TaxTMI 
TaxTMI 
2022 (12) TMI 244
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....9;Learned TPO') to the extent prejudicial to the appellant, is bad in law and facts and liable to be quashed. Transfer pricing ('TP') related 2. That, on the facts and in the circumstances of the case, the learned Transfer Pricing Officer ('TPO')/hon'ble Dispute Resolution Panel, erred in making a transfer pricing adjustment to the arm's length price of the appellant's international transaction of payment of royalty amounting to Rs. 75,274,460. 3. That, on the facts and in the circumstances of the case, the learned Transfer Pricing Officer/hon'ble Dispute Resolution Panel erred in rejecting the transfer pricing documentation maintained by the appellant under section 92D of the Act read with rule 10D of the Income-tax Rules, 1962 ('the Rules'). 4. That, on the facts and in the circumstances of the case, the learned Transfer Pricing Officer/hon'ble Dispute Resolution Panel erred in rejecting the aggregation approach followed by the appellant to benchmark the international transactions including payment of royalty. 5. That, on the facts and in the circumstances of the case, the learned Transfe....
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....companies ; (c) randomly selecting certain companies which are functionally dissimilar i. e., Minda Industries Limited, JBM Auto Limited, ZF Steering Gear (India) Limited ; (d) selecting companies which have incurred research and development expenses whereas the selection criteria set by the Transfer Pricing Officer himself suggests that companies which have incurred research and development expenses should not be selected as comparables ; and (e) not selecting certain companies proposed by the appellant i. e., Rasandik Engineering Industries India Limited and Sandbar Technologies Limited which have not incurred any research and development expenses. 10. That, on the facts and in the circumstances of the case, the learned Transfer Pricing Officer/hon'ble Dispute Resolution Panel has erred in applying an inconsistent approach in the assessment year 2016-17 as the learned Transfer Pricing Officer had himself accepted similar approach of economic analysis, carried out by the appellant in the assessment year 2011-12 as well as assessment year 2012-13 and concluded that all the international transactions of the appellant, including the payment of ....
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....plant layout charges are for setting up or realigning the production process and hence are considered as capital in nature. 18. Without prejudice to the above, the learned Assessing Officer/ hon'ble Dispute Resolution Panel erred in not allowing the consequential additional depreciation under section 32(1)(iia) of the Act for the expenses treated as capital expenditure for the assessment year 2016-17. 19. Without prejudice to the above, the learned Assessing Officer/ hon'ble Dispute Resolution Panel erred in not allowing the consequential depreciation for the expenses treated as capital expenditure for the prior years. (Tax effect : Rs. 31,35,016)." 2. The brief facts of the case are that the assessee is company is engaged in the business of manufacture of automobile component such as seats, door strings, and interiors for the automobile industry. It filed its return of income on November 29, 2016 declaring the total income as Nil and current year carry forwarded loss amounting to Rs. 1,37,85,727. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee furnished the details time to time in ITBL portal. During t....
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....) is the most appropriate method. The Transfer Pricing Officer gave an opportunity to the taxpayer to make an analysis under profit split methods such as excess profit method, profit differential method (also called residual profit split method). 2. The taxpayer furnished a reply dated October 14, 2019 stating that as the taxpayer is a licensed manufacturer, the manufacturing activity is dependant on the technical know how from TBC, the trans actions are closely interlinked, royalty relates to turnover and forms an essential part of sales and due to the peculiar circumstance of operations involving various types of interdependent transactions, the taxpayer has aggregated the transactions and used transactional net marginal method as the most appropriate method which should be allowed. 5.4 Why transactional net marginal method cannot be used as an appropriate method here ? 5.4 1 There are numerous approximations in usage of transactional net marginal method. Aggregation of transactions and analysis can still be justified if there are numerous high-value international trans actions, and all the transactions are so inter-linked that they can be called a '....
