Issue 3/2015 - February 1-15, 2015

Whats inside
DIRECT TAX
1. Non-Compete fees re-characterized as consideration for transfer of
shares;
2. MFN clause invoked to bring the make available condition into the
India-Sweden tax treaty;
3. Advances by company to its sister concerns bearing indirect benefits
to the company not to be treated as deemed dividend;
4. Delhi High Court distinguishes the ruling of Alcatel and holds that
interest under section 234B was not leviable;
5. USA and India Tax Authorities agree on framework for resolving
certain double tax cases;
TRANSFER PRICING
6. The Tribunal upholds the principle of estoppel for the exclusion of
comparable companies selected taxpayers own TP documentation;
7. Tribunal grants relief by excluding functionally incomparable
companies added by TPO on ad-hoc basis;
INDIRECT TAX

DIRECT TAX
1. Non-Compete fees re-characterized as
consideration for transfer of shares
Shiv Raj Gupta [the taxpayer], an
individual, was the chairman-cummanaging director of M/s Central
Distillery and Breweries Ltd. [CDBL], a
listed public company, engaged in the
business of manufacturing and sale of
Indian Made Foreign Liquor [IMFL] and
beer. The taxpayer along with his family
members held 57.29 per cent of the
paid-up equity share capital of CDBL.
Shaw Wallace Company Group [SWC], purchased through their
subsidiaries, shares held by the taxpayer and his family members in CDBL at
the rate of INR 30 per share for INR 5.5 million. The deal for the sale of
shares was formalized by a Memorandum of Understanding [MoU]. The
taxpayer who individually held 12 per cent of the paid-up equity share
capital of CDBL also entered into a deed of covenant in his individual
capacity with SWC.

8. Issue of summons in Central Excise and Service Tax matters;

FEMA
9. External Commercial Borrowings Policy Simplification of Procedure;
10. Review of FDI policy Sector Specific conditions: Construction
Development;

On the same date, another MOU was executed between SWC and the
taxpayer as an individual with the restrictive covenant to the effect that the
taxpayer would not either directly or indirectly carry on any manufacturing
or marketing activities relating to IMFL for a period of 10 years. As per the
MOU, the taxpayer received a non-compete fees of INR 66 million out of
which INR 60 million was paid upfront and balance was to be paid at a
subsequent date.

In the return of income filed by the taxpayer, the entire non-compete fee of
INR 66 million was treated as a capital receipt and hence, not liable to tax.
The Assessing Officer [AO] invoked Section 28(ii) of the Income-tax Act,
1961 [the Act] and held that INR 66 million ostensibly paid as noncompete fees were nothing but a colourable device and the tax treatment
should not be accepted. The High Court, in due course of appeal, observed
and ruled as under The first MOU was for transfer of 57.29 per cent of paid-up equity share
capital in CDBL which was considerably a large company. The market
price of the share was only INR 3 per share and the purchase price
under the MOU was INR 30 per share but the total consideration
received was merely INR 5.6 million. What was allegedly paid as noncompete fee was ten times more, i.e. INR 66 million. The amounts did
not appear to be a realistic payment made on account of non-compete
fee, dehors and without reference to sale of shares, loss of
management and control of CDBL.
By purchasing majority shares with controlling interests in CBDL, SWC
was acquiring a company which was directly competing with them. The
price paid for acquiring the majority shareholding, would include
consideration paid to procure management rights as well as price paid
for acquiring an effective competitor. The rights/assets acquired by
purchasing shares of CBDL were significantly more valuable, than
securing non-compete obligation from the taxpayer, an individual.
When contrive and camouflage is adopted, the Courts must aim and
strive to find out the true intention by looking at the genesis of the
agreement, the context and the surrounding circumstances as a whole.
The meaning and intent of the transaction cannot be at variance with
the actual intent.

