, the addition made by the assessing officer in respect of the above payment is to be deleted in entirety. 7.1 The learned Deputy Commissioner of Income tax, Circle 3(3), Hyderabad has erred in disallowing interest paid to M/s. IJMII India Ltd amounting to Rs. 2,21,95,301 in computing the business income. On facts and in the circumstan....
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....9;ble DRP has erred in confirming the additions made by the TPO despite not agreeing to the conclusions of the learned TPO on many issues. 8.7 The Hon'ble DRP has erred in confirming the additions (i) only with a view to keep the matter alive and (ii) for the reason that the department does not have recourse to any remedy against the directions in favour of the assessee. 8.8 The learned assessing officer, TPO and the DRP has erred in making additions in respect of individual international transactions despite making adjustment at enterprise level profit margin using TNMM. 8.9 The findings and the conclusions of the learned Transfer pricing officer, DRP and the assessing officer are incorrect, bad in law and liable to be quashed. 8.10 On facts and in the circumstances of the case and law applicable, the addition on account -of transfer pricing adjustment amounting to Rs. 38,34,39,486/- is to be deleted in entirety. ....
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....al ground after satisfying that the reasons advanced by the assessee counsel are bona-fide and the assessee is having reasonable cause for not raising the above grounds on earlier occasion. 4. With regard to addition in respect of cost of land transferred to Andhra Pradesh Housing Board (APHB) at Rs. 13,43,96,800 (Ground Nos. 2.1 to 2.3), the AR submitted as follows: 4.1 There was an acute shortage of quality residential accommodation in the state of Andhra Pradesh. In order to alleviate this problem, the Govt. of Andhra Pradesh through its arm - Andhra Pradesh Housing Board constituted under the Andhra Pradesh Housing Board Act, 1956 (Board for short hereafter) decided to undertake housing projects in a large scale. The Board had limited financial resources, technical expertise and wherewithal to undertake the housing projects on such a large scale. The Govt. of AP therefore decided that the Board should undertake the housing projects with participation from the private sector. 4.2 The Board invited expression of interest from private sector companies with established track record in handling giant housing projects. In the competitive bidding process, M/s IJM (India) Infrastruc....
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....proval of Foreign Investment Promotion Board (FIPB) for development of integrated township project; (v) Appointment of IJMII as the main contractor and project manager for the development of integrated township project, entering into sales and marketing agreement with IJMII; (vi) Entering into technical collaboration agreement with M/s IJM Properties Sdn. Bhd, Malaysia (vii) Appointment of M/s CESMA International, Singapore as the Architects of the project; (viii) Power of attorney from the Board in favour of the assessee; (ix) Commencement of site clearing and earth works; (x) Registered office of the Company, financial year, appointment of first auditors, common seal, printing and signing of share certificates and share transfer endorsements and opening of bank account. 4.6 'Development & Shareholders Agreement' dated 4.11.2003 was entered i....
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.... The aforesaid guaranteed compensation of Rs. 2,200/- per square yard is inclusive of the land cost and APHB's share of anticipated profits in the development of integrated township. The Joint sector company shall pay the guaranteed profits at the rate of Rs. 800/- per square yard amounting to Rs. 13,43,97,120/- (Rupees Thirteen Crores Forty Three Lakhs Ninety Seven Thousand One Hundred Twenty Only), to APHB whether or not the Joint Sector Company realises profits from the integrated township. If the Joint Sector Company makes profits amounting to more than 15% of the Total Development Cost, APHB and IJMII shall be entitled to share such additional profits in the ratio of 49:51. For avoidance of doubts it is made clear that IJMII shall alone be entitled to receive all the profits generated by the Joint Sector Company up to 15% of the total development cost" 4.8 The Board of directors in their meeting on 2.2.2004 discussed and recorded minutes regarding the shareholders and development agreement dated 4.11.2003 and other matters. 4.9 The Assessing Officer and the DRP have disallowed the payment of Rs. 800/- per square yard totally amounting to Rs. 13,43,96,800/- for the reaso....
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....dia) Ltd [1966) 29 ITR 661 (SC), where the managing agents' commission was payable as a percentage of net profits, it was held that commission so paid was eligible for deduction in computing the profits chargeable to tax. The fact that the commission payable had to be computed as a percentage of net profits was held not relevant in determining whether the same is eligible for deduction. [Nizam Sugar Factory v C Ag. IT [1964) 52 ITR 939 (AP)) 4.14 According to the AR, the Income-tax is a tax on the real income, i.e., the profits arrived at on commercial principles subject to the provisions of the Income-tax Act. The real profit can be ascertained only by making the permissible deductions. There is a clear-cut distinction between deductions made for ascertaining the profits and distributions made out of profits. In a given case whether the outgoings fall in one or the other is a question of fact to be found on the relevant circumstances, having regard to business principles. This was the view of the Supreme Court in Poona Electric Supply Co. Ltd v CIT [1965) 57 ITR 521. In the above decision, the assessee Company was liable ....
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.... Co. Ltd., entered into an agreement wherein the business of three concerns were agreed to be sold by the Government of Travancore to the respondent Company which was to be floated for that purpose. Under the said agreement, in addition to the consideration for the transfer of business, the Govt. of Travancore was entitled to a certain sum calculated at a percentage of net profits of the respondent Company. On a question as to whether the sums paid to Govt. of Travancore under the agreement constitutes diversion of income by overriding title or whether the same is allowable as deduction in computing the income, the Kerala High Court ruled in favour of the respondent Company on both the questions. The Supreme Court affirmed the above decision and held as under: "On a construction of the terms of the contract in this case and the obligations arising therefrom we cannot say that the conclusions of the Kerala High Court are unsustainable. The assessee had no choice at the time of inception, as a condition of its coming into existence to agree to the several terms stipulated by the Government for transferring the ....
