TaxTMI 
TaxTMI 
2022 (9) TMI 880
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....Dispute Resolution Panel) on 25.09.2019. 02. The assessee has raised following grounds:- "Being aggrieved by the order of the learned DCIT, Circle - 15(3)(2), Mumbai, (AO'), read with the order of the learned Dispute Resolution Panel (DRP'), Mumbai, the assessee begs to prefer the present appeal on the following grounds: A. Grounds relating to additions other than Transfer Pricing Adjustments 1. That on the facts and in the circumstances of the case, the lower authorities erred in upholding the disallowance of Rs. 3,54,24,353/- oil of non-deduction of tax relating to export commission paid by the assessee to its associated enterprises. 1.1. The lower authorities erred in holding that the payments made towards export sales commission are in the nature of fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961. 1.2. The lower authorities erred on facts and in law, in not appreciating the decision of Hon'ble Apex Court in the case of CIT V. Toshoku Ltd. [1980] 125 ITR 525 (SC) and by the Bombay High Court in DIT v. Wizcraft International Entertainment Pvt. Ltd. [2004] 364 ITR 227 (Bom). 2. That on the facts and in the circumstances of t....
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....the assessee on account of payment of trademark fees to the associated enterprise. 6.1. The lower authorities erred in rejecting the transfer pricing documentation and the economic analysis undertaken by the assessee without any robust reasons to determine the arm's length price for the use of the trademark 'SULZER'. 6.2. The lower authorities erred on facts and in law in determining the arm's length price of the payment of trademark fees to be Nil without following any of the prescribed methods under section 92C(1) of the Income-tax Act, 1961. 6.3. The lower authorities erred in ignoring the documentation, factual and legal submissions provided by the assessee to substantiate the benefit, corresponding economic or commercial value derived by the use of the trademark 'SULZER'. 7. That on the facts and in the circumstances of the case, the lower authorities erred in upholding the adjustment of Rs. 3,92,66,987/- to the income of the assessee on account of SAP related support services cost, paid by the assessee to its associated enterprise. 7.1. The lower authorities erred in rejecting the transfer pricing documentation and the economic analysis under....
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....n rejecting the transfer pricing documentation and the economic analysis undertaken by the assessee without any robust reasons to determine the arm's length price of management services. 9.2. The lower authorities erred on facts and in law in determining the arm's length price of ASP management services to be Nil without following any of the prescribed methods under section 92C(1) of the Income-tax Act, 1961. 9.3. The lower authorities erred in going beyond the scope of section 92CA and in questioning the commercial rationale of the legitimate business expenses incurred by the assessee. 9.4. The lower authorities erred in ignoring the documentation, factual and legal submissions provided by the assessee to substantiate the benefit corresponding economic or commercial value derived oil of management services. 10. That on the facts and in the circumstances of the case, the lower authorities erred in upholding the adjustment of Rs. 4,34,858/- to the income of the assessee on account of payment of professional fees to the associated enterprise. 10.1 The lower authorities erred in rejecting the transfer pricing documentation and the economic analysis undertaken by the ....
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....yalty thereof 16,45,91,253 CUP 6. Technical Service rendered, consideration received thereof 1,17,91,101, Other method 7. Professional services availed, and Fees paid thereof 4,34,858 Other Method 8. Marketing services (agency services) received and Commission paid thereof 1,70,99,895 CUP 9. Marketing services (agency services) rendered and Commission received thereof 28,62,597 CUP 10. Warranty expenses paid to AES for undertaking repair/ rectification work on behalf of the Assessee (including reversal of amount charged by the AEs for warranty claims in earlier years) 2,29,53,871 Other Method 11. SAP related support services received, and payments made thereof 3,92,66,987 Cost Plus Method (CPM) 12. ASP management services received, and payments made thereof 6,06,85,073 CPM 13. Microsoft licenses procured, and annual charges paid thereof 1,01,08,087 Other Method 14. Corporate IT support services received, and payments made thereof 2,57,90,700 CPM 15. Reimbursements/ Recoveries 1,12,02,025 Other Method 16. Receivables/ Payables All the balances due from and towards the AEs have been/ would be cleared within reasonable time as agreed. 05. ....
