TaxTMI 
TaxTMI 
2014 (1) TMI 388
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...., reject sub ground no. 3.1. 3. Ground no. 3 sub grounds 3.2 & 3.3 are connected, wherein there was an addition proposed by the TPO at Rs. 15,988,100 with respect to technical fee paid to AE. 4. The AR giving the description of the business of the assessee, submitted that the assessee is one of the affiliates of Generale De Survillance (SGS), based in Geneva, Switzerland, which operates a network of 840 offices & subsidiaries and have over 320 laboratories and have presence in over 140 countries around the world, who are providing verification, inspection and certifications services including in India for the past over 50 years. From India office, the assessee monitors internationally traded agricultural products, minerals, petroleum, petrochemicals, consumer goods and provides certification and other services to industrial environment, non destructive testing, project resourcing, logistics and hygiene sectors. 5. Since the assessee is providing such a wide range of services with its AEs and other affiliate with whom there were international transaction, reference was made to the TPO with regard to, Particulars Amount Technical fees paid by SGS India for the year ....
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....permitted payment @ 1% on domestic sale and 2% on export for the use of trademark and brand name on foreign collaboration. 10. In response to this notice, the assessee submitted before the TPO that it had adopted comparables of four entities and made comparisons, wherein one of the comparables was an independent entity. And to give an idea with regard to margins recovered against turnover, the assessee provided the following table :- 11. From the above tables it is seen that in the case of comparables, OP/TC comes to 15.62%, as against the assessee average 18.44%. It was also stated that affiliates located in Asia region such as Malaysia, Thailand & Pakistan were paying license fee @ 5% of the turnover. The assessee also submitted with respect to license fee @ 1% that guidelines issued by the RBI or FIPB are not necessarily indicative of the ALP. It was also submitted that in instances of particular merit, RBI or FIPB can allow approval of higher amount also. In the case of the assessee, FIPB has allowed a higher amount. 12. Considering all facts, the TPO considered the rates as prescribed by the Press no. 9, wherein the license fee was allowed at 1% on local turnover and ....
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....nd other intangibles, strictly in accordance with the authorization of the Government of India and the Board controlling the payments. The AR referred to the case of Sona Okegawa Precision Forgings Ltd. vs Add. CIT, ITA No. 4781/Del/2010, wherein coordinate Bench at Delhi, held, "It is seen that the main question is whether the royalty paid by the assessee @ 3 per cent of the net sale price stands justified under CUP. The assessee has placed on record a copy of the letter dt. 30th April, 1993 written by the RBI, Exchange Control Department , to SSS Ltd. in which payment of royalty @ 3 per cent on domestic sales was allowed to be paid for a period of five years. There are similar other correspondences which have been placed on record. The assessee has also placed on record a press note issued by the Government of India, Ministry of Commerce and Industries, Department of Industrial Policy and Promotion, issued in 2003, under which royalty payment @ 8 per cent on export sales and 5 per cent on domestic sales has been referred to be reasonable for the purpose of processing approval of payments. On the other hand, the AO failed to bring any material on record that payment of royalty ....
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....n we look into the table 1, where the breakup of services/benefits received by SGS India, we find that there are two elements, i.e. license fee @ 3% of turnover of 89.61 crores, which comes to 2.69 crores and ASF payment which comes to 2.87 crores, which, apparently stands accepted by the TPO as there is no proposed adjustment, therefore, we are concerned with a net of 2.17 (5.04 - 2.87). In that case computation made by the TPO at 5.56 is factually incorrect. Hence 5.56 could not have been the payment made, as the payments debited to the P&L account was in accordance with press note, agreement dated 26.09.2000 and FIPB approval dated 06.04.2000, said the payments to be made net of taxes. 19. The DR strongly opposed and contended that very basis of adoption of a particular method would itself render the computation and reliance by the assessee on an infirmity, as there cannot be any benchmarking for ALP 20. At this juncture, we enquired from the AR, as to how CUP could be suggested, the AR pointed out that in that set of comparables as provided by the assessee, there is one entity, which could be taken as falling in CUP which could be compared with the assessee, i.e. W. Rabba....
