TaxTMI 
TaxTMI 
2018 (9) TMI 1812
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....ssing Officer took up scrutiny. He came across assessee's Form 3CEB and transfer prise which study report (TPSR) revealing international transactions in the nature of management services provided to its UK based associated enterprise M/s Price Waterhouse Coopers Development Associate Ltd. ('PwCDA' hereafter) in lieu of having received corresponding management consultancy fee of Rs.18,48,88,843/- in the relevant previous year. The taxpayer had employed Resale Price method "RPM" in its TPSR report. The assessing authority made section 92CA(1) reference for ascertaining Arm's Length Price "ALP" of the above international transactions. 3. The transfer prising officer "TPO" took up consequential proceedings. He treated the assessee as an information technology services provider first of all by taking into account relevant comparables mainly functioning isinformation technology field or IT based services. This followed his showcause notice dated 11.01.2016. This show-cause notice first of all brought into light the assessee's AE's functions comprising inter alia identification of potential clients, project undertaken involving multi functional services rendered, assessee's engagement th....
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....4.97%, 13.61%, 25.24% 12.13%, 16.06%, 10.86%; respectively averaging 20.98%. It was this average PLI what was finalized sought to be applied in the TPO's above stated show-cause notice. 7. The assessee's reply came to be submitted on 22.01.2016. It first of all sought to highlight the fact that its selection as a tested party instead of PwCDA (supra) required the relevant comparability adjustment as it was engaged in service of client in the nature of both entrepreneurial functions as well as assumption of related services risks whereas the latter carried out distribution activity only. The assessee then contested TPO's show-cause proposing rejection of its Resale price method. It pleaded that its "AE" M/s PwCDA distributed routine services procured without owning any none-routine assets. Its impugned distribution margin was therefore stated to be very well proportionate to its function. It alleged that its Resale price method had not been rejected by way of speaking reasons as well. Its case was that its AE's margin could be easily segregated without any adjustment in computation. 8. The assessee's reply then disputed its characterization as software and IT services provider. It....
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....port reveals more function about the assessee than the transfer pricing report as consulting service including tax and regulatory services, software development (including resale of software) and related technical service. In view of the above analysis and discussion it is sufficient to reject the transfer pricing report of the assessee." 10. The TPO thereafter observed that the assessee's AE taken as a tested party on its behalf was not liable to be accepted since the relevant data, accuracy of its selection procedural and functional aspects had to be declined for lack of verification of the relevant FAR analysis. He was of the view that the relevant ALP had to be determined as per assessee's and not its overseas AE's profitability. He adopted the very rejecting for assessee's transfer pricing report. 11. The TPO thererafter proceeded to benchmark assessee's international transactions in tune with the relevant most appropriate method. He considered both section 92C as well as the inter-play between the Comparable Uncontrolled Price method 'CUP' claimed in first, Resale Price Method (RPM), Cost Plus Method (CPM) and Profits Split Method (PSM) in second and Transactional N....
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....ty in terms of laying out the work distribution function- the AE decides whether the external consultants will be engaged for executing the work or the execution will be done internally. The AE is also interacting with the end user- the client and delivers the services to it, besides being legally obliged for execution of the projects. The invoicing is done by the AE. Clients are solicited and business obtained by the AE. Even if the AE retains a fixed percentage of the invoiced amount before remitting to the assessee, the primary nature of its ownership of the assignment remains. The AE is in the forefront while the assessee is merely executing the job assigned. This fact is applicable for both the projects executed separately with the UK based AE as also the Lankan AE. The AE (PwC UK) has much complex profile and also holds responsibility for the deliverables to the client and is ultimate owner of the group. The valid analysis can hence not be done by retaining it as the tested party. Besides, ITA T Mumbai has also held in case of Aurionpro Solution Limited ( ITA No 7872 of 2011 that for the purpose of determining the ALP, tested party is always to be the assessee and not the AB.....
