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TaxTMI 
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2023 (5) TMI 1295
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....Assessee filed its return of income on 30.11.2017 declaring total income of Rs.90,94,42,450/-. The case was selected for complete scrutiny and notice u/s. 143(2) was issued to assessee along with questionnaire in notice u/s. 142(1). The Ld.AO noted that for the year under consideration, assessee had international transactions with its associated enterprises that exceeded Rs. 15 crores. Accordingly, a reference was made to the transfer pricing officer for determining the arm's length price of the international transaction undertaken by assessee. 2.3. On receipt of the reference, the Ld.TPO called upon assessee to furnish the economic details of the international transaction in form 3CEB. On receipt of the details filed by the assessee, the Ld.TPO noted that assessee had following international transactions with its AE. 2.4. The Ld.TPO noted that assessee used TNMM as the most appropriate method for manufacturing and trading segments and adopted combined transaction approach under the manufacturing segment. 2.5. The PLI was selected to be OP/OC. The assessee thus computed its margin under manufacturing segment to be 7.8% and trading segment to be 2.18%. The Ld.TPO noted that asses....
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....at expatriate employees, the DRP upheld that it fall within the ambit of fee for technical services and therefore TDS ought to have been deducted u/s. 195 of the act. 2.15. The DRP thus upheld the disallowance made by the Ld.AO, u/s. 40(a)(i) of the act. On receipt of the DRP directions, the Ld.AO passed the impugned order by making an addition in the hands of assessee at Rs.17,31,94,360/-. Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal. 3. The Ld.AR submitted that Ground nos. 1 to 5 are general in nature and therefore do not require any adjudication. 4. In Ground no. 6 - The Ld.AR submitted that sub-ground (c) &(d) are the comparables that the assessee is seeking inclusion/exclusion under the manufacturing segment. He submitted that Ground no. 6(a) - (b) are general in nature and therefore do not require adjudication. Before we undertake the comparability analysis, it is sine qua non to understand the FAR performed under manufacturing segment by the assessee before us: Functions: Under the manufacturing/ systems segment, Yokogawa India imports certain components from its AEs which form the basic structure of its finished products in the na....
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....2. The Ld.AR submitted that all the 3 comparables passes through the filters applied the Ld.TPO. It is also submitted that in case of Supernova Engineers Ltd., the Ld.TPO had not raised any objections except for mentioning that it is functionally not similar. 4.3. It is the submission of the Ld.AR that all the 3 comparables are engaged in manufacturing activities of various products. He submitted that assessee is also into manufacturing of various components and is involved in providing end to end solutions as has been observed by the Ld.TPO while narrating the profile of the taxpayer at page 6 of the order u/s. 92CA. 4.4. He thus submitted that, the reasoning adopted by the DRP to reject inclusion of the 3 comparables do not have any basis. He thus submitted that the comparables may be remanded to the Ld.AO/TPO for reconsideration based on the FAR. 4.5. On the contrary, the Ld.DR though could not controvert the submissions of the Ld.AR however agreed with the proposition of the comparables being remanded. We have perused the submissions advanced by both sides in the light of records placed before us. 4.6. We note that the Ld.TPO while rejecting the comparables being not given....
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....d.AR thus submitted for exclusion of this comparable. The Ld.DR on the contrary submitted that the filters applied by the Ld.TPO does not include the export income filter and therefore the fact that this company do not have any export income is of no relevance. He thus submitted that this company is into manufacturing of control panels that are used in machines and accordingly deserves to be included. We have perused the submissions advanced by both sides in the light of records placed before us. (c) We note that this company as per the corporate information given at page 2525 of paper book is engaged in manufacturing of control panels for machines and installation, erection of machines. In the profit and loss account, the revenue from operations are from sale of products and sale of services. It is nowhere into manufacturing of any automation equipments / instruments as has been observed by the DRP. It also do not provide any automation solutions for industrial plants. The assessee before us is into manufacturing of control systems, industrial automation instruments and equipments and electrical measuring instruments. The product that is developed by the comparable company is a ....