In the case of Sundaram Finance Ltd. [1966 SC 1178] the Supreme Court
held that the document must be looked at, as only a part of the
evidence and the Court should look at the other parts, i.e. surrounding
circumstances to ascertain the actual truth. The reality must be
ascertained to determine the nature of transaction.
The assessees contention that the High Court cannot look through and
examine the real nature of the transaction in view of the Supreme
Court decision in the case of Vodafone Holdings International B.V. [341
ITR 1] was rejected. Where there is one or a series or combination of
transactions intended to operate as such, the courts are entitled to look
at the real scheme as such or as a whole, even when a particular stage
is only an expectation without any contractual force. It means looking
at the document or the act in the context to which it properly belongs.
Ramsays approach promises ascertaining the legal nature of the
transaction and is a principle of interpretation applicable to taxing
statutes.
In view of the above and findings on the true and real nature of the
transaction camouflaged as non-compete fee, it was held that the
taxpayer had indulged in abusive tax avoidance. The real and true
nature of the transaction or event was the sale of shares and transfer of
control and management of CDBL in favour of SWC. The capital gains
tax on sale of shares where controlling interest had resulted in transfer
of control of management would form part of the consideration
received and it should not be segregated. It was appropriate to treat
INR 66 million as consideration paid for sale of shares, rather than a
payment under Section 28(ii) of the Act. The High Court relied on the
decisions pronounced by S.H. Kapadia, CJI and Radhakrishnan J. in the
case of Vodafone Holdings International B. V. Accordingly, the entire
amount should be taxable in the hands of the taxpayer.
[Source: CIT v. Shiv Raj Gupta [2014] 52 taxmann.com 425 (Delhi)]

2. MFN clause invoked to bring the make

available condition into the India-Sweden tax
treaty
Sandvik AB [the taxpayer], a
company incorporated in and a tax
resident of Sweden received
management fee from its group
companies
for
rendering
commercial, management
and
marketing related support services.
The receipts were claimed to be not
taxable in India in its return of
income on the view that that fees
for technical services [FTS] under
Article 12 of the India-Sweden tax treaty read with the protocol thereto
enabled the invocation of the Most favored nation [MFN] clause. With
reference to the MFN clause, a restricted definition of FTS under the IndiaPortuguese tax treaty could be imported into the India-Sweden tax treaty.
The Assessing Officer [AO] as well as the Dispute Resolution Panel [DRP]
took a contrary view and held the receipts to be taxable in India. The
matter came before the Income Tax Appellate Tribunal on the question
whether reference could be made to the India-Portugal tax treaty in view of
the MFN clause appended to the India-Sweden tax treaty and whether the
services rendered by the taxpayer satisfy the make available condition to
be taxed as FTS?
The taxpayer contended that the management fee received by the
company was for rendering managerial services, which could not be
categorized as a FTS, under Article 12 of India-Sweden tax treaty read with

the protocol thereto. Even if the services were to be categorized as

technical services, the same did not satisfy the make available condition,
which was a pre-requisite for the receipts to be taxed as FTS. For
interpretation of make available, reliance was placed on Karnataka HC
decision in the case of De Beers India Minerals Private Limited [346 ITR 467]
and Pune Tribunals decision in the case of Sandvik Australia Private Limited
[141 ITD 598].
The Revenue contended that the Company had provided technical support
and guidance to its Indian affiliate companies and accordingly, the services
rendered were technical in nature, and not managerial services as claimed
by the Company. Further, while rendering these technical services, the
taxpayer had satisfied the make available condition. This conclusion was
based on an interpretation that the words make available were used in
the treaty in the context that services in the nature of technical knowledge,
experience, skill, etc. were offered or made accessible to the other party
and it never meant that the other party should be trained or made expert in
such technical knowledge.
The Income Tax Appellate Tribunal observed and ruled as under The India-Portugal tax treaty, which allowed a restricted definition of
FTS, was valid in light of the MFN clause attached to the India-Sweden
tax treaty. A protocol was an integral part of the tax treaty and has the
same binding force. Reliance was placed on the Delhi Tribunal decision
in the case of Maruti Udyog Limited [34 SOT 480] and the AARs order
in the case of Poonavala Aviations [343 ITR 202]. In tax treaties, the
MFN clause finds a place when countries were reluctant to forego their
right to tax some elements of the income. An MFN clause can direct
more favourable treatment available in other treaties only in regard to
the same subject matter, the same category of matter, or the same
clause of the matter.

