TaxTMI 
TaxTMI 
2019 (2) TMI 795
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts and circumstances of the case, Canon India Private Limited (hereinafter referred to as "the Appellant"), respectfully submits in respect of the order passed by the learned Assistant Commissioner of Income Tax, Circle 5(2), New Delhi (hereinafter referred to as the "Ld. AO") under section 143(3) / read with section 144C of the Income Tax Act, 1961 (hereinafter referred to as the ''Act") the following grounds: A. Transfer Pricing Grounds 1. That on the facts and circumstances of the case and in law, the Assessing Officer ("AO") has erred in assessing the total income of the Appellant under section 143(3) read with section 144C( 13) of the Act, for the relevant assessment year ("AY") at INR 146,04,58,050 as against the returned loss of INR 33,76,80,930. 2. That on the facts and circumstances of the case and in law, the AO / Dispute Resolution Panel ('DRP') / Transfer Pricing Officer ('TPO') have erred in making adjustment of INR 175,91,11,274 to the arm's length price ('ALP') of alleged international transaction of Advertisement, Marketing and Promotion ("AMP") expenditure. 3. That on the facts and circumstances of the case and in law, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e in favor of AE, for which it should be compensated by the AE. 8. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in re-characterizing the Appellant as service provider rendering brand building services to its AE, without appreciating that it is a full risk bearing distributor incurring AMP expenditure in the course of its own business to promote its sales in India. Notwithstanding and without prejudice to the above grounds that the AMP expenditure incurred by the Appellant does not constitute an international transaction under Chapter X of the Act, the Appellant craves to raise following grounds on merits: 9. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not appreciating that distribution and marketing functions being inter-connected and intertwined should be benchmarked on an aggregate basis. The AO / DRP / TPO further erred in not appreciating that if the two functions are segregated and benchmarked, then the same would result in over taxation and is contrary to the provisions of the Act. 10. That on facts and circumstances of the case and in law, the AO / TP....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e same was to be segregated and benchmarked separately. 12. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in including subsidy from the scope of AMP expenditure while benchmarking the same on segregated basis. 12.1. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not excluding selling / business promotion expenses from the scope of AMP expenditure, particularly when the TPO pursuant directions of DRP for AY 2011- 12 had excluded similar expenses from scope of AMP expenditure. Further AO / DRP / TPO erred in not following the decision of the jurisdictional High Court and Tribunal in Appellant's own case for assessment years 2006-07 to 2008-09 to exclude the selling / business promotion expenses as per the details filed. 13. That on the facts and circumstances of the case and in law, the AO / TPO have erred in not granting the benefit of quantitative / economic adjustments (such as non-payment of royalty / expenditure incurred on new product launches), while computing the alleged excessive AMP expenditure. Further, DRP erred in not adjudicating the objection of the Appellant in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1.6. The Ld. AO / Hon'ble DRP ought to have appreciated that there is an employer- employee relationship between the Appellant and the expatriates and that the payments are towards reimbursement of actual administrative costs of the expatriates as incurred by Canon Inc., Japan. 1.7. The principle of determining employment relationship through the "economic criteria" is also supported by OECD Commentary on the Model Convention. The Commentary supports the concept of "economic employer" (rather than formal / legal employer) in the context of taxation of dependent personal services. It states that the term "employer" should be interpreted as "the person having rights on the work produced and bearing the relative responsibility and risks". It is the substance that prevails over the form. The real employer is the user of the labour. The Ld. AO / Hon'ble DRP has erred in not relying on the concept of economic and legal employer. 1.8. The Ld. AO / Hon'ble DRP have erred in holding that section 195 of the Act is applicable to the present case and the Appellant is liable to deduct tax at source under that section on the payments made to Canon Inc., Japan towards reimbursem....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ow. 4. At the outset, Ld.Counsel submitted that issues pertaining to transfer pricing adjustments stand fully covered by orders passed by coordinate bench of this Tribunal in assessee's own case for preceding assessment years. 4.1. He submitted that Ground No. 1-2 are general in nature and therefore do not call for any adjudication. 5. Ground No. 3-8 raised by assessee are legal issues wherein assessee is challenging order passed by Ld.TPO/AO to be bad in law, as there did not exist any international transaction between two Associated Enterprises. He submitted these issues now stands fully covered by order of this Tribunal for Assessment Year 2011-12 placed at pages 213-254 of case law paper book. Placing reliance upon order of this Tribunal in ITA No. 832/Del/2016 filed by assessee for Assessment Year 2011-12 he submitted that these grounds are decided as under: " 40. As regards to ground no.2 & 2.2 relating to non-existence of international transaction and ground no.4 relating to no creation of marketing intangible in favour of AE, the same are identical with ground no.4 & 5 of the appeal filed by the assessee for AY 2010- 11. Therefore, the observations made in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reliance upon observations of this Tribunal in preceding Assessment Years in assessee's own case. 10. Ld.CIT,DR though supported order passed by authorities below could not controvert aforestated observations by this Tribunal in assessee's own case for preceding Assessment Years. 11. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254. 12. As we have already set aside issue relating to nature of AMP expenditure to Ld.AO/TPO, applicability of most appropriate method relating to same head of transaction also deserves to be set-aside. It is also observed that, this is the consistent view taken by this Tribunal in case of assessee for preceding Assessment Years, copies of orders are placed before us. 12.1. Respectfully following same, we also set aside this issue back to Ld. AO/TPO. 12.2. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 13. Ground No. 12.1 & 13 have been raised by assessee as Ld. TPO has included selling/business promotion expenses in scope of AMP expenditure wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ax issues, Sh.S.K Agarwal CA appeared before us. Ground No. 1-1.9 16. Brief facts are that assessee distributes/trades in high-tech office automation, entertainment photographic products etc. In addition it is also engaging export of software from STPI unit and also by way of sub contract it projects. 17. DRP issued vide order sheet entry dated 26/12/16 show caused assessee a notice for enhancement and case was fixed for hearing on 27/12/16. DRP observed that assessee made payments in respect of reimbursement of salaries of seconded employees amounting to Rs. 3,90,27,709/-, without deducting TDS under section 195 of the Act. DRP was of the opinion that decision of Hon'ble Supreme Court in case of Centrica India Offshore Pvt.Ltd., squarely covers issue against assessee. 18. Ld.AR submitted that assessee during year filed its return of income at loss of Rs.(-)33,76,80,930/-. He submitted that in draft assessment order Ld.AO had not made any proposal for disallowance of amount of reimbursement made by assessee to Cannon Inc., in respect of secondment of employees. He submitted that DRP vide its order dated 30/12/16, for first time held reimbursement of part of salary paid ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tered into between assessee and seconded employees more particularly placed at pages 41- 59 of paper book; * Cost Reimbursement Agreement entered into between assessee and Cannon Inc more particularly placed at pages 79-98 of paper book 21. Referring to certain specific clause in above referred agreements, Ld.AR submitted that, assessee took into account both portions of salary paid in Indian Rupees as well as Japanese Yen for purposes of deducting tax at source, on payments of salary to such seconded employees under section 192 of the Act, and has issued Form 16 to them, which has been enclosed at page 11-40 of paper book. 22. Ld.AR further submitted that relationship between assessee and seconded employees was of employer employee as per terms of agreement it clearly provides that these employees will work wholly and exclusively for assessee only. Further he submitted that, as per agreement seconded employees were under an obligation to perform from time to time such duties as has been directed by assessee. Referring to cost reimbursement agreement entered into between Canon Inc., and assessee, Ld.AR submitted that it clearly states that assessee is hiring these em....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Advocate (former Judge Delhi High Court). 27. Ld.AR further submitted that, facts in case of Centrica India Offshore Pvt. Ltd., (supra) are different from that of assessee on following grounds: * that Centrica UK outsourced back-office support functions like debt collections, consumer billing, monthly jobs to third-party vendor is in India for which the Indian subsidiary had entered into a service agreement (seconded agreement) with overseas entities, thereby acting as an interface between overseas entities and Indian vendors. * That according to terms of agreement Centrica India charged cost plus markup of 15% from overseas entities. * That it was at request of Centrica India that overseas entity provided staff with appropriate expertise and knowledge about process and practices implemented at Centrica UK with an intent to seek support during initial years of setup. And Centrica India subsequently entered into individual agreement with seconded employees. 28. He submitted that, it was on above aforestated factual background that Hon'ble Delhi High Court, held that there was no purported employment relationship between Centrica India and seconded ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re business functions of assessee and since assessee is economic employer of seconded employees, assessee bears economic burden of salary cost of such seconded employees. 31. Ld.AR thus submitted that decisions relied upon by DRP for making addition in hands of assessee is not justified under peculiar facts in assessee's case. 32. On the contrary, Ld.CIT,DR placed reliance upon distinguishing factors brought on by DRP which is as under: S.No. Centrica Reference Taxpayer Secondment Agreement Ref 1. Seconded employees duties and functions were dictated by the instructions and directions of the CIOP. Two sample cost reimbursement agreements have been furnished i.r.o Mr. Takehiko Imoto and Mr. Katsuyuki Matsuda. While it is stated that the said persons would work under the directions of the tax payer, the subsisting relationship with Canon Inc. whose regular employees they are is defined by S.No.1 and 2 of the cost reimbursement agreement (refer Annexure-3) which states, 1. Mr.Takehiko Imoto is an employee of Canon Inc. 1. Canon Inc transfers Mr Takehiko Imoto to Canon India Private Limited as the Manager Ma....
