SIEMENS AKTIENGESELLSCHAFT,MUMBAI vs. ASSTT. CIT (INTERNATIONAL TAXATION)-CIRCLE-4(2)(1), MUMBAI

The AO erred in holding that the Appellant and Siemens Limited allegedly constituted an Association of Persons (AOP') in respect of contract with Power Grid Corporation of India Limited ('PGCIL') and others.

The AO/DRP erred in taxing the income arising from offshore supply of equipments in relation to PGCIL and other contracts overlooking the provisions in the Act and the DTAA between India and Germany.

On the facts and circumstances of the case and in law, the DRP/AO/TPO have proceeded to make an adjustment on ground of non-reconciliation of the amounts reported in form 3CEB of the Appellant (reported on receipt basis); with the financial statements of the AEs (prepared on accrual basis); without appreciating the Hon'ble Bombay High Court's judgement in Appellant's own case 1615/Mum/2022; A.Y. 2017-18 & 2018-19 Siemens Aktiengesellschaft has held that the international transactions pertaining to 'technical services and other transactions' are taxable on receipt basis, and not otherwise.

On the facts and circumstances of the case and in law, the TPO/AO/DRP have failed to appreciate that the Appellant has reconciled transactions pertaining to 'Technical services and other transactions' with the transactions reported by the Indian AEs in their respective Form No. 3CEB which also have been acknowledged by the TPO in its Order.

On the facts and circumstances of the case and in law, the DRP has erred in concluding that the material facts and circumstances for current year are same as per the earlier years; without appreciating the fact that TPO in current year has acknowledged the 100% reconciliation of international transactions provided by the Appellant in relation with amounts reported by the Appellant and the AEs in their respective form 3CEBs.

On the facts and circumstances of the case and in law, the TPO/AO/ DRP failed to appreciate that in respect of the said international transactions entered into by the Appellant with its AEs in India, the Revenue had accepted the transactions to be at ALP in the case of certain AEs and in respect of other AEs they had held the payment/expenditure to be at more than ALP. Having accepted the ALP or found the transaction to be at a price more than the ALP, it was not open to the Revenue to make a transfer pricing adjustment in the Appellant's case.

The AO erred in initiating penalty proceedings under Section 270A of the Act.” Brief facts of the case are as under:

The Ld.AR has filed a chart of grounds with the narration of the issues that are covered with the orders passed by this tribunal and is earlier assessment years. The Ld.AR submitted that order for a suspended 2009-10 dated 07/06/2024 has discussed in detail all the issues. Ground No. Issue alleged 2. Income from royalty and FTS taxed on accrual basis as against receipt basis 3-5 Income from supplier of software treated as royalty 1615/Mum/2022; A.Y. 2017-18 & 2018-19 Siemens Aktiengesellschaft 6-11 Considering the assessee and the Indian entity as an AOP and taxation of income from offshore supply in the hands of the assessee in India as a composite contract 13-21 Benchmarking the transaction with Indian AE on an ad hoc mechanism to determine the ALP. The transactions 4.1 The Ld.DR admitted that all issues are covered based on the fact that the authorities have also relied on me the preceding assessment years which has been considered by this Tribunal. However, the Ld.DR place reliance on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of the records placed before us.

Ground No.2 raised by the assessee is with regards to the addition made towards the royalty and fee for technical services to be offered to tax on accrual basis. 5.1 The Ld.AR place reliance on the decision of coordinate of this Tribunal in assessee’s own case in vide order dated 07/06/2024 for assessment in 2009-10, vide order dated 16/06/2025 for assessment in 2008-09 and ITA No.4713/Mum/2023 vide order dated 27/02/2025 for assessment in 2021-22. 5.2 The Ld.AR submitted that the contract with CMRL was taken over by the assessee from Siemens AG. It was submitted that the cognate in case of Siemens AG has held that the receipts from the set contract is taxable on accrual basis. It is submitted that the same is applicable to the present facts of the case also.

The ld. DRP held that Hon’ble Bombay High Court in assessee’s own case has accepted the contentions of the assessee inA.Y.1986-87to1992-93,1996- 97,1997-98and2001-02wherein the Hon'ble Bombay High Court has considered the various ITAT decisions in assessee's own case and the stand of the assessee has been upheld that the receipt is to be taxed on actual receipts. Therefore, the AO is directed not to bring tax the income on account of royalty and FTS on accrual basis but to tax the same on receipt basis. After considering the submissions and decisions of the Tribunal and the Hon’ble Bombay High Court in the case of the Tribunal, this issue is decided in favour of the assessee that income on account of Royalty and FTS can be taxed only on receipt basis.

