Dear Patron Here we are with the Twenty Sixth successive issue of our monthly ‘Missive’. We trust you will enjoy reading this Missive, even while soaking in the contents. We would very much appreciate your feedback which consistently helps us in improving and upgrading the contents. Thanks and regards, Knowledge Management Team S.P.Nagrath & Co.

1. Missive
Volume XXVI – May 2013

2. Dear Patron
Here we are with the Twenty Sixth successive issue of our
monthly ‘Missive’.
We trust you will enjoy reading this Missive, even while soaking
in the contents. We would very much appreciate your feedback
which consistently helps us in improving and upgrading the
contents.
Thanks and regards,
Knowledge Management Team
Topics Page
No
FEMA 1
Income Tax 2
Transfer Pricing 5
Transactions that made headlines 8
Never hold your head high with pride or ego, even the
winner of a gold medal gets his medal only when he puts
his head down!!!

3. 1 | P a g e
FEMA
A.P. (DIR Series) Circular No. 96 Dated April 5, 2013
Memorandum of Instructions governing money changing activities
The RBI, on a review, has decided that Authorised Money Changers (AMCs) may
sell Indian rupees to foreign tourists /visitors against International Credit Cards
/ International Debit Cards and should take prompt steps to obtain
reimbursement through normal banking channels.
All the other instructions shall remain unchanged.
A.P. (DIR Series) Circular No. 98 April 9, 2013
Trade Credits for Imports into India – Review of all-in-cost ceiling
On a review, the RBI has decided that the all – in – cost ceiling of Trade Credits
for imports into India, as specified in A.P. (DIR Series) Circular No. 28 dated
September 11, 2012 will continue to be applicable till June 30, 2013. All other
aspects of Trade Credit policy remain unchanged.
A.P. (DIR Series) Circular No. 100 April 25, 2013
Overseas Direct Investments – Clarification
The RBI has observed that eligible Indian parties are using overseas direct
investments (ODI) automatic route to set up certain structures facilitating
trading in currencies, securities and commodities. It has come to the notice of
the Reserve Bank that such structures having equity participation of Indian
parties have also started offering financial products linked to Indian Rupee (e.g.
non-deliverable trades involving foreign currency, rupee exchange rates, stock
indices linked to Indian market, etc.).
The RBI has clarified that any overseas entity having equity participation
directly / indirectly shall not offer such products without the specific approval
of the Reserve Bank of India given that currently Indian Rupee is not fully
convertible and such products could have implications for the exchange rate
management of the country. Any incidence of such product facilitation would
be treated as a contravention of the extant FEMA regulations and would
consequently attract action under the relevant provisions of FEMA, 1999.

4. 2 | P a g e
Income Tax
CIT vs. Rajarani Exports Pvt Limited (Calcutta High Court) (ITAT No 49
of 2013) dated 24th April, 2013.
The Calcutta High Court upheld the stand of the Assessee on the grounds that
even if the amount of Commission of Rs 1.28 crores paid to Alia Transportation
were actually kickbacks (bribery) to Iraqi regime, it would not attract
Explanation to s. 37(1). It was pointed out that while the transactions between
Alia and the Iraqi regime may be contrary to the UN sanctions, the transactions
between the Assessee and Alia were not against the UN sanctions and hence
there was no specific violation of law by the Assessee, It was also held that
what the recipient of the payment does is not important because the Assessee
has no control over the matter. Keeping in view of the above facts the High
Court therefore, dismissed the appeal.
Vijay Rameshbhai Gupta vs. ACIT (Gujarat High Court) (17207 of 2012)
dated 4th March 2013.
The Gujarat High Court held that u/s 147 reopening of an assessment has to be
done at the sole discretion, opinion and reasonable belief of the AO and not on
the basis of some other authority. The AO cannot blindly follow the opinion of
an audit authority for the purpose of reopening of any assessment u/s 148.
However, if the AO acts under compulsion of the audit party and not
independently, the action of re-opening would be vitiated. It was clearly
established that the AO was under compulsion from the audit party to issue
notice for reopening the assessment. Hence it was held that the sec 148 notice
issued by the AO had to be squashed.
CIT vs. Jagtar Singh Chawla (P&H High Court) (ITA No 71 of 2012)
dated 20th March, 2013.
The Punjab & Haryana High court on the basis of the rulings in the case of
Fatima Bai & Rajesh Kumar Jalan, upheld the stand of the Assessee & opined
that the benefit of tax exemption on long Term Capital Gain would be available
as long as the taxpayer made the new investment within the time line of filing
tax return u/s 139 of the Act. The same shall be allowed even if any belated
return is filed by the assesse within the time limit. Hence it was held that the
tax payer had acquired the new residential house within the extended period of
filing tax return (here 31.3.2008) i.e.by the end of the assessment year,
relevant to the previous year in which the asset was sold. Therefore the tax
payer is eligible for exemption from tax on LTCG u/s 54F.

