TaxTMI 
TaxTMI 
2008 (5) TMI 660
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....ent Year 2001-2002 wherein this expenditure was considered to be of capital nature and the assessee's claim was denied. However, assessee was granted depreciation at 10% on the additions made in the year under account. Following its earlier order for Assessing Year 2001-2002 Assessing Officer again disallowed the claim of the assesseee. He however, following his earlier view allowed depreciation on this account at 10% on WDV. Assessee preferred an appeal before the CIT(A) but the CIT(A) again following the order of his predecessor has confirmed the disallowance. 5. Now the assessee is before and during the course of being the learned counsel for the assessee has brought to the notice of the Bench that the appeal for the Assessment Year 2001-02 has already been heard and the order is awaited. He however, submitted that the facts of both the assessment years are quite identical. Whatever decision taken by the Tribunal for the Assessment year 2001-02 may also be followed in this year. This proposition of the assessee was not objected by the learned DR. 6. Keeping in view the joint request of the parties we set aside the order of the CIT(A) in this regard and restore the matt....
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....ort of the Transfer Pricing Officer. Though a reference was made by the Assessing Officer under Section 92CA, but the report submitted by the TPO was neither considered by the Assessing Officer nor the CIT(A) before allowed deduction of 20% of the total licence fee paid by the assessee. 12. Now the assessee has preferred an appeal before the Tribunal with the submissions that the facts in the present year are not identical with the facts of Assessment Year 2001-02. During the course of hearing the learned counsel for the assessee has invited our attention to the report of the Transfer Pricing Officer under Section 92CA of the IT Act and the details of analysis to justify the payment of licence fee. The same are appearing on page No. 237 to 244 of the compilation. In order to justify the payment of licence fee made by the assessee at arms length price, the learned counsel for the assessee, Shri. Porus F. Kaka has submitted that it has purchased distribution rights of certain channels in the territory of India, from Indian Sky Broadcasting Ltd. vide agreement dated 1st January 2001 read with letter of amendment dated 15th February 2001 and subsequently from Asia Broadcasting FZE v....
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....mined. He further contended that assessee could not adduce any comparative case where similar percentage of income is diverted to overseas company for the purpose of acquiring signals. Apart from the payment of licence fee the assessee has incurred expenses to the extent of Rs. 15.58 crores on marketing and advertisement which is six times more than the expenditure of Rs. 2.48 crores incurred in 2000-2001. As a result of payment of excess licence fee of Rs. 21.57 crores to ISkyB and by incurring a high expenditure of Rs. 15.58 crores on advertisement the profit of the assessee is reduced to Rs. 23.41 crores from Rs. 31.82 crores of the immediately preceding year and percentagewise the profit has gone down to 21.70% from 28.70% shown in the immediately preceding year. He has also placed reliance upon the observations of the CIT(A) made in 2001-02. 15. Having heard the rival submissions and from a careful perusal of records we find that in the impugned assessment year though Assessing Officer has made a reference to the Transfer Pricing Officer under Section 92 of the IT. Act to determine the arms length price of the licence fee but while adjudicating the issue he squarely relied ....
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....light of detailed analysis and relevant evidences furnished by the assessee. Whereas the Assessing Officer has disallowed the entire claim of payment of licence fee without looking into the merits of the case and the relevant provisions of the Act. In the impugned assessment year the claim of the assessee should have been examined in the light of the report of the Transfer Pricing Officer and the evidences filed by the assessee but the Assessing Officer as well as the CIT(A) have not adjudicated the issue in accordance with law. We, therefore, are of the view that this issue requires fresh adjudication. Since the report of the Transfer Pricing Officer has already been obtained and the issue requires proper examination by the Assessing Officer in the light of the report of TPO, detailed analysis of licence fee paid and other evidences filed by the assessee, we set aside the order of the CIT(A) in this regard and the matter is restored to the file of the Assessing Officer to readjudicate the issue in terms indicated above. 17. Ground No. 4 relates to disallowance of Rs. 206,06,456/- on account of software expenditure incurred by the assessee. Facts in brief borne out from the orde....