Hence, we do not find any reason to take any different position. Before us the ld. DR had submitted that there is a reference in the case of Ampacet Cyprus Ltd. vs. DCIT reported in (2020) 119 Taxmann.com 277 (Mumbai Trib) wherein the Tribunal has referred the matter to special Bench. In the context of the India-Cyprus Tax treaty where the issue is whether interest received should be taxed on receipt basis or on accrual basis. Since in assessee’s own case this issue stands settled by the Tribunal and by the Hon’ble Bombay High Court which is binding on us and therefore, reliance placed by the ld. DR in the aforesaid matter to refer to the Special Bench is declined. Thus, this ground raised

Furthermore, in AY 2005-06, the Tribunal has examined the scenario wherein software was provided separately from any hardware, and it has adhered to the precedent established in assessee’s own case for A.Y.2001-02. The relevant extract of the observations made by the Tribunal is as under:- “6. During the year under consideration, the assessee had supplied equipment to the various parties in India. The software required for the said equipment wasalsosuppliedbytheassesseetoitsIndiancustomers.Duringtheco urseof assessment proceedings, the A.O. verified the relevant invoices and found on such verification that the software in some cases was supplied by the assessee independently without any reference to the supply of corresponding equipment. He therefore treated the income earned by the assessee from the supply of software as in the nature of royalty and the same was brought10 tax in the hands of the assessee as income from royalty. On appeal, the Ld.CIT(A) held that the value of software could not be taxed as royalty in the hands of the assessee following the decision of the Tribunal in assessee's own case on similar issue for the earlier yearsie.2001-02 & 2002-03. He also took note of the fact that a similar issue was decided by his predecessor in favour of the assessee in assessment years 2003-04 & 2004-05."

Now, this issue of taxation of royalty under the DTAA has been decided by the Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence PrivateLimitedvs.CIT reported in (2021) 432 ITR 471(SC). The Hon'ble Supreme Court vide its order grouped various appeals before it into following four categories: - − The first category deals with cases in which computer software is purchased directly by an end-user, resident in India, from a foreign, non- resident supplier or manufacturer. − The second category of cases deals with resident Indian companies that act as distributors or resellers, by purchasing computer software from foreign, non-resident suppliers or 1615/Mum/2022; A.Y. 2017-18 & 2018-19 Siemens Aktiengesellschaft manufacturers and then reselling the same to resident Indian end-users. − The third category concerns cases wherein the distribute or happens to be a foreign, non- resident vendor, who, after purchasing software from a foreign, non-resident seller, resells the same to resident Indian distributers or end-users. − The fourth category includes cases wherein computer software is affixed onto hardware and is sold as an integrated unit/equipment by foreign, non-resident suppliers to resident Indian distributors or end-users

The Hon'ble Supreme Court held that the amounts paid by resident Indian end-users / distributors to non-resident computer software manufacturers / suppliers, as consideration for the resale/use of the computer software, is not payment of royalty for the use of copyright in the computer software and that the same does not give rise to any income taxable in India in all the categories of transactions mentioned above.

Before us comparison between facts of the case and the terms and conditions which have been submitted to the ld. AO during the assessment proceedings for later assessment years vis-à-vis the conclusions outlined by Supreme Court in the case of Engineering Analysis Centre of Excellence (P) Ltd. has been given in the following manner:- Facts in Engineering Analysis Centre of Facts in the case of Excellence (P.) Ltd. assessee 1 GRANT OF LICENCE. Samsung grants you a The Purchaser shall have limited non-exclusive license to install, use, the perpetual and non- access, display and run one copy of the exclusive right to use the Samsung Software on a single Samsung Software Product on the Mobile Device, local hard disk(s) or other devices for which it is permanent storage media of one computer intended, whereby each and you may not make Samsung Software Software Product may only available over a network where it could be be used on one device at used by multiple computers at the same time. any given time. 2. You may make one copy of the Samsung The Purchaser may make up Software in machine readable form for backup to three copies of the purposes only; provided that the backup copy Software Product to be used must include all copyright or other proprietary for back-up purposes only notices contained on the original.