 The expression making available was important for deciding in which

contracting state the amount received for rendering the services
relating to the technical know-how was to be taxed. The expression
make available was used in the context of supplying or transferring
technical knowledge or technology to another. It was different from the
mere obligation of the person rendering the services by using their own
technical knowledge in performance of the services. The technology
would be considered as made available when the person receiving the
services was able to apply the technology by himself/ herself. Reliance
was placed on the decisions of its co-ordinate bench in the case of
Sandvik Australia Private Limited and Karnataka HC in case of De Beers
India Minerals Private Limited as relied upon by the assessee as well.
[Source: Sandvik AB v. Dy. DIT [2014] 52 taxmann.com 211]

3. Advances by company to its sister concerns

bearing indirect benefits to the company not to
be treated as deemed dividend
Bagmane Constructions Private
Limited [the taxpayer] advanced
money to its sister concerns
including, an individual shareholder
who held 99 per cent of the equity
share capital in the taxpayer. The
purpose of the advance was the
sourcing of land on account of a
joint venture agreement. In view of
the law, a non-agriculturist including a company could not purchase or own
agricultural land. Therefore, funds were given by the taxpayer to its sister
concerns (including individual shareholder) to procure land in the name of

the directors and hold the same in the form of capital asset and then
transfer it back to the company after the agricultural land was converted
into non-agricultural land. The taxpayer claimed that since the funds were
not given for individual benefit of directors, deemed dividend concept was
not applicable.
The Assessing Officer [AO] held that the payment by way of loans that
were advanced to the extent of accumulated profits is to be treated as
deemed dividend under Section 2(22)(e) of the Act. The Commissioner of
Income-tax (Appeals) [CIT(A)] upheld the order of the AO. The Income-tax
Appellate Tribunal [the ITAT) held that the advances made by the taxpayer
to its sister concerns would not fall within the definition of dividend under
Section 2(22)(e) of the Act and hence not taxable. The matter came become
the High Court in appeal, which observed and ruled as under As per the Companies Act, 1956, only registered shareholder in a
company is entitled to dividend. Even a person who holds shares as a
trustee is treated as a registered shareholder. The shareholder is the
only person recognised by the company, who is entitled to payment of
dividend. It was a judicially established fact that the purpose of the
insertion of sub-clause (e) of Section 2(22) of the Act was to bring
within the tax, net accumulated profits which are distributed by closely
held companies to its shareholders in the form of advances and loans to
avoid payment of taxes.
A gratuitous loan or advance given by a company to specified classes of
shareholders would fall within the purview of Section 2(22) of the Act
but not the cases where the loan or advance is given in return to an
advantage conferred upon the company by such shareholder. The
intention behind the provisions of Section 2(22)(e) of the Act is to tax
dividend in the hands of shareholders.

 The word any payment, by a company, by way of advances or loans,

has to be interpreted in the context of the object with which said
provision is introduced. Though the legislature has introduced
advance as well as loan which are two different words, the meaning
of each of those words have to be understood in the context in which
they are used. In the case of a loan, money is advanced generally on
payment of interest. In the case of an advance, the element of
repayment is there but such a repayment may be with interest or
without interest. When the said two words are used in the provision
with the purpose of levying tax, if the intention of such advance or loan
is to avoid payment of DDT under Section 115-O of the Act, such
payment by a company certainly constitutes deemed dividend.
If payment is made firstly not out of accumulated profits and secondly
even if it is out of accumulated profits, but as trade advance as a
consideration for the goods received or for purchase of a capital asset
which indirectly would benefit the company advancing the loan, such
advance cannot be brought within the word advance used in the
aforesaid provision. The trade advance which is in the nature of money
transacted to give effect to commercial transactions would not fall
within the ambit of the provisions of Section 2(22)(e) of the Act.
The High Court ruled that Clause (ii)4 of Section 2(22)(e) of the Act would
be applicable only when all the conditions prescribed in clause (e) of SubSection (2) of Section 22 are complied with. If a payment is made by way of
trade or business, advance or loan, Section 2(22)(e) of the Act is not
attracted and the question of applying the aforesaid clause (ii) would not
arise. Accordingly, the advances made by the company to its sister
concerns in this particular case did not fall within the definition of a
deemed dividend under Section 2(22)(e) of the Act.
[Source: Bagmane Constructions Pvt. Ltd. v. CIT (ITA No. 473/2013,
474/2013, 475/2013, 476/2013)]