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....osit, the amount was reinvested as fresh term deposit with an interest of 8.5% in Scotia Bank The assessee has earned a dividend income of Rs. 9,12,306/- from investment in Mutual Funds which were made out of the surplus funds. The CIT(A) was not convinced with the explanations of the assessee and he formed an opinion that certain amounts of expenditure are certainly attributable to earning of dividend income. He accordingly confirmed the disallowance after considering it as reasonable. 22. Now the assessee is before us with the submission that the assessee has incurred total interest, expenses amounting to Rs. 2,27,42,239/- and party-wise breakup of the interest expenses were furnished before the Assessing Officer. The majority amount of interest expenses was incurred in connection with the loan of Rs. 40,00,00.000/- taken by the assessee @ 9% from Credit Lyonnais Bank on August 17, 2001 in connection with its business. This loan was subsequently repaid by the assessee on March 23, 2002. The assessee had immediately utilized the loan of Rs. 40,00,00,000/- to create a term deposit with the ICICI Ltd. from August 20, 2001 at a rate of interest of 9%. This term deposit was created....
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....d income of Rs. 9,12,366/-. It is not clear either from the written submissions or from the orders of the lower authority from which source assessee has investment in Mutual Funds. Was it out of the term deposits with the Scotia Bank of from different source or from surplus funds? The learned DR further contended that since it is not clear from the facts from where the investment in Mutual Funds were made the matter should go back to the Assessing officer for verification and the assessee be directed to establish that the investment in Mutual Funds were made out of the surplus funds. 24. Having given a thoughtful consideration to the rival submissions and from a perusal of records we find that undisputedly assessee has incurred interest expenses of Rs. 2,27,39,858/-, paid on the borrowings taken from Credit Lyonnais Bank and HDFC Bank. It is also not disputed that the load of Rs. 40,00,00,000/- taken from Credit Lyonnais Bank of 9% were immediately put in term deposits with ICICI Ltd. from August 20, 2001 at an interest rate of 9%. This term deposits were further deposited into fresh term deposits at an interest rate of 8.5% with Scotia Bank from December 18, 2001, but from a re....
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....pted income but once it is primarily discharged the onus shifts on the assessee to establish that the borrowed funds were not invested to earn exempted income. It was rather surplus funds of the assessee In the instant, case the assessee has paid a substantial amount of interest on the borrowed funds and he has also earned the dividend income of Rs. 9,12,366/- from investment in Mutual Funds which is exempted from tax and from the details furnished before the Assessing Officer and even before us it is not clear as to what was the sources of investment in Mutual Funds. Was it from the aforesaid short term deposits which was initially borrowed from the Credit Lyonnais Bank or the surplus funds of the assessee. Even before to the assessee could not furnish the complete details. We, however, in the interest of justice afford one more opportunity to the assessee to explain with evidence as to from where investments were made in Mutual Funds. If it was made out' of short term deposit with the Scotia Bank corresponding disallowance of interest deserves to be made as the short term deposits was made out of the borrowed funds from the Credit Lyonnais Bank which were kept in short term d....
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....ring counsel for the assessee has assessees own case for Assessment Years 1997-98 to 1999-2000 wherein it is held that commission income accrued to the assessee only when the payment due to his principal was actually realized by the assessee and it was in a position to retain its commission. Copy of the order of the Tribunal is placed before us during the course of hearing. The learned counsel for the assessee further contended that it has entered into different agreements with different parties from the earlier assessment, years, whereby the assessee was appointed as an exclusive representative in India to sell advertisements on various television channels. 29. The learned DR did not dispute this fact. 30. Having heard the rival submissions and from a careful perusal of the orders of the authorities below and the order of the Tribunal in assessee's own case for Assessment Year 1997-98 to 1999-2000 reported at 103 ITD 73 in which identical issue was examined and the Tribunal has held according lo majority view that commission due to assessee for procuring advertisement for television channels accrued lo it only when the payment due to its principal from the clients was re....
