TaxTMI 
TaxTMI 
2023 (10) TMI 771
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...., M/s. Shell Global Solutions International B.V. is a company incorporated in Netherlands and is engaged in the business of providing research and technical services to array of petroleum related segments. It's services include chemical analysis, crude oil evolution, engineering, energy optimisation, gas to liquids conversion, re-gasification, hybrid cracking, inspection, thermo-analysis and water treatment. 3. During the year under consideration, the Assessing Officer observed that as per Form No. 3 CEB, the assessee had received certain amounts from it's Associated Enterprises (in short "AE") in India for services related to operations of LNG storage and re-gasification. During the course of assessment, the Ld. Transfer Pricing Officer (in short "TPO") observed that the assessee had provided services related to operation of LNG storage and regasification terminal to its Associated Enterprises, HPPL and Hazira LNG Pvt. Ltd. The assessee has adopted CUP method for determination of Arms Length Price (in short "ALP"). However, the TPO observed that no comparison appears to have been made with the available internal CUP nor any alteration has been made to the above amount while con....
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.... provisions and making a TP adjustment to the value of international transactions entered into by the Appellant with Hazira LNG Private Limited ('HLPL'), Hazira Port Private Limited ('HPPL') in respect of rendering services in relation to operation of LNG storage and regasification. 1.2. The learned AO / TPO has erred on the facts and in law and learned DRP has further erred in confirming the action of the AO / TPO on the facts and in law in applying the TP provisions and making a TP adjustment to the value of international transactions entered into by the Appellant with Shell India Markets Private Limited ('SIMPL') in respect of rendering of manpower services. The Appellant prays that the TP provisions are not intended to apply where the adoption of the arms-length price would result in a decrease in overall tax incidence in India. 1.3. The learned AO / TPO has erred on the facts and in law and learned DRP has further erred in confirming the action of the AO / TPO on the facts and in law in misinterpreting directions of the learned DRP in earlier years, wherein learned DRP has accepted the legal position that the TP .provisions ca....
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....nfirming the action of the AO / TPO on the facts and in law in misinterpreting directions of the learned DRP in earlier years, wherein learned DRP has accepted the legal position that the TP .provisions cannot be applied where the adoption of the arm's length price would result in a decrease in overall tax incidence in India, however, TP adjustment was upheld on account of the losses incurred by HLPL, HPPL and SIMPL in the respective years, without appreciating the facts that: * HLPL has started making profits from the captioned year (i.e. AY 2012-13 and onwards); * HPPL has started making profits from AY 2013-14 and onwards; and * SIMPL may be liable to pay the tax on the assessed income for the AY 2012-13. 1.4. Without prejudice to the above, on the facts and in the circumstances of the case and in law, learned AO / TPO has erred and learned DRP has further erred in confirming the TP adjustment with respect to the income from services mentioned above, from HLPL, HPPL and SIMPL by not allowing the benefit of provisions of Article 9(1) of India -Netherlands Tax Treaty ('DTAA') being more beneficial to the Appellant than the provisions....
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.... 2012-13 the TPO has not accepted the transaction at Arm's Length Price and has made adjustments to the same. It was submitted that the assessee is in appeal before ITAT against the aforesaid adjustments and it was submitted that the assessee has a good case on merits and is accordingly willing to be bound by the order passed by ITAT on this issue. The Counsel for the assessee submitted that the aforesaid legal proposition has been accepted in favour of the assessee by the decision rendered by Karnataka High Court in the case of CIT vs. UE Development Indian Pvt. Ltd. in ITA No. 52, 53, 54 & 55/2014 which was also subsequently followed by other Courts as well, in which it was held that if the transaction is considered to be at Arm's Length Price in the hands of the Indian Associated Enterprises, then no transfer pricing adjustment should be made in the hands of the assessee company with respect to the same transaction. In addition to the above legal argument, the Counsel for the assessee took an additional argument in respect of issues between the assessee and HLPL for A.Y. 2012- 13, in which it was submitted that Brunei LNG (BLNG) has been accepted to be the comparable for HLPL by....
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....efore the Department, the assessee has apparently given no justification as to why there was of variance between the price charged by the assessee to its Associated Enterprises and the rates which were charged by the assessee for the same services to third parties. At all stages before the Department, (both the Transfer Pricing Officer as well as before DRP), the assessee has stressed upon the arguments on based erosion only. However, before us, the assessee has submitted that in view of the decision of Hon'ble ITAT Kolkata Special Bench in the case of Instrumentarium Corporation Ltd. (supra) the assessee shall not be pressing for this argument of base erosion. In the alternative, the assessee has relied upon the case of CIT vs. UE Development India Ltd. (supra) and has taken a legal argument that since in the case of Associated Enterprise, no transfer pricing adjustment made by the concerned TPO, the transaction in question should be considered at ALP. However, we observe that in the case of HPPL for A.Ys. 2011-12 and 2012-13, no transfer pricing reference was made in the first instance and hence no adjustment was recommended by the TPO. Accordingly, for A.Y. 2011-12 and 2012-13, ....
