Bank account attachment quashed

The Karnataka High Court, in the case of Karnataka State Beverages Corporation Ltd, allowed the writ petition filed by the taxpayer in relation to the stay of demand proceedings, on the grounds that the taxpayer had paid more than 30 per cent of the arrears in demand — which was the primary contention of the tax authorities to attach the bank accounts. Further, the HC directed the

tribunal to dispose of the stay petition within four weeks from the receipt of the HC order;

taxpayer to pay a partial amount on the demand payable; and

tax authorities to not take any coercive action till the stay is disposed.

CBDT clarifies on software export

The Central Board of Direct Taxes has clarified a number of issues relating to tax holiday claims by taxpayers who have registered under the STPI (software technology parks of India), SEZ (special economic zone) and EOU (export-oriented unit) schemes. It clarifies that

Profits derived from computer software developed abroad at a client’s location (onsite) and onsite deployment of technical manpower shall be eligible for tax holiday benefits, provided there exists an intimate nexus/ connection between the onsite development and the eligible unit, subject to the condition that such activity is pursuant to a contract between the customer and the eligible unit;

No separate MSA (master service agreement) is required for each work contract;

R&D is within the ambit of ‘engineering and design’, which is a notified category;

Successor is eligible for tax benefits under a slump sale;

Maintenance of separate books of accounts is not mandatory for claiming the deductions.

The CBDT clarifications should come as a relief to the taxpayers who are litigating on similar issues before various appellate authorities.

Rules on intra-group services

In the case of GE India Technology Centre Pvt Ltd, the Bangalore Income Tax Appellate Tribunal upheld the Transfer Pricing Officer’s rejection of the taxpayer’s TP study, as it was conducting R&D through its multi-disciplinary centre in various fields of engineering. The tribunal rejected the taxpayer’s argument that its functions are synonymous with the industry, and the comparables have to be from the same industry in which the taxpayer had R&D. The tribunal observed that the taxpayer’s argument was not in tune with the comparability analysis under the transactional net margin method, or TNMM, which is based on the principle that only broad functional and product comparability needs to be considered as net margins are less influenced by differences in products and functions.

The tribunal also rejected the taxpayer’s contention that it was a risk-free entity and remanded the matter back to the TPO for fresh adjudication of comparables for all the assessment years. This ruling highlights the importance of having an appropriate set of comparables in the TP study to prevent rejection during assessment.

Relief on payment to associated firms

In the case of Eaton Technologies Pvt Ltd, the Pune Tribunal has set aside the Revenue order and upheld that where the taxpayer has disallowed any expenditure that falls within the purview of international transaction with its associated enterprise, no adjustment on account of arm’s length price can be made. The tribunal reasoned that as the taxpayer has suo motu added the amount while computing taxable income, and has not claimed benefit by capitalising it and claiming depreciation or benefit in subsequent years, disallowing such amount would amount to double disallowance — which is not appropriate.

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