4. Delhi High Court distinguishes the ruling of

Alcatel and holds that interest under section
234B was not leviable
General Electric group was
manufacturing equipment relating
to
oil
and
gas,
energy,
transportation and aviation, for
supply to customers in India. After
a survey under Section 133A at the
premises of General Electric
International Operations Company
Inc.,
the
liaison
office,
reassessment proceedings were
initiated against several entities of
the GE group [assessees]. In response to the notice, the assessees filed NIL
returns of income. The Assessing Officer [AO] observed that the assessees
had a permanent establishment [PE] in India. The taxable income of the
assessees was computed by attributing some percentage of the sale
price/consideration received as profits to the PE, interest under Sections
234A and 234B of the Act was also levied. The Commissioner of Income Tax
(Appeals) [CIT(A)] and the Income Tax Appellate Tribunal [ITAT] affirmed
the existence of a PE, however it deleted interest u/s 234B by relying of
Delhi ITAT ruling in the case of Jacobs [330 ITR 578].
Before the High Court the Revenue placed reliance on the ruling of Alcatel
[ITA No. 327 of 2012, dated 07.11.2013], in which it was held that interest
could be imposed on an assessee foreign company which denies tax
liability, for non-payment of advance tax, because there exists a
presumption that the assessee had represented to the Indian payer that tax
should not be deducted from the remittances made to it.

The assessees contended that they were non-resident companies and the
payment received by them should have suffered a tax deduction at source,
by the payer, who was required so to do by Section 195 of the Act. Placing
reliance on Jacobs (supra), it was argued that the obligation upon the payer
to deduct tax at source, before making remittances to the non-resident
assessee, was absolute. The assessee further contended that the position in
law, was that the assessee was entitled to, in its computation of its advance
tax liability, take a tax credit of that amount which was deductible or
collectible, regardless of whether the amount was actually deducted or
collected. There was no possible way in which the provision could allow a
tax credit of the amount deducted or collected, because the actual
deduction took place at a later point in time i.e. at the point at which the
payment was actually made to the assessee.
The Delhi High Court, held that the view taken in Alcatel Lucent (supra)
could not be applied to this case because if the payer deducts tax at source
only when the assessee admits tax liability, then deductions would not be
made in cases where the assessee either falsely or under a bona fide
mistake denies tax liability. The High Court further held that the primary
liability of deducting tax (for the period concerned, since the law has
undergone a change after the Finance Act, 2012) was that of the payer. The
payer would be an assessee in default, on failure to discharge the obligation
to deduct tax, under Section 201 of the Act and no interest was leviable on
the respondent assessees under Section 234B, even though they filed
returns declaring NIL income at the stage of reassessment.
[Source: TS-27-HC-2015(DEL)]

5. USA and India Tax Authorities agree on

framework for resolving certain double tax cases
Douglas ODonnell, US competent
authority
and
Deputy
Commissioner (International) in
the Internal Revenue Service
[IRS]
Large
Business
&
International [LB&I] Division,
said that he met with Indian
competent authority and Bilateral
Advance
Pricing
Agreement
[APA] Commissioner, Akhilesh
Ranjan on 15-16 January 2015 in
Delhi.
According to news reports, they agreed on a framework for the resolution
of pending transfer pricing double tax cases involving information
technology enabled services and software development,. Specifically, the
agreed-upon framework is aimed at resolving cases involving ITeS and
software development services. ODonnell noted that there are more than
250 pending Mutual Agreement Procedure [MAP] cases between the two
countries, and the next steps involve reviewing that inventory to identify
those cases that can be resolved under the framework.
The meeting achieved a resolution that provides a framework that will be
used to settle as many as 100 competent authority cases and that the IRS
will allow for the filing of bilateral APAs with India and US tax authorities.
The resolution is of significant importance since Indian transfer pricing
adjustments are on the rise. In the most recent audit cycle, transfer pricing
adjustments were made in over half of the audits which collectively

