TaxTMI 
TaxTMI 
TaxTMI 
2025 (10) TMI 94
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....ficer (hereafter referred as the 'AO') in pursuance to the transfer pricing adjustment proposed in the order of the Transfer Pricing Officer (hereafter referred as the TPO') passed under Section 92CA (3) of the Act and upholding the disallowance for alleged default in deduction of tax at source under Section 40(a)(i) of the Act by the AO is bad in law to the extent the same is detrimental to the Appellant. 2. That on the facts and circumstances of this case, the Ld. CIT (A) has erred in partly confirming the action of the AO in computing the assessed loss of INR (20,90,96,770/-) as against INR (35,23,15,314/-) declared in the income tax return. 3. That the Ld. CIT(A) erred in providing an opportunity of being heard before passing the impugned order which is a breach of principles of natural justice, equity and fair play. 4. That on facts and circumstances of the case and in law, the Ld. CIT(A), while passing the impugned order, has erred in not placing correct reliance on the order of the Hon'ble Income Tax Appellate Tribunal (hereafter referred as the 'ITAT') in the case of the Appellant for AY 2011-12 in ITA No. 845/Del/2016 date....
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....A) has erred in upholding the action of the AO in disallowing the payments made by the Appellant to its AEs on account of cost recharges for receipt of IT services and product design services amounting to INR 1,63,36,548/- under Section 40(a)(l) of the Act alleging default in deduction of tax at source. 12. That on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in upholding the action of the AO in alleging that the cost recharges earned by the non-resident parties, were liable to tax in India in the hands of such non-resident parties. 13. That on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in upholding the action of the AO in holding that the amount of cost recharges are in the nature of fee for included services and fee for technical services under respective DTAAs and alleging that the Appellant was under the obligation to deduct tax under Section 195 of the Act. 14. That on the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in upholding the action of the AO in alleging that the services were made available' to the Appellant as per the pr....
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....the ground that this comparable is functionally dissimilar when the TPO has chosen this comparable from the list selected by the assessee and had also established functional similarity under TNMM, a Transfer Pricing method provided in section 92C under which strict similarity is not mandated as in other TP methods ? 2. In this case, the assessment was completed u/s 143(3) of the Act on 07.02.2017, making the following addition/ disallowance: (i) An adjustment of Rs. 12,68,82,000/- u/s 92CA of the Act (ii) Disallowance of u/s 40(a)(i) of the Act - 1,63l36,548/-. 2.1 The Assessee as well as the Department have filed cross appeals on the issue of TP adjustment under Section 92CA of the Act. In the appeal filed by the department as stated above, the entire grounds of appeal being (i) to (vi) relate to TP issues only. At the outset, the Ld. AR referring to its letter dated 02.04.2025 placed before us submitted that the assessee has entered into unilateral Advance Pricing Agreement (APA) under Section 92CC of the Act, (hereinafter referred to as the 'Act') dated 29.11.2019 relating to AMP expenses subject matter of dispute in the department's appeal in Gr. No. (i)....
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....sessee asked to show cause why the same should not be disallowed. 4.2 In reply, the assessee submitted as under: "Facts 1.1 A brief facts of services provided by the related parties to assessee during the year are as below: a) Timex Group USA Inc.: amount paid Rs 64,36,712/- Nature of services received by assessee: Cost recharge for LT support services. (nature of services also certified by auditor in TP report and form 3CEB) b) Timex Group Luxury Watches BV (Netherlands). Rs 192029/- Services: Cost recharge for IT Support Services. (Nature of services also certified by auditor in TP report and form 3CEB) Timex Netherlands BV Rs. 9707807/- Nature of services received by assessee: Design Charges cost recharged. (Nature of services also certified by auditor in TP report and form 3CEB) Brief of services: Information technology ("IT") - This includes charges on account of the following services- IT support/services: This represents time cost spent by IT personnel (outside India) in providing 24/7 IT related support/ services to Timex India on a daily basis. Server/ database management services:....
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...., etc) which the Timex India team needs to adhere to in order to ensure consistency with global Timex designs. No skill, knowledge or knowhow is passed on to the Timex team in India for the purposes of designing the watches. The watches once designed are sent to Mr Georgio Gali and his team in Italy for review to ensure that such designs meet the standards globally followed by the Timex group entities. * It is further submitted that Mr Gali and his team neither make any changes to such designs nor provide any technical inputs on such designs; Mr Gali and team only provide certain suggestions in line with the guidelines issued in respect of designs developed by Timex India team to ensure that such designs meet the quality and consistency standards globally followed by the Timex Group entities. * Further, we understand that the changes suggested by Mr Gali do to involve any deviations as such to the Helix time piece design prepared by the Timex India Team, 30 as to result in the development and transfer of a new design itself. 1.2 All such services are provided from outside India to the assessee company in India. 1.3 All overseas entities involved ....
