TaxTMI 
TaxTMI 
2023 (2) TMI 247
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....2,735/- to the total income of the Assessee on account of determination of Arm's Length Price in respect of an international transaction of rendering of Software Development Services by the Assessee to its Associated Enerprise. Though the Assessee has raised several grounds of appeal, at the time of hearing of the Appeal, the learned counsel for the Assessee restricted his arguments to exclusion of 7 comparable companies viz., and exclusion of margins for R.S.Software (India) Ltd., for FY 2014-15 & 2015- 16) inclusion of one comparable company Akshay Software Technologies Ltd., besides grounds on working capital adjustment. 3. The Assessee in engaged in the business of provision of Software Development Services (SWD services), to its wholly owned holding company. In terms of the provisions of Sec.92-A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises ("AEs"). In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services was an "international transaction" i.e., a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible p....
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....ghted Average 1 Kals Information Systems Pvt. Ltd. 3.97% 5.77% 16.94% 8.60% 2 E-Zest Solutions Limited 7.65% 11.80% 14.88% 10.87% 3 Rheal Software Pvt. Ltd. 3.20% 2.76% 36.64% 14.50% 4 Sybrant Technologies Private Limited 16.10% 13.88% 15.26% 14.74% 5 Harbinger Systems Pvt. Limited 12.69% 17.18% No Data in Public Domain 15.06% 6 C G-V A K Software & Exports Ltd. 19.60% 19.87% 13.81% 18.50% 7 R S Software (India) Ltd. -2.09% 32.75% 24.14% 20.87% 8 Larsen & Toubro Infotech Ltd. 26.29% 24.22% 23.54% 24.83°- 9 Orion India Systems Private Limited 26.08% 25.14% No Data in public domain ' 25 64% 10 Nihilent Ltd. 15.94% 29.19% 35.72% 26.36% 11 Integ Software Pvt. Ltd. 7.53% 32.14% 45.00% 28.20% 12 Persistent Systems Ltd. 26.92% 31.34% 35.64% 30.89% 13 Infobeans Technologies Ltd. 34.98% 20.78% 41.95% 32.42% 14 Thirdware Solution Ltd. 23.89% 44.39% 44.68% 36.90% 15 Infosys Ltd. 38.22% 41.30% 36.28% 38.61% 16 ....
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....e the Tribunal. 7. The grievance of the Assessee projected in the grounds of appeal filed before the Tribunal which was pressed for adjudication and argued before us were: (i) choice of comparable companies by the TPO which was affirmed by the DRP. It was the plea of the Assessee that the Ld. ITO/ Ld. TPO/ Ld. DRPanel, while applying the turnover filter rejected companies having turnovers less than INR 1 crore, however, erred in not applying an appropriate upper limit to reject high turnover companies and thereby, erred in accepting companies without considering the turnover and size of the Assessee and comparables. It was the plea that should an upper limit be applied, the following companies would be rejected: Sl.No Company Turnover FY 2013-14 FY 2014-15 FY 2015-16 1 R S Software (India) Ltd. 351.88 345.51 - 2 Persistent Systems Ltd. 1,184.12 1,242.50 1,447.14 3 Thirdware Solution Ltd. 206.76 230.08 - 4 Larsen & Toubro Infotech Ltd. 4,643.94 4,744.40 5,569.52 5 Infosys Ltd. 44,341.00 47,300.00 53.983.00 6 Nihilent Ltd. 242.00 267.00 7 Aspire Systems....
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....which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the ....
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....ter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the OECD on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: • None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or • Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 11. As far as comparability of companies listed in Grd.No.4.3 raised by the Assessee is concerned, the admitted factual position is that the turno....
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.... exclude a company from the list of comparable companies in determining ALP, held that there were contrary views on the issue and hence the view favourable to the Assessee laid down in the case of Pentair Water (supra) should be adopted. The following were the conclusions of the Tribunal in the case of Dell International (supra): "41. We have given a very careful consideration to the rival submissions. ITAT Bangalore Bench in the case of Genesis Integrating Systems (India) Pvt. Ltd. v. DCIT, ITA No.1231/Bang/2010, relying on Dun and Bradstreet's analysis, held grouping of companies having turnover of Rs. 1 crore to Rs.200 crores as comparable with each other was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be ....