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....d TPO. The assessee benchmarked the same showing the group transfer pricing policy where such services are charged at cost plus markup of 5% based on in to company agreement dated 2 August 2018. The learned TPO found that the identical service was also tested for its arm's-length price in earlier year where it has been determined at Rs. Nil and confirmed by the learned DRP. The learned TPO therefore determined the arm's-length price of the same at Rs. nil holding that assessee has merely submitted budget rate per user per month arrive at the cost and has not submitted any analysis on the basis of which such budget rate was arrived at. Merely a management certificate with respect to monthly cost was submitted without support of list of employees for whom such licenses were obtained. The learned TPO found that the services are in the nature of on call services, which could not be shown resulting into benefit to the assessee. [3] Payment of annual charges towards software licensing of Rs. 10,180,087/- which are the services with respect to the Microsoft volume license agreements cost charged based on the agreement allocated based on licenses. This was paid to Sulzer management AG. T....
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....e assessee has paid royalty at the rate of 1.5% on sales to 3rd parties. The learned transfer-pricing officer has noted that assessee has submitted the agreement dated 2/1/2008 wherein the royalty rates were 1% from 1/1/2008 and the second agreement dated 9/2/2012 where the rate of royalty is 1.5% from 1/1/2012. As per these agreements the royalty was payable on monthly basis. He found that in the earlier years the arm's-length price of the royalty payment was determined at Rs. Nil as assessee failed to substantiate any benefit received. Accordingly, he also determined the arm's-length price of royalty payment at Rs. Nil. Accordingly, as per order dated 16/10/2018 u/s 92CA (3) of the act he determined the arm's-length price of these payments at Rs. Nil and total adjustment with respect to these 5 payments of Rs. 181,034,113/- was made. 07. The learned Assessing Officer passed the draft assessment order on 28th December, 2018, therein he made the following additions; I. The learned Assessing Officer noted that assessee has debited Rs.3,73,10,658/- on account of warranty charges that held to be a mere provision and therefore, disallowed the same. II. He even otherwise submitte....
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....a(ia) of the Act of Rs.3,63,69,080/-. V. Addition on account of AIR information of Rs.5,29,687/-. 011. Assessee aggrieved by this order has preferred this appeal. 012. Ground number 1 of the appeal is with respect to the disallowance of commission paid to associated enterprise for procurement of export orders amounting to Rs. 35,424,361 on which the assessee did not deduct tax at source. The learned authorised representative submitted that this issue is squarely covered in favour of the assessee for the reason that for assessment year 2007 - 08 identical issue arose where the issue was set-aside to the file of the learned assessing officer by the coordinate bench and in set-aside proceedings the learned assessing officer passed an order u/s 143 (3) read with Section 254 of the income tax act on 29/12/17 where the learned assessing officer has deleted the addition relating to commission on account of non-deduction of tax u/s 195 of the act. Even Otherwise he submitted that issue squarely covered in favour of the assessee by the decision of the honourable Supreme Court and honourable Bombay High Court. 013. The learned departmental representative supported the orders of the lowe....
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....id to associated enterprise for procurement of export orders. 015. Ground number 2 is with respect to the provision for commission incurred by the assessee to associated enterprise for procuring export orders which was disallowed by the learned assessing officer amounting to Rs 1,70,99,895/- stating that it represents a mere provision cannot and ascertained liability and therefore provisions are not deductible as an expenditure. 016. The learned authorised representative submitted that the commission expenses on account of concluded sales as per the matching concept of expenses for which revenue as per accounting policies has already been accounted as income, needs to be provided for. According to him, as soon as the sales are concluded, the resultant commission also accrues and therefore such expenditure is required to be provided for. The rate of commission is fixed based on export prices, the country of export is also known, therefore the associated enterprises, which would be receiving the commission, is also ascertained. Therefore the price, the commission payment, the recipient of the income are known to the assessee and therefore as the liability for payment of commission ....
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.... by the learned assessing officer holding that provision for commission payable to associated enterprises for procuring export order is merely a provision and not an ascertained liability. Hence, we direct the learned assessing Officer delete the disallowance of Rs. 170,99,895/- on this account stop accordingly ground number 2 of the appeal is allowed. 019. Ground number 3 is against the disallowance of provision of warranty expenditure provided by the assessee at the rate of 1.25% of the pumps sold on account of between charges that firstly it is merely a provision and not an ascertained liability and secondly even if it is deductible as an expenditure, assessee has failed to deduct tax at source u/s 195 of the act on the sum amounting to Rs. 37,310,658/- and therefore, it is this allowable u/s 40(a)(i) of the act. 020. The learned authorised representative submitted that provision of warranty is made on the basis of past history of the failure of products, the provision made is not excessive, therefore, it is an ascertained liability. Therefore he submitted that the claim of the assessee of warranty expenditure squarely covered in favour of assessee by decision of the honourabl....