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....directors. The assessing officer and the first appellate authority disallowed the said payment for the reason that the same amounted to distribution of profit and a case of profit adjustment with the object of evading tax. The Tribunal in its third member decision held that the payment was an additional purchase price and if it is regarded as adjustment of profit at a pre-determined level, the nature of the payment would not change and cannot be termed as distribution of profits. The High Court on appeal held that the amount in question had gone out of the coffers of the assessee and had been received by the member societies. He placed reliance on the judgement of the Supreme Court in CIT v. Ashokbhai Chimanbhai [1965] (56 ITR 42) where it was held that profits of a business do not accrue day to day or month to month and the same accrue at the year end on comparison of Assets at two stated points, the Gujarat High Court held that payment to member societies were not made after drawing the accounts and after determining the profits and hence, the question of distribution of profits does not arise. It was also held that the said payments were eligible for deduction in the process of ....
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.... Act. (f) A payment agreed to be made compulsorily at the inception from income which may accrue or arise subsequently, whether by virtue of statue or contract, results in diversion of income by overriding title. The income to the extent of payments agreed to be made compulsorily at the inception is not taxable by virtue of overriding title. 4.20 He submitted that in the present case, the assessee was incorporated by the Govt. of Andhra Pradesh through its arm - The Andhra Pradesh Housing Board (Board). The assessee was incorporated as a SPV with a view to alleviate the acute shortage of housing in the state of Andhra Pradesh. As per the term of the MoU dated 15.5.2002 the assessee was responsible for the construction and implementation of the housing projects as contemplated by the Board and it was bound by the policy framework of the Govt. of Andhra Pradesh. The assessee was bound by the guidelines of the Govt. of AP and the Board from time to time. The assessee undertook the development of housing projects on terms accepted and finalised by the Govt. of AP and the Board. 4.21 He submitted that the Board provided the land ....
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....in computing the profits of the business under section 28. Alternatively and without prejudice, the said payments partake the character of expenditure wholly and exclusively incurred for the purpose of business and consequently allowable under section 37. 4.23 He relied on the judgement of Bombay High Court in the case of CIT v Crawford Bayley and Co. [1977]106 ITR 0884 (Bom), the aspect of diversion of income by overriding title was explained as under: "In respect of this matter the material question to be considered is, is there diversion of income by an overriding title or whether there is an application of income after it accrued to the assessee-firm. The true test in determining this question is laid down in Sitaldas Tirathdas"s case [1961} 41 ITR 367 (SC). The true test for the application of the rule of diversion of income by an overriding charge, is whether the amount sought to be deducted, in truth, never reached the assessee as his income. Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which ....
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....ted profits'. The assessee has not registered this agreement. The land is never registered and transferred to the taxpayer by the APHB. Such evidence is not produced. When specifically questioned as to why registration is not done, the AR only replied that there is no necessity to register the agreement. 5.1 According to the DR, agreements can be mutually concluded which can be of self-serving nature. Such agreements can also be concluded to avoid tax. From subsequent paras of agreement wherein incentive is also paid to the other shareholder, the matters would get further clarified. First the exact words used in the agreement are to be considered. These words clearly show that the 'anticipated profits' are being passed on. The details of rate per square yard as per Sub Registrar is not produced. Kukatpally Housing Board Colony is nearby and it is one. of the biggest townships in Asia, Hence, it is also for consideration as to why the company failed to register this developmental agreement to get it recognized or give it the authenticity. Moreover, the land was given in terms of acres because it was not yet developed. Hence, the rate per acre would be applicable and not....
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....red (500) low- Income-group apartment units of the size of 450 square feet each (inclusive of apportioned common areas), at Rs.400/- per sq. feet. Provided however, APHB shall cause the allottees of the said 500 apartment units, to pay directly to the Joint Sector Company, all other costs, charges and expenses including but not limited to stamp duty, registration, water, electricity sewerage deposit, maintenance charges and deposit, parking area etc. (c) 15% of the balance Land cost amounting to Rs. 1,44,29,244 shall become due and payable by the Joint Sector Company to the APHB on the 90th day from the date of APHB making available to the Joint Sector Company, the vacant unencumbered Land mentioned in sub-clause 4.1.3; and (d) the balance of the Land cost amounting to Rs. 5,17,65,716 and the guaranteed profits of Rs. 800 per sq. yd amounting to RS. 13,43,97,120 (Rupees Thirteen Crores Forty three lakhs Ninety seven thousand one hundred and twenty Only) totalling to Rs. 21,61,62,836 shall be progressively realized by the APHB from the Joint Sector company from time to tim....
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....actual agreement between the shareholders, the company has paid the compensation to the land owners. Without considering the merits of the contractual agreement, the assessing officer has disallowed an amount of Rs. 13,43,96,800 being part of the land compensation as distribution of profits to APHB. The assessing officer has not mentioned the section and provision under which the distribution of profits is treated as income. 6.2 This is a contractual payment and the assessee is having no control over this and if the assessee failed to abide by the agreement entered by the APHB and IJMII it would lead to total break-down of the contract. The true test for allowability of this expenditure is where an amount is sought to be deducted, it never to be reached the assessee as its income. An amount paid, if it is an application of income it cannot be allowed. The nature of obligation under which the assessee is liable to be incurred is very decisive. There is a difference between an amount which a person is obliged to apply out of its income and an amount which by the nature of the obligation as part of the contractual obligation the assessee to be incurred. Whereby there is obligation by....
