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Honda Siel Power Products Limited Versus Deputy Commissioner of Income Tax

TPA - AMP expenses - Does the decision in Sony Ericsson apply? - Held that:- As noticed in MSIL (2015 (12) TMI 634 - DELHI HIGH COURT ) the facts of the cases of the Assessees in Sony Ericsson (2015 (3) TMI 580 - DELHI HIGH COURT ) did not give rise to a dispute that there is no international transaction involving the Assessee therein and its AEs. In fact each of the Assessees were receiving subsidies/subventions from their respective AEs. The second factor taken note of by the Court is that as .....

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the Revenue.

Existence of an international transaction - whether the Revenue has been able to discharge the initial onus of showing that there was an international transaction concerning the Assessee and its foreign AEs - Held that:- During the financial year 2007-2008 relevant to the AY in question, of the total turnover of ₹ 251.06 crore only ₹ 9.57 crore, constituting 3.81 per cent, is towards distribution activity whereas the balance revenue of ₹ 241.48 crore wa .....

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a and abroad. The condition in the license agreement that the technology will be used for sale of goods in designated jurisdictions or specified territories is not an unusual arrangement. The question of re-characterising the Assessee as a ‘contract manufacturer’ was unwarranted. The Court finds that the Revenue has not been able to controvert any of the above submissions.

In that view of the matter, the question of a benchmarking analysis by evaluating the AMP expenses incurred by th .....

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question of AMP expenses. - Decided against the Revenue - ITA 346/2015 - Dated:- 23-12-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr. Ajay Vohra, Senior Advocate with Mr. Neeraj Jain and Mr. Aditya Vohra, Advocates For the Respondent : Mr. G.C. Srivastava and Mr. D.S. Bhardwarj, Advocates JUDGMENT Dr. S. Muralidhar, J. 1. This appeal by the Assessee, under Section 260A of the Income Tax Act 1961 ('Act') is directed against the impugned order dated 12th December, 2014 .....

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sing of pressure die casting parts. The HONDA trademark is owned by Overseas Associated Enterprise (AE), i.e. Honda Motor Company, Japan ( Honda Japan ). During the AY in question, the Assessee entered into the following international transactions with its AE: Sl. No. International transactions Amount (in Rs.) Method used by Assessee i. Payment for purchase of raw material and components 19,69,25,346 TNMM ii. Payment for purchase of spares 35,15,973 TNMM iii. Payment for purchase of finished goo .....

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tion on 30th September, 2008, declaring a total income of ₹ 37,15,72,026. The return was picked up for scrutiny and notices under Sections 143(2) and 142(1) of the Income Tax Act, 1961 ( Act ) were issued. During the course of the assessment proceedings, the Assessing Officer invoked Section 92CA(1) of the Act and referred the case of the Appellant to the Transfer Pricing Officer (TPO) for determination of Arm s Length Price ('ALP ) in relation to the international transactions underta .....

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ight Line Test ( BLT ), and compared the percentage of such expenses incurred to total sales of the Appellant with that of comparable companies. It was found that the AMP expenses of the Assessee as a percentage of sales at 4.46 per cent was higher than 1.87 per cent incurred by the comparable companies. The TPO concluded that the AMP expenses incurred by the Appellant, in excess of the Bright Line must be regarded as having been incurred for promoting the brand name HONDA and further that this .....

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ry, 2012 wherein it restricted the disallowance of royalty paid to ₹ 53.34 lakhs instead of the inadvertent figure of ₹ 1.53 Crore, as stated in the order. The Dispute Resolution Panel ( DRP ) by an order dated 24th September, 2012 negated the objections to the draft assessment order by the Assessee and sustained the TP adjustment in respect of AMP expenses proposed by the TPO. The AO then completed the adjustment and passed the final assessment order on 31st October, 2012 inter alia .....

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of foreign AEs in LG Electronics India Pvt. Ltd. v. ACIT (2013) 140 ITD 41 (Del). By a majority of 2:1, the Special Bench of the ITAT inter alia decided as under: (i) A TP adjustment in relation to AMP expenses incurred by the Assessee for creating and improving the marketing intangibles for its foreign AE was permissible. (ii) Earning the mark up from the AE in respect of AMP expenses incurred by the foreign AE was also allowed. 10. The majority of the ITAT adopted the BLT for determining the e .....