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....vations made in the orders of assessment passed for AY 2012-13 in their case shows that the AO of FHPL and FIPL accepted that services were in fact rendered by FHPL and FIPL and that the nature of services rendered was technical services and fees for right to use IPR i.e., royalty. Therefore the TPO in his order cannot say that no benefit or services were received by the Assessee from FHPL and FIPL. To this extent the orders of assessment in the case of FHPL and FIPL would be relevant and will go to show that the Assessee received benefit or service from FHPL and FIPL for which it made payments to FHPL and FIPL. 21. Apart from the conclusion that the Assessee received services from FHPL and FIPL for which it made payments from the orders of assessment in the case of FHPL and FIPL, we also find that the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd., IT Appeal No.1068 of 2011, dated 29.03.2012 had taken the view that the TPO has to evaluate the ALP of an international transaction and without doing so, he cannot give a finding that the Assessee received no services and therefore the ALP has to be determined at NIL. The Hon'ble Delhi High Court had....
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....ons. In the context of cost sharing arrangement, the Hon'ble High Court opined that concept of base erosion is not a logical inference from the fact that the AEs have only asked for reimbursement of cost. This being a transaction between related parties, whether that cost itself is inflated or not only is a matter to be tested under a comprehensive transfer pricing analysis. The basis for the costs incurred, the activities for which they were incurred, and the benefit accruing to the Taxpayer from those activities must all be proved to determine first, whether, and how much, of such expenditure was for the purpose of benefit of the Taxpayer, and secondly, whether that amount meets ALP criterion. In the present case however, the arrangement between the AE and the Assessee is not a cost sharing arrangement but a payment for specific services rendered. To this extent the above observations of the Hon'ble High Court may not be relevant to the present case. The Hon'ble Delhi High Court held that the following aspects would require consideration in order to identify intra group services requiring arm's length remuneration: * Whether services were received from re....
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....in the hands of the Indian entity, there would be a benefit of 30% if the ALP interest to the Indian entity. In this scenario whether the exercise of determination of ALP would serve any purpose, was the question before the Special Bench. The plea of the assessee was that there was no erosion of Indian tax base and therefore no such adjustment can be made. The special Bench ruled against the Assessee and held that in order to further the objective of preventing base erosion, the substantive section of the Indian TP code, i.e., section 92(1) of the Act, requires that any income arising from an international transaction shall be computed having regard to the ALP. Further, as per Rule 10D of the Income-tax Rules, 1962, ALP is required to be contemporaneously determined by an assessee. From a conjoint reading of CBDT circular No. 14 of 2001, section 92(1) and Rule 10D, contemporaneous determination of ALP would need to be undertaken by an assessee, and such determination cannot be bereft of the underlying intent of prevention of base erosion in India. 24. Section 92(1) of the Act lays down that any income arising from an international transaction shall be computed having regar....
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....he has gathered, the Transfer Pricing Officer shall,by order in writing, determine the arm's length price in relation to the international transaction in accordance with sub-section (3) of section 92C and send a copy of his order to the Assessing Officer and to the assessee." 25. Once, the TPO determines ALP, the AO has no other option but to make addition to the total income of an Assessee as TP adjustment by the TPO. This would be clear from the provisions of Section 92CA(4) of the Act. Sec.92CA(4) of the Act, as it stood prior to amendment by the Finance Act, 2007 read as follows:- "92CA (4) On receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C having regard to the arm's length price determined under sub-section (3) by the Transfer Pricing Officer." The AO on receipt of a report from the TPO had power to disregard to the ALP determined by the TPO. However with effect from 1st June, 2007, Section 92CA(4) has undergone a change vide Section 33 of the Finance Act, 2007 whereby it has been laid down that the Assessing officer is bound to pa....
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....y the entity located abroad. It has therefore been made clear in the second proviso that income of one associated enterprise shall not be recomputed merely by reason of an adjustment made in the case of the other associated enterprise on determination of arm's length price by the Assessing Officer.". 28. It is clear from the above circular that second proviso to Sec. 94CA(4) is meant to apply only when ALP is determined in the case of FIPL and FHPL. Another aspect which the Circular makes it clear is that the commercial reality of a transaction will be looked into viz., wherever the determination of income or expense in the hands of one enterprise results in tax base erosion of the country, the AO is free to apply the provisions of Sec.92(1) read with Sec.92CA(4). Corresponding adjustment in the assessment of the other enterprise to the transaction need not be made where there is no tax base erosion of the country. This is also the purport of Sec.92(3) of the Act which lays down that wherever computation of income under sub-section (1) of Sec.92 or the determination of the allowance for any expense or interest under that sub-section, or the determination of any cost or....