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....rent companies who formed the assessee through that agreement. Then, undoubtedly, the provisions of the agreement are not to be violated by the assessee. The assessee cannot say that only the beneficial clauses in that agreement would be followed and the other part cannot be acted upon. The agreement as a whole is to be acted upon by the assessee in order to give full effect to the agreement. The obligation of the assessee under the agreement is nothing but an actionable claim in favour of the APHB. It is true that the burden of a contract cannot be assigned without the consent of the other party of the contract. But so far as this contract is concerned, a contract as a whole is to be acted upon for the functional operation of the assessee. The terms of the agreement are very clear that unless obligations cast upon the assessee are carried on by the assessee, the assessee cannot function and operate. The assessee is bound by the terms therein and being so it is not possible to accept on behalf of Revenue that this is a case where income has accrued to the assessee and later on it was applied by it by passing the share of profit in favour of the APHB. As per agreement entered by APH....
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....ficer has disallowed the incentives paid to IJMII amounting to Rs. 18,59,85,000/- for the following reasons. (a) The payment of incentive is not reasonable and attracts the provisions of section 40A of the Income tax Act. (b) Assessee is not liable for payment of incentive as it is not a party to the shareholders agreements. (c) Payment of incentive above the contract price amounts to distribution of profits. (d) As per the details available the claim of incentive is not related to this year, as the project is not yet completed. (e) IJMII has not executed the work in time to term the payment as incentive for timely completion. 7.3 The AR submitted that the Honourable DRP has confirmed the impugned findings of the learned assessing officer and has confirmed the addition amounting to Rs. 18,59,85,000/- 7.4 The AR submitted that the incentive paid to IJMII has been disallowed for the reason that ....
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....rities. He placed reliance on the judgement of Gujarat High Court in the case of Voltamp Transformers (P.) Ltd. v. CIT [1981] 129 ITR 1051 and on the judgement of Delhi High Court in the case of Mittal Metal vs ITO (2008) 021 SOT 0186. 7.8 He submitted that the provision of section 40A(2) is intended to prevent evasion of tax. [CBDT Circular No. 6P (LXXVI-66) of 1968] Though the object of the section is to prevent evasion of tax, the provision must be worked not from the standpoint of the Tax Collector but from that of a businessman. The Income-tax Officer must take an overall picture of the financial position of the business. He should put himself in the position of the prudent businessman or the director of the company and deal with a sympathetic and objective approach. He placed reliance on the judgement of Supreme Court in the case of ClT v. Gangadhar Banerjee and Co. (P.) Ltd. [1965] 57 ITR 176 (SC); CIT v. Edward Keventer (P) Ltd [1972] 86 ITR 370 [approved by the Hon'ble Supreme Court in CIT v. Edward Keventer (P.) Ltd. [1978] 115 ITR 149]. 7.9 According to the AR, the disallowance under section 40A(2)(a) can be made only if the expenditure otherwise allowable is exces....
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....party to the shareholders agreements. Having made disallowance u/s 40A(2)(a) thereby accepting that the impugned expenditure qualifies for deduction under section 37, the assessing officer cannot turn around and conclude that the assessee was not liable for payment of incentives. The assessing officer cannot blow hot and cold at the same time. Disallowance cannot be made for two opposite and contrary reasons. The disallowance is to be deleted for this reason alone. 7.11 According to AR, even otherwise, the conclusion of the assessing officer that the since assessee was not a party to the shareholders agreements, it was not liable to pay incentive is incorrect. The assessee was incorporated solely for the purpose of development of township with APHB and IJMII as its shareholders. It was imperative for the assessee to agree to the terms of MoU and shareholders agreement. The assessee had no choice at the time of inception, as a condition of its coming into existence to agree to the several terms stipulated by the AP Government through APHB and the other shareholder viz., IJMII. He placed reliance on the judgement of Supreme Court in the case of CIT v Travancore Sugars and Chemicals ....
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....r section 37. The fact that payment of incentive was measured or quantified as a percentage of development cost subject to availability of profits is not a relevant criteria at all. He placed reliance on the judgement of Supreme Court in the case of CIT vs. Ponni Sugars and Chemicals Ltd [2008] 306 ITR 392 (SC), wherein held that where subsidy was allowed by the Govt. for the purpose of repayment of loans and the same was allowed through a rebate on excise duty, it was held that the form or the mechanism by which the subsidy was allowed is irrelevant in determining whether the subsidy allowed is capital receipt or revenue receipt. It was also held that the source of subsidy or the point of time at which it is paid is not irrelevant. In the present case, the incentive paid to IJMII was a consideration for undertaking the construction contract for development of the township. Thus, the said payments are allowable under section 28 or under section 37 in computing the profits of the business. Alternatively and without prejudice, the said payments constituted diversion of income by overriding title for the assessee. 7.13 According to him, the assessing officer has disallowed the incent....
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....year or not. The profit calculated under the mercantile system is profit actually earned during the previous year, though not necessarily realized in cash. 7.16 He drew our attention to Accounting Standard-I, relating to disclosure of accounting policies, issued by the Central Government under section 145(2), requires the assessees to make provisions towards all known liabilities and losses, even though the amount cannot be determined with certainty. This is the principle of prudence. 7.17 He referred to the word "provision" as defined in paragraph 7(1)(a) of Part III of Schedule VI to the Companies Act to mean "any amount written off or retained by way of providing for depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. " 7.18 He contended that if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certai....
