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2018 (5) TMI 1686
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....eing 25% of the entertainment expenditure of Rs. 17. 32 lakhs on the ground that same was incurred for non-business purposes. 2.1. It was brought to our notice that while deciding the appeal for the assessment year 2007 - 08 (ITA/6708/Mumbai/2011, dated 21/02/2018) the Tribunal had dealt with the identical issue. We are reproducing relevant portion of order and it reads as under: 37. In ground no. 3, the assessee has challenged the disallowance of entertainment expenditure of Rs. 3, 44, 138. 38. Brief facts are, while framing the draft assessment, the Assessing Officer noticed that the assessee has debited an amount of Rs. 13, 76, 552 on account of entertainment expenses. After calling for the necessary details, he found that most of these expenses are in the nature of payment made to various hotels towards lunch and dinner of various persons. Alleging that the assessee failed to provide specific reason / purpose for which such expenditure was incurred the Assessing Officer disallowed 25% out of such expenses on ad-hoc basis which worked out to Rs. 3, 44, 138. 39. The DRP also sustained the disallowance taking note of the fact that in assessment year 2006-07, s....
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....deducted tax on an amount of Rs. 67, 56, 840, while not doing so in respect of Rs. 1, 25, 60, 485. He, therefore, called upon the assessee to explain the reason for not withholding tax on part of the payment made to EMCAP. In response, it was submitted by the assessee that EMCAP is a non-resident and does not have a P. E. in India. Services were rendered outside India, hence, the payment made cannot be considered as income deemed to accrue or arising in India in view of section 9(1)(i) of the Act. Without prejudice to the aforesaid submissions, the learned Counsel for the assessee submitted that the payment made is not liable for TDS in view of the specific provisions of India Singapore tax treaty as per which fees for technical services is taxable in the hands of the recipients only in case of transfer of technology. The Assessing Officer, however, did not find merit in any of the submissions made by the assessee. He observed that the payment made by the assessee is in the nature of fees for technical services as defined in Explanation-2 to section 9(1)(vii) of the Act, as EMCAP has rendered services of highly technical nature involving in drawing and research. He further....
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....ffairs, tax, human resources, law, safety, health and environment services, medical security, business procurement, business line, etc. , which cannot be considered to be in the nature of fees for technical services as defined under Explanation-2 to section 9(1)(vii) of the Act He submitted that as per the agreement, the EMCAP has to charge on cost-to-cost basis without any mark-up. He submitted, the payment made, since, is towards reimbursement of expenditure withholding of tax was not necessary. Further, he submitted that since the assessee has made short deduction of tax and it is not a case of no deduction disallowance under section 40(a)(i) of the Act cannot be made. Without prejudice to the aforesaid contention, the learned counsel for the assessee submitted that as per Article- 12(4)(b) of India Singapore tax treaty fee for technical service means payment of any kind to any person in consideration for service of managerial, technical or consulting nature if such services make available technical knowledge, experience, skill, knowhow, process which enables the person acquiring the services to apply technology contained therein. Learned counsel for the assessee submitted, firs....
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....rring to Article-5 of India Singapore tax treaty the assessee does have a P. E. in India since it maintains a research facility at Bangalore. In support of this contention, the learned Departmental Representative relied upon the following decisions:- i) G. V. K. Industries Ltd. v/s ITO, [1998] 96 Taxman 179 (AP) ii) Foster Wheeler France S. A. v/s DDIT, ITA no. 774/Mds. /2014, order dated 05. 02. 2016; and iii) U. S. Technology Resources Pvt. Ltd. v/s ACIT, IT no. 222/Coch. / 2013, order dated 28. 09. 2013. 48. We have heard rival contentions and perused material on record. We have also applied our mind to the decisions relied upon. It is evident, while disallowing the amount in dispute under section 40(a)(i) of the Act, the Assessing Officer has held that the payment made by the assessee to EMCAP towards Global support services is in the nature of fees for technical service as defined under Explanation-2 to section 9(1)(vii) of the Act. It is also relevant to note, under Article-12 of India Singapore tax treaty, fees for technical services, though, is taxable in the hands of the recipient in Singapore, however, it can also be taxed in India unde....
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....his own benefit and without recourse to the service provider in future and for this purpose a transaction of the technical knowledge, experience, skills, etc. , from the service provider to the service recipient is necessary. Some sort of durability or permanency of the result of the rendering of services is envisaged which will remain at the disposal of the service recipient. In other words, the technical knowledge, experience, skill, etc. , must remain with the service recipient even after the rendering of the services has come to an end. In contrast to Article-12(4)(b) of the India-U. S. tax treaty, Article- 12(4)(b) of India-Singapore tax treaty has made it more specific by providing that technical knowledge, experience, skill, knowhow or process, would not amount to fees for technical service unless it enables the person acquiring the service to apply the technology therein. A perusal of the agreement between the assessee and EMCAP makes it clear that as per the terms of the agreement EMCAP would provide management consulting, functional advice, administrative, technical, professional and other support services to the assessee either itself or through any affiliate or through ....
