2025 (10) TMI 94 - AT - Income Tax

Unilateral APA applied to AY 2013-14 for AMP reimbursement; appeals dismissed; matters under s.195 and s.40(a)(i) remanded

ITAT held the unilateral APA covering AYs 2016-17 to 2020-21 and rolled back to AYs 2012-13 to 2015-16 applies to AY 2013-14 on the issue of reimbursement ... Adjustment u/s 92CA - Reimbursement of AMP expenses - Applicability of unilateral Advance Pricing Agreement (APA) for the AY in question - HELD THAT:- The assessee has entered into unilateral APA which covers AYs 2016-17 to 2020-21 and is also rolled back for AYs 2012-13 to 2015-16, and therefore, the present assessment year being AY 2013-14 is also covered by the aforesaid AP agreement, on the issue of ‘Reimbursement of AMP expenses’. Therefore, by virtue of the above agreement grounds of the assessee’s appeal along with grounds of the department’s appeal being related to the issue of ‘Reimbursement of AMP expenses’ are dismissed. TDS u/s 195 - Disallowance of u/s 40(a)(i) - payments to non-residents without deduction of TDS - AO noted that the assessee has claimed that non-residents have not 'made available' these services to the assessee in India, and, therefore, the payments for these services are not taxable as 'fees for included services' as per India-USA DTAA or as 'fee for technical services' as per the provisions of India-Netherlands DTAA - HELD THAT:- We find that the full facts regarding the exact nature for which payments has been made by the assessee to the non-residents has not been brought on record either in the case of IT services or the product design, whereas the submission made before us and the case laws relied upon by the assessee will be applicable only when there reimbursement is purely on cost basis with no markup on IT services and the product design charges do not satisfy ‘make available’ clause and was reimbursed on cost basis whereas such facts are not clearly on record as discussed above. The submission of the assessee that the cost allocation in the arrangement for software / licensing etc. does not contain any income element and is made purely on the cost-to-cost basis is also not backed up by the details of markup payment made by the assessee as stated above, in the ‘Remuneration’ column of its written submission filed before us. Therefore, the entire claims made the assessee as discussed above, require re-verification by the AO, in view of the above observations. We therefore, set aside the order of the Assessing Officer and the Ld. CIT(A) and restore the matter back to the file of the Assessing Officer for fresh adjudication, keeping in view our above observations and as per law. ISSUES PRESENTED AND CONSIDERED 1. Whether transfer pricing disputes relating to reimbursement of advertisement, marketing and sales promotion (AMP) expenses survive where the assessee has entered into a unilateral Advance Pricing Agreement (APA) rolled back to the relevant assessment year. 2. Whether payments to non-resident associated enterprises described as cost recharges for IT services and product design charges were required to be subjected to tax withholding under section 195 read with section 40(a)(i) of the Income-tax Act on the ground that they amount to Fees for Technical Services (FTS), Fees for Included Services (FIS) or royalty under applicable DTAAs. 3. Whether payments characterised as reimbursements without mark-up can be treated as non-taxable in India (and hence not subject to TDS) or whether their character requires scrutiny for embedded income element and taxability. 4. Whether the factual record before the assessing authority was adequate to conclude absence of cost-to-cost character and to classify the payments as taxable FTS/FIS/royalty without further verification. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Effect of unilateral APA on transfer pricing disputes Legal framework: Section 92CC and the scope of APAs, including roll-back provisions, allowing settlement of TP issues for covered assessment years. Precedent Treatment: Administrative practice and jurisprudence treat a valid APA covering the year under review (including roll-backs) as operative to resolve contested TP issues covered by the agreement. Interpretation and reasoning: The Tribunal noted the assessee executed a unilateral APA dated 29.11.2019 covering the AMP reimbursement issue and rolled back to the assessment year in dispute. The record (including the APA and Tribunal order sheet) established that the APA specifically addressed the AMP reimbursement subject-matter of the pending TP grounds. The Revenue did not contest the applicability of the APA in the hearing. Ratio vs. Obiter: Ratio - where an APA validly covers a subject-matter and the assessment year, TP grounds relating exclusively to that subject fall away and must be dismissed. Conclusion: Grounds and appeals relating solely to TP adjustment for AMP reimbursements are dismissed as non-surviving in view of the APA; departmental TP grounds accordingly do not survive. Issue 2 - Obligation to deduct tax at source under section 195 and applicability of section 40(a)(i) Legal framework: Section 195(1) mandates withholding on sums 'chargeable under the provisions of this Act'; section 195 must be read with charging provisions (sections 4, 5 and 9) and relevant DTAA articles; section 40(a)(i) disallows expenditures where tax deductible at source was not withheld. Precedent Treatment: Supreme Court and appellate Tribunal decisions emphasise that withholding obligation arises only to the extent payment is chargeable to tax in India; DTAA provisions (including 