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....vices. The examination of the TP study does not bring out the functions performed by the assessee very clearly. The assignments are listed in ambiguous terms. The panel called for and examined specific assignment details. The chart produced in this regard clearly indicates the nature of services rendered to be of IT and ITES type of services. The TPO has also categorized the International Transactions accordingly. The choice of comparables by the assessee in the TP study shows that the profile of such entities to be of IT and ITES type. Further, the choice of parameters in the database whereby the criteria of search are laid down also indicates similar. The NACE codes [NACE (Nomenclature of Economic Activities) is the European statistical classification of economic activities. NACE groups organizations according to their business activities. Statistics produced on the basis of NACE are comparable at European level and, in general, at world level in line with the United Nations' International Standard Industrial Classification (ISIC). The change in the identification and grouping of similar economic activities associated with the move to the new NACE implies a statistical break ....
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....o be done in order to examine if the Indian entity is offering its profits to lawful taxation in India. In order to determine the correct profits by ascertaining correct ALP- the transactions have to be examined. The TPO is required to determine the ALP of a transaction. The restrictive cap sought to be imposed by the assessee on reported GP of the billed amount would vitiate the very basic tenets of determination of ALP. The assessee has to demonstrate that the ALP determination was spurious on the facts/merits. The adjustment could not have been restricted to the gross margin of the billing to the end customer as there could be instances of multiple transactions and various set offs between the AE and the end users. The end user interacts with the AE and AE only is legally liable for deliverables and to ensure end to end services as and if required so. The objection is dismissed as untenable and contrary to the intent and purpose of chapter X of the Income Tax Act 1961. 6. Without prejudice, while selecting the Assessee as a tested party, the Ld. TPO and Ld. AO have erred in characterizing the Assessee at entity level as Software and IT service provider. DRP Directions....
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.... in line with the United Nations' International Standard Industrial Classification (ISIC). The change in the identification and grouping of similar economic activities associated with the move to the new NACE implies a statistical break in the time series. - Note: NACE (Nomenclature des Activites Economiques dans la Comrnunaute Europeennej] selected by the assesse all pertain to the IT and ITES services. The details of services rendered and some invoices have been furnished before the panel to consider the primary nature of such services. The nature of services rendered are listed hereunder to support the above conclusion: I. The services involving PwC DA UK are SAP Advisory, staffware workflow, IT Application support, ER &P Productisation, IT Spreadsheet services and so forth- to name a few. II The services involving PwC Lanka are Surveillance, Samurdhi Programme and project management- to name a few. The panel thus does not see any infirmity in the categorization done by the TPO more so in the absence of clear depiction of functions performed per the stated international transactions anywhere in the TP study or elsewhere to support_ the contention that the mana....
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....;ble Bombay high court. Its case accordingly is that lower authorities right from the TPO upto Assessing Officer as well as DRP have erred in law as well as on facts in taking entity level margin than those pertaining to its international transactions only. 16. We afforded sufficient opportunities to the Revenue to rebut the above legal principle emanating from various judicial precedents that only international transactions with AE are to be considered in TPO's proceedings and not the entire corresponding figures at entity level. We are informed that hon'ble apex court has admitted Revenue's Special Leave Petition (SLP) arising from hon'ble Bombay high court's decision(s) quoted in preceding paragraph. It vehemently contends that the relevant method adopted i.e TNMM is an indirect method based on profit margin of an entity in enterity which has to be thereafter apportioned to its international transactions. We find no merit in Revenue's above arguments. It emerges that hon'ble Bombay high court's last judgment in M/s Tara Jewels Export Pvt. Ltd. case involved the very substantial question of law raised at the Revenue's behest which has been decided in taxpayer's favou....
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.... Assessing Officer disallowed the same on estimation basis @ 40% alleging assessee's failure in providing all the relevant particulars of its payees as well as indicating the relevant nexus between its repair and maintenance vis-à-vis the corresponding assets. The DRP has upheld the same in its directions. 19. Learned Authorized Representative vehemently submits that all those details totaling to 142 pages as well as relevant information on record in pages 86 to 89 as well as the corresponding supporting documents of around 500 pages in paper book dated 03.03.2016 and also pages 92 to 94 in Volume-I and pages 298 to 1434 all parameters of the impugned claim. Mr. Kaushal pleads therefore that all the expenses in question have been incurred wholly and exclusively for the purpose of the business. The Revenue stand on the other hand is that lower authorities have rightly disallowed the impugned expenses at an estimated rate of 40% than 100%. We have given our thoughtful consideration to rival submissions. There is hardly any dispute that lower authorities have already accepted 60% of assessee's expense to be correct as wholly and exclusively incurred for the purpose of the busi....