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....r up to 15% of the total cost. The quantification of incentive is premature according to the AO. Payment of incentive to the contractor is something peculiar. It also envisages that profit of over 15% would certainly be generated. However, the profit is normally 8 to 12% in real estate and after tax it works out to 5.6% to 8.4% only. The AO also narrated in page 6 of his order the facts as obtained from the record of M/s. IJMII that the profit disclosed is only 0.09%. If incentive is considered, it comes to 4.8% which is still on the lower side. 8.1 The DR further submitted that the taxpayer is not a party to the agreements between the shareholders. He also relied on the doctrine of Privity of Contract. Accordingly, for the following reasons the sum of Rs.18,59,85,OOO incentive paid to one of the shareholders i.e., IJMII: i) The payment of incentive is not reasonable and attracts the provisions of section 40A of the Income Tax Act, ii) SITCO is not liable for payment of incentive as it is not a party to the shareholders agreements. &n....
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....d that is paid to the shareholder and hence the deduction is not admissible. On the other side, it should also be noted that even before the work is executed in time and without examining the quality, an incentive is sought to be paid in crores. In fact, this is a case wherein there was .substantial delay in handing over the flats and nearly Rs. 7 crores of liquidated damages / compensation was paid for the delay in execution and handing over the flats. The commercial complex was not completed in time. It is not clear how such incentive was paid and what is the necessity for such payment while the project was in progress. It is also a fact that IJMII is 51% shareholder of this company (taxpayer). It is also to be seen that incentive as well as 'anticipated profits' are taken away and profit is not disclosed for income tax purposes such. that no dividend tax nor any tax need be paid. Further, different contracts are concluded with IJMII towards technical services execution of work and separate payments are made. Mobilisation advance is also paid to IJMII. The profit margin of the taxpayer is given in the table below: Item FYE 2006 FYE 2007 FYE 2008 FYE2009 Operating r....
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....ing Officer finds that it is an excessive payment, then the duty of the Assessing Officer is to bring on record the comparable cases and disallow that portion of the expenditure only. The Assessing Officer cannot disallow the entire expenditure by observing that section 40A(2) is applicable. However, it is not the case of the Department that the expenditure was either not incurred or if incurred then were incurred for other than business purposes or for acquiring any personal benefit of the assessee. For the details of the evidence produced by the assessee, the expenditure were incurred for the purpose of carrying on the business of the assessee in terms of contractual obligations which in turn result in earning profit in the business of the assessee. In our opinion, in the present case, the incentive was paid to IJMII as a consideration for undertaking the construction contract for development of integrated township. The assessing officer has not doubted the genuineness and purpose of the expenditure. The fact that the expenditure has been disallowed u/s 40A(2)(a) itself demonstrates that the requirements of section 37 has been satisfied. The scope and requirements of section 40A(....
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.... regard to the legitimate needs and the benefit there from. Further, as explained earlier, no. disallowance u/s 40A(2)(a) can be made unless the requirement of 'evasion of tax' is prayed. The assessing officer has failed to prove that the payment of incentive to IJMII has lead to evasion of tax. The assessee was eligible to set off brought forward losses and unabsorbed depreciation and hence there was no incentive to evade taxes. The assessee and IJMII both were domestic companies with uniform tax rate for the year under consideration. IJMII was not eligible for any tax holiday like ss. lOA, lOB, 10AA so that the incentive earned was tax exempt. IJMII has also paid tax on the incentive received from the assessee. The taxable income of IJMII was more than that of the assessee for the year under consideration. Thus, there was no evasion of tax. The assessing officer has failed to view the transaction underlying the payment of incentive on a holistic approach from commercial or business perspective. The disallowance made in violation of the requirements of s. 40A(2)(a), Board Circular No. 6P (LXXVI-66) of 1968, dated 6-7-1968 and the principles laid down by the Courts is, ther....
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....e paid by the assessee to various buyers as handing over charges. 10.2 The assessing officer has disallowed the above payment under section 40(a}(ia) for the reason that the impugned payments constitute 'interest' under section 2(28A) and the assessee has failed to deduct tax at source in respect of the said payments under section 194A of the Act. The Hon'ble DRP has confirmed the disallowance made by the assessing officer. 11. The AR submitted that section 4(2) provides the basis for deduction of tax at source. Section 190 provides that tax on income shall be payable by deduction of tax at source in accordance with the provisions of Chapter XVII, notwithstanding that the regular assessment in respect of any income is made in a later assessment year. Section 194A mandate deduction of tax at source in respect of interest other than interest on securities. He drew our attention to the term 'interest' is defined in section 2(28A). 11.1 The AR submitted that as per section 2(28A), interest means interest payable in any manner in respect of any moneys borrowed or debt incurred. It is clear from the definition in section 2(28A) of the Income-tax Act, 1961, that bef....
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....ld that the impugned sum is to be treated as interest as per definition u/s 2(28A) and to the extent there was failure to do TDS and the same is held to be disallowable u/s 40a(ia). However, the case is to be examined with respect to the EPC Contract on which the assessee is relying upon. As per clause 38 which deals with delay in completion, the contractor shall pay to the employer for every day's delay certain compensation. These sums are to be as liquidated damages for delay and not as a penalty. As per Appendix:-B liquidated damages clause.38.1 the tax payer is liable to collect the damages from the contractor-cum-shareholder, i.e. IJMII. The AO has already pointed out that IJMII has not executed the work in time to term the payment as incentive for timely completion. There is no evidence placed on record to state that contractor handed over possession in time and hence, the liability to pay liquidated damages squarely vested in the tax payer. Since no proper proof is adduced, the stand of the assessee. To be rejected. Findings in respect of ground Nos. 4.1: 13. We have heard both the parties and perused the material on record. In our opinion, payment of handing over char....