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....not telecast or amount is not realized by the assessee's principal. Their is no clause in the agreement which would indicate that commission would accrue to the assessee as soon as advertisements are solicited by the assessee. The AM or the Departmental Representative during the course of hearing could not show any provision or case law under which to right to receive commission could be said to have accrued in favour of assessee as soon as advertisement are solicited/booked by the assessee. In the agreement there are further steps to be taken and advertisements solicited are required to be sent for approval by the principal. The principal under the agreement is not only to approve the advertisement solicited by the assessee but also raise invoices within 30 days from the date on which advertisement is so telecast. The principal has also to issue instruction to the client to make payment thereof to its agent (assessee). The assessee further obliged to collect all the sums due to its principal. It is not possible to ignore all the abovementioned clauses of the agreement and held that assessee acquires right to receive income as soon as advertisement are solicited by the assessee....
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....tual aspect. 35. We have carefully examined the orders of the authorities below and the order of the Tribunal in assessee's own case passed in this regard and we find that the Tribunal has decided the issue in favour of the assessee by holding that advertisement expenses incurred on promoting viewshort of Television channels by assessee engaged in procuring advertisement and producing/procuring programmers for those channels, was expenditure incurred wholly and exclusively for the purpose of its business and it could not be disallowed on the ground that it might have also benefited assessee's principal. The relevant observation of the Third Member agreeing with the Judicial Member is as under: - "There is no dispute about the genuineness of the expenditure incurred by the assessee. There can further be no dispute at expenditure incurred by the assessee on advertisement made had direct nexus with earning of income by the assessee it is possible that expenditure on advertisement might have also benefited the principal by the assessee but on above ground, the expenditure incurred by the assesses could not he disallowed. The assessee clearly incurred expenses wholly....
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....y of the assessee would not be excluded a constituting commission income under clause 80HHF. In analyzing a similar clause for Section 80HHC, the Hon'ble High Court has laid down certain tests to consider whether an activity would constitute operational income. The jurisdictional High Court has further held that broadly the department has to consider the Memorandum and Articles of Association of the Company, the nature of business's, the nature of activity and such other tests. Department will also have to ascertain as to what is the dominant business of the company and whether receipts like interest, commission etc, accrues as a part of main business activity or whether it accrues out of incidental business. The learned counsel for the assessee further contended that the gross receipt from this commission activity was around Rs. 605 million during the year, which represent nearly 13 percent of assessee's gross income for this period. To earn this income assessee maintains office throughout India and has over 700/800 staff. This is one of the three principal activities of assessee as noted in assessee's own case by the Hon'ble Third Member. He further invited ou....
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....t time?." Their Lordships of the Apex Court have deliberated on this issue and finally concluded the processing charges shall be included in the total turnover. They have not given any specific finding whether this processing charges is to be excluded from the profits of the business as per clause (baa). In that case, it was vehemently argued on behalf of the assessee that the processing charges earned by assessee by processing raw cashew nut for third parties had no nexus with the export business and therefore, such charges were not includable in the total turnover. The assessee's main grievance before the Apex Court was that the processing charges should not be included in the total turnover. He did not plead before the Apex Court that the processing charges be treated as operational income as defined in the case of Bangalore Clothing Co. (Supra) and its exclusion as per (baa) is not permissible. In the light of these facts, the judgment of the Apex Court does not disturb the finding of the judgment of the jurisdictional High Court in the case of Bangalore Clothing Co. as such, the impugned issue should be decided in the light of ratio laid down by the jurisdictional High Cou....