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....ciated enterprises. By doing this, it reduces its prof its in India to the market average. As a cover, it prepares documentation on how the associated enterprises gave the taxpayer the know-how of a new technique to weld gear machines. There is no way of benchmarking such unpatented know-how (even for patents, a survey shows that 98 per cent. of patents cannot be commercially harnessed). The company pays less tax in India and can justify the profit shifting by saying that it is within tolerance limit of transactional net marginal method mean margin. In this situation, transactional net marginal method actually defeats the very purpose of transfer pricing as an anti-abuse provision. There is no justification for application of transactional net marginal method, because the so called tech supplied by the associated enterprises to this hypothetical company is not 'start-up tech'. It is technological update/upgradation. There is no benchmark of such technology intangible. As such, intangibles can be benchmarked only using analytical approaches. Transactional net marginal method is very crude, and it definitely does not give any indication of the arm's length nature....
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....priate method for benchmarking of royalty transactions. The logic for same is also very strong. A licensee will commit to pay a percentage of its sales as royalty in third party situation only if it knows that it can make much more profits. The profitability from the intangibles shared by licensor have to be split between the licensor and licensee profit split is the logic on which all third-party negotiations of royalty rate take place internationally. 6.2 After going through the data available on public databases, and analysis of the facts of the case, the Transfer Pricing Officer concludes that residual profit split steps can be applied to get the profit split. The Transfer Pricing Officer refers to the judgment of the Income-tax Appellate Tribunal, Delhi Bench in the case of Global One India P. Ltd. v. Asst. CIT [2014] 31 ITR (Trib) 722 (Delhi) (I. T. A. No. 5571/ Delhi/2011 and I. T. A. No. 5896/Delhi/2012) for the steps involved. There is sufficient literature on the steps involved. However, in this case, the Income-tax Appellate Tribunal had also observed that (refer para 20.5 of Income-tax Appellate Tribunal order) residual profit split method involves : (a) determ....
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....prises) are as under : Company Royalty OR Rate Minda Industries Ltd. 4.35 1613.17 0.27% J B M Auto Ltd. 1.12 654.34 0.17% Z F Steering Gear (India) Ltd. 0.04 427.83 0.01% Average 0.15% 6.6 The taxpayer's EBITR (earnings before interest, taxes and royalty) margin is calculate as under (royalty is removed from the operating expenses, so that profit before royalty is computed routine return is removed from it and then residual profit is split between licensor (its royalty) and licensee (its profit from usage of technology): Particulars Amount (INR) Operating revenue 4,61,23,47,934 Total cost 4,59,17,97,705 Less : Royalty 13,33,90,044 Operating cost 4,45,84,07,661 Operating profit-EBITR 15,39,40,273 EBIT R/OR 3.3% 6.7 The non-routine profitability of the taxpayer is 3.3 per cent.-0.15 per cent. which equals 3.15 per cent. on sales. A/OR is the enhancement of profits of the taxpayer by using the associated enter prises technologies transferred. This has to be split between the taxpayer and its associated enterprises. The Transfer Pricing Officer gives....
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....much more than EBITR/OR ratio, one has to investigate other international transactions of the tested party with associated enterprises. For instance, in this case, the taxpayer pays its associated enterprises a substantial amount of 'management fees'. However, since EBITR/OR ratio is more than routine returns, the arm's length price royalty could be determined analytically. 7. Hence, the total adjustment made under section 92CA of the Income-tax Act, 1961 is Rs. 7.52.74,460." 2.2 After receipt of the Transfer Pricing Officer order the learned Assessing Officer passed draft assessment order under section 144C of the Income-tax Act, on December 6, 2019. The learned Assessing Officer further observed from the profit and loss account that he has claimed expenditure relating to line set up expense amounting to Rs. 1,06,57,228 and the similar was also discussed in the previous assessment order. The same was incurred for reimbursement or renovation of old premises so as to enhance the producing capacity accordingly he observed that the expenditure incurred was enduring in nature and not a revenue expenditure. Income-tax is a capital expenditure accordingly he....