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....sts of the words "chargeable under the provisions of the Act". A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not charge-able to tax under the Income-tax Act. For instance, where there is no obligation on the part of the payer and no right to receive the sum by the recipient and the payment does not arise out of any contract or obligation between the payer and the recipient but is made voluntarily, such payments cannot be regarded as income under the Income-tax Act. 3. It may be noted that section 195 contemplates not merely amounts, the whole of which are pure income payments, it also covers composite payments which have an element of income embedded or incorporated in them. Thus, where an amount is payable to a non-resident, the payer is under an obligation to deduct TAS in respect of such composite payments. The obligation to deduct TAS is, however, limited to the appropriate proportion of income chargeable under the Act. 4. This obligation being limited to the appropriate proportion of income flows from the words used in section 195(1), namely, "chargeable under the provisions of the Act". It is for this ....
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....d by it towards cost recharge of the various services rendered to it. 9. Applicability of relevant provisions of DTA is given below and consequent taxability in brief are tabulated below: Nature Taxability relevant tax treaty Withholding tax obligation Withholding tax rate product design charges for Helix time pieces - Such cross-charges should not to be taxable as Fees for Technical Service ("FTS") by the virtue of the restrictive applicability of Article 12 of India- Netherlands tax treaty (ie services do not 'make available' technical skills or knowledge to Timex India) Also, in the absence of PE or any presence in India, consideration for such No withholding obligation on Timex India as consideration received by overseas Timex Group enterprise should not be taxable in India NA Information technology ("IT") services IT support services Provision of such services should not be taxable as FTS under the purview Article 12 of the applicable tax treaties due to its restrictive applicability (ie services do not 'make available' technical 'skills or knowledge to Timex India) Also, in the abse....
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....t in the instant case, the assessee, Timex, is in the business of manufacturing watches for a number of years and the services provided by the above non-residents provide an enduring benefit to Timex India. It was noted by the AO that the non-residents make available its technical experience, knowledge or skill which go a long way in designing, developing or standardizing a product of the assessee and such experience; knowledge or skill helps the assessee to eliminate the possibility of committing an error in future. According to the AO, thus, the services provided by the non-residents remain at the disposal of the assessee much after the services have been rendered and the assessee can utilize this knowledge or knowhow in its future operations. In view of these facts, the AO held the non-residents have carried out technical services which are 'made available' to Timex India and, accordingly, the payments thereof are FTS / FIS within the meaning of Article 12(5) of the DTAA between India and the Netherlands or Article 12(4) of the India-USA DTAA. 4.5. Regarding the claim of the assessee that the payments to the non-residents are only cost recharge, the AO relying upon various ca....
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.... as the sum chargeable under the Act' within the meaning of section 195 of the Act. 5. Aggrievd with the said order, the assessee filed an appeal before the Ld. CIT(A). The Ld. CIT(A) held that the TPO has given detailed reasons for holding that the non-residents had 'made available' its technical experience, knowledge or skill to the assessee, which was taxable as FTS/ FIS as per the provisions of Article12(5)/ 12(4) of the DTAA between India and Netherlands/ USA and hence, the assessee was liable to deduct tax at source on the payments made to the non-residents which it had failed to do so. Hence, the Ld. CIT(A) held that the provision of section 40(a)(i) of the Act was applicable on such payments and dismissed the appeal of the assessee. The relevant finding of the Ld. CIT(A) is in respect of the issue contested in ground no. 3 (including 3.1 to 3.4 in para no. 6.29 to 6.31 of the appeal) is reproduced as under: "6.29 Ground No. 3 (including 3.1 to 3.4) pertains to the contention of the appellant that the AO had erred in making a disallowance of Rs. 16,336,548 u/s 40(a)(i) of the Act for payments made to AEs on account of cost recharges for receipt of IT services....
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....recharged Pg. 118 (Cost Recharge; other Method) 3. Timex Group Luxury Watches BV Netherlands (dutch Co.) 1,92,029/- Cost recharge for IT services Pg. 11 (Cost Recharge; other Method) Total 1,63,36,548/- Product Design Charges for Helis time pieces since product developed by the Assessee is required to meet certain guidelines provided by Mr. Georgio Galii, Creative Director through Timex Netherlands BV S. No. Agreement Between Date of Agreement Services covered Remuneration 1 Services Agreement (Pg. 103-107 of PB) Timex Group USA. Inc. & Assesser 15.02.2014 (Pg.106) until (Art.4A, Pg.104) terminated Designated Services included but not limited to email hosting, software and online meeting platform, human resources information services, finance, legal, tax and IT IT Services Cost-5% based on time spent by IT personnel If by third party no markup (Pg. 107) 2 Services Agreement (Pg. 108-112 of PB) Timex Nederland BV and Assesser 15.02.2014 (Pg.111) until (Art.4A, Pg.104) terminated Designated services website design & hosting, brand management & planning....