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....omparable with a company that has low turnover. The following were the relevant observations: 17.7. We have considered the rival submissions. The substantial question of law (Question No.1 to 3) which was framed by the Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) Pvt.Ltd., (supra) was as to whether comparable can be rejected on the ground that they have exceptionally high profit margins or fluctuation profit margins, as compared to the Assessee in transfer pricing analysis. Therefore as rightly submitted by the learned counsel for the Assessee the observations of the Hon'ble High Court, in so far as it refers to turnover, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricin....
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.... the Assessee has to be followed. Therefore, the decisions cited by the learned DR before us cannot be the basis to hold that high turnover is not relevant criteria for deciding on comparability of companies in determination of ALP under the Transfer Pricing regulations under the Act. For the reasons given above, we uphold the order of the CIT(A) on the issue of application of turnover filter and his action in excluding companies by following the ratio laid down in the case of Genisys Integrating (supra). 14. In view of the aforesaid decision, we hold that 7 companies listed in the earlier paragraph 7 of this order whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. 15. As far as the company R.S. Software (India) Pvt.Ltd., listed at Sl.No.1 in Ground No.4.3 is concerned, the said company has admittedly a turnover of above Rs.200 crores in FY 2013-14 & 2014-15 and hence is not a comparable company in those two Financial Years and therefore while computing the average profit margin of three financial years, the profit margins of these two Financial years 2013-14 & 2014-15 should be excluded and only margins for....
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....cial years 2013-14 & 2014-15 should be excluded and only margins for FY 16-17 should be taken for working out the average profit margin of this company. 17. The next plea of the Assessee is for inclusion of Akshay Software Technologies Ltd., as a comparable company. As far as the plea of the Assessee for inclusion of the aforesaid companies is concerned, the DRP dealt with the plea of the Assessee and held that this company is not strictly speaking said to be engaged in software development services but was a mix of software services and professional services. It also held that segmental details were not available to ascertain the profit margins of the software services segment. 18. It was submitted that under the safe Harbour Rules under Rule 10TA of the Income Tax Rules, 1962 (Rules), software development services include support services like debugging of systems and services for maintenance of software products and hence the conclusion of the DRP is incorrect. It was submitted that SWD services forms 96.05% of the total ooperating revenue. Reliance was placed on decision of ITAT Bangalore in the case of Citrix R & D India Private Limited order dated 19.7.2022 in IT(TP) A.....
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....as to the impact of working capital on the costs, price or profit. (ii) working capital requirements and impact depends on various factors such as business cycle, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc., all of which cannot be captured in the year end receivable or payable position. (iii) the year end receivables and payable may not reflect as to whether it arises from transactions relating to revenue account or capital account as there is no uniformity in the accounting or reporting requirements and an intermixing is generally possible. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 22. The learned counsel for the Assessee submitted that the conclusions of the DRP are identical to the conclusions arrived at by the revenue authorities in the case of Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). In the aforesaid decision on....
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....o either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory) 16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that: ♦ A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) ♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 23. The tribunal observed that examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the diffic....
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.... affording Assessee opportunity of being heard. 26. Grounds No.17 to 22 raised by the Assessee reads as follows: Disallowance of short term capital loss of INR 550,0891891 on transfer of investment and erroneous computation of the same at INR 146,900,010 17.erred in questioning the business rationale behind hiving off the sprinkler business by TFSIPL as opposed to shutting it down completely and transfer of CCDs to Aigua Sprinkler at nominal value by TFSIP in a short span of time post subscription 18.erred in asserting that the rationale and action of investment of INR 550,000.000 by TFSIPL in the CCDs of Aigua Sprinkler is contradictory in nature considering the continuous losses being incurred by the sprinkler business. 19.erred in concluding that the sale of investment in Aigua Sprinkler at nominal value is a pre-planned and arranged transaction and rejecting the short-term capital loss of INR 550.089.891 arising on the sale of investment in Aigua Sprinkler on account of projection of growth of revenue in the valuation report of the Sprinkler business without considering the historic negative EBITDA of the Sprinkler business 20.wit....
