TaxTMI 
TaxTMI 
2013 (9) TMI 48
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....were heard together and are being disposed off by way of this consolidated order for the sake of convenience. We first proceed to dispose off the assessee's appeal in ITA no.4203/Mum./ 2012, for the assessment year 2007-08. 2. The main issue involved in this appeal, relates to disallowance of expenditure u/s 40 (a) (ia) for sums aggregating to Rs. 3,93,03,905, claimed by the assessee towards reimbursement of cost of salary and other expenses made by the assessee to its holding company at Singapore. 3. Facts in brief, as culled out from the material on record and the arguments advanced by the parties are that the assessee, Temasek Holdings Advisors India Pvt. Ltd. (for short "THAIPL"), is wholly owned (100%) subsidiary of Temasek Holding Pte. Ltd. (for short "THPL"), which is an Asia investment firm based at Singapore. The assessee renders investment advisory services to THPL, Singapore, which includes identifying and analyzing potential investment particulars in India, evaluating political and economic scenario for the investment purpose in India and monitoring and making recommendation to THPL in respect of specified investment in India, specifically for unlisted companie....
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....estment advisory services to THPL. Since, the said employees were on the pay roll of THPL, therefore, the salary of these employees was paid by them. The THPL, in turn, recharges the salary to the assessee which is to be reimbursed by the assessee. As the salary was paid to these employees in respect of services rendered by them in India, the overseas company THPL has deducted taxes thereon in accordance with the provisions of section 192 and deposited the same to the Indian Government treasury. Besides this, there were certain other expenses incurred on behalf of the assessee by the THPL, the same were also reimbursed by the assessee. These expenses were in the nature of expenditure incurred by the seconded employees, business promotion, professional fees and information technology, etc. In support of this contention, various documents like - (i) copies of secondment agreement entered between the assessee and the THPL for the deputation of the employees; (ii) representation letter from the assessee that services have been rendered by the deputed / seconded employee to the assessee, only (iii) affidavit from the deputed / sedonded employees stating that they have provided services ....
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.... laws. Agreement is required to be approved from appropriate authorities to the Govt. of India before payments under the terms of agreement; however, no approval from Govt. of India is accorded to the assessee company. Further, no tax on income chargeable to tax is withheld at the time of making payment by the assessee company. c) The relationship of THPL and assessee company is that of independent contractors and agreement shall be governed in accordance with the laws of India. Accordingly, amount which is reimbursed is nothing but a contractual payment. d) The advice to be raised by THPL on assessee company is on monthly basis such as monthly remuneration or salary for services provided by Managing Director and other employees in India. The assessee company is beneficiary of such expenditure as it has inherent character of salary. Further, by expending said amount, assessee has earned its business income and accordingly the same is business expenditure of the assessee company. e) By paying amount on information technology, professional fees, business promotion, accommodation, traveling, etc. assessee company gets benefits for its business in India as services by the empl....
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....the salary paid to the seconded employees under section 192 was strongly emphasized. In support of the same, copy of Form- 16 and Form-12A issued to the seconded employees was also furnished. This fact has been noted by the learned Commissioner (Appeals) at Page-5 / Para-1.12. Point by point rebuttal of Assessing Officer's finding was submitted before the learned Commissioner (Appeals) and also the facts emerging from the 'seconded agreement' which were elucidated as under:- Supervision, direction and control of the deputed employees is with the Appellant's Board of Directors (refer para 2.2. of page I of the agreement). THPL does not bear any responsibility or risk for the results produced by the work of the deputed employees (refer para 3 on page 2 of the agreement). The salary cost of the deputed employees is borne by the appellant and the cost of the deputed employees is charged back by THPL to the appellant at actual basis without any markup (refer para 2.1 of page 2 of the agreement). The salary cost of the deputed employees is borne by the appellant and the cost of the deputed employees is charged back by THPL to the appellant at actual basis without any markup (....