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....attracted only if the case falls under section 2(28A} irrespective of the fact that a particular receipt may represent income in the hands of the recipient. (b) CIT v HP Housing Board [2012] 340 ITR 388 (HP) "That, in case the houses were ready within the stipulated period the assessee would not be liable to pay interest. When construction of a house was delayed there could be escalation in the cost of construction. The allottee does not get the right to use the house and was deprived of the rental income from such house. He was also deprived of the right of living in his own house. In these circumstances, the amount which was paid by the assessee was not payment of interest but was payment of damages to compensate the allottee for the delay in the construction of his house/flat and the harassment caused to him. Though compensation had been calculated in terms of interest this was because the parties by mutual agreement agreed to find out a suitable and convenient system of calculating the damages which would be uniform for all the allottees. The allotte....
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....by the Board was possible only after completion of construction of these flats by the assessee and the said construction could not have been made by the assessee without the contribution of land by the Board. Further, (i) sale of 500 flats by the assessee and payment of same as compensation to Board or (ii) direct realisation by the Board by sale of flats, lead to the same result. The two way traffic of first selling the houses by the assessee and then paying the same amount to Board as compensation was avoided. The compensation of Rs. 2,200/- per sq. yard paid to the Board was partly realised in the form of direct sale of 500 flats. He placed reliance on the judgement of Supreme Court in the case of J.B. Boda and Co. Pvt. Ltd. v. CIT [1997) 223 ITR 271 and also on the order of Tribunal, Special Bench, Chennai in the case of Zylog Systems Limited v ITO [2011) 7 ITR (Trib) 348 wherein held that in taxation matter "A two-way traffic is unnecessary. To insist on a formal remittance first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a meaningless ritual, on the facts of this case" 15. The AR submitted that on facts and in the circ....
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....Rs. 107/- per sq. ft 16.3 The transfer of 500 LlG houses at a discount was mandatory for the assessee in terms of the development and shareholders agreement dated 4.11.2003. The APHB was obliged to provide residential accommodation to low income group people by virtue of the governmental instructions and policy framework. The transfer of 500 houses at a price of Rs. 450/- per sq.ft was therefore made as a condition pre-requisite for entering into developers and shareholders agreement dated 4.11.2003. The assessee had no choice but to accept to the terms of the said agreement. The transfer of 500 houses at a price of Rs. 450/- per sq. ft was therefore out of commercial or business expediency. 16.4 The learned assessing officer has concluded that s. 40A(2){a) is applicable in the present case. The expression used in section 40A(2) is "incurs any expenditure in respect of which payment has been or is to be made to any person" [Emphasis supplied]. The emphasized words clearly show that there has to be an expenditure incurred and actual payment should have been or is to be made in respect of such expenditure before the provision can be said to be applicable. He placed reliance....
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....ly to an expenditure and not sale proceeds less received. 16.7 The assessing officer has added a sum of Rs. 18,06,75,000/- for the reason that the assessee should not have transferred the houses for a lesser sum. The addition made represents a sum which the assessee never received or earned. In other words, the assessing officer has imputed income in making additions. The revenue cannot question the rates at which an assessee provides services, sells goods or leases property. The following reasons are in support of the above position of law. a) Income tax Act is a fiscal statute. It has to be interpreted strictly. One cannot tax an assessee based on intendment. In the absence of clear words, income on which tax is computed cannot be deemed. The Income Tax Act does not contain any general provision for imputing income in excess of what is actually earned or received by the assessee. The income received and computed as per the provisions of the Act has to be accepted by the revenue as the taxable income. b) The income from development of integrated townsh....
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....ntext: "We are unable to agree with the submission that an act which is otherwise valid in law can be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the respondents." g) The Supreme Court in S.A Builders Ltd. v. CIT (A), [2007] 288 ITR 1 (SCj, has defined the expression "commercial expediency" in the context of business expenditure in the following manner: "The expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency." Extending the above principle in the context of income, one can hold that the decision to charge less or more is left to the discretion of the businessman. If business compulsions or commercial expediency is the basis fo....
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....rofits. Secondly, had the taxpayer sold the flats at a higher price and paid Rs.9 crores as per the agreement, the situation would be different as no loss would have arisen to the taxpayer. It is also to be noted that had the taxpayer-sold it directly at Rs. 4OO/- and credited the sales account, the loss or the expenditure may have to be allowed. But, herein the expenditure is incurred for a specified person as per Sec.40A(2}(a)/(b) as per mutual consent and agreement concluded between the shareholders which is not binding on the taxpayer as it was not a party to the same. It is also to be seen that such agreement came into existence after 8 months of incorporation of the company. Agreement concluded for mutual convenience cannot be the basis for allowing such expenditure. 17.1 The DR submitted that real consideration received on account of 500 flats would be the correct consideration for the purpose of Income-tax. If one has not consider the real consideration received, it would be a case where profit is diverted to the shareholder by incurring loss in the hands of the company/tax payer and hence, disallowance is called for. The income is to be taxed on the correct hands He relie....
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.... 18,06,75,000 towards cost of construction of houses handed over to APHB. On this issue also the Assessing Officer invoked the provisions of section 40A(2) of the Act. According to the Assessing Officer, the assessee has transferred the houses at lesser price. As held in the earlier paras with regard to disallowance incentive, the Assessing Officer is required to bring on record comparable cases having regard to the fair market value of the service rendered. The burden is on the Assessing Officer to bring on record the proof with regard to market value of the services rendered. If the assessee sold the houses at discounted price, that discount allowed cannot be considered as disallowance u/s. 40A(2) of the Act. The provisions of section 40A(2) pertain to disallowance of an expenditure which is made by the assessee, that it means an amount actually spent by the assessee and claimed in the Profit and Loss A/c. The expression used in this provision is "incurs any expenditure in respect of which payment has been made or is to be made in person". This clearly shows that actually payment must be made and there has to be expenditure incurred before the provision can be said to be applicab....