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.... Ltd. (a) The Ld.AR submitted that this company is engaged into manufacturing of various types of valves catering to oil, gas, petrochemicals, power, water treatment and distillation, steel, electricals, pharma, paper and pulp industries. He thus submitted that this company is functionally not similar with that of assessee as the industry to which this company caters is to be as compared to the assessee. He also submitted that even the product manufactured do not match or is not even similar in nature with that of assessee. (b) On the contrary, the Ld.DR submitted that assessee is using TNMM as the method to determine ALP and therefore there is no requirement to match the products manufactured thereby narrowing down the perspective of the comparability. He thus supported the inclusion of this comparable. We have perused the submissions advanced by both sides in the light of records placed before us. (c) We note that admittedly this company is involved in manufacture of various kinds of valves that forms a small part of an equipment used in a particular industry. We therefore do not find it comparable with that of assessee who is involved in manufacturing the entire equipment....
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.... the filter of 25% RPT whereas the assessee has contended that the filter of revenue from RPT should be applied at 15% instead of 25% applied by the TPO. The learned Departmental Representative has submitted that there is no standard rule for applying the filter of 15% regarding the RPT. It is pertinent to note that the ALP as per the provisions of the TP has to be determined by considering uncontrolled comparable prices and therefore only unrelated prices have to be taken into account to bench marked international transactions. However, 0% RPT of the comparable price is an impossible situation and therefore a reasonable tolerance range from revenue from RPT can be considered for selecting uncontrolled comparables. There is no dispute that there cannot be a single criteria/parameter to be applied as a general rule in all the cases. The tolerance range varies from case to case and depending upon the availability of comparables for a particular case. Thus if the comparables of an international transactions are easily available in sufficient number then this tolerance range of RPT should be restricted to minimum. Though there is no specified range in the provisions of Act or Rules, ho....
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.... 55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law. 56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of l....
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....India Pvt Ltd? and Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that RPT filters should be 15% and not 25%, taken by the TPO?. The Hon'ble Court held as follows: '3. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to 'Transfer Pricing' and 'Transfer Pricing Adjustments' made by the concerned authorities below. We consider it appropriate to quote from the order of Tribunal rejecting the Application seeking a review before Tribunal as hereunder:- "7. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. At the outset, we note that the TPO has applied the filter of 25% RPT whereas the assessee has contended that the filter of revenue from RPT should be applied at 15% instead of 25% applied by the TPO. The learned Departmental Representative has submitted that there is no standard rule for applying the filter of 15% regarding the RPT. It is....
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.... RPT." . 4. This Court in ITA No. 536/2015 C/w ITA No. 537/2015 delivered on 25-6-2018 (Prl. Commissioner of Income Tax & Anr. v. M/s. Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable. ...... ... ... ... ... ... 5. The relevant portion of the said judgment is quoted below for ready reference: "Conclusion: 55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under ....
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....the threshold limit of 15%. (g) We accordingly direct the Ld.AO/TPO to verify the RPT filter of these three comparables and to apply it at threshold limit of 15%. In the event, the RPT of these three comparables exceed 15%. The comparables will stand excluded. Accordingly these 3 comparables are remanded back to the Ld.AO/TPO for necessary verification considering the directions hereinabove. Accordingly ground no. 6(d) r.w. ground nos. 8-10 stands allowed. 6. Ground no.7 is in respect of not considering Swati Switchgears India Pvt. Ltd. as a comparable. The Ld.AR submitted that the DRP had directed the Ld.TPO to include this comparable provided it passes all the filters adopted by the Ld.TPO. It is submitted by the Ld.AR that while passing the order giving effect, the Ld.AO/TPO has not discussed or considered the directions of the DRP. 6.1 The Ld.DR on the contrary relied on the orders passed by the authorities below. However could not controvert the arguments advanced by the Ld.AR. We have perused the submissions advanced by both sides in the light of records placed before us. 6.2. We note that in the order giving effect dated 11.10.2019, the Ld.TPO has not mentioned an....