'make available' tests) and judicial dicta (including GE India Technology Centre and subsequent authorities) guide classification of payments as FTS/FIS/royalty or reimbursement. Interpretation and reasoning: The AO classified the payments as FTS/FIS/royalty on findings that non-residents 'made available' technical knowledge and provided access/use of software, thus making the sums chargeable under the Act and DTAA. The appellate authority endorsed the TPO/TPO's conclusion. However, the Tribunal found that critical facts were not placed on record: (a) documentation quantifying whether payments were pure cost allocations or included mark-ups; (b) clear evidence whether technical know-how or rights enabling independent exploitation were transferred or 'made available'; and (c) whether non-residents had PE or presence in India. The Tribunal observed the assessee's own submissions indicated a 5% mark-up on IT services and that other parties received mark-ups, undermining categorical assertions of cost-to-cost reimbursement. Given the incomplete factual matrix, the Tribunal held that the AO and CIT(A) could not sustain a definitive classification without further verification and remanded the issue for fresh adjudication. Ratio vs. Obiter: Ratio - withholding under section 195/ disallowance under section 40(a)(i) can be imposed only where the payer's obligation is shown on the basis of sums being chargeable to tax (per sections 4/5/9 and applicable DTAA); factual determination of 'make available', existence of mark-up or income element, and PE presence is requisite before concluding TDS obligation. Obiter - discussion of specific jurisprudence cited by parties as persuasive guidance. Conclusion: The Tribunal set aside prior findings on TDS/section 40(a)(i) and restored the matter to the assessing officer for re-examination of facts, documentary verification of cost allocations and mark-ups, and re-application of legal tests (including DTAA 'make available' and royalty definitions) before determining withholding liability. Issue 3 - Characterisation of payments as reimbursements versus taxable consideration (embedded income element) Legal framework: Distinction between reimbursements (cost-to-cost allocations without profit) and payments containing an income element; section 195 focuses on sums 'chargeable under the provisions of the Act'; DTAAs may exclude certain independent personal services or limit application of FTS/royalty definitions. Precedent Treatment: Authorities recognise that nomenclature is not decisive; substance over form applied. Reimbursements without income are generally not taxable, whereas composite payments require identifying the appropriate proportion that is income-chargeable (section 195(2) allows AO determination). Jurisprudence cited illustrates that reimbursements may escape tax if genuinely cost-only and devoid of mark-up. Interpretation and reasoning: The assessee asserted cost-to-cost allocations and lack of IPR transfer or right to commercially exploit software. The Tribunal observed inconsistencies and incomplete proof: (a) presence of stated mark-ups (5% IT services) in submissions; (b) absence of conclusive documentary evidence proving absence of income element for software/database costs or product design charges; (c) lack of clarity on rights conferred in respect of software access. Accordingly, factual determinations were necessary to separate reimbursements from taxable consideration. Ratio vs. Obiter: Ratio - payments claimed as reimbursements must be supported by clear documentary evidence demonstrating absence of any income element; absent such proof the payer cannot conclusively avoid withholding obligations and the AO must determine the proportion chargeable. Conclusion: The Tribunal reinforced the need for fact-based verification of reimbursement character, remanding for the AO to examine agreements, invoices, mark-ups, rights to use IPR, and whether payments embed income; only after such verification can withholding/disallowance be validly determined. Issue 4 - Adequacy of factual record and requirement for remand to AO Legal framework: Principles of natural justice and standard of proof in tax proceedings; role of assessing officer to make primary factual findings; appellate forum to interfere only where record establishes error or absence of material. Precedent Treatment: Appellate authorities will remit matters to the AO for facts requiring fresh enquiry or where documentary lacunae impede adjudication; appellate interference is constrained where AO has made permissible findings supported by record. Interpretation and reasoning: The Tribunal found that neither the AO nor the CIT(A) had before them a complete factual matrix to justify summary treatment of the payments as taxable FTS/FIS/royalty. The assessee's own inconsistent averments (about mark-ups and nature of rights) and the lack of conclusive documentary proof meant that the matter was unsuitable for final appellate determination. The Tribunal therefore exercised its remedial power to set aside and remand for fresh adjudication while identifying the precise factual points requiring verification. Ratio vs. Obiter: Ratio - where essential facts are not on record or are inconsistent, the correct course is remand to the AO for fact-finding rather than sustaining adverse tax consequences at appellate stage. Conclusion: The Tribunal remanded the TDS/section 40(a)(i) issues to the assessing officer for detailed verification and fresh decision applying legal tests and DTAA provisions; the assessee's appeal was partly allowed to that extent.