5. 3 | P a g e
ITO vs. Right Florists Pvt Ltd (ITAT Kolkata) (ITA No 1336/Kol/2011)
dated 12th April, 2013.
The Tribunal held dismissing the appeal. The tribunal considered the fact u/s
5(2)(b) “Income accrue or arise in India” and held that the servers of Google
and Yahoo are not located in India so there is no PE in India. In the absence of
any business connection the second limit of sec 5(2) (b) ‘’Income deemed to
accrue or arise in India’’ also does not applies. The tribunal considered that the
advertising revenues are not assessable as royalty u/s 9(1) (vi) and the same
does not qualify for Managerial, Consultancy & technical services as these
involves a human element. The Tribunal appreciated that search engines such
as Yahoo and Google provided advertisement services in a purely automated
manner using algorithms and codes without any human intervention. The
services rendered by the search engines are a wholly automated process &
does not involve any human touch at all. Consequently, the receipts in respect
of online advertising on Google and Yahoo cannot be brought to tax in India
under the provisions of the Act or the India US and India Ireland tax treaty.
M/s Shieve Exports v. JCIT [ITA No. 321/Mum/2012] dated 10th April,
2013
On appeal to the Tribunal, it noted that as per the amended provisions of
Section 80-IA (2), an option was given to the Assessee for claiming deduction
for any 10 years out of 15 years in which the business begins to operate. The
Tribunal held that the taxpayer has an option to choose the initial Assessment
Year. Hence u/s 80(IA) (5), only the losses of the year starting from the initial
Assessment Year alone are to be b/f and set off. The Tribunal distinguished the
decision relied on the by the CIT in the case of Goldmine shares & Finance Pvt
Ltd as the same was based on the erstwhile definition of ‘Initial AY’).The
Tribunal set aside the order of the CIT u/s 263 since the order of the AO could
not be termed as erroneous in law.
Notification
C B D T vide. Notification NO.34/2013 [F.NO.142/5/2013-TPL]/SO 1111(E),
dated 1-5-2013 released new Income Tax Return Forms for the AY 13-14 with
few amendments. It shall come into force w.e.f 1.04.2013.Certain important
amendments have also been made in the forms which are as follows:-

6. 4 | P a g e
 Return in ITR 1 can’t be filed if Assessee incurs losses under the Head
“Income from Other Sources”
 Return in ITR 1 can’t be filed if Assessee claims tax relief or has any
income which is exempt under chapter III.
 Return in ITR 4S can’t be filed if Assessee claims tax relief or has any
income which is exempt under chapter III.
 E-filing of Audit Reports u/s 44AB in respect of books of accounts, 92E
in respect of international transactions and 115JB in respect of MAT
computation have been made mandatory.
 Mandatory E-filing of return if income for every person(not being a
company or a person filing return in ITR 7) whose total income
exceeds Rs. 5,00,000 or Assessee claims tax relief u/s 90, 90A or 91.
Circular
CBDT via Circular No. 04/2013 [F. No. 275/34/2011-IT(B)], dated 17
th
April,
2013 stated that the TDS certificate in Form 16 issued by a Deductor on an
after 1.4.12 shall contain two parts viz. Part A & Part B(Annexure).Part A
contains details of tax deduction and Part B (Annexure) contains details of
income. It further added that Part A of Form 16 shall be issued by all the
deductors, (including Government deductors), only by generating it through
TRACES Portal and after duly authenticating and verifying it. Part B (Annexure)
of Form 16 shall be prepared manually and shall be issued to the deductee
after due authentication and verification along with Part A of Form 16. Form 16
should be issued by 31st May of the financial Year immediately following the
financial year in which income was paid and tax deducted. The Director General
of Income-tax (Systems) shall specify the procedure, formats and standards for
the purpose of download of Part A of Form No. 16 from the TRACES Portal and
shall be responsible for the day-to-day administration in relation to the
procedure, formats and standards for download of Part A of Form No. 16 in
electronic form. It is also clarified that Form 16 issued in accordance with the
circular, shall only be treated as valid compliance.

