In this bulletin, we bring to our readers, certain important and significant judicial precedents pronounced by various high courts which would determine the future course of Transfer Pricing litigation. We wish the readers shall be benefited from the following judgments.

1. Pr CIT v Ameriprise India (P)Ltd –Delhi High Court

The Court upheld Tribunal’s order considering foreign exchange gain/loss arising out of revenue transactions(i.e. ITES services) as an item of operating revenue/cost.

2. Toluna India Pvt Ltd – Delhi High Court

HC upholds ITAT’s exclusion of 4 comparables viz. Infosys Technologies Ltd, KALS Information Systems Ltd, Tata Elxsi Ltd and Wipro Ltd for assessee providing software development and marketing support services to AE for AY 2008-09 and 2009-10; Notes that ITAT, while directing AO to exclude these comparables, had followed order passed in assessee’s own case for AY 2007-08 and such order did not appear to have been challenged by Revenue; On merits, HC holds that “given the scale of operations of the above entities, their exclusion from the list of comparables for the purposes of determination of ALP appears justified”; Accordingly, HC holds that no substantial question of law arises and dismisses Revenue’s appeal.

3. Yum Restaurants(India) Pvt Ltd v ITO – Delhi High Court

The Court held that the TPO was incorrect in presuming the existence of an international transaction between the assessee and its AEs, on the basis that the assessee allegedly made a contribution towards AMP expenditure to its wholly owned Indian subsidiary on behalf of its AEs and the fact that the assessee had incurred a loss in the relevant segment and therefore concluding that it was not adequately compensated by the AEs for the creation of marketing intangibles. The Court held that there would be a need for a detailed examination of the operating agreement between the assessee, its Indian subsidiary and the AEs to ascertain if any part of the AMP expenses was for the purpose of creating marketing intangibles for the AE of the assessee and only after an international transaction between the assessee and its AE in relation to AMP expenses was shown to exist, could the question of determining ALP of such international transactions arise.

4. CIT v Thyssen Krupp IndustriesIndia (P)Ltd – Bombay High Court

The Court held that where a substantial part of revenue of a comparable company in execution of turnkey projects arose out of executing projects of public sector undertakings, it could not be considered to be comparable to assessee-company providing turnkey services to its AE as contracts between Public Sector undertakings were not driven by profit motive alone but other consideration also weigh in such as discharge of social obligations etc.

5. CIT v Goldstar Jewellery Design Pvt Ltd – Bombay High Court

The Court held that the TPO was unjustified in applying the base of capital employed under the TNMM method without segregating the capital employed in respect of AE and Non-AE transactions. Further, it held that where the assessee entered into both international as well as domestic transactions, the Tribunal was justified in restricting the adjustment only to international transactions.

6. CIT v ITC Infotech India Ltd – Calcutta High Court

The Court held that where in respect of marketing and administrative services provided to third party customers, the assessee adopted a revenue sharing model whereby it kept 75 percent of the revenue and paid 25 percent to its subsidiaries who provided support services for transactions where the customers directly contracted with either the assessee or its subsidiaries, the TPO was incorrect in determining the remuneration to subsidiaries at 15 percent, where the customers directly contracted with the assessee, since there was no difference in the functions performed by either the assessee or its subsidiaries as compared to cases where customers directly contracted with the subsidiaries.

7. Honda Cars India Ltd v DCIT – Delhi High Court

The Court held that where the Petitioner was not a foreign company and the TPO did not propose any variation to income returned by petitioner, neither of two conditions of section 144C of the Act were satisfied and therefore the petitioner was not an ‘eligible assessee’. Consequently, the Assessing Officer was not competent to pass draft assessment order under section 144C(1) of the Act and therefore the said draft assessment order was quashed.