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....of the sales. He submitted that as the warranty condition is embedded into the sale price, as soon as the sale are recorded and recognized as Revenue, related warranty cost is also required to be provided for according to the accounting standard 9 of the ICAI. He therefore, submitted that this warranty cost is ascertained liability and not merely the provision. He further, stated that this issue is squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in case of Rotork Controls India (P.) Ltd. (2009) 314 ITR 62 (SC). We find that the provision of the liability has been made by the assessee on the past trends available of the product failure and incurring of warranty expenditure for that. Naturally, assessee extends the warranty of the pumps sold for 18 months. The only information that could be used by the assessee is the past product failure. This is not proved to be incorrect by the revenue authorities. Warranty is necessary cost, which is embedded in the sale price. The contract of sale itself includes the same. Therefore, as soon as the sales are accounted for as income, the corresponding warranty liability is required to be provided as exp....
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....ded in the sale price and are incurred simultaneously. 025. The next argument for non-deduction of tax of the warranty expenditure raised by the learned authorised representative is that as the warranty expenditure relates to services utilized in business carried out by the assessee outside India and thereby it falls into the exclusion under Section 9(1) (vii) (b) of the Act from the definition of income of fees for technical services. He submitted that assessee export goods manufactured by it to overseas customers. To them, the warranty obligation of the assessee was fulfilled by Associated Enterprises. These Associated Enterprises then, charges the assessee for the services provided by it. He submitted that the payment for availing repair services was utilized by the assessee for the business carried on by the assessee outside India of making or earning income from source outside India. Therefore, according him these payments falls in the exclusion clause of Section 9(1)(vii)(b) of the Act not liable for taxation in India. Therefore, no tax is required to be deducted at source. To further support his arguments, that assessee should be regarded as a person carrying on business ou....
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....ses whether at the time of making payments for such services, deduction of tax at source was31 necessary. 6. In the case of GE India Technology Centre P. Limited v. CIT reported in [2010] 327 ITR 456 (SC), the ratio laid down by the Supreme Court was that mere remittance of money to a non-resident would not give rise to the requirement of deducting tax at source, unless such remittance contains wholly or partly taxable income. It is true that after such judgment was rendered, the Legislature had amended section 195 of the Act by inserting Explanation 2 by the Finance Act, 2012, but with retrospective effect from April 1, 1962. Such Explanation provides that for removal of doubts, it is clarified that the obligation to comply with sub-section (1) of section 195, and to make deduction as provided therein applies and shall be deemed to have always applied to all persons, resident or non-resident, whether or not the non-resident person has a residence or place of business or business connection in India ; or any other presence in any manner whatsoever in India. Mere requirement of permanent establishment in India was thus done away with. Nevertheless, the basic principle that require....
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....he Supreme Court in the case of GE India Technology Centre P. Limited (supra), sub-section (1) of section 195 of the Act would not apply. The fundamental principle of deducting tax at source in connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field. In the present case, the Revenue has not even seriously contended that the payment to foreign commission agent was not taxable in India." 7. In this context, we would refer to section 9(1)(vii)(b) of the Act. Sub-section (1) of section 9 enlists situations under which the income shall be deemed to accrue or arise in India. Clause (vii) contained therein pertains to income by way of fees for technical services payable by the Government or a person who is a resident, or a person who is a non-resident under the circumstances specified therein. Sub-clause (b) thereof pertains to a person who is a resident and reads as under : "9. Income deemed to accrue or arise in India.-(1) . . . (vii) income by way of fees for technical services payable by- (a) the Government ; or (b) a person who is resident, except where the fees are payable in respect of services utilized in a business or ....
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....t. In the present case, we have primarily gone on the question of the nature of the assessee's activities and the nature of services rendered by the parent based company, for which commission was paid. Keeping the question pending before the High Court in the case of Adani Enterprises untouched, we can still dispose of this appeal.‖ 026. Above decision of the honourable Gujarat High Court has also considered the decision of the honourable Delhi High Court of CIT V Havells India Ltd 280 taxman accordingly, we agree with the assessee that no tax is required to be deducted u/s 195 of the income tax act on the said sum of warranty expenditure paid to associated enterprises. Therefore , disallowance of warranty expenditure on this account is also not warranted. Accordingly, ground number 3 of the appeal of the assessee is allowed. 027. Ground number 4 of the appeal is with respect to the disallowance of professional fees paid to associated Enterprises and non associated enterprises for the reason that assessee has failed to deduct tax at source . The disallowance was made of Rs. 944,719/-. 028. Before us, assessee submitted that the assessee has made payment of the above am....