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....o be the operational income to form part of the business of profits without its exclusion as per Explanation (f) below S. 80HHF(6) of the Act. Learned Department Representative further contended that even if the fact of the case are examined in the light of the decision of the jurisdictional High Court in Bangalore Clothing Co. supra, the commission earned by the assessee does not assume the character operational income as it is not the main activity of the assessee. Moreover, it is to be received/ collected from the principles or form the advertisement agency or the parties. The main activity of the assessee is either to act as distributor of the product to channels to export of television channels or the content. The commission received by the assessee is not out of the main business activity and hence is not a part of its operational income. 42. We have heard the rival submission and carefully perused the orders of the authorities below and judgment in referred to by the parties and we find that while re-computing deduction u/s. 80HHF the Assessing Officer has excluded or reduced 90% of the gross receipt of commission from the profits of business, as computed under the head p....
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.... of the revenue is that activity of channel distribution through the cable operators being independent and unconnected with export activity. 90% of receipts emanating from such activity should be excluded from the profits of business in view of the Hon'ble Supreme Court judgment in the case of K.Ravindranathan Nair (supra). On the other hand, the stand of the assessee is that no part of any receipt emanating from an activity having element of turnover can be excluded in view of the judgment of the jurisdictional high court in the case of Bangalore Clothing Co. (supra). In order to appreciate the arguments of the parties it would be appropriate to consider the history legislative intent/object behind the amendment made by the legislature by way of insertion of clause (baa) of Explanation to section 80HHC which is similar to Explanation (f) to section 80HHF. 35. Upto Assessment Year 1991-92, the judicial opinion was that formula provided in sub-section (3) of section 80HHC permitted the assessee to claim deduction with reference to the profits of the entire business even though there may be loss from the export activity. Such judicial opinion was later on approved by the....
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.... some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 per cent Deduction from such incomes is provided to account for these expenses. 32.12 Many exporters maintain branch offices, warehouses. etc, abroad. The export goods are first sent to these branch offices, etc. and are then sold to foreign buyers from such branch officer etc. Certain doubts have been raised about the point to time when such goods should be treated as having been exported. 32.13 With a view to removing the doubts in this respect, an Explanation has been inserted in section 80HHC clarifying that, goods will be deemed to be exported out of India when they are transferred by an assessee to an overseas branch office, etc. The value of such goods declared in the shipping bill, etc., will be deemed to be the sale proceeds thereof for the purpose of computing the deduction under section 80HHC. 23.14 It has also been clarified that 'profits of the business' for the purpose of section 80HHC will not include profits of any branch warehouse, etc., situated overseas. 32.15 These amendments will take ef....
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....s from operator to operator depending upon the number of viewers. If the cable operator stops making payment, the assessee can stop the exhibition of programmes to such cable operators through the equipments installed by the assessee. Therefore, what the assessee receives in our humble opinion, is the consideration on account of transfer of right to exhibition of programmes contained in such software and, therefore, the same would amount to turnover. 38. Even as per the decision of Hon'ble Supreme Court in the case of K. Ravindranathan Nair (Supra) as well as the decision of Hon'ble Bombay High Court in the case of Bangalore Clothing Co. (supra), the cable subscription has to be treated as turnover. As per judgment of Hon'ble Supreme Court, the receipts from independent activity if found part of profits of business has to be treated as part of the total turnover. In the present case, there is no there that activity of distribution of channel Programmes is an independent activity and therefore the profits arising there-from would also form part of the profits of business. Accordingly, as per the test laid down by the Hon'ble Supreme Court in the above case, the ca....
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....In order to appreciate the contendation of parties, it would be appropriate to refer to the facts of that case, the question considered by the court and the arguments raised before the court by the respective parties. In that case, the assessee was deriving income mainly from the business as a cashew exporter. He had a factory in which he was processing the cashew nuts which were grown in his farm. After the processing, he exported the cashew nuts. Simultaneously, the assessee also processed cashew nuts which were supplied to him by the exporters on Job Work basis. After processing, the assessee returned the processed cashew nuts to the exporters. In respect of such processing on job-work basis, he earned processing charges. The assessee claimed deduction u/s. 80HHC. In his return, he indicated the business profits at Rs. 1,94,08,220/- which included the processing charges (on job work basis) amounting to Rs. 1,54,68,811/-. Even though the processing charges were included in the profits of business, the assessee did not include the same in the total turnover. The Assessing Office did not accept the working of the assessee since he was of the view that such processing charges sho....
