HC upholds ruling on notional interest

The Bombay High Court recently upheld, in the case of Indo American Jewellery Ltd, the ruling of the Income Tax Appellate Tribunal, which had observed that there was complete uniformity in the taxpayer’s act of not charging interest from its associated enterprises on overdue receivables, as was done for non-associated enterprises as well, and the delay in realisation of export proceeds was the same in both instances. Accordingly, it held that the overdue balances from associated enterprises did not warrant an interest charge under arm’s length conditions as there was no such charge on non-associated enterprises. Taxpayers facing a similar challenge can refer to this ruling. However, it appears that the Finance Act 2012’s amended definition of ‘international transaction’, with retrospective effect from April 1, 2001, to include payments or deferred payments or receivables or any other debt arising during the course of the business was not brought to the court’s attention.

Lessor entitled to depreciation

The Supreme Court in a recent decision on ICDS Ltd held that the taxpayer satisfied the twin requirements of being the owner of the asset as well as using it for business, and upheld the right to claim tax depreciation allowance for assets given on lease. According to the SC, the taxpayer need not necessarily use the asset to claim the depreciation allowance. Further, the test of ‘ownership’ is that of legal right over the asset against the rest of the world, to be ascertained contextually; and the lessor satisfies the test of legal ownership and is entitled to tax depreciation if the lease agreement provides for

exclusive ownership of lessor during lease term;

lessor’s right to repossess the asset in case of default by lessee;

obligation on lessee to return the asset at end of lease; and

lessor’s right to inspect asset during lease term.

Introducing arm's length concept

Companies Bill 2012, which was recently passed by Lok Sabha and is likely to take effect in the coming months, has proposed to introduce transfer pricing provisions. The Bill seeks to strengthen the regulatory framework for related party transactions by introducing the arm’s length concept and mandating shareholder approval through a special resolution, unless such transactions are in the ordinary course of business on arm’s length basis. In addition, it provides for stricter punitive measures for non-compliance. The Bill provides extensive definitions of the parties coming under the purview of related parties, as well as the transactions covered by the provisions. Taxpayers with related party transactions should analyse the impact of the proposed amendments and compliance requirements to avert penal provisions.

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