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.... a going concern, identifying it's assets and liabilities. The Assessee sold its sprinkler business on a slump sale basis. As per section 2(42C) of the Act, 'slump sale' means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Section 50B of the Act, provides the mechanism for computation of capital gains arising on slump sale. Sec.50B of the Act is a special provision for computation of capital gain on slum sale and excludes other provisions of the Act, in so far as it relates to charge and computation of capital gain on slump sale. Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is defined in Explanation 1 to section 50B as the difference between 'the aggregate value of total assets of the undertaking or division' and 'the value of its liabilities as appearing in books of account'. The 'aggregate value of total assets of the undertaking or division' is the sum total of: WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case....
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....0) 12 June 2015 • Assessee transferred its entire Investment of Share Capital of INR 99,990 and Debentures of INR 55,00,00,000 in "Aigua Sprinkler" (wholly owned subsidiary) to Mr. Jitendra G Mahnot (unrelated third party) for a nominal value of INR 10,099. • The Share Capital of INR 99,990 was transferred to Mr. Jitendra G Mahnot for INR 9,999 and the Debentures worth of INR 55,00,00,000 were transferred for INR 100 to Mr. Jitendra G. Mahnot. • Reason for Selling at Nominal Value • Though Assessee tried to maximize the sale consideration of the CCDs of Aigua Sprinkler to the value determined for Sprinkler business in the valuation report, neither the Purchaser nor any other party was willing to purchase the CCDs of Aigua Sprinkler at the proposed price. • In this scenario, Assessee had the option to either : • Cancel this sale transaction and continue to incur significant losses and added investment cost or; • To sell the CCDs at the price agreed by the Purchaser. • Hence, Assessee decided to dispose of its investment in Aigua Sprin....
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.... losses in its sprinkler business which motivated the business restructuring, then it had its own right to shut off the sprinkler business completely. However, instead the Assessee had decided to invest INR 55,00,00,000 in debentures of the Sprinkler business held by its subsidiary. • The entire transaction of subscribing to the CCDs of Aigua Sprinkler and transfer of the same happening with a period of 4 days doesn't substantiate any business expediency for sale of its investment at nominal value; • The sale of asset worth INR 55,00,99,999 for INR 10,099 clearly establishes the motive of Assessee to avoid the tax liability and to provide undue favor to its related party; 32. On the above reasoning, the AO proceeded to determine the capital gain on sale of shares and assignment of debentures as follows: • On short term capital loss on sale of equity shares of Aigua India by Assessee to Jitendra G.Bhanot, at nominal value, the AO relied on the valuation report of sprinkler business at the time of Slump Sale wherein the value of INR 14.7 crores was determined as the value of sprinkler business and substituted the full value of consideration r....
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....l for the Assessee submitted that in so far as the loss on sale/assignment of debentures is concerned, the same has been determined at nil and therefore there are not tax implications. It was also submitted that there would no income, which could be set off within the time permitted in law of the short term capital loss that the Assessee incurred on sale/assignment of the debentures. In the circumstances, he submitted that that the said ground with regard to rejection by the revenue authorities of short term capital loss on sale/ assignment of debentures is not pressed. He however submitted that the Assessee reserves its right to contest the correctness of the findings and action of the revenue authorities on the issue and without prejudice to its rights in law to contest the said findings, on the issue in other proceedings. In view of the prayer of the learned counsel for the Assessee, the ground of appeal with regard to rejection of short term capital loss on sale/assignment of debentures raised by the Assessee in its appeal is dismissed. The learned counsel for Assessee also filed a memo requesting withdrawing original ground No.21 & 22 and hence these grounds are dismissed as w....