7. 5 | P a g e
Transfer Pricing
Automatic RBI approval means transaction is at Arm’s Length
Price
ThyssenKrupp Industries India Pvt. Ltd vs. ACIT (ITA NO.
6460/Mum/2012)
The ITAT in its judgment held that when the rate of royalty payment and
fee for drawings etc. has been approved or deemed to have been
approved by the RBI, then such payment has to be considered at ALP.
Scope of +/- 5% tolerance adjustment to ALP explained
IHG IT Services (India) Pvt. Ltd vs. ITO (ITA No. 5890/Del/2010)
It was held that the benefit of tolerance margin would be available only
if the variation is within the tolerance margin. Once the variation
exceeded the tolerance margin, then there would be no benefit even up
to tolerance margin.
Foreign AE cannot be the tested party. TP additions can exceed
overall group profits
Onward Technologies Limited vs. DCIT (ITA No. 7985/Mum/2010)
The Tribunal held that there is no question of substituting the profit
realized by the Indian enterprise from its foreign AE with the profit
realized by the foreign AE from the ultimate customers for the purposes
of determining the ALP of the international transaction of the Indian
enterprise with its foreign AE. Further, the contention of the Assessee
that the authorities cannot go beyond the overall profit of the group of
AEs in determining the ALP of the international transaction is also not
acceptable because it will constitute a new method/ yardstick for
determining the ALP.

8. 6 | P a g e
DRP entitled to enhance by questioning very existence of
transaction
Hamon Shriram Cottrell Pvt. Ltd vs. ITO (ITA No. 7982/Mum/2011)
The Explanation to section 144C(8) has widened the DRP’s power of
enhancement to all the matters arising out of the assessment
proceedings irrespective of whether they were raised or not by the
Assessee. With this amplification of the power, even the matters not
agitated by the Assessee before the DRP can also be considered for the
purposes of enhancement.
If more than one price is determined by the most appropriate
method, the ALP has to be the arithmetical mean of such prices
CIT vs. Mentor Graphics (Noida) Pvt. Ltd (Delhi High Court) (ITA No.
1114/2008)
High Court in its judgment referred that the proviso to section 92C(2) is
explicit that where more than one price is determined by most
appropriate method, the arm’s length price shall be taken to be the
arithmetical mean of such prices. Further, it was held that fresh search
can be conducted by TPO under section 92C (3) which stipulate four
situations where under the AO/ TPO may proceed to determine the ALP
in relation to an international transaction.
Important principles on “turnover filter” & comparison explained
Capgemini India Private Limited vs. ACIT (ITA No. 7861/Mum/2011)
Tribunal held the following:-
 A comparison of margin between the Assessee and the comparables
has to be made under identical conditions, for the purpose of
making proper comparison of the margin, onetime cost incurred by
the Assessee has to be excluded.
 Only standalone results should be adopted for the purpose of
comparison of margins as the consolidated results which include
profit from different overseas jurisdictions having different
geographical and marketing conditions will not be comparable
 The concept of economy of scale is relevant to manufacturing
concerns, which have high fixed assets and, therefore, with the rise
in volume, cost per unit of the product decreases, which is the
reason of increase in margin as scale of operations goes up but the