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.... of section 80HHC(3). These contentions appear at page 232 and 233 of the report Their Lordships of the Hon'ble Supreme Court referred to the scheme of section 80HHC and the Hoard Circular No 621 dated 19.12.1991 and then finally observed as under: "In our view, for the above reasons, the said processing charges, which was part of gross total income, was an independent income like rent, commission, brokerage, etc., and, therefore 90 per cent, of the said sum had to be reduced from the gross total income to arrive at the business profits and since the said processing charge was an important component of business profits, it also had to be included in the total turnover in the said formula to arrive at the business profits in terms of clause (baa) to the said Explanation." 43. The perusal of the above observations indicate that 90% of the processing charges is to be excluded from the profits of business and the processing charges is also to be included in the total turnover in the formula u/s. 80HHC. 44. Now the question arises as to what is the ratio of the above judgment. In this connection, reference can be made to the judgment of the Hon'ble Supreme Court i....
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.... and consequently cannot be treated as precedent as held by the apex court in the case of Goodyear India Ltd. Even the decision in the case of Sun Engineering Works (P) Ltd. clearly lays down that judgement of a court has to be considered in the light of the question before the court. 45. In the case of Ravindranathan Nair (supra), the scope of Explanation (baa) to section 80HHC was not before the court. The only question referred to the court for its opinion was whether labour charges received by the assessee on account of job work could be treated as part of total turnover. The issue whether 90% of such labour charges could be excluded from the profits of business in terms of Explanation (baa) was neither before the court nor any argument was advanced on this aspect of the matter by either of the parties. Therefore, this decision cannot be said to be a precedent for the proposition that in case of an independent activity involving element of turnover, 90% of the receipts should be excluded from the profits of business. This decision is a precedent only for the proposition that in such case the receipt would form part of total turnover in terms of section 80HHC(3) of the Act. ....
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....eld that the standard test for deciding what would constitute the operational income, cannot be laid down. Broadly, the department will have to ascertain as to what is the dominant business of the company and whether the receipts like interest, commission etc., accrues as part of the main business activity or whether they accrue out of the incidental business. They have discussed the case of CIT vs. KK Doshi and 163 CTR 472 in which the assessee had received Rs. 19.6 lakhs as service charges. Through substantial amount were received, but, it was held to be not having the element of turnover because the service charges were received for seasonal activity which was not an integral part of manufacturing activity. Therefore, it did not represent the operational income, and came with Explanation (baa) Their Lordship have also held that one should not go with a nomenclature of the receipts. The real nature of the receipt should be examined whether it is directly related to the main business activity of the assessee or it is only an incidental receipt. In the case of Bangalore clothing Co. though the assessee was engaged in export of garments after manufacturing it, but, the processing ch....
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....s services rendered for collecting the advertisement and its realization. In the case of appointment of a cable operator and collecting the fees from them, the assessee was doing this activity? under his own domain and he was not acting as an agent for any one. For these reasons, these activities were considered to be the part of the business activities and the receipt were considered Lo be the part of the operational income. But, in the case of commission on advertisement, the assessee is concerned with respect to the commission on consideration realised for advertisement which is either to be deducted from payment of consideration to its principal or to be collected from its principal. 47. We are therefore, of the view that receipt of particular percentage of commission on collecting the advertisements for the principal's cannot be called to be the part of the operational income of the assessee, as such, it attracts the provisions of Explanation (baa) and 90% of the same is to be reduced. Moreover, the commission received from its principal does not have an element of turnover as it is to be received on realisation of consideration from advertisement and as such cannot be ....