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....of the service is in a position to derive an enduring benefit out of utilisation of the knowledge or knowhow on his own in future without the aid of the service provider but such technical knowledge, skill, knowhow, etc. , must remain with the recipient even after the contract comes to an end. The Court has observed, the technology will be considered to have been made available when the person acquiring the service enable him to apply the technology. Further, the Court went on to hold that the payment can be considered as fees for technical services only if the twin test of rendering service and making technical knowledge available at the same time is satisfied. If we apply the aforesaid tests laid down by the Hon'ble Karnataka High Court to the facts of the present case it becomes clear that it has not been established on record that while rendering the services, EMCAP has made available technical knowledge, knowhow, skill, etc. , to the assessee in a manner to enable him to apply them independently or on its own. Therefore, the payment made by the assessee cannot be considered as fees for technical services as defined under Article 12(4)(b) of the India- Singapore tax treaty ....
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....nts would not arise, that it had paid professional tax of Rs. 1. 57 lakhs, that it had also paid entry tax of Rs. 1. 76 lakhs, that there were certain difficulties in verification, that in the AIS Statement amount was reflected against Sales tax Department/Professional tax department, that it was not clear as to whether the payment was under the central sales tax or state sales tax, that it had not made any payment to sub brokers during the year under consideration as alleged by the AO, that the AO was requested to cross check the details of payment with the concerned department / agency before making addition, that the AO did not make any enquiry in that regard, that there was no mixing up of details between assessee and its group entities, that the assessee was engaged in the business of market development, research etc. , that additions should not have been made merely on the basis of AIR without bringing any evidence on record, that the AO had not provided necessary details to the assessee though a specific request was made, that assessee had not made any sales during the year, that question of making payment under the head sales tax would not arise. He referred to page no. 216....
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....t it had suo motu computed the arms length price at 16% and offered the difference at approx 10% to tax, as income from technical services. Out of the comparable selected by the assessee he rejected two comparables namely Neeman Medical International Asia Ltd. (NMIAL) and Pfizer Ltd. (Service Segment). He added TCG Life Science Limited as one of the comparables. He considered OP by TC of the following 8 companies which was 23. 79%, as final comparable set. The working the same is given below:- SN. Name of the Company OP/TC 1. Alphageo (India) Ltd. 41. 05% 2. Choksi Laboratories Ltd. 29. 95% 3. Dolphin Medical Services Ltd. 2. 24% 4. Medinova Diagnostic Services Ltd. 4. 47% 5. N. G. Industries Ltd. 21. 56% 6. Vimta Labs Ltd. 15. 84% 7. TCG Lifesciences Ltd. 29. 97% 8. Transgene Biotech Ltd. -Diagnostic Services 38. 21% Arithmetic Mean 23. 79% Accordingly, he proposed an adjustment of Rs. 81. 51 lakhs under head TS as under :- Particulars Year ended 31/03/2008 Total cost 5, 92, 43, 957 OP/TC as per comparable @ 23. 79% Total income as per comparable (A....
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....nologies Ltd. 96. 66 Introduced by the TPO 19. R Systems International (seg. ) 4. 3 Introduced by the TPO 20. Spanco Ltd. (Seg. ) 11. 04 comparable accepted by TPO 21. Triton Corpn. Ltd. 23. 81 comparable accepted by TPO 22. Wipro Ltd. (Seg. ) 30. 05 Introduced by the TPO Arithmetic Mean 27. 53 Accordingly, the TPO proposed an addition of Rs. 76. 58 lakhs for the BOSS transactions. 5.1. During the appellate proceedings the assessee made detailed submissions before the FAA and relied upon certain case laws. It was argued that while calculating the margins of comparables the TPO had taken wrong margins, that after considering the correct margin of the comparables the margin would be 23. 94% against 27. 53% as adopted by TPO, that out of 22 comparables 4 companies- namely Coral Hubs Ltd. , (50. 68%), Eclerx Services Ltd. (50. 41%), Genesys International Corporation Ltd. (47. 3%) and Mold Tek Technologies Ltd. (96. 66%)- had abnormally high margins, that after removing companies with abnormally high margins the revised average margin would come to 15. 61 %, that various Tribunal ruling had excluded Accentia Tec....