9. 7 | P a g e
same is not true in case of service companies, which do not require
high fixed assets.
 It would not be appropriate to apply turnover filter for the purpose
of comparison of margins. However, for the purpose of comparison,
the turnover would be relevant only from the limited purpose to
ensure that the comparable selected is an established player
capable of executing all types of work as the Assessee is also an
established company in the field.
RBI approval has no relevance on issue of Arm’s Length Price
SKOL Breweries Ltd vs. ACIT (ITAT Mumbai) (ITA No. 6175/Mum/2011)
Tribunal held that Press Note no.9 of 2000 issued by the Ministry of
Commerce and Industry in respect of FDI policy and prescribing the
percentage of royalty to the sales allowed under automatic route
cannot substitute as ALP to be determined under the provisions of the
Act and Rules. FDI policy permitting certain percentage of payment of
royalty is only for remittance of the amount in foreign exchange and
therefore, such permission given in an entirely different context and
purpose cannot be considered as relevant for determination of the ALP
under I. T. Act.
ALP should be determined on segment-wise profits & not
at an entity level. Adjustment cannot be made to the entire entity
turnover/ profits
Sandoz Private Limited vs. DCIT (ITAT Mumbai) (ITA No.
6922/Mum/2012)
The tribunal held that the correct approach under TNMM should be to
determine the ALP of each of the segments by comparing with the
corresponding comparables involved in similar lines of functioning after
proper FAR analysis
ALP of loan transaction has to be determined as per CUP & LIBOR
Cotton Naturals (I) Pvt. Ltd vs. DCIT (ITAT Delhi)(ITA No.
5855/Del/2012)
CUP is the most appropriate method for ascertaining the arm’s length
price of an international transaction of lending money. Where the
transaction is of lending money in foreign currency to its foreign
subsidiaries, the comparable transactions have to be of foreign currency
lent by unrelated parties. In such a situation, domestic prime lending
rate would have no applicability and the international rate fixed being

10. 8 | P a g e
LIBOR should be taken as the benchmark rate for international
transactions.
No notional interest addition for delayed payments by AE
Evonik Degussa India P. Ltd vs. ACIT (ITAT Mumbai) (ITA No.
7653/Mum/2011)
The T.P. adjustment cannot be made on hypothetical and notional basis
until and unless there is some material on record that there has been
under charging of real income. Consequently, an addition an account of
notional interest relating to alleged delayed payment in collection of
receivables from the A.Es is uncalled for as there is no such agreement
whereby interest is to be charged on such a delayed payment.
Transactions that made headlines
 Mahindra Holidays acquires 49% stake in Dubai-based Arabian
Dreams Hotel Apartments
 TCS to acquire French IT firm Alti for $97.5M
 Pearson buys Educomp’s 50% stake in vocational education JV
IndiaCan
 Spanish firm Ebro Foods buying Olam’s Indian rice mill unit for
$14.5M
 KKR to take controlling stake in Alliance Tire in leveraged buyout
 Tata Technologies acquires US-based Cambric for $32.5M
 Bharti Airtel to acquire Warid Telecom Uganda

11. This publication is intended as a service to clients and associates and to provide them with details of the important Transaction updates. It has
been prepared for the general guidance on matters of interest only, and does not constitute professional advise. No person shall act upon the
information contained in this publication without obtaining specific professional advise. Due care has been taken while compiling the
information , however, no representation (express or implied) is given as to the accuracy or completeness of the information contained in this
publication
Our guiding philosophy is “To carry out every professional assignment
effectively and efficiently, while upholding the virtues of independence
and integrity, without compromising on the creativity and quality of work,
so as to provide utmost satisfaction to our clients ”
A-380, Defence Colony,
New Delhi –110024
Tel: +91-11-4980-0000
Fax: 91-11-4980-0029
Email: sanjoli@spnagrath.com
www.spnagrath.com
For any professional advice regarding alerts in this newsletter, we welcome your queries
©Copyright S P Nagrath &Co. , All rights reserved