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....ks of account with respect to security deposit forfeited and has claimed deduction for this amount in its return of income. He has also observed that the requisite conditions prescribed in Section 36(1)(vii) read with section 36(2) were not satisfied. Accordingly he disallowed the claim. Assessee preferred an appeal before the CIT(A) and he was also not convinced with the explanation of the assessee and confirmed the disallowance after having noted that the submission of the assessee is factually incorrect. 50. Now the assessee has preferred an appeal before the Tribunal and has submitted that the security deposits were written off on account of its forfeiture by Snehdhara Constructions P. Ltd. From whom certain premises were taken on lease to carry out the day-to-day activities of the business. The said deposit neither resulted in the benefit of any enduring nature nor acquisition of any capital asset. The learned counsel for the assessee further contended that the said amount of security deposit written of is revenue in nature and should be allowed as deduction under Section 37(1) read with section 28 of the Act. Assessee has relied upon the judgment of the jurisdictional High....
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.... as bad debt written off under Section 36(2)(vii) of the Act. We, however, have examined the claim of the assessee in the light of provisions of Section 37 of the Act and the judgement of the Bombay High Court in the case of IMB World Trade Corporation vs. CIT 186 ITR 412 and the judgement or the Apex Court in the case of CIT vs. Madras Auto P. Ltd 233 ITR 468 in which their Lordships have held that the loss on account of non-recovery of the advance is a business loss but before allowing the claim of the assessee it should be established that the advance amount becomes irrecoverable. In the case of IBM World Trade Corporation vs. CIT (supra) their Lordships have held that where assessee advanced money to landlord of its premises for construction of factory shed and residential flat for leasing them to assessee and the landlord become insolvent making the amounts advanced irrecoverable assessee was entitled to deduction of the amount by way of business loss. 53. We have carefully examined the facts of the case in the light of the aforesaid judgement and we find that nothing has been brought on record to show that the advance given by the assessee has become irrecoverable. Before ....
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....CIT(A) re-examined the issue in the light of assessee's contention and has confirmed the order of the Assessing Officer after having observed that sufficient opportunities were granted to the assessee by the TPO as well as the Assessing Officer and the assessee could not controvert the findings of the TPO. 58. Now the assessee preferred an appeal before the Tribunal. 59. The learned counsel for the assessee, Shri Porus Kaka, has invited our attention to the order of the TPO with the submission that the TPO has ignored the detailed analysis of the various international transactions individually entered into by the assessee in respect of its three principal business activities, namely the advertisement agency business, distribution business and procurement of content business. These are separate business activities and it is totally contrary to the transfer pricing principles that three separate business activities be combined on an entity level lo determine correct profits. The learned counsel for the assessee further contended that it is in fact contrary to the Act and the Rules, which requires each international transaction should be evaluated separately. It is only perm....
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.... a principal. The activities itself are by the very nature also completely different. The TPO has treated all the activities as one and determined the arms length price at an entity level which is clearly contrary to the statute, the rules and OECD commentary and any internationally accepted bench marking principles. One cannot compare a distributor with a principal and an agent at the same time, as each activity will result in completely different functions and reasons analysis. The Revenue themselves had accepted the correct legal position in the transfer pricing order for Assessment Years 2003-04 and 2004-05. The learned counsel for the assessee further contended that the TPO has relied on contemporaneous data and has ignored the detailed transfer pricing analysis furnished by the assessee before him. He further placed reliance upon the order of the Special Bench in the case of Aztec Software with the submission that initial and primary onus of satisfying the transfer pricing regulations is on the assessee and which onus is set out in Rules 10D of the Rules. Once the primary onus of satisfying that the prices are at arms length is discharged the onus shifts upon the Revenue to d....