resulted in approximately US$12.5 billion adjustment in tax assessments

(vs. US$7.4 billion in the previous cycle). The Indian Tax authority continues
to audit most foreign-owned companies in India on an annual basis and the
statistics show that over half of all India transfer pricing audits results in
adjustments.

TRANSFER PRICING
6. The Tribunal upholds the principle of estoppel
for the exclusion of comparable companies
selected taxpayers own TP documentation
International Specialty Products (I) Pvt.
Ltd., [the taxpayer], is a wholly owned
subsidiary of ISP Group based out of
New Jersey, USA. The Group is engaged
in developing, manufacturing and
supplying
innovative
specialty
ingredients that enhance product
performance. The taxpayer on its part
has principally divided its business
activities in three different segments
And provides application support, analytical support, research &
development [R&D] services to its associated enterprises [AEs].
During the year under consideration, the taxpayer rendered R&D and also
provided corporate support services [CSS] to its AEs. Both these
transactions were benchmarked separately by applying Transactional Net
Margin Method [TNMM] as the most appropriate method with operating
profit to operating cost ratio (i.e. net cost plus mark-up [NCPM]) as the

profit level indicator. In its transfer pricing [TP] documentation, the

taxpayers NCPM of 10% from its corporate support services was compared
with arithmetic mean of 14.50% of seven comparable companies. On the
other hand, the taxpayers NCPM of 10% from provision of R&D services to
its AEs was concluded to be at arms length which was compared with
average NCPM of 10.08% earned by two comparable companies.
The transfer pricing officer [TPO], while scrutinizing the CSS, excluded two
out of seven comparable companies accepted by the taxpayer which
resulted in average NCPM of 28.58% leading to an adjustment of Rs. 69.21
lacs (approx. USD 115K). While analyzing provision of R&D services, the
TPO considered both the comparables accepted by the taxpayer and
proceeded to consider two more additional comparables resulting into an
average NCPM of 32.40% while the adjustment worked out to Rs. 1.40
crores (approx. USD 234K). Further, the taxpayers claim for granting risk
and working capital adjustments were also rejected by the TPO.
On further appeal before the Dispute Resolution Panel [DRP], the taxpayer
did not get any relief in the matter. Aggrieved by the actions of TPO and
DRP, the taxpayer filed an appeal before the Income Tax Appellate Tribunal
[ITAT] for principally adjudicating the matters with regard to acceptability
or otherwise of the comparable companies and the claim for allowability of
risk and working capital adjustments. The key observations of the Tribunal
are listed below:
(A) Principle of Estoppel upheld In relation to the taxpayers appeal for
the exclusion of comparable companies selected in its own TP
documentation
Before the Tribunal, the taxpayer also sought to reject comparable
companies wrongly accepted in its TP documentation.
Tribunal accepted the taxpayers plea by following the decisions of the
Special Bench in the case of Quark Systems Private Limited and another

decision in the case of Alcatel Lucent Technologies India Private Limited

upholding that the taxpayer cannot be precluded from seeking
exclusion of companies subsequently.
(B) Discussion of acceptability or otherwise of comparable companies
Under CSS Segment:
The companies accepted by TPO, viz. Cosmic Global Limited, Caliber
Point Business Solutions Limited and Infosys BPO should be excluded
from the final comparable list on account of following reasons:
Cosmic Global Limited Different business model as it receives work
order from its client and outsources the same.
Caliber Point Business Solutions Limited Excessive related party
transactions (having more than 25% of its revenue).
Infosys BPO - Brand value and diversified activities which cannot be
compared to a captive service provider like the taxpayer.
Under R&D Segment:
Celestial Biolabs Limited The taxpayer sought the exclusion of this
company on the basis that the said company is engaged in diversified
activities. Further, various ITAT rulings have been relied upon which
upheld this company to be the comparable to the BPO service provider.
TCG Life Science Limited - The taxpayer objected the selection of this
company on the ground that the manufacturing activity has resulted in
25.16% of total revenues and fails the 25% threshold limit. However,
the contentions were not accepted merely because the revenue
exceeds 0.16% of the cut off.
(C) 2 or 3 comparable companies are sufficient for benchmarking