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....3) read with section 144B of the Act on April 22, 2021. 3. Feeling aggrieved from the above order, the assessee filed appeal before the Income-tax Appellate Tribunal. 3.1 The learned authorised representative submitted that the similar issue has been decided by the co-ordinate Bench of the Tribunal in the assessee's own case covering all the issues in Toyoto Boshoku Automotive India Pvt. Ltd. v. Dy. CIT (I. T.(TP) A. No. 1646/Bang/2017 vide order dated April 13, 2022) for the assessment year 2013-14 and the facts are similar and no any changes has been taken place during the impugned assessment year. 3.2 The learned Departmental representative relied on the order of the lower authorities and could not controvert the findings of the decision of the Tribunal in the assessee's own case cited supra. 3.3 We have heard the rival submissions and carefully considered the same along with the order of the authorities below as well as the documents referred to and relied on before us during the course of the hearing. we adjudicate the issues as under. 4. Ground No. 1 is general in nature, hence no adjudication is required. 5. Ground Nos. 2 to 11 is regarding transfer....
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....2.28 per cent. over the net sales are paid as royalty to the associated enterprises by the assessee. 11.4. We note that, learned Transfer Pricing Officer referred to the decision of the hon'ble Delhi Bench in the case of Global One India (P.) Ltd. v. Asst. CIT (supra). On perusal of this decision, we learn that, that was a case where, Global One India, out of highly integrated operations and deployment of assets and functions of different entities located in different geographical locations, for execution of one transaction, to be ultimately delivered by way of combined effort. It was under such circumstances that profit split method was necessary to be considered as the most appropriate method. 11.5. In the present facts of the case that technology is obtained from the evil witches used by the assessee in its manufacturing activity as there is no involvement of the global entities in order to execute the transaction. We have perused the decision case of the assessee's sister concern referred to hereinabove, wherein, in identical circumstances, the Tribunal observed and held as under : '15. We have considered the rival submissions. We....
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.... in a case involving transfer of unique intangible or in multiple interrelated international transactions which cannot be valued separately for determining the arm's length price. The OECD guidelines cited on behalf of the asses see clearly supports the aforesaid approach and the OECD guidelines in this regard reads as follows : "Further reliance is also placed on OECD Guidelines, which clearly lay down the situations in which the profit split method is selected as an appropriate method for benchmarking. The relevant extract from the OECD Guidelines (para 2.109) is as below : 'A transactional profit split method may also be found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions (e. g. contribute unique intangibles) to the transaction, because in such a case independent parties might wish to share the profits of the transaction in proportion to their respective contributions and a two-sided method might be more appropriate in these circumstances than a one-sided method. In addition, in the presence of unique and valuable contributions, reliable comparables information might be insufficient....
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....tually exclusive and on the contrary may often be found together in a single case. 2.127. At the other end of the, spectrum, where the accurate delineation of the transaction determines that one party to the trans action performs only simple functions, does not assume economically significant risks in relation to the transaction and does not otherwise make any contribution which is unique and valuable. . . 2.147. Under the transactional profit split method, the relevant profits are to be split between the associated enterprises on an economically valid basis that approximates the divisi6n of profits that would have been anticipated and reflected in an agreement made at arm's length. In general, the determination of the relevant profits to be split and of the profit splitting factors should : Be consistent with the functional analysis of the controlled trans action under review, and in particular reflect the assumption of the economically significant risks by the parties, and Be capable of being measured in a reliable manner.' 17. It is clear from the above OECD guidelines that in order to determine the profits to be split, the cr....
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....r concerns case referred to hereinabove. There is no dispute that, factual metrics and background our identical and the nature of payment having considered identically by the Revenue authorities in both these cases. We are therefore respectfully following the view taken by the co-ordinate Bench of this Tribunal in the case of Toyota Kirloskar (supra), we are of the view that transactional net marginal method is the most appropriate method and the learned Assessing Officer/Transfer Pricing Officer is directed to apply the said method in determining the arm's length price, after affording opportunity of being heard to the assessee. Accordingly, ground Nos. 2-10 raised by the assessee for the assessment year 2013-14 stands allowed. 12. The facts for the assessment year 2015-16 are identical with the assessment year 2013-14. Therefore the view taken for the assessment year 2013-14 will apply mutatis mutandis to the assessment year 2015-16 in respect of grounds 2 to 16 raised their in." 5.2 Respectfully following the decision of the co-ordinate Bench of the Tribunal in the assessee's own case for the assessment year 2013-14 cited supra, we allow ground....
