2023 (10) TMI 771
X X X X Extracts X X X X
X X X X Extracts X X X X
..... 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 conducting the transfer pricing study in respect of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tered 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 cannot be applied where the adoption of the arm's length price would result in a decrease in overall ta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion 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 of the Income-tax Act, 1961 ('the Act') and by virtue of section 90(2) of the Act. 1.5 Without prejudice to the above, on the facts and in the circumstances of the case and in law, learned AO ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itted 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 the Ld. TPO of the assessee. The Counsel for the assessee submitted that the agreement with HLPL and BLNG is structured in a manner i.e. there is similar as that with HLPL a fixed opening of services along with varianc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee 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, in the case of HPPL, no adjustment was made with respect to the aforesaid transaction for the reason that no transfer pricing reference was made in the first instance. Further, in the case of HLPL, for A.Y. 2012-13, for the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 to deal with a case where an assessee entered into an agreement pursuant to which it paid brand fee/royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....arties, 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 related party. * Nature of services including quantum of services received by the related party. * Services were provided in order to meet specific need of recipient of the services. * The economic and commercial benefits derived by the recipient of intr....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 regard to the arm's length price. Section 92B(1) of the Act defines "international transaction" and it lays down that for the purposes of this section and sections 92, 92C, 92D and 92E, "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-reside....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 pass an order in conformity with the ALP determined by the TPO. Amended Section 92CA(4) reads as under:- "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 in conformity with the arm's length price as so determined by the T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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 expense allocated or apportioned, or, as the case may be, contributed under sub-section (2) of Sec.92, has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into. There would appear to be a conflict between....
X X X X Extracts X X X X
X X X X Extracts X X X X
....urn 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) rendered by ITAT Kolkata Special Bench. Further, we observe that for two years, no transfer pricing adjustment was made in the case of AEs for the simple reason that no transfer pricing reference was made by the Assessing Officer in the first instance. Further, we observe that the argument of "likes have not been compared with like" and the argument of similarity of agreement with BLNG were never taken be....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 Electronics Co. Ltd. 16 taxmann.com 141 to hold that the payments received by the assessee company from Indian customers give rise to royalty income in terms of Article 12 of India-Netherlands DTAA r.w.s. 9(1)(vi) of the Act. 12. Before us at the outset, the Ld. Counsel for the assessee submitted that now the taxability of software royalty has been decided in favour of the assessee by the decision rendered by the Hon'ble Supreme Court in the case ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eview 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 terms of which payments for services qualify as FTS under the Income Tax Act read with the India- Netherlands Treaty only if the assessee "makes available" technology to the recipient of services. It was submitted that in the instant facts while holding that aforesaid payments as FTS, nothing has been brought on record by the Department to demonstrate that the condition of "make available" as provided under the Treaty has been satisfied in the instant set of facts, so as to make t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 transfer of plans and designs." 20. Further, we are observe that the Department has not been able to demonstrate that in the instant facts, any technology was "made available" to the recipient of services in a manner that the recipients had been imparted with the requisite knowledge in such a manner that they were enabled to perform the aforesaid services in the future, without any recourse to the services of the assessee. Further, we are also unable to agree with the observations made by DRP....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er 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 not shift the source of income and economic activity outside India. The Assessing Officer held that the economic activity of manufacturing to which the technical services pertained were carried out entirely in India. In appeal, DRP did not agree with the contention of the assessee and held that the assessee is not carrying out any business outside India and the business is being carried out from India, for which the FTS has been paid. 24. In appeal before us, the Counsel for the assessee submitted that the payment for services was rec....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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, from the facts placed on record in our view, L&T has made payment for utilization of the services provided by the assessee in business carried out by L&T outside of India. The services which were provided by the assessee were utilized by L&T in respect of its plant set up in Vietnam and China for its foreign clients. Accordingly, respectfully following the decision of Motif India Infotech Pvt. Ltd. (supra), this ground of the assessee's appeal is allowed. 28. In the result, assessee's appeal with respect to the aforesaid ground is allowed. G....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ts 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 is being restored to the file of the Ld. TPO for carrying out the necessary verification / analysis and pass order in accordance with law. 34. In the result, Ground No. 1 of the assessee's appeal is allowed for statistical purposes. Ground No. 2:- (Income from software treated as royalty in nature Rs. 35,85,667/-) 35. In view of our observations with respect to Ground No. 2 for A.Y. 2011-12, Ground No. 2 of the assessee's appeal for A.Y. 2012-13 is allowed. Ground No. 3:- (Rendering for Global P&T Functional Services treated as fees for technical Services Rs. 15,5....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 under the India-Netherlands Tax Treaty excluding those services from the ambit of technical services, which do not "make available" technology to the recipient of such services. On perusal of the nature of services, in our considered view, no such technology has been made available to Shell India during the course of rendering of such services. From the facts placed before us it is evident that the Department has not been able to substantiate that the services were rendered in a manner so as to make the technology available to the recipient of services in a manner that in the future the recipient is able to pe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....see'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 result, Ground No. 1 of the assessee's appeal is allowed for statistical purposes. Ground No. 2:-Income from software treated as royalty (Rs.26,80,583/-) 47. In view of our observation in Ground No. 2 for A.Y. 2011-12, Ground No. 2 of the assessee's appeal is allowed. Ground No. 3:-Income from rendering Global P&T Functional Services treated as fees for technical services (Rs.21,62,65,463/-) 48. The assessee has raised the following grounds of appeal:- "3. Income from rendering of Global P&T Functional Services treated as fees for technical services - Rs. 21,62,65,463 3.1. The learned AO/TPO has erred on the facts and in la....