The ITAT set aside the contentions of the DR that that 2 or 3 companies
result in unhealthy comparative analysis and hence, the TPO may be
directed to conduct a fresh search analysis.
The tribunal, on perusal, of Rule 10B of the Income-tax Rules, 1962,
observed that the said provisions does not require a comparative
analysis with any particular minimum number of companies for
determining the arms length price by applying TNMM as the most
appropriate method.
(D) Claim for risk and working capital adjustment
Taxpayer claimed working capital to eliminate differences on account of
difference in functions assets and risks vis--vis that of comparable
companies.
Risk adjustment is also claimed on the ground that taxpayer works in a
risk mitigating environment being remunerated on cost plus basis.
Though the Tribunal rejected these contentions on the premise that the
same has not been claimed in the TP documentation. Since the matter
has been sent back to the TPO, the Tribunal directed the TPO to
consider the taxpayers claim towards the said adjustment and decide
the matter accordingly.
Accordingly, the Tribunal restores the matter to TPO for recomputation of arms length price based on its directions.
[Source: International Specialty Products (I) Private Limited [ITA No.
218/Hyd/2014]]

7. Tribunal grants relief by excluding functionally

incomparable companies added by TPO on ad-hoc
basis
DE Shaw India Software Private
Limited, [the taxpayer], is a
wholly owned subsidiary of DE
Shaw and Co., LLP [Desco]
(associated enterprise [AE] of
the taxpayer). Desco is engaged
in global financing services in the
investment advisory activities,
broker dealer activities and
computer based quantitative
management. The taxpayer, on the other hand, is engaged in providing
software development services to its AE.
As per the terms of the contract with its AE, the taxpayer is remunerated at
cost plus 12% for the provisions of services to its AE. The taxpayer in its
transfer pricing [TP] documentation has benchmarked the aforesaid
transaction by applying Transaction Net Margin Method [TNMM] as the
most appropriate method and considered operating profit on operating
cost as the Profit Level Indicator [PLI]. The taxpayer selected eighteen
companies as comparables with an average profit margin of 16.97% which
showed price charged to the AE was within arms length as per Indian TP
regulations perspective.
During the course of the assessment proceedings, the Transfer Pricing
Officer [TPO] rejected TP study on the grounds of using multiple year data
of comparable companies, identification of incomparable companies and
inappropriate filters. The TPO selected seventeen comparables companies

[including few of taxpayers comparables]and after allowing working capital

adjustment of 0.96% the adjusted arithmetic PLI was computed at 25.63%
which resulted in upward adjustment of INR 29,967,243 under section 92CA
of the Income Tax Act, 1961 [The Act]. The TPO also rejected the
taxpayers claim towards risk adjustment for determining ALP. The
Commissioner Of Income-Tax (Appeals) [CIT(A)] excluded one of the
comparable company [i.e. Satyam Computer Services Limited] which was
included by the TPO from the list of comparables which results in decline in
the adjusted PLI to 25.45% and consequently the adjustment to INR
2,96,57,901. Aggrieved by the same the taxpayer filed an appeal before the
Income Tax Appellate Tribunal [ITAT].
Firstly, the taxpayer specifically objected to the inclusion of eight
companies selected by the TPO as comparables and retained by CIT (A).
Secondly, the taxpayer also objected the denial of risk adjustment of 0.85%
as proposed by the TPO. The Tribunals ruling is summarized hereunder Exclusion of following eight companies selected by TPO as comparables
The ITAT agreed to the taxpayers contention by excluding the following
eight companies as included by the TPO in its impugned order:
Bodhtree Consulting Ltd: It should be rejected on the basis of related
party transactions and functionally different filters applied by the TPO.
Exensys Software Solutions Ltd: it should be rejected as it was
functionally different and it had exceptional year of operations due to
amalgamation, also error was made by the TPO while computing the
margins of the company.
Sankhya Infotech Ltd: This company should be rejected as the company
was functionally different and TPO himself rejected this company as
comparable in subsequent years.