8. International Air Transport Association – Bombay High Court

The Court set aside the final assessment order passed under section 143(3) of the Act without passing a draft assessment order as mandated by Section 144C(1) of the Act which applied to the assessee. It observed that the DRP did not entertain the assessee’s objections absent the draft assessment order and therefore the rights made available to the assessee under section 144C of the Act were rendered futile by directly passing final order under section 143(3) of the Act.

Concluding Remarks:

Irrespective of the fact that most of the issues in Transfer Pricing are attaining finality through the judgements of the Tribunals, there are still certain conflicting views on various issues which are being cleared by the High Courts. However, the Tribunals and the Transfer Pricing Officers have been following their respective views stating that some of these High Court Judgements are not Jurisdictional High Courts pronouncements.

Source:

Chapter X of Finance Act, 2016 provides for the scheme. The Scheme come into force on 1st July, 2016. The declaration may make declaration on or before 31st December, 2016.

The declarant (as defined in the scheme) has to file a declaration in relation to ‘tax arrear’or ‘specified tax’ in respect of which appeal is pending.

Tax Arrear means the amount of tax, interest or penalty determined under the Income Tax Act or Wealth Tax Act in respect of which appeal is pending before CIT(A) or CIT(W) as on the 29th February, 2016.

Specified Tax means tax determined in consequence of or is validated by an amendment made with retrospective effect in Income Tax Act, 1961 or Wealth Tax Act,1957 and relates to a period prior to the date on which the Act amending the Income Tax Act or Wealth Tax Act, as the case may be, received the assent of the President.

Salient Features of the Scheme:

Declaration is to be filed before the Designated Authority in Form 1 and shall be signed by the declarant or any person competent to verify the return of income on his behalf in accordance with the provisions of section 140 of the Income Tax Act, 1961. Form 2 has to be filed along with Form 1 stating that the declarant has agreed to waive his/her rights towards appeals and other related matter on opting to this scheme.

As per section 204(1) of Chapter X of the Finance Act, 2016 the designated authority shall within a period of 60 days from the date of receipt of declaration determine the amount payable by the declarant in accordance with the provisions of the schemevide Form 3.

The declarant shall pay sum determined by the designated authority within in 30 days of date of receipt of the certificate and intimate the fact of such payment to the designated authority along with the proofvide Form 4.

On verification of the payment challan and other related documents, the authorities shall issue an order vide Form 5, if disclosed amount is ‘tax arrear’and Form 6, if disclosed amount is ‘specified tax’. Such order shall be the order of full and final settlement of tax amounts and shall guard the declarant from all other prosecutions and related issues.

Every order passed under section 204(1) determining the sum payable under the scheme shall be conclusive as to the matters stated there in and no matter covered by such order shall be re- opened in any proceeding under the Income Tax Act or Wealth Tax Act or under any law for the time being in force or as the case may be under any agreement, whether for protection of investment or otherwise, entered in to by India with any other country or territory outside India.

Immunity (benefit):

In case of Tax Arrear-

1. If disputed tax up to Rs 10 Lakh– Immunity from100% penalty;

1. If disputed tax exceeds Rs10Lakh–Immunity to the extent of 75% of minimum penalty;

1. If appeal pending related penalty– Immunity to the extent of 75% of minimum penalty.

In case of Specified Tax-

1. 100% Immunity form payment of interest and penalty.

Note:

Disputed Tax means tax determined under the Income Tax Act or Wealth Tax Act which is disputed by the assessee or the declarant.

Immunity from instituting any proceedings in respect of any offence under the Income Tax Act or Wealth Tax Act as the case may be.

Any amount paid in pursuance to declaration shall not be refundable under any circumstances.