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....29.90 Crore • Number of employees - 112 The same were transferred as part of the slump sale. Further the assets that were transferred comprised of fixed assets such as laptops and current assets such as trade receivables and work in progress for projects under process whereas the liabilities transferred included accrued expenses, accrued pension, income received in advance, and advance from customers. It was submitted that the sprinkler business unit was historically incurring significant gross losses and negative EBITDA y-o-y basis. This was adversely impacting the overall business of Assessee. The historical EBITDA margins is tabulated below for your reference: (Amount in INR Crores) Particulars 30-Sep-2013 (YE) 30-Sep-2014 (YE) 24 April 2015 (YTD) Revenue (A) 902 352 186 Gross Profit (B) -36 -195 37 Gross Margin -4% -55% 20% Employee Costs (C) -22 -22 -17 Other expenses (D) -119 -128 -319 EBITDA (E = B-C-D) -176 -345 -300 EBITDA margin (F =E/A) -20% -98% -161% 38. It was submitted that as provided in the aforementioned valuation report, the Sprinkler business reg....
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....nclusions which we may ultimately arrive at on the issue in question, it may become unnecessary. We may also add that, if a third party would not be willing to pay the price which the Assessee received from its subsidiary, then the provisions of Sec.92 of the Act regarding specified domestic transactions or Sec.40A(2)(b) of the Act, would stand attracted. The Assessee's plea as above, cannot therefore be accepted. The Assessee has neither reported the above transaction as specified domestic transaction nor qualified payment covered u/s.40A(2)(b) of the Act. 40. The learned counsel submitted that merely, because the transfer of investment in Aigua Sprinkler has taken place at a loss, it cannot be said that it is a colorable device to evade tax and provide undue favour to related party. In hindsight, there have been no tax benefits arising out of the transfer of investment in Aigua Sprinklers to the unrelated third party. If the sprinkler business was continued by the Assessee, it would have resulted in growing business losses in the future. The decision taken by the Assessee in the normal course of business to divest its sprinkler business has minimized any further losses on acco....
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....ation towards Aigua assuming the liabilities of the Sprinkler Business and continuing the Sprinkler Business in the manner contemplated in this Agreement and to fund the purchase of the Sprinkler Business and the immediate working capital needs of the Sprinkler Business, TFS has agreed to invest an amount of INR 550,000,000 (Subscription Consideration) in Aigua and subscribe to 55,000,000 compulsorily convertible debentures of Aigua (CCDs)." (Emphasis supplied) This is further substantiated in para 3.2 of the debenture subscription 3.2. Aigua agrees and covenants that the Subscription Consideration shall be used as follows: (a) an amount of INR 120,000,000 shall be paid as consideration to TFS for purchase of the Sprinkler Business under the BTA; (b) subject to and in accordance with the terms of Clause 4, an amount up to 13,000,000 shall be used to pay the retention amounts to the Employees as set out in Schedules 1 and 2 (Employee Retention Amounts) pursuant to the respective retention agreements listed in Schedule 3 (Retention Agreements) in the following manner: Within 7 days of the Transfer Date INR 6,500,000 (First Installment) Within....
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....tion and second on valuing 9,999 equity shares of Aigua Sprinkler. It was submitted that the AO has recomputed the short term capital loss of INR 89,991 to a short term capital gain of INR 146,900,010 by notionally substituting the value of sale consideration which is ultra-vires the power of the AO. It was submitted that it is a settled position of law that the AO has no power to replace/substitute the value of consideration agreed between the parties for the year under consideration. In this regard, the learned counsel for Assessee has relied on the Hon'ble Supreme Court's judgement in the case of George Henderson & Co. Ltd. (Civil Appeal No. 1618 of 1966) dated April 26, 1967 where the Hon'ble court held that the full value of consideration of a capital asset is different from its fair market value and that the former does not have any reference to the latter. Attention was drawn to the following observations of the Judgment: It follows that the expression "full consideration" in the main part of s. 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only means the full value of the thing received by the trans....