 Foursoft Ltd: It should be rejected as the company was functionally

different.

1% has already been allowed to the taxpayer in subsequent assessment

year by the ITAT.

Thirdware Solutions Ltd: This Company should be rejected as the

company was functionally different engaged in training of personnel
and distribution of products.

This is yet another ITAT ruling which emphasize that the functional profile
of the taxpayer should be duly kept in mind while identifying the
comparable companies. This ruling also supports the grant of economic
adjustment pertaining to difference in the risk profile of the taxpayer vis-vis of the identified comparables. However, the ruling is silent on the
manner in which such adjustment was being computed by the TPO.

Tata Elxsi Ltd: This Company should be rejected since it is a specialized

embedded software development company and had stated in response
to the notice [issued under section 133(6) of the Act] that it is not
comparable to any other software services company.
Infosys Technologies Ltd: It should be rejected as it was engaged in
diversified activities and commanded a premium in the pricing due to
its reputation.
While rejecting aforesaid seven companies, the ITAT relied on the
findings of the decision in the case of Ness Innovative Business Services
Private Limited Vs. DCIT [ITA No. 472, 553 and 1775/ Hyd/2011].
Flexitronics Ltd: The taxpayer submitted that this company should be
rejected as it was functionally different.
In this relation, the ITAT relied on the decision in the case of Intoto
Software India Private Limited [ITA No. 1196/Hyd/2010] and directed
the TPO to exclude this company as comparable.
Accepting the claim of risk adjustment of 0.85% as computed by the TPO
The taxpayer submitted that the TPO computed the risk adjustment at
0.85%, but no such adjustment was allowed by him. The ITAT directed TPO
to allow the risk adjustment since the TPO himself computed the risk
adjustment. The ITAT also considered the fact that the risk adjustment of

[Source: DE Shaw India Software Private Limited Vs. ACIT [ITA No.
1302/Hyd/10]]

INDIRECT TAX
8. Issue of summons in Central Excise and
Service Tax matters
It has been brought to the notice of the Board that in some instances, the
summons under Section 14 of the Central Excise Act, 1944 have been issued
by the field formations to the top senior officials of the companies in a
routine manner to call for material evidence/ documents. Besides,
summons have been issued to enforce recovery of dues, which are under
dispute. As per Section 14 of Central Excise Act, 1944, summons can be
used in an inquiry for recording statements or for collecting evidence/
documents. While the evidentiary value of securing documentary and oral
evidence under the said legal provision can hardly be over emphasized,
nevertheless, it is desirable that summons need not always be issued when
a simple letter, politely worded, can also serve the purpose of securing
documents relevant to investigation. It is emphasized that the use of
summons be made only as a last resort when it is absolutely required.

The following guidelines have been issued to be followed in both Excise and
Service Tax matters
Power to issue summons are generally exercised by Superintendents,
though higher officers also issue summons. Summons by
Superintendents should be issued after obtaining prior written
permission from an officer not below the rank of Assistant
Commissioner with the reasons for issuance of summons to be
recorded in writing;
where for operational reasons it is not possible to obtain such prior
written permission, oral/telephonic permission from such officer must
be obtained and the same should be reduced to writing and intimated
to the officer according such permission at the earliest opportunity;
In all cases, where summons are issued, the officer issuing summons
should submit a report or should record a brief of the proceedings in
the case file and submit the same to the officer who had authorised the
issue of summons.
Further, senior management officials such as CEO, CFO, General Managers
of a large company or a PSU should not generally be issued summons at the
first instance. They should be summoned only when there are indications in
the investigation of their involvement in the decision making process which
led to loss of revenue.
[Source: Instruction F. No. 207/07/2014-CX-6 dated January 20, 2014]

