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13.05.2016 - Voice of CA presents - Updates
Friday, May 13, 2016


I. Headlines Today    

  1. Finance ministry, foreign investors discuss GAAR, tax treaties  (Click for detail)
  2. Firms with heavy debt may face credit squeeze  (Click for detail)
  3. Govt tells traders to display tax ID and registration no.  (Click for detail)
  4. Ecomm Cos say GST will be Taxing for Customers  (Click for detail)
  5. Dividend disclosure policy may be made mandatory  (Click for detail)
  6. CSR expenses need to be treated as non-cost items  (Click for detail)
  7. Sebi to tighten KYC, transfer norms for P-Notes  (Click for detail)
II.  Direct Taxes Case Laws: 

1.   CIT Vs. Amar Ujala Publication Ltd., I.T.A. No. 546/2013, Date of Judgment: 11.05.2016, High Court of Delhi

Whether discount and interest on borrowing through commercial papers and Non-Convertible Debentures (NCDs) is a business expenditure and allowable?


Brief Facts:
The AO in his assessment order disallowed certain expenditure declaring it to be not for business purposes. The expenditure comprised of Discount on commercial paper and Interest on non-convertible debentures. The Commercial Paper was issued by the assessee and A&M Publications Limited to give effect to the Company Law Board’s order for making payment to Ajay Aggarwal & others to buy the shareholding of Shri Ajay Aggarwal in the Assessee Company and A&M Publications Limited. Due to shortage of funds, the Non-convertible debentures were also issued. The AO contended that the acquisition of shares is not in ordinary course of business and the said expenditure on Commercial Paper and Debentures were disallowed u/s 36(1)(iii), 37(1), 57(iii) of the Income Tax Act. The CIT (A) and ITAT disagreeing with the findings of the AO allowed such expenditure. Aggrieved by which, the revenue appealed before the High Court.

After the acquisition of these shares, A & M Publications Limited merged with and into the respondent/assessee resulting in the cancellation of the shareholding held by each of the companies. It was observed that as on 01.04.2007 post-merger, the entire funds owned by the respondent/assessee were deployed in its business. The entire borrowed funds on which the interest had been paid had been utilized for the purpose of business. It was noted that the re-structuring of the respondent/ assessee was affected in the preceding year and that during the year under consideration there was no implication of such re-structuring so far as the allowability of interest on borrowed funds was concerned. Consequently, the addition of ₹ 10,79,75,982/- could not be sustained on facts and in law.

(Please click here for judgment)


2.  Thomas Cook (India) Limited Vs. Add. CIT, I.T.A. No. 859/Mum/2014, Date of Judgment: 29.04.2016, ITAT - Mumbai

Whether Corporate Guarantees are comparable to Bank Guarantees & accordingly the commission charged by Banks becomes a benchmark to evaluate the ALP of a corporate guarantee?


Brief Facts:
The assessee company engaged in the business of tour operator, travel agent, authorized dealer in foreign exchange, global service card and call centre was found to have entered into certain international transactions with its associated enterprise and consequential reference u/s 92CA(1) was made by the AO to the TPO for determination of ALP of such transactions. The TPO found that assessee had not charged any fee for providing corporate guarantee on behalf of its associated enterprise. During the year under consideration, the assessee had provided a corporate guarantee on behalf of its associated enterprise M/s. Thomas Cook Mauritius Operations Co. Ltd. for banking facilities availed by it from HSBC bank. The TPO contented that in the absence of any guarantee fee commission earned by the assessee from such transaction, the same could not be said to have been recorded at an ALP and determined guarantee commission fee at a rate of 3%, that was liable to be charged as an arm’s length rate as guarantee commission fee.

Before the Hon’ble ITAT, the assessee contended that the rate of 3% adopted by the income-tax authorities in order to determine the arm's length rate of the impugned international transaction was untenable and instead pointed out that in certain decisions of the Tribunal, rate of 0.50% has been considered to be arm's length rate on account of fee for providing corporate guarantee.

Hon’ble ITAT held that assessee company issued corporate guarantee on behalf of the it’s associated enterprise which enabled it’s associated enterprise to avail banking facilities from HSBC Bank in Mauritius. When commercial banks issue bank guarantees, the same is quite distinct in character, than the situation where a corporate issues guarantee to the effect that, if a subsidiary associated enterprise does not repay a loan, the same would be made good by such corporate. Thus, the manner in which the TPO has proceeded to determine the arm's length rate is not justified and 3% rate of guarantee commission fee determined as arm's length rate by the income-tax authorities is not approved whereas 0.50% rate is upheld for the purpose of determining the arm's length rate of the guarantee commission fee.
Hence, the appeal of assessee partly succeeded.

(Please click here for judgment)  

III. Useful Articles:

1.  Indirect tax Digest – May 9, 2016

(Please click here for detail)

2.  Rate of interest on delayed payment of duty as applicable during the impugned period – Issues therein

(Please click here for detail)   

(Please click here for its Video)


(Contribution by CA. Bimal Jain and contributor is available at eMail-id:

 Golden Rules:

  "Strength grows when we dare,
unity grows when we pair,
love grows when we share and
relation grows when we care.
Live in peace not in pieces"


  Thanks & Regards


Voice of CA 

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