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....s AE is at arm's length within the methods laid down in the Act and the judicial decisions rendered on this issue. The TPO will consider the same in accordance with the law, after affording an opportunity of being heard." 7. In the aforesaid case, the Hon'ble ITAT took into consideration the case of UE Development India Pvt. Ltd. and held that it cannot be said that consequent to acceptance of return of income filed by the Associated Enterprises, the price paid by the assessee in the international transaction has to be accepted as an arm's length price. The ITAT further held that ALP has to be determined in the hands of the assessee irrespective of the acceptance of the ALP in the hands of the AEs of the assessee. In the instant facts we observe that at any stage of the proceedings, the assessee has given no justification for charging the rates at which the services were rendered to the AEs as compared to similar services provided to third parties. Further, the assessee has only emphasized on the argument of based erosion before the Transfer Pricing Officer and DRP, which argument was not pressed before us in view of the decision of Instrumentarium Corporation Ltd. (supra) r....
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....software treated as royalty in nature- Rs. 26,80,583 The learned AO/ TPO has erred on the facts and in law and learned DRP has further erred in confirming the action of the AO/TPO on the facts and in law in treating the revenues of Rs. 26,80,353 received by the Appellant from Bharat Petroleum Corporation Limited (BPCL) and Bharat Oman Refineries Limited ('BORL') for grant of software license as royalty under section 9(1)(vi) of the Act and under Article 12 of DTAA." 10. We shall first discuss the facts for A.Y. 2011-12 and since the facts in the issues for consideration for A.Y. 2012-13 and 2013-14 are similar our observations for A.Y. 2011-12 would apply to A.Y. 2012-13 and 2013-14 as well. 11. The brief facts in relation to this ground of appeal are that the assessee earned revenues from provision of off the shelf standard software to certain Indian entities. The Assessing Officer taxed the aforesaid amounts as software royalty in the hands of the assessee under Section 9(1)(vi) of the Act read with the applicable Treaty law. While holding receipts as royalty payment, the DRP primarily relied upon the decision of Karnataka High Court in the case of CIT vs. Samsung ....
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....,20,716 received by the Appellant from HLPL as Fees for technical services under section 9(1)(vii) of the Act and under Article 12 of DTAA." 16. The brief facts in relation to these grounds of appeal are that the assessee provided Computational Fluid Dynamics (in short "CFD") modelling of the temperature effects on the Hazira Sea Water outflow into the port and also provided marine biological advice on its implications to HLPL. Further, the assessee provided desktop quality review of Shell Reliability Centre Maintenance done by HLPL's site team. Further, the assessee performed a Integrity Review of Ageing Switchgear (in short "IRAS") for HPCL for providing the above services, and the assessee received a total consideration of Rs. 51,68,025/-. The Assessing Officer held that the aforesaid receipts qualify as fee for technical services under Section 9(1)(vii) of the Act read with Article 12 of the Treaty. 17. Before us, the primary argument taken by the Ld. Counsel for the assessee that under the applicable India-Netherlands treaty, the taxability of aforesaid services are governed by the "make available" clause in respect of payment for "Fees for Technical Services (FTS)", in ....
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....taxmann.com 214 (Kar.):- "Therefore, the assessee not being possessed with the technical know how to conduct this prospecting operations and reconnaissance operations, engaged the services of Fugro which is expert in the field. By way of technical services Fugro delivered to the assessee the data and information after such operations. The said data is certainly made use of by the assessee. Not only the said data and information was furnished in the digital form, it is also provided to the assessee in the form of maps and photographs. These maps and photographs which were made available to the assessee cannot be construed as technology made available. Fugro has not devised any technical plan or technical design. Therefore, the question of Fugro transferring any technical plan or technical design did not arise in the facts of these cases. The maps which are delivered are not of kind of any developmental activity. As such, earlier the information which is furnished to the assessee by way of technical services in the digital form is also given in the form of maps. Therefore, the case on hand do not fall in the second part of the aforesaid clause dealing with development and tr....