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s by identifying the comparable domestic cases. It was further held that the initial burden to show that the international transaction with the AE was at ALP was on the Assessee. The decision of this Court in Sony Ericsson 11. The correctness of the decision of the Special Bench of the ITAT in LG Electronics (supra) was considered by this Court in Sony Ericsson Mobile Communications India P. Ltd. v. Commissioner of Income Tax (2015) 374 ITR 118 (Del). This Court heard a batch of appeals in the a .....

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ny and Canon India Pvt. Ltd. In the case of Sony Mobile Communications India Pvt. Ltd., TNMM had been followed. In respect of Reebok India, the TNMM had been followed for the sourcing of goods and exports from India, the CUP method had been followed in respect of the royalty paid by the Indian entity to the foreign AE and for import of apparels and footwear for re-sale, the re-sale price ( RP ) method had been followed. In the case of Cannon India, the RP method was adopted for import of finishe .....

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ncurred by the assessee in India can be treated and categorized as an international transaction under Section 92B of the Income Tax Act, 1961? (iii) Whether under Chapter X of the Income Tax Act, 1961, a transfer pricing adjustment can be made by the Transfer Pricing Officer/ Assessing Officer in respect of expenditure treated as AMP Expenses and if so in which circumstances? (iv) If answer to question Nos.2 and 3 is in favour of the Revenue, whether the Income Tax Appellate Tribunal was right i .....

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ench in Sony Ericsson (supra) was as under: (i) The Court concurred with the majority of the Special Bench of the ITAT in the LG Electronics case qua the applicability of 92CA (2B) and how it cured the defect inherent in 92CA (2A). The issue concerning retrospective insertion of 92CA (2B) was decided in favour of the Revenue. (ii) AMP expenses were held to be international transaction as this was not denied as such by the assessees. (iii) Chapter X and Section 37(1) of the Act operated independe .....

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ctions as per the scheme of Chapter X and the TP Rules. Thus, the word transaction would include a series of closely linked transactions. (vi) The TPO/AO could overrule the method adopted by the Assessee for determining the ALP and select the most appropriate method. The reasons for selecting or adopting a particular method would depend upon functional analysis comparison, which required availability of data of comparables performing of similar or suitable functional tasks in a comparable busine .....

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d in the net profit of the inter-linked transaction. The TNMM proceeded on the assumption that functions, assets and risks being broadly similar and once suitable adjustments have been made, all things get taken into account and stand reconciled when computing the net profit margin. Once the comparables pass the functional analysis test and adjustments have been made, then the profit margin as declared when matches with the comparables would result in affirmation of the transfer price as the arm .....

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no segregation of a bundled transaction. Set off of transactions segregated as a single transaction is just and equitable and not prohibited by Section 92(3). Set-off is also recognized by international tax experts and commentaries. (x) Segregation of bundled transactions shall be done only if exceptions laid down in the EKL Appliances Case are justified. Re-categorisation and segregation of transactions are different exercises; former would require separate comparables and functional analysis. .....

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majority of the Special Bench in the LG Electronics Case. (xiii) The RP Method loses its accuracy and reliability where the reseller adds substantially to the value of the product or the goods are further processed or incorporated into a more sophisticated product or when the product/service is transformed. RP Method may require fewer adjustments on account of product differences in comparison to the CUP Method because minor product differences are less likely to have material effect on the pro .....

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y with or without adjustment is accepted. (xv) The task of arm s length pricing in the case of tested party may become difficult when a number of transactions are interconnected and compensated but a transaction is bifurcated and segregated. CP Method, when applied to the segregated transaction, must pass the criteria of most appropriate method. If and when such determination of gross profit with reference to AMP transaction is required, it must be undertaken in a fair, objective and reasonable .....

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entive as brand building exercise would be contrary to common sense and would be highly exaggerated. Direct marketing and sale related expenses or discounts/concessions would not form part of the AMP expenses. (xvii) The prime lending rate cannot be the basis for computing mark-up under Rule 10B(1)(c) of the Rules, as the case set up by the Revenue pertains to mark-up on AMP expenses as an international transaction. Mark up as per sub-clause (ii) to Rule 10B(1)(c) would be comparable gross profi .....