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....es shows any stamp of receipt of the assessee company to depict that when and by what mode the same was received to the assessee; (vi) Signatory persons of Singapore company are not known and who has signed, as in some of the invoices, same person has signed in other invoices the name and designation of the person are not evident; (vii) None of the tax invoice shows that these details were raised for services rendered by both the seconded employees. Some of the invoices have not been filed; (viii) He also mentioned some invoices of various dates which have not been filed, Other details of date of remittance, details of Form-16 along with BSR code has been elaborated by him. 11. However, from these notes especially which has been elaborated by the learned Commissioner (Appeals) from point no.IX to XV as given in Para-4.6 of the appellate order, what inference he wanted to draw has not been made clear. Apparently, it seems that he wanted to demonstrate that monthwise payment has not been made by the assessee as per the tax invoices raised by the Singapore company and the payments have been made on later dates. Another most important fact which has been noted by him is the....
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....o be borne by the assessee company and if any reimbursement was to be borne by the assessee, then the same should have been done on monthly basis which has not been done and held that there is no justification or evidence for deferring the payment. On this basis, he held that there is no justification for such quantification of reimbursement of expenses by the assessee company and also that both these employees were working in India and there was no necessity to incur such expenses by the parent company and in any case deferment of reimbursement of expenses cannot be justified. On these basis, he has tried to justify the Assessing Officer's action of invoking the section 40(a)(ia) and confirm the disallowance. He has further placed reliance on the following decisions:- i) Danfoss Industries Pvt. Ltd. v/s CIT, AAR no.606/2002; and ii) AT&S India Pvt. Ltd. v/s CIT, AAR no.670/2005. In both the aforesaid decisions, reference has been made to the Hon'ble Supreme Court decision in Transmission Corporation of A.P. Ltd. v/s CIT, [1999] 239 ITR 587 (SC). The AAR ruling in case of Verizon Data Services India Pvt. Ltd. v/s CIT, AAR no.865/2010, was heavily relied upon him. In ....
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....the agreement itself provides the date of the agreement which means that the agreement has been entered on the said date itself. For e.g., in case of Anuj Maheshwari, the secondment agreement was dated 7th September 2006, and in case of Mr. Manish Kejariwal, it was entered on 1st May 2004. Secondly, before the Commissioner (Appeals), a copy of duly signed agreement was filed which has been noted by the learned Commissioner (Appeals) also, along with the Affidavit of these two employees. Thus, it cannot be held that the secondment agreement is sham or not genuine. Regarding the Assessing Officer's allegation that no permission has been obtained from the Government of India for the secondment agreement, he submitted that there is no such provision in the law or elsewhere for getting any approval of the agreement entered into between two parties for transfer of its employees. Insofar as the date of appointment letter and the date of joining are concerned, he submitted that there is no discrepancy and what inference the learned Commissioner (Appeals) wants to draw, has not been made clear and in any case it has no bearing on the issue involved here. Regarding discrepancy in the figures....
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....ispute on this fact. Once the TDS has been deducted under section 192, then there is no provision to deduct TDS under section 195 also. There is another important angle in this case he submitted, that all the payments including reimbursement of expenses between the parent company and the Indian company was subject matter of reference to the TPO who has found that these transactions are at ALP and there could not be any question that these reimbursements of expenses are for any payment for getting any kind of services from Singapore company. Even under the Explanation 2 to section 9(1)(vii), if the consideration which is the income of the recipient, chargeable under the head "salary", the same will not be termed as "fees for technical services" (FTS). Thus, this cannot be a case of FTS also. In support of his contention and on the facts of the case, he relied upon catena of decisions and also filed synopsis of such decisions along with copy of the judgment. A list of such decisions are as under:- i) Abbey Business Services India Pvt. Ltd. v/s DCIT, 53 SOT (Bngl.) 401; ii) ACIT v/s CMS (I) Operations & Maintenance Co. P. Ltd. (CMS India), 135 ITD 386 (Chennai); iii) ITO v/s ....