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....(1)(vii) of the Act." 23. The brief facts in relation to these grounds of appeal are that the assessee had entered into the several contracts with Larsen & Toubro (in short "L&T") in connection with L&T's various projects outside India. The services broadly included engineering services related to manufacturing of coal gasification equipment by L&T. The aforesaid services were provided in countries outside of India viz. Vietnam and China etc. and were in relation to overseas EPC projects undertaken by L&T. Before the Assessing Officer the assessee contended that the aforesaid receipts are not taxable in India because of exclusion clause under Section 9(1)(vii)(b) of the Act. The assessee's contention was that the services were provided by the assessee outside of India and hence the aforesaid receipts are not taxable in India. However, the Assessing Officer did not agree with the contention of the assessee for the reason that manufacturing of gas fire equipment has been done in India by L&T and the manufactured equipment has been supplied to the non-resident third party. The Assessing Officer further held that mere location of the person placing an order being outside India does ....
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....erson who is a resident of India would be deemed to accrue or arise in India. However, this clause contains two exceptions namely where the fees are payable in respect of services utilized in a business or profession carried on by such person outside India, or it is for the purpose of making or earning any income from any source outside India. In other words, therefore, if the assessment of an assessee falls in either of these two clauses, the income by way of fees or technical services paid by the assessee would still not be covered within the deeming clause of Section 9(1)(vii) of the Act. 27. In the present case, the Commissioner (Appeals) and the Tribunal have accepted assessee's factual assertion that the payments were for technical services provided by a non-resident, for providing services to be utilized for serving the assessee's foreign clients. Thus, the fees for technical services was paid by the assessee for the purpose of making or earning any income from any source outside India. Clearly, the source of income namely the assessee's customers were the foreign based clients of L&T and the services were also to be performed in locations outside of India. In this case, ....
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....me-tax which is deductible or collectible during the financial year. If the construction of the words 'would be deductible or collectible' as placed by the revenue is accepted, the amendment made to section 209(1)(d) by insertion of the proviso would be meaningless and an exercise in futility. To give the intended effect to the proviso, section 209(1)(d) has to be understood to entitle the assessee, for all assessments prior to the financial year 2012-13, to reduce the amount of income-tax which would be deductible or collectible, in computation of its advance tax liability, notwithstanding the fact that the assessee has received the full amount without deduction." 31. Respectfully following the decision of Hon'ble Supreme Court in the case of Mitsubishi Corporation (supra), we are of the considered view that the assessee is not liable to pay interest under Section 234B of the Act for A.Y. 2011-12 and A.Y. 2012-13. 32. In the result, Ground No. 5 of the assessee's appeal is allowed. ITA No. 747/Ahd/2017 Assessment Year (2012-13):- Ground No. 1:- (Transfer Pricing Adjustment of Rs. 57,57,77,763/-) 33. In light of observations made for A.Y. 2011-12, the matter ....
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....ble in India. Before us, the Counsel for the assessee submitted that in view of the "make available clause" under the India- Netherlands Tax Treaty, payments for such services do not quality as FTS since the assessee has not made available any technical knowledge, experience, skill, know-how or process to Shell India and hence the same are not taxable as FTS under Article 12 of the Tax Treaty. Further, it was submitted that the above services are provided by the assessee on recurring basis from year to year and if the technology had been "made available" to its subsidiary Shell India, there would have been no need for availing the aforesaid services on a recurring basis, from year to year. Accordingly, it was submitted that the aforesaid services do not qualify as FTS under the India-Netherlands Tax Treaty. 39. In response, the Ld. D.R. placed reliance on the observation made by the Assessing Officer in his order. 40. We have heard the rival contention and perused the material on record. On going through the nature of services, we are of the considered view that the aforesaid services do not qualify as fee for technical services in view of the specific exclusion provided unde....
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....se. In the instant facts, we observe that nature of services are not which make available the technology to the recipient of services i.e. Shell India and further, the Department has also not placed on record any evidence to support that such services have made available the technology to the recipient of such services. 42. Accordingly, in view of the facts noted above and the judicial precedent of the subject, Ground No. 3 of the assessee's appeal is allowed. Ground No.4:- Income from L&T treated as FTS (Rs.7,41,84,000/-) 43. In view of our observation in Ground No. 4 for A.Y. 2011-12, Ground No. 4 of the assessee's appeal is allowed. Ground No. 5 (A.Y. 2011-12):- Levy of interest under Section 234A, 234B, 234C and 234D of the Act. 44. In view of our observation in Ground No. 5 for A.Y. 2011-12, Ground No. 5 of the assessee's appeal is allowed. ITA No. 2935/Ahd/2017(A.Y. 2013-14) Ground No. 1:- (Transfer Pricing Adjustment of Rs. 50,68,79,713/-) 45. In light of observations made for A.Y. 2011-12, the matter is being restored to the file of the Ld. TPO for carrying out the necessary verification / analysis and pass order in accordance with law. 46. In the....