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....t of our observations, we reverse the adjustment proposed by the TPO and hold that assessee payment made on account of royalty/license fee of Rs. 1,59,88,100 to be at arm's length. 24. Grounds no. 3, 3.2 & 3.3 are, therefore, allowed. 25. Grounds no. 4 & 4.1 with regard payment of Rs. 28,794,000 on account of Research and Development. 26. Since the payments made under this segment pertained to international transactions, this segment was also referred to the TPO, before whom, the assessee submitted, "10. It is explained by the assessee that in order to keep abreast with the vari6us developments on account of technological strides and breakthroughs in the recent years, rapid globalization and the computerization the associate entity Switzerland had undertaken several computerization and communication projects. It is stated that the associate entity spent sizeable are sums of money in conducting research and development in new areas and is constantly developing better and more economical and efficient methods, techniques and process. It is stated that such projects benefit the assessee and the other group entities and are aimed at developing latest customised software, ne....
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....mmunication revolution in the business to business segment. It is stated that the cost hence had to be allocated amongst these entities only. The assessee contends that the charge in this regard is in the nature of cost contribution arrangement and is in accordance with the OECD guidelines in this regard". 27. The TPO, after examining the contentions of the assessee, observes, "In the case of a cost contribution arrangement, it would be necessary for e assessee to enter into a prior agreement with the other parties to the arrangement wherein the costs proposed to be incurred by the various entities would be determined, as also the benefits that each of the entity expects to derive from the arrangement. In the case of a cost contribution arrangement through no specific method is prescribed under the Indian Tax Laws, the principles of OECD requires that the benefits which a person expects to derive from the arrangement should be commensurate with the costs allocated to it. Therefore, in order to justify the transaction the assessee at least needs to establish that it expected to derive certain benefits from the arrangement, there must be a approximate quantification of such ben....
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....ngaged in a business similar to that of the assessee and is in fact a competitor in many segments was making a net profit of 36% on sales during the previous year which is also much higher than that of the assessee. Though the transactions entered into by TUV India Pvt. Ltd. are controlled transactions and by definition can not be used to determine the ALP, they still give a fair indication of the margins prevailing in the industry. Hence even at an entity level TNMM it is established that the international transactions entered into by the assessee are not at arm's length. After making the adjustment to the extent proposed above, the assessee's operating profit margins would still be lower than that of the comparables. Hence the determination of ALP on transaction by transaction basis is lesser than what is required to be made under the TNM method and hence corroborated to that extent." and suggests an adjustment of Rs. 28,794,000 in this segment. 29. The assessee preferred an appeal before the CIT(A), who, after examining the submissions made before him, observes, "As far as payment of research and development expenses is concerned it is also seen that the appellant had agre....
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.... say that proper and adequate opportunity shall be provided to the assessee to present its case. 34. In the result, the grounds no. 4 and 4.1 are treated as allowed for statistical purposes. 35. Resorting ourselves to domestic issues in grounds no. 1 & 2. 36. Ground no. 1 is in respect to the disallowance of Rs. 70,844 on account of delayed payment of contribution to PF, Rs. 45,907 on account of ESIC and Rs. 32,518 on account of the fund. 37. From the order of assessment, we find that the above payments have been made before the due date of filing of the return, in which case, the impugned addition cannot be made. We, therefore, delete the same. 38. Ground no. 1 is, therefore allowed. 39. Ground no. 2 is in respect to the allowance of credit of Rs. 5,44,475 on account of TDS. 40. The AO is directed to allow the credit of TDS as per law. Ground no. 2 is therefore, allowed. 41. In the result, the appeal, as filed is partly allowed. 42. For assessment year 2003-04, the following appeals are filed: Appeal filed by the department, bearing ITA No. 9035/Mum/2010, Cross Objection filed by the assessee, bearing CO No. 245/Mum/2012 and Appeal filed by the assessee,....
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....peal : ITA No. 9110/Mum/2010 52. The assessee has taken the following grounds: "1. The following grounds of appeal are independent of, and without prejudice to, one another: 1. The learned CIT(A) has erred in law and on facts in upholding the addition made by the Assessing Officer/Transfer Pricing Officer with respect to Research & Development (R&D) Expenses of Rs. 1,46,51,865/- by: * not appreciating the additional evidences presented by the assessee for justifying the payment of R&D expenses; * disregarding the 'Remand report' prepared by the Joint Commissioner of Income Tax-Transfer Pricing II(4), which stated that the additional evidence provided in respect of the R&D expenses seems acceptable; * not applying a fresh mind or appreciating the new facts an circumstances, while following precedent for AY 2002-03 which is under appeal before the Income Tax Appellate Tribunal. 2. On the facts and circumstances of the case, and in law, the learned CIT(A) ought to have granted the benefit of Article 10 of the India Switzerland Double Taxation Avoidance Agreement, that the dividend declared by the Appellant is liable to dividend distribution tax at the rat of 10 pe....