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....9;Article 15 : Income from employment 1. Subject to the provisions of articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State. 2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if : (a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, and (b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and (c) the remuneration is not borne by a permanent establishment which the employer has in the other State. 3. Notwithstanding the preceding provisions of this article, remuneration derived in respect of an empl....
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....'employer' for purposes of para graph 2 of article 15. In determining the employer, the guidelines attaches importance to the nature of the services rendered, in order to determine, whether the services rendered by the individual constitute an integral part of the business of the enterprise to which these services are provided. In cases where the nature of the services rendered point to an employment relationship different than the one of the formal employer, the guidelines suggests objective criteria to determine the employer, namely : -who has the authority to instruct the individual regarding the manner in which the work has to be performed ; -who controls and has responsibility for the place at which the work is performed ; -the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided ; -who puts the tools and materials necessary for the work at the individual's disposal ; -who determines the number and qualifications of the individuals performing the work. 14.7. As a consequence, instead of being regarded as non-resident employee of a non-resi....
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....etween the assessee and Toyota Corporation Japan, the assessee in India as well as the seconded employee shall not disclose confidential information of the other party. 14.13. From the recitals to the 'Agreement of employees on loan', dated August 1, 2008 between the assessee and Toyota Corporation Japan, it is clear that, the process of secondment of employees by Toyota Corporation, Japan to the assessee in India is initiated, when the assessee in India, makes a request requiring the services of seconded employees of the Toyota Corporation, Japan, for its business projects by the assessee in India. The assessee in India gives offer letter to the seconded employee. By way of illustration, we may take the case of one Mr. Minoru Asahi who is a Japanese national and who is on the rolls of Toyota Corporation, Japan. 14.14. The offer letter dated June 11, 2014 of the assessee in India addressed to Mr. Minoru Asahi contains the following features : '1. He is employee of Toyota Corporation Japan and during his assignment to assessee India, his employment responsibilities with Toyota Corporation Japan will remains suspended. 2. That, he will ....
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....n Double Taxation Avoidance Agreement that deals with 'Fees for technical services', as under : '4. The term "fees for technical services" as used in this article means payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.' Reading article 12(4) of India Japan Double Taxation Avoidance Agreement, it is clear that payments made to individuals or firm of individuals for services rendered by them in independent capacity are specifically excluded as they are covered by article 14 being "Independent Personal Services". Article 12(4) also excludes payments made towards services rendered by an 'employee' of an enterprise. 14.18. The definition of fees for technical services under the Act is given in Explanation 2 to section 9(1)(vii) of the Act that reads as follows : '9. Income deemed to accrue or arise in India.-(1) The following incomes shall be....
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....learned Deputy Commissioner of Income-tax placed reliance on the decision of the hon'ble Delhi High Court in the case of Centrica India Offshore Pvt. Ltd. v. CIT [2014] 364 ITR 336 (Delhi); [2014] 44 taxmann.com 300 (Delhi) concluded that the reimbursement was fees for technical services and that services provided make available technical skill or knowledge for use by the assessee. 14.20.1. In the case of the decision of the hon'ble Delhi High Court Centrica India Offshore Pvt. Ltd. v. CIT (supra) dealt with identical case of reimbursement of salaries paid to expatriate employees. The hon'ble court held that, overseas entities had, through seconded employees, undoubtedly provided 'technical' services to Centrica India and that, the expression rendering technical services expressly includes provision of services of personnel. The court held that the seconded employees, were provided by overseas entities and work conducted by them thus, i.e. assistance in conducting business of the assessee of quality control and management was through overseas entities. The court also held that, mere fact that secondment agreement, phrases payment made by Centrica India ....
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....sement of salary of expatriates to foreign company by Indian company results in taxable income in the hands of the foreign company. The hon'ble High Court also upheld the observations of Authority for Advance Rulings, wherein it characterized the secondment of personnel as provision of managerial services. However, the hon'ble court set aside the ruling of the hon'ble Authority for Advance Rulings, wherein it held that, the reimbursement of salary of expatriates constitutes fees for included services in terms of article 12(4) of India USA Double Taxation Avoidance Agreement. There fore, reliance placed on this decision is of no assistance to the Revenue. 14.22. There is another decision of the hon'ble Supreme Court in case of DIT (IT) v. Morgan Stanley and Co. Inc. [2007] 292 ITR 416 (SC) ; [2007] 162 Taxman 165 (SC), wherein, it is held that, in case of deputation, the entity to whom the employees have been deputed cannot be regarded as employer of such employees as the employees continue to have lien on his employment with the entity which deputes him. Entity seconding the employee is the employer as it retained the right over seconded employee is also he....