X X X X Extracts X X X X
X X X X Extracts X X X X
....audulent or even fleeting, but rather permanent, especially in comparison to CIOP, which is admittedly only their temporary home. (Page 42 para 35) Canon Inc transfers the employee for a period of 3 years for the purpose of its business operations in India, the subsisting relationship with Canon Inc. whose regular employees they are is clearly specified and the temporary nature of the assignment is highlighted as also the fact that it is for the purpose of the business operations of Canon Inc in India. 5. While CIOP may have operational control over these persons in terms of the daily work, and may be Apropos remuneration it is stated that Canon India P Ltd. Shall reimburse and repay to Canon Inc the actual cost responsible (in terms of the agreement) for their failures, these limited and sparse factors cannot displace the larges and established context of employment abroad. (Page 42 para 36). of remuneration paid to the seconded employee-thus the terms of agreement simply mention salary in JPY and INR. (Refer Annexure 3) Thus clearly the employees retained their entitlement to participate in the overseas entities retirement and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....educted. 34. We have perused at length and in detail all submissions advanced by both sides in light of decision of Hon'ble Delhi High Court in case of Centrica India Offshore Pvt.Ltd vs. DCIT (supra). We are in agreement with submission of Ld.AR that, applicability or otherwise of ratio of Hon'ble Delhi High Court in case of Centrica India offshore Pvt. Ltd., (supra), is a fact specific question to be determined with reference to functions performed and conduct of seconded employee with reference to business of assessee, vis-a-vis activities performed by Canon Inc. Thus to analyse, moot question that arises before us is to decide, whether amount paid by assessee to its overseas entity, equivalent to salary and other benefits paid to seconded employees by overseas entity, reimbursement of such salaries and whether withholding of tax thereon was contemplated by Section 195 of the Act. 34.1. At the outset, we observe that assessee is 100% subsidiary of Canon Singapore PTE Ltd., which in turn is a wholly owned subsidiary of Canon Inc Japan. 34.2. It is observed that overseas entity is to assign relevant individuals to perform duties at location of assessee, for a speci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed employee to claim such part is only against overseas entity. Further from agreement it is not clear if seconded employees conferred any right to claim salary from assessee or whether assessee is burdened with obligation to pay that part of salary to these employees directly. 34.5. It is difficult to accept argument advanced by Ld.AR that what is paid by assessee to its overseas entity in view of its sending its employees to assessee for rendering service, is reimbursement of salary paid by overseas to seconded employees. Merely because overseas entity is not charging assessee anything more than what it has paid by way of salary to seconded employees, does not alter the situation. The fact that in accounts of assessee, this is entered as reimbursement of cost, or, it is not shown as income in account of overseas entity, cannot be conclusive of question. What Model commentary on Article 15 concerning "Taxation of Income from Employment" says that, where a comparison of nature of services rendered by the individual with business activities carried on by his former employer and by the enterprise to which services are provided points to an employment relationship that is different....
X X X X Extracts X X X X
X X X X Extracts X X X X
....at "attachment of the secondees was not fleeting as concluded by the Hon'ble High Court in Centrica and that on facts it is established that employees seconded, continued to retain their lien with their parent organization who continued to pay them for the period of their secondmeant on terms where they transferred and made available their technical knowledge, and the reimbursement of salaries of seconded employees was thus in the nature of FTS." 35. It is observed that documents filed by assessee do not throw any light on these questions. In our considered opinion, inference that could be drawn from documents filed by assessee does not distinguish present case from Centrica offshore India (P.) Ltd. case (supra) and documents produced by assessee are no substitute for Secondment Agreement and fails assessee in discharge of its burden of proof. It would be relevant to go through secondment agreement before coming to a conclusion. 35.1. Neither before DRP nor before us assessee filed Secondment Agreement. Assessee is therefore directed to file Secondment Agreement before Ld.AO and Ld.AO is then directed to verify the same. In the event assessee is not able to demonstrate th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be produced by assessee to substantiate its claim. Ld.AO/TPO shall determine the issue by applying law in force. 46. Accordingly, these grounds raised by assessee are allowed for statistical purposes. 47. Ground No.7 to 8.2 have been raised against bench marking the alleged international transactions of AMP, by using PSM instead of allowing set-off or following aggregated approach. 47.1. Both parties submits that these issues are covered by ground no.9 to 12 for A.Y. 2012-13 which needs to be set aside for re-consideration. 47.2. Both parties refers to and relies upon submissions advanced while arguing ground no.9 to 12 in appeal for A.Y. 2012-13. 48. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254. 48.1. As we have already set aside issue relating to nature of AMP expenditure to Ld.AO/TPO, applicability of most appropriate method relating to same head of transaction also deserves to be set-aside. It is also observed that, this is the consistent view taken by this Tribunal in case of assessee for preceding ....