FEMA
9. External Commercial Borrowings Policy
Simplification of Procedure
Powers have been delegated to
Authorized
Dealer
[AD]
Category-I banks to deal with
cases related to change in drawdown and repayment schedules
of ECBs. On a review, as a
measure of simplification of the
existing
procedure
for
rescheduling / restructuring of
ECBs and in supersession of
aforesaid provisions, it has been decided to delegate powers to the
designated AD Category-I banks to allow:
Changes / modifications (irrespective of the number of occasions) in the
draw-down and repayment schedules of the ECB whether associated
with change in the average maturity period or not and / or with
changes (increase/decrease) in the all-in-cost.
Reduction in the amount of ECB (irrespective of the number of
occasions) along with any changes in draw-down and repayment
schedules, average maturity period and all-in-cost.
Increase in all-in-cost of ECB, irrespective of the number of occasions.
This measure is subject to the designated AD Category-I bank ensuring that
the revised average maturity period and / or all-in-cost is / are in

conformity with the applicable ceilings / guidelines; and the changes are
effected during the tenure of the ECB. Further, if the lender is an overseas
branch / subsidiary of an Indian bank, the changes shall be subject to the
applicable prudential norms.
It has also been decided to delegate powers to the designated AD CategoryI banks to permit changes in the name of the lender of ECB after satisfying
themselves with the bonafides of the transactions and ensuring that the
ECB continues to be in compliance with applicable guidelines. Further, the
AD Category-I banks may also allow the cases requiring transfer of the ECB
from one company to another on account of re-organisation at the
borrowers level in the form of merger / demerger / amalgamation /
acquisition duly as per the applicable laws / rules after satisfying
themselves that the company acquiring the ECB is an eligible borrower and
ECB continues to be in compliance with applicable guidelines.

The extant FDI policy for Construction Development sector has since been
reviewed. Accordingly, effective December 3, 2014 100% FDI under
automatic route shall be permitted in construction development sector
subject to the conditions specified in the Press Note 10 (2014 Series) dated
December 3, 2014.

These measures of simplification will be applicable for ECBs raised both

under the automatic and approval routes. FCCBs will, however, not be
covered within these provisions.

In this regard the DIPP, Ministry of

Commerce & Industry, Government
of India has issued Press Note No.10
(2014 Series) dated December 3,
2014 issued in this regard by 4. The
Reserve Bank has also amended the
Principal Regulations through the
Foreign Exchange Management
(Transferor Issue of Security by a
Person Resident outside India)
(Sixteenth Amendment) Regulations, 2014 notified vide Notification No.
FEMA.329/2014-RB dated December 8, 2014, c.f. G.S.R. No. 906(E) dated
December 22, 2014.

[Source: A. P. (DIR Series) Circular No. 64 dated January 23, 2015]

[Source: A. P. (DIR Series) Circular No. 60 dated January 22, 2015]

10. Review of FDI policy Sector Specific

conditions: Construction Development
In terms of Annex B of Schedule 1 to the Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident outside India)
Regulations, 2000 notified vide Notification No. FEMA 20/2000-RB dated
May 3, 2000, as amended from time to time, 100% Foreign Direct
Investment (FDI) is permitted under Automatic route in Construction
Development sector subject to conditions.

****

TAX & REGULATORY NEWSLETTER

Suite - 4A, Plaza M-6

Jasola, New Delhi
PIN: 110025 INDIA
Ph.: +91-11-4737 1000
Fax.: +91-11-4737 1010

The Summit, Level 2, Unit No. 210

Western Express Highway
Vile Parle (East), Mumbai
PIN: 400057 INDIA

3rd Floor, NCR Plaza,

New Cantt Road, Dehra Dun
PIN: 248 001 INDIA

24 Raffles Place
# 25-04A
Clifford Center
SINGAPORE - 048621

nangia@nangia.com
www.nangia.com