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.... not justified. Moreover, payments such as project management, incentive, etc., are also made to the contractor. There are four contracts concluded such as Construction Agreement, Project Management Agreement, Sales and Marketing Agreement & Technical Service Agreement and substantial amounts paid to shareholder M/s. IJMII. Hence, this ground of objection is also should be rejected. 20.1 The DR placed reliance is placed on the decision of the Tribunal Bench 'D' Mumbai (Special Bench) in ITA. No. 5792/Mum/2009 in the case of M/s Dalal Boracha Stock Broking Pvt. Ltd (2011)-TIOL-375-ITAT-Mum-SB. wherein it is held that when commission is paid to the director of the assessee company who hold all the shares of the company, disallowance is warranted on the ground that the commission was paid in lieu of the dividend to avoid tax on dividend. Application of Sec.40A(2) was also considered in the impugned decision. Disallowances made by the AO with regard to incentive fall within the purview of the findings given in this decision. Findings with regard to Ground No. 7.1: 21. We have heard both the parties and perused the material on record. This ground is with regard disallowance o....
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.... comparables was computed at 8%. The budgeted PLI of the assessee was computed at 20%. Since the assessee's budgeted operating margin on sales was more than the arithmetic mean of comparables, the assessee concluded that its international transactions are at arm's length. 23.4 As the reimbursements reimbursement of bank guarantee charges and other expenses were made at cost, the assessee concluded that the same are at arm's length. 23.5 In the order passed under section 92CA, the learned TPO rejected some of the comparables selected by the assessee and thereafter rejected the TP analysis. 23.6 During the year, apart from the transactions with the AE, the assessee entered in to transactions with IJMII. The TPO has held the following transactions entered into by the assessee with IJMII, as deemed international transactions u/s 92B(2) of the Act: SI No. Nature of Transaction Amount (Rs.) 1 Project Execution Services 85,94,10,399 2 Project Management services 36,22,079 3 Reimbursement of Expe....
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....n to transactions with IJMII. The TPO has held that though the transactions are entered into by the assessee with IJMII, the terms of such transactions are determined in substance between the assessee and its associated enterprise (IJM Group). The TPO was of the view that though the associated enterprise (IJM Group) is not a party to the transaction, yet it has determined its essential terms. The TPO has held that as the terms of transaction, are fixed or dictated by the associated enterprise (IJM Group), the transactions cannot be said to have been entered into between the assessee and IJMII. The TPO thus held that in substance, the transaction is a deemed international transaction u/s 92B(2) of the Act. 24.3 After considering the transactions with IJMII as deemed international transactions u/s 92B, the TPO has determined the transfer pricing adjustment at Rs.34,86,OO,OOO/-. 24.4 The AR submitted that the TPO has erred in concluding that the transactions between the-assessee and its holding company IJMII, are international transaction, under section 92B(2). 24.5 The scope of section 92B(2) is explained in CBDT circular No. 14 of 2001, dated 22.11.2001 with an illustration as un....
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.... by the prior agreement must be avoidance of taxes or shifting of incomes. Otherwise, Chapter X becomes inapplicable. Such prior agreement would consequently be in the nature of an arrangement or an understanding or an action in concert between the unrelated party and the associate enterprise, not meant to be in public domain and in most cases unwritten. Unless tainted with an object of avoiding taxes or shifting of incomes, an agreement in relation the transaction cannot be regarded as a prior agreement. 24.9 Further, the prior agreement has to be in relation to such transaction. The object of avoiding taxes under the prior agreement should be sought to be achieved by influencing the transaction between one party to such prior agreement and the associated enterprise of the other. 24.10 Even where there is no prior agreement, it is sufficient, if the unrelated person and the associated enterprise have in substance determined the terms of the transaction. The words "substance" means that which is essential and that which is used in opposition to 'form'. The word 'determined', which is derived from the word 'determine', means to fix the character by prescrib....
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....cular, the transactions between the assessee and IJMII cannot be deemed to be an international transaction. 24.16 The above can also be understood through the diagrammatic illustration below: Facts matrix in the illustration provided in the CBDT Circular 24.17 To summarize, whether an international transaction emerges under various permutations and combinations of transactions between residents and non residents is tabulated herein below: S. No. Party 1 to a Transaction Party 2 to a Transaction International Transaction 1 Resident Non-Resident Yes 2 Non- Resident Resident Yes 3 Non-Resident Non- Resident Yes 4 Resident Resident 24.18 The transactions between the assessee and IJMII fall under item 4 above. Consequently, the transaction between the assessee and IJMII does not constitute an international transaction. The transfer pricing provisions of Chapter X are therefore not attracted. 24.19 According to the AR, the DRP has agreed with the above contention. The DRP has held that the conclusion of the TPO of applying the transfer pricing provisions to the impugned transaction is not correct. However, the DRP declined to interfere by o....
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....c intention underlying the new transfer pricing regulations is to prevent shifting out of profits by manipulating prices charged or paid in international transactions, hereby eroding the country's tax base. The new section 92 is, therefore, not intended to be applied in cases where the adoption of the arm's length price determined under the regulations would result in a decrease in the overall tax incidence in India in respect of the parties involved in the international transaction". 24.22 The AR submitted that in the present case the transactions are between two resident companies. There is no possibility of shifting of profits outside India or erosion of country's tax base. Therefore its transactions with IJMII are outside the purview of the transfer pricing regulations. 24.23 The AR reiterates that transfer pricing provisions are not applicable to transactions between two domestic related parties. The transfer pricing regulations have been specifically been made applicable to transactions between two domestic related parties by virtue of the amendment through Finance Act, 2012. In case, the existing provisions were applicable to domestic transactions then there wa....