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....ality (P.) Ltd. v. Assistant Commissioner of Income-tax, IT Appeal No. 2844 (Delhi) of 2019. Order dated 25.04.2025 (Para 13-13.10) (authored by Shri Brajesh Kumar Singh, AM) held that spa' consultancy and management services provided by an individual fell within the ambit of independent personal services under India-Srilanka DTAA and could not be taxed as FTS under Section 9(1)(vii) of the Act. 7. With respect to taxability as FTS, it is submitted that the "make available" clause under Article 12(5)(b) of India-Netherlands DTAA is required to be satisfied. Assessee only follows the guidelines provided by Mr. Georgio Galli while manufacturing Helix watches. The guidelines are in the nature of standards to be followed and does not empower the Assessee with any kind of technical know how, skill or technical knowledge. Therefore, "make available" clause is not satisfied and no TDS requirement falls on the Assessee. 8. Delhi Bench in ITO, TDS v. Nokia India Pvt. Ltd., [2016] 156 ITD 307 (Delhi-Trib.) (Para 8-10) held that services of review of systems description, diagrams, cost estimates, system design and quality control, etc. provided by Olof Granlund (Finnish ....
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....auditor in TP report and form 3CEB) " Brief of services: Information technology ("IT") - This includes charges on account of the following services- IT support/services: This represents time cost spent by IT personnel (outside India) in providing 24/7 IT related support/ services to Timex India on a daily basis. Server/ database management services: This represents proportionate share of costs allocated to Timex India for management of database server located in Singapore. Timex India does not have any physical access, control or possession rights over the server or any part of its functionality. Further, Timex India does not have the right to use any intellectual property rights such as copyrights in certain software (such as Oracle, etc) stored on such server. Above service description may further be classified into the following two-folds: i) Cost allocation for IT products such as maintenance charges of routers and switches, etc: Since, such cost is being allocated by Timex Group entities only on a cost to cost basis i.e. without any mark-up (i.e. income element), such allocation should not be subject to ta....
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....ntities. * Further, we understand that the changes suggested by Mr Gali do to involve any deviations as such to the Helix time piece design prepared by the Timex India Team, 30 as to result in the development and transfer of a new design itself. (emphasis supplied by us) 8.1 Further, the assessee explains the applicability of relevant provisions of DTAA and consequent taxability in brief in a tabular form, which is reproduced as under: 8.2 Further, the assessee explaining the provisions of Article 12(4) of the India-Netherlands defining royalty submitted as under: "12.2 Further, Article 12(4) of the India-Netherlands tax treaty defines royalty, as following: "4 the term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience" 12.3 Under this arrangement, Timex Group entities allocate the cost of various global software/licenses procu....
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....vice should not be taxable (either as FTS or Royalty or as business income) in India, there should be no requirement to withhold tax on consideration attributable to the subject services." (emphasis supplied by us) 8.3 In the submissions, before the Assessing Officer, as well as the Ld. CIT(A) and before us, it is submitted that the cost allocation in the arrangements for the software / licences etc. does not contain any income element and is made on purely on cost-to-cost basis (para 12.5 of its submissions duly highlighted). Regarding the provisions of services by Mr. Georgio Gali it is submitted that such services do not make available technical knowledge, experience, skill know or process or consist of the development and transfer of a technical plan or technical design to the service recipient (i.e. Timex India), and the consideration towards such services will not qualify as FTS under the India-Netherlands tax treaty. 8.4 Further, the assessee submits in para 13.1 of its submissions as reproduced above, that as per their understanding the changes suggested by Mr. Gali are not substantial enough to result into development and transfer of a new design [which is clearly....
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....hen there reimbursement is purely on cost basis with no markup on IT services and the product design charges do not satisfy 'make available' clause and was reimbursed on cost basis whereas such facts are not clearly on record as discussed above. The submission of the assessee that the cost allocation in the arrangement for software / licensing etc. does not contain any income element and is made purely on the cost-to-cost basis is also not backed up by the details of markup payment made by the assessee as stated above, in the 'Remuneration' column of its written submission filed before us. Therefore, the entire claims made the assessee as discussed above, require re-verification by the Assessing Officer, in view of the above observations. We therefore, set aside the order of the Assessing Officer and the Ld. CIT(A) and restore the matter back to the file of the Assessing Officer for fresh adjudication, keeping in view our above observations and as per law. 8.8 In the result, the appeal of the assessee is partly allowed. 9. To sum up, the appeal of the Department in ITA No. 7598/Del/2019 is dismissed and the appeal of the Assessee in ITA No. - 7526/Del/2019 is partly allowed. ....