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....r which accrues or is deemed to accrue to non-resident in India. In the present case, the issue relates to reimbursement of salary which has been paid by the overseas company on behalf of the assessee. 18. Per contra, the learned Departmental Representative, Mr. Mahesh Kumar, rebutting the arguments of the learned Sr. Counsel, submitted that the entire fulcrum of the case is, whether the payment made to the Singapore company is on account of reimbursement of salary or not. He strongly contended that this is not a case of a salary at all as there is no employer employee relationship between the assessee and the seconded employees. It is a clear cut case for fees for technical services under the domestic law i.e., section 9(1)(vii) and also under the treaty Article-12(4). Without prejudice, if it is not a salary or FTS, then it is a case for a service P.E., hence, the payment made has to taxed in India. Firstly, he submitted that there is no reimbursement of expenses at all but payment on account of fees for technical services. In the present case, there is an agreement between the Singapore company and the assessee company with regard to investment advisory services to the Indian....
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....of Centrica India Offshore Pvt. Ltd. v/s CIT, in AAR no.856/2010. Here also, the assessee was a subsidiary of the overseas entity for coordinating the service of various vendors in India for which the assessee was paid cost plus 15% by the overseas company. The overseas entity deputed the seconded employee to render the service in India and all these service benefits were given by the overseas entity who remained the employee of the original employer. On these facts, the AAR has given the ruling against the assessee after discussing the issue in detail. He also referred to the relevant paragraph of the said decision. Similar reliance was placed on the AAR ruling in case of AT&S India Pvt. Ltd., AAR no.670/2005 and Danfoss Industries Pvt. Ltd. v/s CIT, AAR no.606/2002, wherein it was held that payments made in pursuance of secondment agreement cannot be said to be reimbursement of expenditure and such a payment has to be made after withholding the tax under section 195. He further submitted that even from the plain reading of Explanation (2) to section 9(1)(vii), managerial and consultancy services are treated as "fee for technical services". These seconded employees by doing adviso....
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....expenses, he strongly relied upon the Assessing Officer's findings and submitted that these are not in the nature of reimbursement but the payment made for services by the other party. Once the service was rendered in the Indian company, it was the expenditure of the Indian company and any payment towards reimbursement of expenses towards overseas company cannot be treated as mere reimbursement of expenses. 22. In the rejoinder, learned Sr. Counsel, Mr. Porus Kaka, submitted that the Assessing Officer and the learned Commissioner (Appeals) in the year 2008-09 have accepted that the payment made to these employees are in the nature of salary. The secondment agreement creates the obligation for the payment of salary and the liability to reimburse is under the secondment agreement only. Rebutting the decision of Petroleum India International (supra), he submitted that the Tribunal was examining the issue of the employer-employee relationship under section 40(a)(iii) and whether there is any employee-employer relationship between the assessee and the seconded person. There was no issue of section 195 or FTS. Similarly, the decision Emil Webber's case, the Hon'ble Supreme Court held ....
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....the Indian company who in turn are rendering services to Singapore company for which India is receiving remuneration at the mark-up of 21% plus reimbursement of cost. Hence, it is neither a case of FTS nor a case of service P.E. Once these two contentions failed, then it is a clear cut case of a salary paid to the employees for which TDS has duly been deducted under section 192 and the same has been deposited with the Government of India treasury and, hence, no disallowance can be made. 24. We have given our anxious consideration to the entire gamut of the arguments placed by both the parties and also the relevant findings of the Assessing Officer as well as the learned Commissioner (Appeals). Before adjudicating the issue involved, we briefly reiterate the preliminary facts of the case. The assessee which is a wholly owned subsidiary of Singapore company THPL renders investment advisory service to THPL which includes identifying and analyzing potential investments particulars in India evaluating political and economic scenario for the investment in India and also to monitor and make recommendation in respect of specified investment in India. Based on this advise, the THPL makes....
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....rnment of India is required. He has also not referred to any such provision through which such approval is needed; Secondly, before the learned Commissioner (Appeals), the signed agreement was duly filed and in the said agreements, date has already been mentioned in the operating part of the agreement. If the Assessing Officer had any doubt about the authenticity of the agreement, he could have very well required the assessee to substantiate the same. This premise of the Assessing Officer for coming to the conclusion that the secondment agreement is a colourable device cannot be upheld. The second reason given by him is that the relationship between the THPL and the assessee company is that of independent contractors and agreement shall be governed in accordance with the laws of India and, accordingly, the amount reimbursed is nothing but a contractual payment. Even if the relationship between the assessee and the THPL are that of independent contractor and reimbursement of salary is some kind of a contractual payment, then also, it does not strengthen the case of the Assessing Officer, because the THPL has paid the salary as per the secondment agreement and that too after withhold....