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ratio expounded in this decision, facts have to be ascertained and applied. If required and necessary, the assessed and the Revenue should be asked to furnish details or tables. The ITAT, in the first instance, would try and dispose of the appeals, rather than passing an order of remand to the AO /TPO. An endeavour should be to ascertain and satisfy whether the gross/net profit margin would duly account for AMP expenses. When figures and calculations as per the TNM or RP Method adopted and appl .....

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n Sony Ericsson (supra) had not been rendered. The ITAT accordingly followed the decision of the Special Bench in LG Electronics (supra) and referred back the matter to the assessing authority for fresh consideration. 15. It is the case of the Revenue in this appeal that the decision in Sony Ericsson (supra) would cover the present case as well and, therefore, in the light of the directions issued by this Court in Sony Ericsson (supra), this appeal should also be referred back to the ITAT for a .....

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should the ALP of such a transaction be determined? Questions of law 18. Accordingly, the following questions of law are framed for consideration: i. Is the case of the Assessee covered by the decision of this Court in Sony Ericsson (supra) and is it required to be referred back for a fresh decision in terms of the said judgement? ii. If the answer to question (i) is in the negative has the Revenue been able to demonstrate the existence of international transaction between the Assessee and its .....

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& Lomb Eyecare (India) Pvt. Ltd. v. The Additional Commissioner of Income Tax. Earlier the Court had also decided similar questions in its judgement dated 11th December, 2015 in ITA No.110/2015 titled Maruti Suzuki India Limited v. Commissioner of Income Tax. Question (i): Does the decision in Sony Ericsson apply? 20. As far as question (i) is concerned, it was observed in Maruti Suzuki India Limited (supra) (MSIL) as under: 25. Several appeals and cross-appeals filed by the Assessees and th .....

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dia Pvt. Ltd. 26. The Court explained that all the above six Assessees were engaged in distribution and marketing of imported branded products. In other words, none of the Assessee whose appeals were decided was a manufacturer. The second common factor noted by the Court was: There is no dispute or lis that the assessee are AEs who had entered into controlled transactions with the foreign associated enterprises . Thirdly, the Court noted: It is also uncontested that the controlled international .....

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CUP method had been followed in respect of the royalty paid by the Indian entity to the foreign AE and for import of apparels and footwear for re-sale, the re-sale price ( RP ) method had been followed. In the case of Cannon India, the RP method was adopted for import of finished goods for resale. 21. Having noticed the above factual features, the Court in Maruti Suzuki India Limited (supra) further noticed as under: 42. As already noticed, the judgment in Sony Ericsson does not seek to cover a .....

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re all of distributors of products manufactured by foreign AEs. The said Assessees were themselves not manufacturers. In any event, none of them appeared to have questioned the existence of an international transaction involving the concerned foreign AE. It was also not disputed that the said international transaction of incurring of AMP expenses could be made subject matter of transfer pricing adjustment in terms of Section 92 of the Act. 44. However, in the present appeals, the very existence .....

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parable entities. It is submitted that with the decision in Sony Ericsson having disapproved of BLT as a legitimate means of determining the ALP of an international transaction involving AMP expenses, the very basis of the Revenue's case is negated. 22. The Court is of the view that the above decision in MSIL (supra) holding that the decision in Sony Ericsson (supra) would not cover the case of MSIL would also apply as far as the present Appellant is concerned. As noticed in MSIL (supra) the .....

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nsaction. In the present case, the existence of such a transaction was ascertained only by applying the BLT. For the above reasons, the Court is satisfied that the case of the present Appellant would not stand covered by the decision in Sony Ericsson (supra). Question (i) is accordingly answered in favour of the Assessee and against the Revenue. Question (ii): Existence of an international transaction 24. The central question which arises in the present case is question (ii), which is whether th .....

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were acting in concert as far as the Assessee having to promote the brand of the foreign AE is concerned. 26. The relevant facts are that under a Technical Collaboration Agreement, the Assessee is granted exclusive license to manufacture and sell the products of the foreign AEs against payment of royalty of 4% on sales. Additionally, the Assessee entered into agreement dated 19th March, 2007 for obtaining license to use the trademark HONDA. The consideration for use of such trademark is determin .....