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.... of this company is Rs. 3.56 crores. Out of this revenue from sale of flats was Rs. 1.27 crores. Segmental details of construction and sale of flats is not available and thus this company should be rejected as comparable. 3. Marg Constructions Ltd. Related party transactions more than 25% As per annual report of the company for FY 2006-07, total revenue during the year is Rs. 1418.45 Million. Out of this, revenue from the related parties amounts to Rs. 1,348 Million. The revenue from related parties amounts to 95% of total revenues of the company and, therefore, this company should be rejected as comparable 24.29 The AR further submitted that there is error in margin computation of K Raheja Pvt Ltd. The learned TPO has computed the margin of this company at 47.76%. As per segmental information available under Notes to Accounts of the company, this company operates in three segments namely i) Real Estate; ii) Hotels; and iii) others. Based on the segmental results of Real Estate segment, the margin of this company is 29.30%. The margin computation is as below:- Particulars Amount (Rs.) Total Revenue 5,405,405,135 Operating Profits 1,584,016,817 Operating Profits/....
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....plied forex revenue filter in his TP analysis. As per data available in Prowess database 100% of the revenue of the company is from construction and sale of residential buildings. 5. Kamwala Housing Constructions Ltd. Foreign exchange revenue is zero In the facts of the case, Foreign exchange revenue filter is not applicable. Even TPO has not applied forex revenue filter in his TP analysis. 6. Martin Burn Ltd. Foreign exchange revenue is zero In the facts of the case, Foreign exchange revenue filter is not applicable. Even TPO has not applied forex revenue filter in his TP analysis. 7. Tribhuvan Housing Ltd. Foreign exchange revenue is zero In the facts of the case, Foreign exchange revenue filter is not applicable. Even TPO has not applied forex revenue filter in his TP analysis. 8. Vipul Ltd. Related part transactions As per data available in Capitaline database related party transactions are less than 25% of sales. 9. Sobha Developers Ltd. Foreign exchange revenue is zero and no segmental results. In the facts of the case, Foreign exchange revenue filter is not applicable. Even TPO has not applied forex revenue filter in his TP analysis. Further as per page 6....
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....ferred 13,43,96,800 2 Disallowance of incentive paid 18,59,85,000 3 Disallowance of interest payment 55,77,852 4 Disallowance of delay in handling over charges 7,74,36,597 5 Disallowance of land cost attributable to land sold by APHB on 500 LIG Houses 1,92,19,200 6 Disallowance of cost of construction 18,06,75,000 7 Disallowance of interest to IJM 2,21,95,301 Total 62,54,85,750 24.37 Without prejudice to the AR contention that the determination of ALP at Nil by the TPO and disallowance of above payments by the AO are bad in law and without basis, the AR submitted that if the above payments are disallowed, then these amounts should be reduced from the Operating Cost of the assessee while making TP Adjustment u/s 92C of the Act. 24.38 In this regard, the AR relied on the decision of Tribunal, Delhi Bench in the case of Hawarth (India) Pvt Ltd v DCIT - (2011) 11 Taxmann.com 76(Delhi). In this case, the assessee had suo moto disallowed commission payment of Rs. 1,32,09,105/- made to local dealers for assistance in procuring order for the products of assessee's associated enterprises from the Indian customers. The disallowance was also confirmed by th....
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....es under both the above Tables. Therefore no adjustment is required to be made to the reported values of the assessee's transactions with its associated enterprises. 24.42 Without prejudice to the above submissions, the AR submitted that TP adjustment, if any should be restricted to AE transactions only. During the year under consideration, the assessee had transactions with both AE as well as non-AE. The total cost debited to profit and loss account was Rs. 1,906,260,711/-. Out of this cost related to transactions with AE is Rs. 1,075,205,036/- (Rs. 1,051,932,585+23,272,451) which constitutes 56.40% of total cost. Accordingly, these transactions alone are the subject matter of transfer pricing assessment under Chapter X of the Income Tax Act. The TPO cannot make an adjustment to the price or margin of the transactions with non-associated enterprises. The learned TPO in the Order passed has not restricted the transfer pricing adjustment only to transactions with Associated Enterprises. 24.43 The AR submitted that the TP adjustment, if any should be restricted to AE transactions alone. The transactions with non-AE are not international transactions. It is only with reference t....
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....roneous because he has applied the net profit margin of 7.25% on the gross sales and followed a complicated procedure to arrive at the amount of adjustment. In simple terms if the sales to Associated Enterprises is taken at Rs. 25 crores and straightway 7.25% margin is applied then approximately total margin would be Rs. 1.81 crores, whereas adjustment has been made at Rs. 2,57,26,138/-" 24.47 He also submitted that the Delhi Tribunal in the case of Global Vantedge Private Limited (2010-TOIL-24-ITAT-DEL) upheld the following observations made in the CIT(A) order: "In view of the above discussions, I hold that while applying the TNMM to determine ALP, the revenue earned by the assessee from servicing the independent clients, without any involvement of RCS should not be benchmarked. The proportionate (18.14%) attributable to such revenue should be ignored while computing ALP of the international transactions." 24.48 Further he placed reliance on the following decisions of the Tribunal: 1. DCIT v Startex Networks (India) Pvt Ltd 2010-TIL-13-ITAT-DEL....
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....e to its associated enterprises at NIL. Accordingly the TPO, has made transfer pricing adjustment of Rs. 2,32,72,452/-. 25.4 The learned TPO has made following arguments in determining the arm's length price of the technical services as NIL: - The assessee has not produced any evidence in support of technical services for which payment is made; - The assessee has not been able to show that it derived any economic benefit from the technical services rendered by its AE. 25.5 The AR submitted that under the transfer pricing methodology, either a price or margin is tested. Price is tested in case of CUP Method. Margin is tested in case of other methods. Once the margin is tested and held to be at arm's length, it pre-supposes that the various components of income and expenditure that have been considered in the process of arriving at the Net Profit are also at arms length. A satisfaction of margins being at arm's length cannot be re-evaluated / re-examined. Price or margins are alternative. They are not to be cumulatively satisfied. The law does not envisage a successive application of the price or margin theory with the objective of finally settling down at a revenue f....