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....ection risk Yes No Characterisation: Trading activity: Based on the results of the functional, risk and asset analysis, Yokogawa India can be characterized as a distributor bearing market risks and performing functions undertaken by an independent distributor. 7.2. Based on the above we shall undertake the analysis of comparable sought for inclusion/exclusion by the assessee under the trading segment. 8. Ground no. 12 - The Ld.AR submitted that assessee is only seeking inclusion of Remi Sales & Engineering Ltd. in ground no. 12(c) and exclusion of Innovative Automation Pvt. Ltd. in ground no. 12(d). a) Remi Sales & Engineering Ltd. (sought for inclusion) (i) The Ld.AR submitted that this comparable was accepted by the Ld.TPO in assessment year 2015-16 under the trading segment. The Ld.AR referred to page 6163 of the paper book wherein the relevant observations of the Ld.TPO in respect of this comparable for A.Y. 2015-16 has been placed. He further referred to the order u/s. 92CA for A.Y. 2016-17 placed at page 6188 of the paper book wherein, this comparable was included in the TP study which was not disputed by the Ld.TPO. (ii) On the contrary, the Ld.DR relied on th....
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....e is no similarity in the functions under the trading segment by assessee as well as the comparable company. (iv) On the contrary, the Ld.DR relied on the orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. (v) We note that assessee is also into sale of finished goods without any value addition. The plain activity carried by this comparable is trading of a finished product. This is functionally similar with the assessee under the trading segment. We therefore do not find any infirmity in this comparable to be included. Accordingly we direct retaining this comparable in the final list. 9. Ground no. 13 is in respect of correcting the margin of the comparable Innovative Automation Pvt. Ltd. The Ld.AR submitted that the DRP in its para 5.1.3 had directed the Ld.TPO to adopt the correct margins which has not been followed while passing the OGE dated 26.10.2018. 9.1 We accordingly direct the Ld.AO/TPO to follow the directions of the DRP and recomputed the margin of this comparable in accordance with law. Accordingly this ground raised by assessee stands allowed. 10. Ground nos. 14-15 are general ....
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....nes, emphasizes need for working capital adjustment in terms of receivables and payables as under: "13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect th....
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....ge of these figures that should be considered;, 11.9. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the assessee or the Department to show what is the Arm's Length Price. The data available with the assessee and Department should be the starting point and depending on the facts and circumstances of a case, further details can be called for. As far as the assessee is concerned, the facts and figures with regard to its business must be furnished. In so far as applying inventory, receivables and payables for computing working capital adjustment alleged by DRP/TPO in case of certain comparables, Hon'ble Delhi Bench in case of ITO v. E Value Servc.com reported in (2016) 75 taxmann.com 195 held that, insisting on daily balances of working capital requirements to compute working capital adjustment is not proper, as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. 11.10. It must not be forgotten that transfer pricing analysis is estimation and not an exact science. One has to see that, reasonable adjustment must be made where eve....
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.... of the Hon'ble High Court is placed. 12.2. At page 5692, following substantial questions of law was framed by Hon'ble High Court. "Whether the Hon'ble Tribunal is justified in setting aside the determination of Arms Length Price done by assessing authority and has directed the assessing authority to the file of the TPO/AO by considering the payment in respect of management fees and global sale and marketing activity fees as part of the operating cost and allocating the same in the ration of the turnover of the other international transactions when each transaction is different and should be analyzed separately and without appreciating that duplication of services and benefit analysis is very important to bench mark the transaction in transfer pricing?" 12.3. The Ld.AR submitted that Hon'ble High Court referring to various observations of the Tribunal's order observed and held as under: "3. The learned Tribunal, after discussing the rival contentions of both the Appellants- Revenue and Respondent- Assessee, has returned the findings as under: "4. We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. We find that the assesse....