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.... the expenditure relating to seconded employees, these relate to meals, traveling, accommodation, training, etc., which are in the nature of expenses for which TDS is not required to be deducted under any provisions of law; * secondly, business promotion expenses relates to the amount of Rs. 1,271, which is a credit card expenditure of Mr. Anuj Maheshwari, which again is not liable for deducting TDS; * thirdly, the information technology expenditure represents subscription to factiva for availing data base and equinix charges which are for e-mail system. These are not liable for TDS because they are neither for technical services nor for any professional services; and * lastly; coming to the reimbursement of expenses for professional fees, on a perusal of the details of professional payments, it is seen that following amounts have been paid to the professionals for rendering services to the assessee in India:- (i) Luthra & Luthra Law Firm Rs. 12,32,543 (ii) Estate and Young Pvt. Ltd. Rs. 15,98,831 (iii) Jyoti Sagar Associates Rs. 34,328 Rs. 28,65,702 These payments have been made by the THPL on behalf of the assessee company which has been re....
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....the learned CIT(A) is misplaced because there is no discrepancy as such and the only difference was on account of presentation of financial statement on the net basis and gross basis. The reconciliation submitted by him at Page-91 of the paper book, however, makes it very clear which, for the sake of ready reference, is reproduced herein below:- Debtors and current liabilities as per books of account for the F.Y. ended 31.3.2007 Debtors Temasek Holdings P. Ltd. (THPL) Current Liabilities Sundry creditors THPL Other creditors Provision of expenses Other statutory dues Presentation in the financial statements for the financial year ended 31st March 2007 (Net basis) Debtors (Rs. 144,817,685 receivables from THPL less Rs. 62,616,270 payable to THPL) Current Liabilities Sundry creditors (Other creditors) Provision of expenses Other statutory dues Presentation in the financial statements for the financial year ended 31st March 2008 (ON gross basis) Debtors (on gross basis) Current liabilities (on gross basis as per the books of account) 62,616,270 14,64,581 536,255 29,656 1464581 536255 29656 144,817,685 ....
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....USA relating to development and maintenance of telephone software solution and certain information technology enable services. For the purpose of rendering the services in India, the U.S. company had sent three employees of Affiliate company GTE-OC of U.S. parent company, the salary of these employees were paid by GTE-OC which was reimbursed by the assessee. One of the main functions of the employees was to liaise between the assessee and the parent company to supervise and provide directions on the manner in which activities of the applicant should be carried out. Here also, the issue was that the reimbursement of salary by the Indian company to the GTE-OC, whether amounts to payment on which TDS was to be deducted under section 195. The GTE-OC had already deducted TDS under section 192. The basic difference in this case with that of the present case of the assessee is that the services rendered by the Indian company was for the purpose of U.S. company for operations in India and through the seconded employees the U.S. company was rendering services in India. Thus, the services were rendered by U.S. company only through the Indian company, whereas, in the present case the Indian c....
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....on account of reimbursement of salary of two employees and other costs, is in the nature of "fees for technical services", being rendering of managerial and consultancy services within the ambit of section 9(1)(vii) of the Act and also under Article 12(4)(b) of the India Singapore DTAA. Here in this case, as stated earlier, the Singapore company THPL is not rendering any service to the Indian company i.e., the assessee, rather it is a vice-versa. The two seconded employees are working for Indian company and only for the Indian operation. They are not rendering services on behalf of the Singapore company, therefore, there is no question of rendering of managerial or consultancy services by the Singapore company either directly or through the seconded employees. Hence, provisions of section 9(1)(vii) do not get attracted in this case. Once it is a salary, then it cannot be a case of FTS as it is neither the case of the Assessing Officer nor of the Commissioner (Appeals) that it is in the nature of FTS. Even the "make available clause" as stipulated in Article-12(4) is also not applicable because the Singapore company is neither rendering any services to the Indian company nor they ar....