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....usiness for slump sale happened on 24.4.2015 and the slump sale took place on 9.6.2015 on the basis of the said valuation. By virtue of the Slump Sale, the Assessee hived off its sprinkler business to Aigua Sprinkler. Prior to the slump sale it funded Aigua Sprinkler by subscribing to its Debentures worth Rs.55 crores on 9.6.2015. The valuation of the sprinkler business was without considering the inflow of funds of Rs.55 Crores, in the form of debenture subscription by the Assessee. The full value of consideration received on slump sale was Rs.20 Crores. Thus the Assessee funded Aigua Sprinkler for payment of consideration for slump sale by subscribing to its debentures. On 12.6.2015 the slump sale was effected in favour of Aigua Sprinkler. On 12.6.2015 the Assessee sold Debentures worth Rs.55 Crores for a nominal sum of Rs.100 to Mr.Gitendra G.Bhanot. Likewise the shares held by the Assessee in Aigua Sprinkler of the face value of Rs.99,999/- were sold on 12.6.2015 to Mr.Gitendra G.Bhanot for a paltry sum of Rs.999/-. Between 9.6.2015 and 12.6.2015 how could there be such a huge difference in valuation and the rationale for incurring loss on sale of shares and assignment of deben....
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....Sprinkler Business by way of slump sale. With this end in mind the Assessee got the Sprinkler business valued by a valuer who vide his valuation report dated 24.4.2015 valued the sprinkler business at Rs.14.70 Crores. On 9.6.2015, the Assessee subscribed to 5,50,00,000 compulsorily convertible debentures of Rs.10/- each of Aigua Sprinkler and paid a sum of Rs.55 Crores. On the very same day i.e., 9.6.2015 the Assessee sold way of slump sale Sprinkler Business to Aigua Sprinkler for a consideration of Rs.12 Crores. The capital gain on such slump sale in accordance with the provisions of Sec.50B of the Act, was determined at Rs.2,00,17,830/- computed by reducing from the purchase consideration of Rs.12 crores, the networth of the sprinkler business which was Rs.9,99,82,170/-. The capital gain on slum sale of the sprinkler business as declared by the Assessee was accepted by the AO and there is no dispute on this aspect. 47. On 13.6.2015, just one week after the slump sale of sprinkler business, the Assessee transferred his share holding of 9,990 of Rs.10 each in Aigua Sprinkler, for a consideration of Rs.9,999. It incurred Short Term Capital Loss Rs.89,991/- on sale of shares. Lik....
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....on sale of shares of Rs.999/- by the value of the sprinkler business as per the valuation report of valuer which was a sum of Rs.14.7 crores. By substituting the full value of consideration received on transfer by the fair market value of the equity shares of Rs.14.7 crores, the AO determined a short term capital gain of INR 14,69,00,001 on sale of equity shares(Rs.14,70,00,000 - Rs.999= Rs.14,69,00,001/-). 50. Sec.45 of the Act lays down that profits and gains arising out of transfer of capital asset effected in the previous year shall be chargeable to income tax under the head "capital gains" and shall be deemed to be the income of the previous year in which the transfer took place. Section 48 of the Act provides that income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :- (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto: The expression "full value of consideration received on transfer", has been e....
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....equity share of a company is less than the Fair Market Value (FMV) of such share determined in accordance with the prescribed manner, the FMV shall be deemed to be the full value of consideration for the purposes of computing income under the head "Capital gains". The aforesaid provisions reads thus: "Special provision for full value of consideration for transfer of share other than quoted share. 50CA. Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed, the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer: Provided that the provisions of this section shall not apply to any consideration received or accruing as a result of transfer by such class of persons and subject to such conditions as may be prescribed. Explanation.-For the purposes of this section, "quoted share" means the share quoted on any recognised stock exchange with regularity ....