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....ollowing reasons:- i) The sales relating to service segment as a percentage of total sales works out to only 3. 48%. Hence, the revenue earned from service segment is insignificant; ii) The unallocated expenditure of the company exceeds the revenue earned from the service segment; iii) If operating profit margin to sales ratio of the company is considered without considering unallocated expenditure, the OP/TC ratio will come against the assessee. 7. From a perusal of the notes to the financial statements for the relevant financial year it is noticed that the company has maintained its accounts segment-wise and the Revenue earned from service segment has been separately shown. Therefore, it cannot be said that it is not having any service segment to consider as a comparable with the assessee. Moreover, as noted by us, the DRP in assessee's own case for immediately preceding assessment year 2006-07 has accepted this company as a comparable after verifying annual accounts. Further, the Transfer Pricing Officer himself in assessee's own case for Assessment Year 2009-10 and 2010-11 has accepted this company as a comparable. In fact, in assessee's own ....
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....e two companies, the learned Authorised Representative submitted that both these companies are having Related Party Transaction (RPT) exceeding the threshold limit of more than 15%. Therefore, he submitted that these companies should be excluded. 15. Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP. 16. We have heard rival contentions and perused the material available on record. As per assessee's own submissions, the related party transaction in case of HCL Comnet Systems & Services Ltd. is 22. 37%. In many of the orders including the orders where the Judicial Member is a party, threshold limit of related party transaction has been accepted at more than 25%. That being the case, we are of the view that HCL Comnet Systems & Services Ltd. cannot be excluded on account of high related party transaction. However, as far as Apex Knowledge Solutions Pvt. Ltd. is concerned, the learned Authorised Representative submitted that the related party transaction in case of this company is 104. 38%. It is observed, in the search process adopted by the Transfer Pricing Officer to select comparables one of the criterion ....
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....umber of decisions of different Benches of this Tribunal, it has been held that e-Clerx Services Ltd. being a KPO service provider is not comparable to BPO service provider. In this context, we may refer to following decisions of the Tribunal, Hyderabad Bench:- i) Capital IQ Information Systems India Pvt. Ltd. v/s DCIT, [2013] 32 taxmann. com 21; and ii) HSBC Electronic Data Processing India Pvt. Ltd. v/s ACIT, [2014] 52 taxmann. com 136. 20. In fact, in case of Rampgreen Solution Pvt. Ltd. , 377 ITR 533, the Hon'ble Delhi High Court referring to the decision of the Tribunal, Hyderabad Bench, in case of Capital IQ Information Systems Pvt. Ltd. (supra), has held that e-Clerx Services Ltd. being a KPO service provider cannot be compared to BPO service provider. In view of the aforesaid, we direct the Assessing Officer to exclude e-Clerx Services Ltd. from the list of comparables. 21. As far as Mouldtek Technologies Ltd. (SEG) is concerned, it is observed in the course of transfer pricing proceedings, the assessee has objected to inclusion of this company by specifically stating that it is engaged in providing KPO services in the field of engineering ser....
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....ench, in case of HSBC Electronic Data Processing India Pvt. Ltd. (supra), directed the Assessing Officer to examine this aspect. In view of the aforesaid, we direct the Assessing Officer to examine the functionality of this company and exclude the same if it is found that the company is engaged in the software development. ASIT C. MEHTA FINANCIAL SERVICE LTD. 25. Learned Counsel for the assessee objected to selection of this company as a comparable on the ground that the company lacks segmental details. Further, he submitted that the company has a low employee cost of 24. 78%, hence, cannot be comparable to the assessee. 26. Learned Departmental Representative relied upon the findings of the Transfer Pricing Officer and the DRP. 27. We have heard rival contentions and perused the material available on record. As could be seen in the course of transfer pricing proceedings, in response to the show cause notice issued by the Transfer Pricing Officer the assessee has accepted this company as a comparable. Further, it appears before the DRP also, the assessee has not specifically objected to the exclusion of this company. Thus, it is evident, the Depa....
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....nt itself but out sources the entire work to third parties. This is evident from low employee cost of the company. Considering the aforesaid aspect different Benches of the Tribunal have unanimously held that the company cannot be considered as a comparable. In this context, we may refer to the decision of the Tribunal, Hyderabad Bench, in Capital IQ Information System Pvt. Ltd. and HSBC Electronic Data Processing Pvt. Ltd. (supra). In fact, taking note of the aforesaid factual position, the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra), has held that this company cannot be considered as a comparable. In view of the aforesaid, we direct the Assessing Officer to exclude this company as a comparable. 34. It is relevant to note in the course of hearing, learned Authorised Representative contended before us that the Transfer Pricing Officer has wrongly computed the margin of the comparable companies under both the segments. In this context, he drew our attention to the working of the correct margin as submitted in two separate charts. We direct the Assessing Officer to examine the aforesaid aspect and compute the arm's length price under both the s....