Non- applicability of Scheme:

Section 205 of the Finance Act, 2016 provides that the scheme shall not be applicable in the cases relating to:

1. Assessment made pursuant to search;
2. Assessment made pursuant to survey conducted by the department;

1. Assessment in respect of which prosecution proceedings have been instituted on or before the date of filing the declaration;

1. Tax liability relating to undisclosed income from a source located outside India or undisclosed asset located outside India;

1. Assessment or reassessment made on the basis of information received by the Government of India under the agreement for exchange of information with any other country;

1. In the case of a person in respect of whom an order of detention has been passed under Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974 and the order has not been revoked or set aside by the competent Court;

1. In case of a person in respect of whom prosecution has been instituted on or before filing of declaration or such person has been convicted of any offence punishable under the provisions of Indian Penal Code, The Unlawful Activities (Prevention) Act, 1967, The Narcotic Drugs and Psychotropic Substances Act, 1985, The Prevention of Corruption Act, 1988 or for enforcement of any civil liability;

1992. In case of a person notified u/s. 3 of The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

Withdrawal of Litigation:

In accordance with Section 200(2) of the Act, where a declaration has been filed in respect of tax arrears appeal pending before CIT(A) or CWT(A), as the case may be, relating to disputed income or disputed wealth shall be deemed to have been withdrawn.

In a case relating to specified tax, the assessee is required to firstly withdraw such appeal or writ pending before any appellate authority or the court and has to furnish proof of such withdrawal along with the declaration to be filed. In a case where the assessee has initiated any proceedings for arbitration, conciliation or mediation or has given any notice thereof under any law, he has to withdraw such proceedings or notice or claim, and proof of such withdrawal has to be submitted along with the declaration to be made. The assessee has also to make a declaration waiving his right to seek or pursue any remedy or any claim in relation to the specified tax which may be available to him under any law for the time being in force.

It has also been provided in sub-section (6) of Section 200 that no Appellate Authority or Arbitrator, conciliator or mediator shall proceed to decide any issue relating to specified tax mentioned in the declaration and in respect of which an order has been passed by the Designated Authority or the sum payable under the scheme has been determined.

Effect of False Declaration:

Section 200(5) of the Act, provides that where any material particular furnished in the declaration is found to be false or the declarant violates any of the conditions of the scheme or the declarant acts in a manner which is not in accordance with the undertaking given by him under sub-section (4) of Section 200, it shall be presumed that as if the declaration was never made under the scheme and all the consequences under the Income-tax Act or Wealth-tax Act, as the case may be, will follow and appeal or other proceedings shall be deemed to have been revived.

Forms:

Key Topics Covered:

• International Taxation
• FEMA
• Audit
• Indirect Tax
• Companies Act, 2013
• Labour Laws

This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

In the recent past there has been constant conflict between the employers and the Employees Provident Fund Organisation (EPFO)enforcement authorities on the issue of ‘basic wages’ on which contributions are required to be made. In this paper an attempt is made to collate the information on the subject based on the various judgements of the High Courts and Supreme Court to create a perspective on the subject for future guidance and to initiate corrective measures to avoid possible litigation with the EPFO.

Para 29 of the Employees’ Provident Funds Scheme, 1952 deals with the contributions payable by the employer. In accordance with the said para, the employer shall contribute twelve per cent of the basic wages, dearness allowance (including the cash value of any food concession) and retaining allowance (if any)payable to each employee to whom the Scheme applies.

The EPF&MP Act has defined ‘Basic Wages’ as all emoluments which are earned by an employee while on duty or on leave or on holiday with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include –

• The cash value of any food concession;

• Any dearness allowance ( that is to say, all cash payment by whatever name called paid to an employee on account of a rise in the cost of living ), house rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;

• Any presents made by the employer.

Most of the new economy establishments are devising a salary structure with Basic Salary, HRA and other allowances without the component of Dearness Allowance and contributions towards provident fund are being paid on the basic salary only on the assumption that all other allowances fall under the exclusion category as per the above definition.

There has been conflict between the employers and EPF Organisation and hence these matters reached various Hon’ble High Courts in the country and some of the matters are pending before the Apex Court for its final verdict. Review of some important judgements are mentioned hereunder to understand the views of the judiciary in the matter.