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....t these two employees will work for the assessee company under their supervision and under the control of the Board of Directors of the Indian company. Their services can be terminated by the either party and the salary which is borne by the employer company i.e., Singapore company, the entire cost of salary would be reimbursed by the assessee company as per the advice raised from time to time. Thus, we are unable to sustain the findings of the Assessing Officer as well as of the learned Commissioner (Appeals) on the issue of reimbursement of salary, reimbursement of expenditure relating to the seconded employees, expenditure relating to information technology, expenditure and business promotion. Accordingly, the disallowance under section 40(a)(ia) on account of these expenses stands deleted. 33. However, with regard to the professional fees, we find that these expenditures have been incurred for the purpose of Indian company for its operation in India and these payments were made by the Singapore company which has been reimbursed by the Indian company. We have already held that the payment of professional fee does attract with holding of tax under the provisions of the Act and....
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....advisory services. As far as the first issue is concerned, that is disallowance under section 40(a)(ia) of the expenditure, the facts and the issues involved are exactly similar to the assessment year 2007-08, which has been discussed in detail in the appeal decided herein above. The only difference being that in this year the DRP has treated the reimbursement of these expenses as "fees for technical services" as per the Article-12 of Indo- Singapore DTAA. 39. Both the parties have made their elaborated submissions in support of various decisions which were common for both the appeal (i.e., for assessment years 2007-08 and 2008-09). The relevant directions of the DRP on this score are as under:- (i) The associated entity, foreign company, Temasek Holdings is an investment company which is an active shareholder and investor in financial services, telecommunications & media, technology, transportation, industrials, life-sciences, consumer, real estate, energy & resources and all its employees are engaged in such activity. In the instant case, the impugned reimbursements have been made by the assessee to the foreign company in respect of investment advisory services received fro....
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....the technology contained therein. Here the services are being rendered by the Indian company to the Singapore company and the seconded employees are working for the Indian company for its Indian operation. For all practical purposes, the assessee company is the economic employer of the seconded employees who are rendering services purely for the assessee company. There is no make available of any kind of technical knowledge, experience, skill or process by the Singapore company to the assessee company through these seconded employees, which is purely a case of payment of salary and reimbursement of salary. All the judgments which have been relied upon by the learned Departmental Representative are not applicable on the peculiar facts of the case and the decision of Verizon Data Services (supra), as relied upon heavily by the learned Departmental Representative is also not applicable as discussed in our earlier part of this order. Thus, in view of our findings given in the assessment year 2007-08, such reimbursement of salary and expenditure incurred by the employees are neither in the nature of "fee for technical services" nor in the nature of any payment for which tax has to be wi....
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....r holding that these companies do not offer the investment advisory services. He carried out his own search and shortlisted eleven comparables which have been elaborated at Page-3 of the TPO's order. After inviting the objections of the assessee, he excluded the three comparables and eight comparables were shortlisted with the average PLI worked out at 54.88% of OP/TC. The final list of comparables with the operating profit margin were as under:- Sl. No. Name of Party O.P. Sales % OP / TC % 1. Sundaram Asset Mgt. Co. Ltd. 30.48 43.83 2. ICRA Ltd. 50.52 102.08 3. Deutche Asset Mgt. India Ltd. 9.24 10.18 4. Religare Commodities Ltd. 0.82 0.82 5. BGIL films & Technologies Ltd. 4.73 4.96 6. Brescon Corporate Advisors Ltd. 49.52 98.10 7. Shriyam Broking Intermediary Ltd. 52.88 112.21 8. Twenty First Century Shares & Securities Ltd. 40.06 66.84 Mean 29.78 54.88 46. Accordingly, the upward adjustment was made by the TPO in the following manner:- "3.5 As the assessee's PLI at 21% is way below the average PLI of the comp....
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....there is no such key phrase "investment advisory services" in "Prowess data". Thus, the entire basis of the TPO for rejecting the assessee's comparables and introducing fresh comparables is not only baseless but also erroneous. Thereafter, the learned Sr. Counsel, Mr. Kaka, drew our attention to the data of the six comparables selected by the assessee for bench marking its transactions and submitted that not only these companies are functionally comparable as they all are engaged in the investment advisory services somehow or the other, but also their relevant financial data are also comparable. Most of these comparables have been accepted by the TPO in the earlier year and also in the subsequent years and, therefore, the same set of comparables cannot be rejected without any proper basis or substantial change in the function and financial data particularly in this year. First of all, the TPO has to have some basis for rejecting the assessee's comparables and then only he can proceed for carrying out fresh search of comparables. In support of this contention, Mr. Kaka, strongly relied upon the decision of the Delhi High Court in CIT v/s Mantor Graphics Pvt. Ltd., ITA no.1114/2008 o....