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....PO's report, the Assessing Officer has taken note of all relevant facts and determined the arms length price as determined by the TPO. Therefore, there is no illegality or infirmity in the assessment order or the TPO's report. As such, no interference is called for. 62. Having heard the rival submissions and from a careful perusal of the detailed analysis submitted by the assessee, TPO's report and the orders of the authorities below and the documents available on record, we find that since the transactions involved are international transaction matter was referred to the TPO to determine the arms length price under S. 92CA( 1) of the Income Tax Act. Consequent thereto notices were issued to the assessee and the assessee has filed detailed analysis of its principal activities, which are- (1) Distribution of satellite submission channels of the Star group in the territories of India, Nepal and Bhutan (2) Providing agency services in connection with the advertisement sales in the assigned territory of India to the Star group and News Corp group; and (3) Involvement/engagement in house production and procurement of television content from India and supply the same to th....
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.... the Star channels to Asian Broadcasting Corporation Ltd also based in Dubai and Indian Region Broad Casting Ltd., a company based in Hong Kong. This distribution right cannot be linked up with other activities of the assessee, i.e. with commission for collecting the advertisement sales or with the export of TV programmes. The other activity that results in receipt of commission is also independent activity and the assessee acts as a marketing and collecting agent for Star Ltd. and NGC Asia in relation to advertisement sales to the satellite television channels broadcast by them in India. The contract for advertisement is directly entered into between the advertisers, advertising agencies and Star Ltd and NGC Asia, as the case may be. These entities directly raise the invoice on the advertisers and the advertisement agencies and for the services rendered by the assessee, it receives commission at 10% of the advertisement revenue collected by it from Star Ltd in respect Star channels. In the case of NGC Asia, the assessee recovers 15% commission in respect of advertisement sales revenue of NGC. The assessee collects the dues from the advertisement agencies on behalf of Star Ltd. or ....
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....mation of fair market value arms length principle should be applied on transaction to transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be adequately dealt with on a separate basis. The Tribunal has also held that the burden of proving and establishing Arms Length Price and to furnish the relevant information lies initially on the assessee. Where the Revenue authorities are not satisfied with the ALP and supporting documents, the responsibility of determination of Arms Length Price shifts to the revenue authorities who is to determine the same in accordance with the statute, regulations and on the basis of material collected or available on record. The computation of Arms Length Price is essentially a factual exercise and each case depends on its own peculiar facts and circumstances. In certain cases where identical or similar transactions are available for comparison, determination of Arms Length Price is an easy task. However, it is not easy in most of the transactions and rarely one is able to locate an identical transaction. In such cases. Arms Length Price is determined by taking the results ....
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....an independent party when compared to the price paid/charged in a controlled transaction. External CUP is a price charged in comparable uncontrolled transactions between third parties when compared to the price of a controlled transaction. However, where CUP method is to be applied on the basis of public data, it is provided in regulation 1.482-3(b)(5) of US Regulations that following requirements must be met. The data is widely and routinely used in ordinary course of business in the industry to negotiate price for uncontrolled sales. The data is used to set prices in the controlled transactions in the same way that it is used by uncontrolled taxpayers in the industry; and The amount charged in the controlled transaction is adjusted to reflect product and service transaction. "The US regulations further warn that data from public exchanges, quotation media should not be used in extraordinary situations such as war period, economic depression, natural calamities period, etc. The above principles are of universal application and there is no good reason why they should not be applied in transfer pricing determination in India. (b) Re....
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.... As in other methods, the asset employed, the functions performed, the risk assumed, the contractual terms and other differences have to taken be taken into account. The mark up must be measured consisting between the associated enterprises and independent enterprises. (d) Profit Split Method (PSM) (Rule 10B(1)(e)]: This method may be applicable in cases where transactions involved transfer of unique, intangible or any multiple interrelated international transactions, which cannot be evaluated separately for determining the ALP of any one transaction. The profit split method first identifies the profit to be split for the associated enterprise from the controlled transactions in which the associated enterprises are engaged. It then splits those profits between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made alarm's length price. The combined profit may be the total profit from the transactions or a residual profit intended to represent the profit that cannot readily be assigned to one of the parties, such as the profit ar....