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.... implications. The affairs have been arranged in such a way that there is tax advantage to the Assessee. The transaction of sale of shares of Aigua Sprinkler to Mr.Gitendra Bhanot will be ignored, by lifting the corporate veil and by construing the sale of sprinkler business by the Assessee to Mr.Gitendra Bhanot. Loss on sale of shares to exploit a loophole in the law, has been plugged by way of amendment from AY 18-19 by introduction of Sec.50CA of the Act. We do not wish to go into the tax implications in the hands of Mr.Gitendra Bhanot and whatever is the observations in this appeal is restricted to the tax implications in the hands of the Assessee. Therefore the better course of action would be to ignore the transaction of sale of shares as superfluous and entered into with a view to gain tax advantage. In that view of the matter, the short term capital loss would be nil, in the facts and circumstances of the present case. In the light of the above discussion, we reject the prayer of the Assessee to allow the short term capital loss on sale of shares as claimed by the Assessee and hold that the transaction of sale of shares deserves to be ignored and no loss can be determined n....
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....t source. The AO has wrongly referred to Tyco Fire and Security GmbH instead of referring to TIL, Switzerland. According to the AO, the sums paid to the aforesaid non- residents were in the nature of Fees for Technical Services (FTS) and was chargeable to tax in India as per the provisions of Sec.9(1)(vii) of the Act. 56. Before the Dispute Resolution Panel (DRP), the Assessee gave a description of the nature of services rendered by the non-residents Tyco International Management Co. USA (TIMCO) and Tyco International Asia, Inc., Singapore Tyco Asia, Inc., Singapore. The same is given as an annexure to this order. It was contended by the Assessee that the payment to the non-residents was for services provided by the AEs which are in the nature of management services namely, marketing and product development advisory services; fire and security global account sales support services; information technology support services; financial support services; human resource services; six sigma services and supply chain & real-estate services. It was contended under the Act, tax withholding provisions are attracted in relation to payments to non-residents only if the income is chargeable t....
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....nology contained therein. The relevant extracts of Article 12(4) of India-US DTAA and India-Singapore DTAA is as follows: • Definition of fees for included services as provided under Article 12(4) of India - US DTAA "4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services : (a) .........; or (b) make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design." (Emphasis supplied) • Definition of fees for technical services as provided under Article 12(4) of India - Singapore DTAA "4. The term "fees for technical services" as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services : (a) ....... ; or (b) make avai....
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.... at his / its disposal for taking the benefit therefrom by use. Even the use of such technical services by the recipient for once will satisfy the test of "making available". • The Honorable jurisdictional Karnataka High Court in the case of CIT vs De Beers India Minerals Private Limited (ITA 549 of 2007) has also interpreted the meaning of the term "make available" and observed that: "The service should be aimed at and result in transmitting technical knowledge etc. so that the payer of the service could derive an enduring benefit and utilize the knowledge or know how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skills etc. must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or....
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....nder Article 12(4) of India-US DTAA and India-Singapore DTAA respectively. Accordingly, such payments are not liable to tax in the hands of TIMCO / Tyco International Asia, Inc. in India and consequently the Assessee is not required to withhold any tax on these payments and no disallowance can be made u/s.40(a)(i) of the Act. 64. Alternatively, it was submitted that if payment made to TIMCO is regarded as payment made to TIL Switzerland, then the applicable DTAA would be India- Switzerland DTAA and in terms of the Most Favoured National Clause (MFN Clause) in the said DTAA, the restricted scope of taxation under more than one DTAA for definition of FTS is available to be adopted. Accordingly the restricted scope of FTS as provided in India-UK DTAA can be applied in India Switzerland DTAA by virtue of MFN clause. Thus, the payment made by the Assessee to TIL, Switzerland for management services rendered by TIMCO is not taxable as FTS in India as nothing was made available to the Assessee by virtue of those services. 65. The arguments advanced before the DRP did not find acceptance by the DRP. The DRP, in so far as payment to TIMCO is concerned, observed that the Assessee deduc....