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....exists a service permanent establishment in India (MSAS).' 14.22.2. Per contra, in the present facts of the case there is no finding, of their existing permanent establishment, in any form by the Revenue and therefore is of no assistance to the Revenue. 14.23. As far as the decision of the hon'ble Authority for Advance Rulings in the case of A. T. and S (supra) is concerned, the facts of the said case were that A. T. and S, a company incorporated in Austria, offered services of technical experts to applicant, a resident company, pursuant to a foreign collaboration agreement on the terms and conditions contained in secondment agreement. Under the secondment agreement the applicant is required to compensate A. T. and S for all costs directly or indirectly arising from the secondment of the personnel, and the compensation is not limited to salary, bonus, benefits, personal travel, etc., but also includes other items. On the above facts, the hon'ble Authority for Advance Rulings ruled that the Contention that the payments are only in the nature of reimbursement of actual expenditure is not supported by any evidence and there is no material to show what act....
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....gs of these terms. The hon'ble Authority for Advance Rulings in Cholamandalam MS General Insurance Co. Ltd., In re [2009] 309 ITR 356 (AAR), took the view that, merely supplying technical, managerial or personnel with managerial skills cannot be regarded as rendering technical services by the person supply such personnel. The following were the relevant observations of hon'ble Authority for Advance Rulings (page 363 of 309 ITR) : 'It is debatable whether the bracketted words "including provision of services of technical or other personnel" is independent of preceding terminology -"managerial, technical or consultancy services" or whether the bracketted words are to be regarded as integral part of managerial, technical or consultancy services undertaken by the payee of fee. In other words, is the bracketted clause a stand alone provision or is it inextricably connected with the said services ? HMFICL itself does not render any service of the nature of manage rial, technical or consultancy to the applicant and it has not deputed its employee to carry out such services on its behalf. There is no agreement for rendering such services. In this factual situation, it ....
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....with regard to treatment of payment towards plant layout charges as capital in nature of Rs. 90,58,664. 7.1 The facts in the present assessment year 2016-17 are identical with issue covered by the decision of co-ordinate Bench in the assessee's own case in I. T. (TP) A. No. 1646/Bang/2017 vide order dated April 13, 2022 for the assessment year 2013-14 and also for the assessment year 2015-16. The para Nos. 16 to 17 in the assessment year 2013-14 is reproduced here under : "16. Ground No. 15-17 are raised by the assessee challenging the treatment of payment towards plant layout charges as capital in nature. The assessee has incurred expenses towards plant layout charges to facilitate material movement for optimum utilisation of space. Due to space constraints, amounts have been spent for re-arranging the production lines on a regular basis. These are minor modifications of small value, which do not result in benefits accruing for a long period. Such expenses have been incurred year-on-year basis to improve utilisation of the resources, besides improvement in quality and safety. Such expenditure neither increases the earning capacity of the business, nor does it resul....
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....ntative relied on orders passed by authorities below and submitted that there is nothing placed on record in support of the claim by the assessee. We have perused the submissions advanced by both sides in the light of records placed before us. We note that the alleged expenditure has been claimed as plant layout charges to improve utilisation of resources, besides improvement in quality and safety. The learned authorised representative however alternatively prayed that, in the event the said expenditure is upheld to be capitalised, depreciation may be granted. We note that the assessee has not provided any details in respect of the expenditure incurred towards layout of plant, and why was it necessary to be incurred. In our view this issue needs to be revisited based on the evidence filed by the assessee having regard to the principles laid down by the hon'ble Supreme Court in the case of Ballimal Naval Kishore v. CIT (supra) of Dispute Resolution Panel order. Accordingly, we direct the assessee to file all relevant details in support of the claim which would be verified by the Assessing Officer in accordance with law. Accordingly, ground Nos. 15-17 r....