The Hon’ble Madhya Pradesh High Court Division Bench in the matter of Montage Enterprises Pvt Ltd Vs EPFO, Indore [2011 LLR 867] held that the conveyance allowance and Special Allowance will fall within the definition of ‘Basic Wages’. The rationale taken by the Hon’ble bench is that the Conveyance Allowance and Special Allowance is paid to all non-executive category of employees and it is not a case that some of the employees are not getting the same. It is a settled law that if such wages are paid universally, necessarily and ordinarily to all across the board, the same will fall under the definition of basic wages.

In the year 2005,the Hon’ble Calcutta High Court Division Bench in the matter of RPFC (II), WB Vs.

Vivekanadnda Vidya Mandir [2005 LLR 339] held that contributions are payable on Special Allowance

when it is revised from time to time and the company has not adopted the system of payment of

Dearness Allowance. The detailed view of the court in the matter is as under:

In order to exclude any allowance from the purview of Section 6 which provides for liability to pay contribution based on basic wages, such allowance should fall under Clause (i), (ii) and (iii) of Section 2 (b) which enumerate allowances which are not included in the definition of ‘basic wages’. In the instant case the special allowance paid by the employer was not a retaining allowance, neither cash payment for food concession, nor over time allowance, house rent, bonus, commission, nor a present by employer and it did not satisfy any of the ingredients of Clauses (i) to (iii). Considering that the said allowance was paid in terms of contract of employment and was upwardly revised every 2 years and there is no system of payment of dearness allowance, it was held to be dearness allowance though described differently (Special Allowance) and therefore has to be treated as a part of pay and hence order passed by PF Authority that special allowance was subject to liability of contributions under section 6 of the Act is upheld.

In the year 2004, the Hon’ble High Court of Gujarat in the matter of Gujarat Cypromet Ltd Vs APFC [2004 III CLR 485] also held that the contribution to Provident Fund made on basic wages includes all emoluments earned by the employee and allowances like lunch allowance, medical allowance, conveyance allowance etc., except those which are specifically excluded by the legislature, such as house rent allowance which is clearly excluded from the definition of basic wages by virtue of Section 2(b).

It could be seen from the above the judiciary has interpreted the term ‘basic wages’ to include all allowances which are not specifically excluded. This interpretation has major cost implications to industry.

The establishments have been engaging employees through contractors and agencies to meet the non-core activities of the industry such as Security, House Keeping etc., In addition to this, during the last one decade, the establishments started engaging manpower through outsourcing agencies to meet the work requirements without having long term liability. The number of such employees have increased substantially in the recent past. Most of these employees are paid applicable minimum wages. The outsourcing agencies in general bifurcate the minimum wages as basic wages, house rent allowance and conveyance allowance etc.,

The E P F authorities have come to the view that the employers are bifurcating the minimum wages with a view to avoid payment of provident fund contributions and this led to litigation across India. The Hon’ble High Court of Andhra Pradesh issued a stay order on the circular issued by the PF Department on this issue. The Division Bench of Punjab & Haryana held that the definition of wages under Minimum Wages Act is inapplicable to that of basic wages under EPF Act.

The decisions of the Hon’ble High Courts, which are discussed above and similar other matters are pending before the Hon’ble Supreme Court of India for disposal. We have to await the decision of the Apex Court on these matters.

The courts have also held that certain category of payments does not fall under the ambit of basic wages and does not attract provident fund contributions. They are:-

The Supreme Court held that the Production Bonus / Incentive when paid in a sliding scale with due regard to the production made by each workman then no contribution is payable. Similarly if the production bonus is paid on an average to all workmen on the basis of extra production made by them, then also, no contribution need be paid. [Daily Pratap Vs RPFC 1999 I LLJ 1]

The Madras, Delhi and Gujarat High Courts held in various matters that the ad-hoc allowance and ad-hoc payments made to employees does not form part of ‘basic wages’ and hence no contributions are payable.