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.... margin is computed on these parameters are generally available in the case of the party providing services." 65. The Tribunal further held that the burden to establish the comparability of transactions and determine the Arms Length Price is on the tax payer. It has also to furnish the comparable transactions for appropriate method adopted for determining the ALP and justify the same by producing relevant material and documents before the Revenue authorities. In case the Revenue authorities are not satisfied with the ALP and the supporting documents/evidence furnished by the taxpayer, the authorities have ample power to re-determine the same and make suitable adjustment. The responsibility of determination of ALP in such cases is shifted to the Revenue authorities who have to determine the same in accordance with the statutory regulations. 66. The Tribunal has also examined the scope of various provisions before holding that if there are more than one Arms Length Price determined on the application of most appropriate method, then Arithmetical Mean of such prices or price at the option of the assessee, within 5% variation is to be adopted. The relevant observations of the Tri....
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....mination of ALP when called upon to do so by tax authorities and the taxpayer fails to discharge burden placed on the taxpayer. In similar enactments of other countries, it is provided that burden on the revenue authorities in such a case would br reduced. Similar provisions are in (Chapter X. The tax authorities therefore, have to resort to provision of section 144 and determine the ALP on the basis of the material collected or available on record. In such circumstances, the ALP determined would be on the parity with a best judgement assessment. Such assessment (determination of ALP) would have some approximations and estimations. But even such approximations and estimations must satisfy dictates of justice and fair play and look reasonable. It cannot be arbitrary and capricious. The order of TPO is appealable and, therefore, it must be objective contain detailed reasons, conform to regulations and should be seen as just and fair. On consideration of the relevant provisions, it. is evident that in the process of determining Arm's Length Price, the first important factor to consider is the specific characteristics of services rendered both in the international transact....
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....ng thereby, that prior to substitution of sub-section (4) of S.92CA by the Finance Act, 2007 with effect from 1st June, 2007, the Assessing Officer is supposed to follow the transfer pricing as determined by the TPO, but he has also a right to adopt different transfer pricing other than the one determined by the TPO, but for taking such different transfer pricing, the Assessing Officer must have valid reason which should be recorded. When this power was conferred on the Assessing Officer, it should be exercised judiciously., The Assessing Officer should seek comments of the assessee on the TPO's report and examine the same independently, meaning thereby, that after the receipt of the TPO's report, an opportunity should be afforded to the assessee to offer its comments on the TPO's report. But, in the instant case, no such opportunity was afforded by the Assessing Officer on receipt of the TPO's report, the has merely followed the TPO's report without having discussed much in his order. 68. We have also examined the other orders of the TPO for the assessment years 2003-04 and 2004-05, which are available at pages 283 to 297 of the assessees compilation and on ....
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....n held that advertisement expenses incurred on primary viewership of TV channels by the assessee engaged in procuring advertisement and producing/procuring programmes was expenditure incurred wholly and exclusively for the purposes of its business and it could not be disallowed on the ground that it might have also benefited the assessee's principal. In this view of the matter, we find no merit in this ground of the Revenue. It is accordingly rejected. 72. Ground No.2 relates to expenditure incurred on entrance fee which was allowed by the CIT(A). In this regard, the learned counsel for the assessee has submitted that the CIT(A) has allowed the expenditure primarily relying on his predecessor's order for assessment year 2001 -02, which is under appeal before the Tribunal. The appeal for assessment year 2001-02 has already been heard by the Tribunal and the order is awaited. Learned counsel for the assessee has requested that the order of the Tribunal for assessment year 2001-02 should be followed in this year and as such the issue may be restored back to the file of the Assessing Officer with direction to pass an order following the order of the Tribunal for assessment y....