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....DRP, the Assessee has raised Grd.No.23 & 24 before the Tribunal. We have heard the rival submissions. The learned counsel for Assessee reiterated submissions made before the DRP. The learned DR relied on the order of the DRP. 68. We have carefully considered the rival submissions. The first aspect that needs to be clarified is on the question of applicable DTAA in so far as the payment made to TIMCO is concerned. TIMCO is the person with whom the Assessee entered into Agreement for providing managerial services. TIMCO nominated TIL Switzerland as billing and collecting agent and directed the payment to be made for management services to the agent. TIMCO is the beneficial owner of the payment and therefore taxability of the payment in India has to be considered in the hands of TIMCO and not TIL Switzerland. Therefore the applicable DTAA would only be India-USA DTAA and not India-Switzerland DTAA. The findings of the DRP on the MFN clause on India-Switzerland DTAA are therefore in our view superfluous. In so far as the payment made to Tyco International Asia, Inc. Singapore is concerned, it was not the case of the AO that the services rendered were not in the nature of managerial ....
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....onsideration for the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services : a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3 is received; or b) make available technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design." 71. The case of the assessee is that in terms of Article 12(4)(b) of the Indo US treaty, which is applicable to the present case, only rendering of technical or consultancy services as 'make available' technical knowledge, experience, skill or know-how etc can be taxed in India in the hands of iRunway Inc. In other words, in order to attract the taxability of an income under Article 12(4)(b), not only the payment should be in consideration for rendering of technical or consultancy services, but in addition to the payment being consideration for rendering of technical services., the services so rendered should also be such that 'make available' technical knowled....
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....e case of CESC Ltd. Vs. DCIT (2003) 80 TTJ (Cal) (TM) 806: (2003) 87 ITD 653 (Cal)(TM) also the question regarding the scope of expression making available came up for the consideration of the Tribunal. In that case, the Tribunal was dealing with the scope of Article 13(4)(c) of the Indo-UK tax treaty which is admittedly in pari materia with Article 12(4) of the India-USA tax treaty with which we are presently concerned. The majority view was that in order to attract the provisions of the said article of the tax treaty, not only the services should be technical in nature but should be such as to result in making the technology available to person receiving the technical services in question. The Tribunal also referred to with approval the extracts from protocol to the Indo-US tax treaty to the effect that 'generally speaking, technology will be considered made available, when the person acquiring the service is enabled to apply the technology. 74. Honorable jurisdictional Karnataka High Court in the case of CIT vs De Beers India Minerals Private Limited (ITA 549 of 2007) has also interpreted the meaning of the term "make available" and observed that: "The service sh....
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....¢ Design policy for dealing with thirdparties, particularly where an agent or distributor may be involved, establishes guidelines for selecting and monitoring external professional service providers, and provides training for employees; • Manages the litigation issues on behalf of its entities and also engages outside legal counsel to track worldwide legal expenses; • Assistance in various tax related matters to its affiliates by way of tax planning and compliance; and • Undertakes review of tax issues and management of foreign tax audits, tax accounting and reporting support services, tax planning and guidance on various types of transactions undertaken by the entities of the Group etc Emails & phone conference TFSIPL obtained guidance on overall legal and tax framework and policy as formulated at a group level. TFSIPL also obtained assistance and inputs to enable it to adhere to the global approach to be followed by Tyco group in negotiating contracts with agents / distributors. • Email evidencing webinar conducted in relation to Tax provisioning and process guidance provided by Central Tax team (Refer Ann....
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.... customers, vendors and public relations program Emails & phone conferences Communication services has assisted TFSIPL in integrating the communication lines within the group as well as external communications which helps in ease of communication with the employees and external customers and vendors, and for public relations programs. • In this regard, wish to highlight that TFSIPL's employees generally log a IT ticket in the system to resolve any communication issue and the ticket is assigned to the central communications team which looks into the issue and resolves the same. 4. Information technology support services • Defining the global strategy for the information systems; • Coordinating & assisting in implementation of well-adapted, standardised and secured IT and telecommunication solutions; • Definition & coordination of the office automation policy; • Management and supervision of common IT applications; and • Optimising the information flows in implementing a standard ERP and providing IT and information systems tools. Emails & phone conferences TFSIPL obtaine....