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....locating the same in the ratio of the turnover of the other international transactions." 4. However, this Court in a recent judgment in I.T.A. Nos.536/2015 c/w 537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. -v- M/s Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable. The relevant portion of the said judgment is quoted below for ready reference: "Conclusion: 55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, su....
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....has to be treated as operating cost and has to be allotted in the ratio of the turnover of the other international transaction for determining the ALP under TNMM analysis. Accordingly ground nos. 17-19 raised by assessee stands allowed. 13. Ground nos. 20-28 is in respect of the expat salary reimbursement disallowed by the Ld.AO u/s. 40(a)(i) of the act. The Ld.AR submitted that this issue also stands covered in assessee's own case for A.Y. 2015-16 by order dated 14.02.2023 wherein this Tribunal held and observed as under: "Corporate grounds 26. The AO during the course of assessment called for to submit copies of Form 15CA and to provide ledger extract commenting on the nature of Form 15CA payments. The assessee vide submission dated 10.12.2018 provided the details of expat salary reimbursement amounting to Rs.4,53,92,631 and submitted that no TDS was deducted on the salary reimbursement. The AO held that the salary cost of seconded employees form an integral part of fees for included services and they are not just reimbursements. Therefore, the AO held that tax should have been deducted on the payments and since no tax has been deducted at source, disallowed the amount u/....
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....hat the finding as regards deduction of tax at source under section 195 of the IT Act is tentative insofar as the Revenue is concerned Even if the Revenue orders that there was no obligation to make deduction under section 195, the question of liability of the recipient still remains to be decided subsequently Accordingly, the question of prejudice to the Revenue at the stage of section 195 order is unavailable to it 36. Curiously, the file contains a note by the same DCIT who has eventually passed the impugned order, which note dated 10.03.2020 addressed to the CIT seeks for granting approval for granting deduction of TDS at the rate of zero per cent on cost-to-cost reimbursement However, the opinion was directed to be reconsidered as per the endorsement found in the file and eventually an order was passed by DCIT contrary to the earlier view and has rejected the application 37. Accordingly, the findings in the impugned order and the conclusion regarding the employer-employee relationship is based on a wrong premise and is liable to be set aside As observed by this Court in DIT (International Taxation) v. Abbey Business Services India (P.) Ltd. [2020] 122 taxmann.com 174 (Ka....
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....rovident fund Rs.2,57,885/- 26.11. From conjoint reading of Article 15 of the OECD Model Convention and the articled referred to herein above, there is no doubt in our minds that the assessee in India is the economic and de facto employer of the seconded employees. It is an admitted fact that all the seconded employees are in India for more that 183 days in a 12 month period. Further all the seconded employees have PAN card as well as file their returns in India in respect of the 100 % salary, though the assessee pays only part of the salary in India. 26.12. The definition of FTS under the Act is given in Explanation 2 to Sec. 9(1)(vii) of the Act that reads as follows:- "Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India :- (i) to (vi) (vii) income by way of fees for technical services payable by- (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a ....
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....ence, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 5. Notwithstanding paragraph 4, "fees for included services" does not include amounts paid: (a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a); (b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic; (c) for teaching in or by educational institutions; (d) for services for the personal use of the individual or individuals making the payment; or (e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services)." 27. Rendering of managerial, technical and consultancy services is governed by Article 12 on 'Fees for included services' of the Double Tax Avoidance Agreement, between India and US. Payments made to 'individual or firm of individuals for servi....