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.... of service provided by AE and received by assessee. Benefits derived by the assessee are also narrated to this chart. In our considered view, the Revenue had not brought out anything for negating any content of this chart of services and benefits derived thereof. The assessee company has disclosed net margin for 26% as against 8% average of the comparable other companies at entity level. The assessee is engaged in one class of business that is advertising and its allied services. In the business of the assessee, there are no segments or different activities which can be said independent of each other. In our considered view, the entity level benchmarking on TNMM method shall be most appropriate for all international transactions with AE. ......" 25.9 He submitted that even the DRP has agreed that once enterprise level margin is determined using TNMM method, making additional adjustments for individual international transactions would lead to double adjustment to the income of the assessee and hence not justified. The relevant observations of the DRP on page 31 of the order is are as follows: "Beside the test of benefit....
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....aggregates and construction plant, machinery and equipment to be used in or engaged for the project. e) To render technical assistance and advices in connection with operation and maintenance of construction plant, machinery and equipment used in the execution of project as well as on systems and procedures for safe, efficient and optimum use thereof. f) To advice on strategies, plans and schedules for proper execution of project in accordance with the time schedules as specified by the company. g) To advice on appropriate safely measures to be implemented while executing the project. h) To advice on the cost and budgetary control aspect of execution of the project. i) To generally act as technical consults and advisors to the project, from time to time, including rendering of technical advices, opinions interpretation of technical and engineering data, planning and review of work schedules, programmes and formulating strategies. 25.13 The AR submitted that it has received the....
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....rk. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handles the audit work and in any case the assessee had paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and, therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. An assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this ....
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....incurred by the assessee were due to various internal and external factors. * The turnover increased and losses came down after acquisition of the technology. * The TPO had completely disregarded business and commercial strategy/realities behind the transaction and acted in a completely mechanical manner without regard to the economic circumstances surrounding the transaction and business decision taken by the assessee. 25.18 On appeal by Income Tax Department, the Tribunal upheld the findings of CIT(A). 25.19 The Tribunal decision has been confirmed by the Honourable High Court of Delhi in ITA No. 1068/2011 & ITA No. 1070/2011. The Honourable High Court after discussing the applicable rules, OECD guidelines and decisions of various courts made the following observations: "21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show th....
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....t was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures has been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position is over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (appeals) for both the years deleting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, ....
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....ause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; 25.23 As highlighted above, the first step in applying CUP Method is identifying the comparable uncontrolled transaction. The TPO has not identified any comparables. Therefore the assessee submits that the whole methodology proposed by the TPO is not in accordance with law and is therefore liable to be rejected. 25.24 As per the provisions of section 92F "arm's length price" means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions. Therefore to determine arm's length price there should be uncontrolled transaction. Rule 10A(a) defines "uncontrolled transaction" means a transaction between enterprises other than associated enterprises, whether resident or non-resident. Therefore to determine arm's length price what is important is that there should be uncontrolled transactions. The learned TPO has not identified any such transaction. Without a comparable, the process adopted by the TPO in proposing an adjustment is bad in law and is t....
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....itted that this view is also supported y Para 7.36 of the OECD Guidelines. The relevant extracts are as follows: "When an associated enterprise is acting only as an agent or intermediary in the provision of services, it is important in applying the cost-plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves. In such case, it may not be appropriate to determine arm's length pricing as a mark-up on the cost of the services but rather on the costs of the agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the service themselves. For example, an associated enterprise may incur the costs of rented advertising space on behalf of group members, costs that the group members would have incurred directly had they been independent. In such a case, it may well be appropriate to pass these costs to the group recipients without a mark-up, and to apply a mark-up only to the costs incurr....
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....rises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to anyone or more of such enterprises." A transaction between associated enterprises satisfying the prescribed criteria becomes an international transaction. 28.2 One of the essential limbs/constituents of an international transaction is "associated enterprise". Section 92B(2) outlines the circumstances under which a transaction between two persons would be deemed to be between associated enterprises. Such deeming fiction is in addition to the one created under section 92A(2). The deeming fiction under section 92A(2) are limited to the parameters of management, control or capital. Section 92B(2) travels beyond these parameters. 28.3 Transaction between an enterprise and a person which is not an associated enterprise under section 92A, may be deemed to be transaction between associated enterprises for the purposes of section 92B{l) if the conditions contained in section 92B(2) are attracted. Sec....
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....transactions specified therein and not otherwise. This fiction is transaction specific and does not apply to all transactions between the enterprise and person, on the basis that one transaction attracts section 92B(2}. 28.6 Section 92B(2} was enacted to hit at those cases where two associated enterprises intend to have an international transaction but want to avoid transfer pricing provisions by interposing a third party as an intermediary. In such cases, the third party intermediary will generally not be the ultimate consumer of the services or goods. The intermediary would facilitate the transfer of services or goods from one enterprise to its associate enterprise with no value addition or insignificant value addition. The intermediary is used to break a transaction into two different parts, which parts when viewed in isolation would not satisfy the requirements of section 92A. The legal form of the transaction in such circumstances is ignored. The substance of the transaction is given effect to, not by disregarding the existence of the intermediary but by deeming the transaction with the intermediary itself to be one with an associated enterprise. 28.7 The legal fiction creat....