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....ht not to have estimated the impugned disallowance @ 25% without pin-pointing any irregularity in the relevant books of account. This tribunal's order (supra) has gone quoted in support. Learned Departmental Representative strongly supporta the impugned disallowance mainly on the ground that assessee has failed to prove the same by tendering a cogent explanation in support. We find considerable force in assessee's arguments in principle. We reiterate that all the above quoted details have gone unrebutted from the Revenue's side. The fact however remains that as well as in the preceding substantive ground that Assessing Officer has not carried out one-to-one or even sample verification of the impugned expenditure before invoking the estimated disallowance @ 25%. We therefore accept the assessee's pleadings in principle to restrict the impugned disallowance from 25% to 2% only in order to make both ends meet for the reason that taxpayer has also not been proved all of its expenditure to have been incurred wholly and exclusively for its business activity. The impugned disallowance to be therefore restricted to 2% only. We make it clear that none of such estimation would be as a preced....
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....towards training expenses in lumpsum as against 25% ad hoc disallowance proposed earlier. The assessee's case before us is that the DRP had restored the matter back to the Assessing Officer for allowing the impugned expenditure after verification. It pleads that all the relevant details stood filed before in the consequential proceedings, involving power project expenditure, miscellaneous vendors payment and other heads (payment to chamber / association) amounting to Rs.5,78,017/-, Rs.3,23,897/- and Rs.4,91,838; respectively. It is vehemently contended that all these expenses have been incurred for upto date knowledge to its work force's knowledge, forming keyelement of operation efficiency. Relevant details to this effect in pages No. 11 to 113 of the paper book part also referred. We find force in assessee's instant claim of staff training expenses in principle. The Revenue fails to indicate any rebuttle regarding first and third heads hereinabove. The only question remain is that of miscellaneous vendor payment whose details are nowhere forthcoming a part from PAN etc. We thus confirm the impugned disallowance of Rs.13,93,752/- to the extent of Rs.3,23,897/- only. The assessee g....
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....nbsp; 24. Learned counsel does not press for assessee's eleventh substantive ground of foreign exchange loss on maturity of MTM contracts involving addition of Rs.8,46,64,184/- on the ground that this Tribunal's decision in ITA 1156/Kol/2014 dated 17.03.2017 has already accepted its corresponding grievance in assessment year 2008-09. We thus dismiss the instant substantive ground as not pressed. 25. The assessee's thirteen substantive ground challenges correctness of lower authorities' action disallowing its payment of software charges amounting to Rs.2,07,900/- u/s. 40(a)(ia) of the Act on account of non deduction of TDS thereupon. After arguing very seriously for the sometime, learned counsel submits that the assessee no more wishes to press for instant substantive ground keeping in mind smallness of amount involved. We therefore affirm the impugned disallowance with a rider that same shall not be treated as a precedent in any preceding or succeeding assessment year. 26. The assessee's next substantive ground challenges correctness of the lower authorities' action disallowing its professional fee of Rs. 2,50,00,840/- on account of non-deduction of TDS thereupon by invoking Sec....
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....o the extent indicated hereinabove. 29. This leaves us with professional payments to non-resident payees totaling to Rs. 18290741/- out of total disallowance of Rs. 19,73,72,283/-. The assessee first of all files a payment wise chart thereof as follows: Learned counsel's case in view of above chart is that Section 90(2) makes it clear that it is very much open for an assessee to opt for more beneficial provision either in under domestic law or as per the relevant Double Taxation Avoidance Agreement; as the case may be. He thereafter refers to various Double Taxation Avoidance Agreements pertaining to all these countries namely Australia, Egypt, France, Indonesia, Mauritius, Netherlands, Singapore, Sri Lanka, Thailand and UAE that Double Taxation Avoidance Agreements pertaining to 2nd, 4th, 5th, 6th, 7th, 8th, 9th & 10th countries herein do not contain taxation of fee for technical services clause requiring TDS deduction. Remaining 1st, 3rd, 6th and 7th instances are those nations whose Double Taxation Avoidance Agreements contain 'make available clause' i.e. the payees concerned should have made available the relevant technical knowhow enabling the payee to independently use the ....