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ll as the Assessee in India. Para 4.9 of the TP report has been referred for the purposes of pointing out export market related information for the products and the competitors and other assistance in tapping potential export markets is provided by the Honda Group. It is further pointed out that para 4.47 of the TP report records that HSPP is responsible for brand building and maintaining brand loyalty in domestic market. Reference is made to the statement that this brand name has been developed .....

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ght to change the permitted countries at any time. According to the Revenue this indicates that the Assessee has not been an independent manufacturer and is only functioning as a contract manufacturer for the AE. It is also pointed out that the list of countries to which export is permitted by Honda, Japan included the countries falling in the same geographical location as India. It is stated that the terms of the agreement with such distributors in other countries could have worked as a sound c .....

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ONDA or for incurring AMP expenses for that purpose. There is, according to the Assessee, no tangible material to show that any arrangement or understanding, even an informal one, exists between the Assessee and its foreign AE in relation to AMP expenses. 30. At the outset, it requires to be noticed that Section 92B defines international transaction as under: Meaning of international transaction. 92B.(1) For the purposes of this section and sections 92, 92C , 92D and 92E , "international tr .....

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y contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. (2) A transaction entered into by an enterprise with a person other than an associated enterprise shall, for the purposes of sub-section (1), be deemed to be a transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other per .....

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ould be to compare the price of the transaction that is shown to exist with that of the ALP and make the TP adjustment by substituting the ALP for the contract price. 32. A reading of the heading of Chapter X ["Special provisions relating to Avoidance of Tax "] and Section 92 (1) which states that any income arising from an international transaction shall be computed having regard to the ALP, Section 92C (1) which sets out the different methods of determining the ALP, makes it clear th .....

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hat an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. 34. It is for the above reason that the BLT has been rejected as a valid method for either determining the existence of international transaction or for the determination of ALP of such transaction. Although, under Section 92B read with Section 92F (v), an international transaction could include an arrangement, understandin .....

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Appellant i.e., Daiichi Sankyo Company and Ranbaxy were acting in concert within the meaning of Regulation 20(4) (b) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. In para 44, it was observed as under: The other limb of the concept requires two or more persons joining together with the shared common objective and purpose of substantial acquisition of shares etc. of a certain target company. There can be no "persons acting .....

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ance. The relationship can come into being only by design, by meeting of minds between two or more persons leading to the shared common objective or purpose of acquisition of substantial acquisition of shares etc. of the target company. It is another matter that the common objective or purpose may be in pursuance of an agreement or an understanding, formal or informal; the acquisition of shares etc. may be direct or indirect or the persons acting in concert may cooperate in actual acquisition of .....

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its own or at the instance of the AE is to find out whether an independent party would have also done the same." It was asserted: "An independent party with a short term agreement with the MNC will not incur costs which give long term benefits of brand & market development to the other entity. An independent party will, in such circumstances, carry out the function of development of markets only when it is adequately remunerated for the same". In MSIL (supra) the above submis .....

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nsaction involving AMP expenses, Mr. Srivastava only referred to Section 92F (ii) which defines ALP to mean a price "which is applied or proposed to be applied in a transaction between persons other than AEs in uncontrolled conditions". Since the reference is to price and to uncontrolled conditions it implicitly brings into play the BLT. In other words, it emphasises that where the price is something other than what would be paid or charged by one entity from another in uncontrolled si .....

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siderable merit in the contention of the Assessee that the only TP adjustment authorised and permitted by Chapter X is the substitution of the ALP for the transaction price or the contract price. It bears repetition that each of the methods specified in S.92C (1) is a price discovery method. S.92C (1) thus is explicit that the only manner of effecting a TP adjustment is to substitute the transaction price with the ALP so determined. The second proviso to Section 92C (2) provides a 'gateway&# .....

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ith the ALP. Rules 10B, 10C and the new Rule 10AB only deal with the determination of the ALP. Thus for the purposes of Chapter X of the Act, what is envisaged is not a quantitative adjustment but only a substitution of the transaction price with the ALP. 70. What is clear is that it is the 'price' of an international transaction which is required to be adjusted. The very existence of an international transaction cannot be presumed by assigning some price to it and then deducing that sin .....

