Issue 3/2015 - February 1-15, 2015

What’s 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 taxpayer’s own TP documentation;

7. Tribunal grants relief by excluding functionally incomparable companies added by TPO on ad-hoc basis;

INDIRECT TAX

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;

DIRECT TAX

1. Non-Compete fees re-characterized as

consideration for transfer of shares

Shiv Raj Gupta [‘the taxpayer’], an individual, was the chairman-cum-managing 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. 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 non-compete 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 non-compete 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 assessee’s 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. Ramsay’s 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 India-Portuguese 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 Tribunal’s 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 AAR’s 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 Sub-Section (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 O’Donnell, 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. O’Donnell 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 taxpayer’s 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 taxpayer’s 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 taxpayer’s NCPM of 10% from provision of R&D services to its AEs was concluded to be at arm’s 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 taxpayer’s 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 taxpayer’s 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 taxpayer’s 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 arm’s 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-à-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 taxpayer’s claim towards the said adjustment and decide the matter accordingly.

Accordingly, the Tribunal restores the matter to TPO for re-computation of arm’s 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 arm’s 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 taxpayer’s 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 taxpayer’s 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 Tribunal’s ruling is summarized hereunder - Exclusion of following eight companies selected by TPO as comparables The ITAT agreed to the taxpayer’s 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.

Thirdware Solutions Ltd: This Company should be rejected as the company was functionally different engaged in training of personnel and distribution of products.

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

1% has already been allowed to the taxpayer in subsequent assessment year by the ITAT. 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-à-vis of the identified comparables. However, the ruling is silent on the manner in which such adjustment was being computed by the TPO.

[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 draw-down 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 Category-I 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 borrower’s 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. 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.

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

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.

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. 60 dated January 22, 2015]

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