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....e its Arm's Length Price at Rs. Nil is covered by ground no. 5 of the earlier years of the ITAT Orders. 034. The ground no. 8 of the appeal challenges the determination of Arm's Length Price at Rs. Nil of international transaction of Rs.1,01,08,087/- of Microsoft software license fee reimbursed to the associate enterprises is covered by ground no. 7 of the order of the ITAT orders. 035. He submitted that ground no. 9 with respect to management fee paid to associate enterprises of Rs.6,06,85,073/- whose Arm's Length Price is determined by Transfer Pricing Officer at Rs. Nil is also covered by ground no. 4 of earlier years order of ITAT order. 036. The ld DR Relied up on the orders of the Ld TPO and DRP. 037. We have carefully considered the rival contention and orders of lower authorities. We find that same issue arose in the case of assessee for ITA No. 1153/MUM/2017 [Assessment Year: 2012-13], ITA No. 6013/MUM/2017 [Assessment Year: 2013-14] and ITA No. 6660/MUM/2018 [ Assessment Year: 2014-15] dated 23 March, 2021 wher in coordinate bench has hled as under :- "25. We have heard the rival submissions and perused the relevant materials available on record. Having narrated at ....
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.... Show cause reply for payment of trademark fees, (iv) Show cause reply for payment of engineering services, (v) Show cause reply for payment of annual charges towards Microsoft licenses fees, (vi) Brief description for payment of Global IT support service. Finally, the assessee had filed additional evidences before the DRP on 10.06.2016 (i) Detailed note on engineering services along with copies of invoices, (ii) Copy of inter-company invoice for payment of Global IT support service, (iii) Sample copies of email correspondence w.r.t. Global IT support service, (iv) Analysis and benefits derived by use of Sulzer brand. 25.1 In the instant case, we are of the considered view that given the range of transactions involved, the arm's length method cannot be adequately applied on a transaction-by-transaction basis. Accordingly, for the purpose of determining the ALP, the assessee has rightly aggregated for the purpose of benchmarking (i) purchase of raw materials, sale of finished goods and engineering services that are essentials to its business, (ii) payment of ASP charges, IT and service charges to assist in business administration and (iii) payment of commission that assists ....
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....es raised by the TPO during the course of TP proceedings. Further, the assessee has filed before the DRP additional evidence dated 06.06.2016. However, instead of examining / scrutinizing those submissions, the tax authorities have made disallowances/adjustments on general propositions. Having considered the above factual scenario, we allow the 4th , 5th, 6th, 7th, 8th and 9th ground of appeal." 038. We have carefully considered the decision of the coordinate bench. We find that in case of assessee identical issue decided in I.T.A. No. 1453/Mum/2014 (Assessment Year 2009-10), I.T.A. No. 4495/Mum/2015 (Assessment Year 2010-11) and I.T.A.(TP) No.1086/Mum/2016 (Assessment Year 2011-12) on 31/10/2018 where in this issue is decided as under :- "9. Hence they are dismissed as Not Pressed. The remaining grounds give rise to the following issues:- (a) Disallowance of expenses of Royalty, technical knowhow fees and annual charges of Microsoft licencing fee by determining the ALP at NIL. (b) Disallowance of ASP Management fees (c) Addition on account of difference in income as per Form 26AS. 4. We heard the parties and perused the record. The first issue relates to the disallowa....
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....to examine all these contentions, since he considered the assessee to be a contract manufacturer. Accordingly we are of the view that the issues relating to Royalty and Technical knowhow requires fresh examination at the end of the AO/TPO. Accordingly we set aside the order passed by Ld CIT(A) on these two issues and restore the same to the file of AO/TPO for examining them afresh in accordance with the law. 11. With regard to disallowance of Annual charges of Microsoft licence fees, we notice that the reasoning given by the tax authorities to determine the ALP at NIL is not justified. The Ld A.R submitted that the Sulzer management AG and Sulzer Management Ltd are one and same company. The Tax authorities were under the impression that there is variation between the transactions reported in Form 3CEB and the actual agreement submitted by the assessee due to existence of different names, which according to assessee refers to same company, referred above. The assessee has furnished a document from Commercial Register of the Canton of Zurich to show that both the names refer to the same company. In any case, this transaction has also not been benchmarked under any of the recognised....