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.... at the functional level itself, this company cannot be compared with that of the assessee's company. Regarding ICRA Online Ltd. he submitted that the segmental reporting of the said company shows that they are engaged in information services, outsourced services and software services. These services cannot be said to be comparable with the investment advisory services. Thus, this company has rightly been rejected by the TPO. Regarding IDC India Ltd., he did not make any comment and relied upon the rejection made by the TPO. Regarding Information Technology Ltd., he submitted that its main income is from data outsourcing charges i.e., BPO and, therefore, this company has to be excluded from the comparability analysis. Lastly, coming to the Kinetic Trust Ltd., he submitted that this company is registered as NBFC with the RBI and again it is not comparable to the assessee. 50. Thus, without prejudice, even if out of six comparable companies chosen by the assessee company, only two companies are included in the comparability analysis then the average margin comes to 30% as the margin of Access India Advisories India Ltd. is 45.96% and the margin of IDC Ltd. is 13.88%. Going by the ....
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....pon by the either party before us and also the order of the TPO. The assessee which is mainly engaged in rendering of investment advisory services to its parent company at Singapore has received mark-up of 21%. This margin of 21% has been benched marked by using TNMM as the most appropriate method with PLI as operating profit to operating cost. After detail process of selection in "Prowess data" and selection criteria, it had selected six comparables in its transfer pricing study report with average margin of 13.85%. Since this margin was lower than assessee's margin of 21% and, hence, it was declared that its margin on the transaction carried out with its parent company was at ALP. The TPO, however, out rightly rejected the assessee's comparables, firstly, on the ground that they are not in investment advisory services and secondly the assessee has not carried out search by using the key phrase "investment advisory services". He was of the opinion that the data should have been accessed from the "capital line data base". No proper reasoning has been given by the TPO as to why data from "Prowess" is not reliable and the "capital line data" should have been taken. On a perusal of hi....
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....nt India Ltd. and Religare Commodities Ltd., as selected by the TPO, cannot be compared with the assessee company. Lastly, there are few companies which are doing entirely different activities viz. ICRA Ltd., which is a credit rating agency in India and BGIL Films and Technologies Ltd., which is mainly engaged in production of distribution of movies. Both these companies under any parameter or yardstick cannot be said to be functionally comparable with that of the assessee company. Lastly, Breson Corporate Finance Ltd., are mostly into making investment in the companies using its own fund and it is a leading player in distress and special situation advisor and investment company. The over all function as per the profile of the company, cannot be said to have much functional similarity with that of the assessee company. Accordingly, none of the comparables as selected by the TPO can be said to be comparable on FAR analysis and, therefore, none of the comparables can be included for the comparability analysis for bench marking the transactions carried on by the assessee under TNMM. 54. Coming to the assessee's comparables, it is seen that some of them have been found to be proper ....
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....tative did not had any objection for including this comparable for the comparability analysis. Accordingly, the said company has rightly been included in the list of comparables; iv) IDC India Ltd. This company is also engaged in advisory and consultancy and services for the purpose of investment made in various sectors. This company was also found to be a good comparable in Carlyle India Advisories Pvt. Ltd. for rendering similar kind of function. Moreover, this company has also been found to be good comparable by the TPO in the assessment years 2007-08 and 2009-10 (x) II (v) Informed Technologies Ltd. This company mostly offers range of data management services to the financial sector in U.S.A. It collects and analyses data on financial fundamentals, corporate governance and capital market. It outsource services i.e., BPO services consisting of financial data base and back office activities for research and advisory reports. Thus, the data outsourcing charges are mostly related to analysing of data based on which advise is given for the investment purpose in India. Moreover, this company has been accepted by the TPO in the year 2009-10 also. Thus, it is a good comparable. ....