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....quality control and management was through overseas entities. The Hon'ble Court also held that, mere fact that secondment agreement, phrases payment made by Centrica India to overseas entity as 'reimbursement' could not be determinative. It was also held that, the fact that overseas entity did not charge markup over and above costs of maintaining secondee could not negate nature of transaction. 29.2 Hon'ble Pune Tribunal in case of M/s. Faurecia Automative Holding (supra) has observed as under: "4.10. We have gone through the facts of the case obtaining in Centrica India (supra). The assessee therein contended that payment to foreign party towards seconded employees was only reimbursement and hence, no income was chargeable to tax in its hands. The Authority for Advance Ruling (AAR) held that payment made by the petitioner to the overseas entity was in the nature of income in view of the existence of Service Permanent establishment (PE) in India and hence liable for tax withholding. Overturning the view of the AAR that Service PE was constituted, the Hon'ble High Court held that the payment to AE was in the nature of `fees for technical services' and not reimb....
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....ble Supreme Court in the case of Morgan Stanley (supra) were in the context of existence of service PE. This is clear from a reading of the relevant portion of the judgment of the Hon'ble Supreme Court, which is as follows:- "As regards the question of deputation, an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the UN Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entail it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case, it is found ....
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....continue to be employees of AT&S. Recipient of the compensation is AT&S and not the seconded employees. Further contention was that AT&S is not engaged in the business of providing technical services in the ordinary course of its business is also not tenable. Therefore, payments made to AT&S by the applicant are for rendering "services of technical or other personnel" and are in the nature of fees for technical services within the meaning of Explanation 2 to sub clause (vii) of section 9(1) and Article 12(4) of the relevant DTAA and are subject to deduction of tax at source under section 195. 30.1 The ruling of Hon'ble AAR is on the factual finding that payments were not only reimbursement of actual salary, bonus etc., but was also included other sums. 30.2 Per contra in the present facts of the case, it is not at all the contention of the revenue that, something over and above what was paid as salary, bonus etc. 30.3 Liability under section 195 to deduct tax at source when making payment to a non-resident arises, only if, sum paid is chargeable to tax in India. Payment of salaries is not covered under section 195. Thus, it is necessary to take into consideration following....
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....ot without tax under the provisions of the Act. 33. Hon'ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. reported in (2005) 144 Taxmann 492 (Delhi) upheld the order of Hon'ble Delhi Tribunal which held that, when an Indian company had already deducted and remitted taxes under Sec. 192 of the Act on salaries paid abroad to the technical personnel and when such salary is reimbursed on a cost to cost basis without any profit element, the provisions of Sec. 195 of the Act cannot be applied to reimbursement of salaries made to foreign company, once again. 34. Coordinate bench of this Tribunal in case of IDS Software Solutions v. ITO reported in (2009) 32 SOT 25, Abbey Business Services (P.) Ltd v. DCIT reported in (2012) 23 taxmann.com 346, took the view that expats are deputed to work under the control and supervision of the Indian company and that the oversees entity is not responsible for the actions of the expatriate employees. Thus, oversees entity does not render any technical service to the Indian company, since such payment are towards reimbursement of salary cost borne by oversees entity, and that, no income can be said to accrue to oversees entity in Indi....
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....he 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 techniques in the future without depending upon the provider. Technology will be considered 'made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b ). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as 'fee for technical/included services' only if the twin test of rendering services and making technical knowledge ava....
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....into separate employment contract with the Seconded Personnel. The seconded Personnel, during the period of secondment, work under the control and supervision of the Appellant; In terms of the employment contract, the appellant is under obligation to pay salary (including other entitlements) to the Seconded Personnel during the period of secondment in foreign exchange in his home country; for administrative convenience, the Appellant remits the salary payable to the Seconded Personnel in his home country in Foreign Exchange through the Seconder Company; the Seconded Personnel, as required under the Income Tax Act, 1961. We find that the issue is no longer res integra and is covered by decision of Volkswagen India Pvt. Ltd. Vs CCE, Pune-I, 2014 (34) STR 135 (Tri. Mumbai) [maintained by Apex Court in 2016 (42) S.T.R. J145 (S.C.)] wherein it was held that: 5.1 In view of the clauses of agreements noticed herein above and other facts, we hold that the global employees working under the appellant are working as their employees and having employee employer relationship. It is further held that there is no supply of manpower service rendered to the appellant by the foreign/holding comp....