The Hon’ble High Court of Bombay held that payment made in lieu of notice for terminating the contract of employment of a permanent employee does not constitute ‘basic wages’ and hence no contributions are payable. The Gujarat High Court in the matter of Swastik Textile Engineers Vs V M Rathod [2008 II LLJ 533] held that the back wages awarded by Court cannot be regarded as ‘basic wages’ payable to the employee and it is in the form of damages or compensation and hence provident fund contributions are not required to be paid.

The Supreme Court held that Leave Encashment should not be taken as part of ‘basic wages’ and hence no provident fund contributions are payable.

The Hon’ble High Court of Madras in the matter of Wipro Ltd Vs PO Employees PFAT [[2007 LLR 624] held that the canteen subsidy is not equivalent to cash value of food concession and hence provident fund contributions are not payable on canteen subsidy.

With effect from 1.9.2014, employees drawing basic wages, dearness allowance and retaining allowance of Rs. 15,000/- or below are liable to be covered under the provident fund scheme. Once covered employee will continue to get covered even though his wages exceed Rs. 15,000/- per month. The Supreme Court in the matter of Marathwada Gramin Bank Karamchari Sanghatana Vs Management of Bank [2011 LLR 1130] held that employers need not pay provident fund contributions higher than the prescribed limited under the Act and Scheme that is now Rs. 15,000/-.

Most of the new generation organisations are following the concept of cost to the company of the employee and the compensation package is decided on annualised basis. As the organisations are deciding the cost to the company, it has all the freedom to bifurcate the mutually agreed compensation package. Say for example the annual CTC is Rs. 2.90 Lacs, the monthly wages can be defined as Basic: Rs. 15,000/-, HRA 40% of the Basic Salary ie Rs. 6000/- and the employer Provident Fund contribution as Rs. 1800/-. Thus the monthly cost to the company is Rs. 22,800/- and annual cost is Rs. 2, 73, 600/-. In view of the recent amendment to the Payment of Bonus Act, the employee with basic wages of Rs. 15,000/-will also be covered under the Act. Hence the employee will be entitled to at least 8.33% of the basic wages earned in the financial year which translates to one month basic wage of Rs. 15,000/-. Thus the annual cost to the company will be Rs. 2, 88, 600/-.

When the CTC offered to an employee is higher than the Rs. 2.9 lacs per annum, other allowances such as conveyance allowance, medical reimbursement etc., may be introduced.

In case of employees whose monthly wages are minimum wages, it would be advisable to bifurcate the minimum wage as basic wages and house rent allowance only. For example if the minimum wage is Rs. 10,010/- per month the same may be bifurcated as Rs. 7150/- as basic wage and 40 percent of basic wage as HRA ie Rs. 2860/-. The cost to the company per annum would be Rs. 1, 43, 272/- which includes statutory minimum bonus of 8.33%, 12% of PF and 4.75% of ESI contributions.

If the monthly wages are above minimum wage and below Rs. 22,800/- per month, that is the annual cost to the company is between Rs.1.45 lacs and Rs. 2.9 lacs, the applicable minimum may be taken as basic and the balance wage be bifurcated as HRA, Conveyance Allowance, Washing Allowance and Medical Reimbursement etc.,

In the above mentioned cost to the company, the liability that may arise on account of Payment of Gratuity Act is not included.

Of late the highly reputed and law abiding employers are also finding it difficult to convince the provident fund enforcement authorities the method followed by them in finalising the compensation package of the employees during the 7A proceedings and the matters are going against them. This has led to large scale litigation in the Tribunal and also depositing a part of the amount determined in the 7 A proceedings by the Qasi Judicial Authority by the company. The cost of litigation has also become substantial besides monitoring the maters under litigation which may become major liability on the company at a later date.

In view of the above analysis, it is suggested that organisations may consider to restructure the salaries of the employees, as suggested above, to ensure litigation free statutory compliance under Provident Fund Act, Payment of Bonus Act and the Minimum Wages Act.