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her. An 'assumed' price cannot form the reason for making an ALP adjustment. 71. Since a quantitative adjustment is not permissible for the purposes of a TP adjustment under Chapter X, equally it cannot be permitted in respect of AMP expenses either. As already noticed hereinbefore, what the Revenue has sought to do in the present case is to resort to a quantitative adjustment by first determining whether the AMP spend of the Assessee on application of the BLT, is excessive, thereby evid .....

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ne of the substantive or procedural provisions of Chapter X of the Act apply, cannot be held to be permitted by Chapter X. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act being applicable to an AMP TP adjustment, the inevitable conclusion is that Chapter X as a whole, does not permit such an adjustment. 73. It bears repetition that the subject matter of the attempted price adjustment is not the transaction involving the Indian entity and the agen .....

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that while such AMP expense may be wholly and exclusively for the benefit of the Indian entity, it also enures to building the brand of the foreign AE for which the foreign AE is obliged to compensate the Indian entity. The burden of the Revenue's song is this: an Indian entity, whose AMP expense is extraordinary (or 'non-routine') ought to be compensated by the foreign AE to whose benefit also such expense enures. The 'non-routine' AMP spend is taken to have 'subsumed .....

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international transaction. And this, notwithstanding that this is not one of the deemed international transactions listed under the Explanation to Section 92B of the Act. The problem does not stop here. Even if a transaction involving an AMP spend for a foreign AE is able to be located in some agreement, written (for e.g., the sample agreements produced before the Court by the Revenue) or otherwise, how should a TPO proceed to benchmark the portion of such AMP spend that the Indian entity should .....

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considered by him to be excessive or unreasonable shall not be allowed as a deduction." The AO in such an instance deploys the 'best judgment' assessment as a device to disallow what he considers to be an excessive expenditure. There is no corresponding 'machinery' provision in Chapter X which enables an AO to determine what should be the fair 'compensation' an Indian entity would be entitled to if it is found that there is an international transaction in that regar .....

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impermissible but will lend itself to arbitrariness. What is then needed is a clear statutory scheme encapsulating the legislative policy and mandate which provides the necessary checks against arbitrariness while at the same time addressing the apprehension of tax avoidance. 37. Additionally it was held both in MSIL (supra) as well as Whirlpool of India Limited (supra) that in terms of the law explained by the Supreme Court in CIT v. B.C. Srinivas Setty (1981) 128 ITR 294 (SC) and PNB Finance L .....

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in the present case, the Assessee is carrying on business as an independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of the AE. The benefit of creation of marketing intangibles for the foreign AE on account of AMP expenses can at best said to be incidental. The decision in Sony Ericsson (supra) acknowledges that an expenditure cannot be disallowed wholly or partly because it incidentally benefits the third party. This was in context of Section 37(1) of t .....

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under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law." 39. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment .....

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Highlight: Anti-dumping duty on import of bus/truck tyres from China

Highlight: Cabinet approves Extension of time period of the Scheme "Special Industry Initiative for J&K" (Sll J&K) - Udaan

Highlight: Non-payment of service tax - maintenance and repair charges - appellants had knowingly and deliberately shown the repair charges as job work charges to mislead about their taxability - demand confirmed.

Highlight: BAS - execution of the project of smart card for vehicle registration – implementing the SOC-VRC project - The fact that the Government has outsourced some part of the work and paid certain consideration for such outsourced work, does not make the activity subject to service tax.

News: Cabinet approves Extension of time period of the Scheme "Special Industry Initiative for J&K" (Sll J&K) - Udaan

Highlight: Constitution of National Anti-profiteering Authority (NAA) under GST-reg. - Trade Notice

Highlight: Amendments in Hand Book of Procedures 2015-20 –reg. - Various amendments are made in Chapter-4 of Hand Book of Procedures 2015-2020.

Circular: Constitution of National Anti-profiteering Authority (NAA) under GST-reg.

Highlight: Sharing of expenses - BAS - promotion of business of group companies - sharing of expenditure for common facilities cannot be treated as service by one to another in such arrangement.

News: RBI Reference Rate for US $

Article: Credit of unsold stock [Section 140(3)] - Actual Credit as well as Notional Credit - Part-I - GST Transitional provisions

Circular: Certain Clarifications sought on Construction Services provided in the Real Estate Sector – reg.

News: Anti-dumping duty on import of bus/truck tyres from China



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