During the course of hearing, the ld. DR had strongly relied upon the observation made in the assessment order and submitted that a review petition had also been filed before the Hon'ble Supreme Court in the matter of Engineering Analysis Centre of Excellence Pvt. Ltd., However, the same is not entertained because judgment of the Hon’ble Supreme Court as on to dfay is binding on us. Moreover, there are various other decisions of the Hon’ble High Courts on this issue which has been highlighted before us, the same is not being reproduced. Accordingly, we hold that this issue is covered in favour of the assessee not only in its own case as well as by the judgment of the Hon’ble Supreme Court and therefore, we hold that income derived by the assessee from supply of software cannot be subject to taxation as royalty either under Income Tax Act or under the treaty. Thus, ground Nos. 2-5 raised by the assessee are allowed.”

Grounds No.6 to 11 pertain to the addition made towards offshore supply of goods as taxable in India on protective basis. The Ld.AO observed that the assessee received Rs.328,865,813/- towards offshore supply of goods and treated it as not taxable in India. The assessee submitted that the transfer of goods happened outside India and hence the receipts are not liable to tax in India. The Ld.AO did not accept the submissions of the assessee and proceeded to make addition by applying 5% of total receipts on protective basis in the hands of the assessee. The Ld.AO held that, the parties to the agreement namely the assessee and Siemens India Ltd., are to be treated as Association of Person (AOP) in whose hands the income arising towards supply of equipments is to be taxed on substantive basis. The relevant findings of the Ld.AO in this regard are extracted as below:

A single, indivisible, composite contract for transmission line project has been artificially segregated to make it appear as three independent contracts, solely with a purpose of avoiding taxed in India. The following facts of the case buttress such assertion:

The arrangement with Siemens Limited (India) as associate for assignment of part of the composite contract has been made with a view to avoid taxes since in case of sub-contract to any unrelated third- party would have resulted in some taxable margin/profits in the hands of the assessee foreign company, Siemens AG. The contract has been artificially divided into 3 parts so as to avoid formation of a Permanent Establishment in India and avoid taxability.

The Permanent Establishment of the assessee, Siemens Limited (India) is directly involved in the relevant transaction as an 'associate'. 8.7. In light of the above discussion, the contentions of the assessee are not acceptable. Therefore, it is hereby held that the revenues stated to be emanating from the off-shore supply contract are liable to tax in India in the hands of the Association of Persons (AOP) formed by the assessee Siemens AG and Siemens (India) Limited. 8.8 During the course of assessment proceedings no India-specific account has been furnished by the assessee so that its income from operations in India can be determined and proper allocation may be made to profits attributable to Indian operations in respect equipment supplies. In such a situation, there is no option but to perforce resort to estimation of the taxable profits of the assessee as per Rule 10 of the Income Tax Rules. In this case, Rule 10(ii) will not be applicable in the instant case since the global profits and gains of the assessee have not been computed in accordance with the provisions of the Indian Income Tax Act. The income of the assessee is, therefore, liable to be computed as per Rule 10(i) read with Rule 10(iii) of the Income Tax Rules, which provides that income of the assessee may be determined at a reasonable percentage of the turnover. Off-shore supply companies world over earn their income primarily from the margin earned in manufacturing and sales process. In these circumstances and in absence of details from the side of the assessee with respect to the profitability of the assessee payee (Siemens AG), it is reasonable to estimate the income as 10% of their receipt. Further, since some parts of the operations have been carried out in the respective 1615/Mum/2022; A.Y. 2017-18 & 2018-19 Siemens Aktiengesellschaft country of residence, Germany, it is also reasonable to estimate that the residence and source country have a 50:50 right over the income so received by the assessee. Hence, the net taxable income from off-shore supplies is 5% in case of the assessee. Since, the tax rate in India for foreign companies is 40%, it is estimated that the tax payable by assessee Siemens AG in India is 2% of the gross receipts from Off-shore supply of the equipment( cess and surcharge extra). 8.9. However, it has been held in the above discussion that the income from Offshore supplies have accrued to the A.O.P. comprising of assessee Siemens AG and Siemens (India) Limited. Obviously, the relevant A.O.P. would be a resident of India for tax purposes. Therefore, the tax liability arising to the A.O.P. is liable to be determined and levied by the Assessing Officer concerned exercising jurisdiction over the resident A.O.P. The substantive determination and assessment of income of the A.O.P. is to be referred to Assessing Officer having jurisdiction over the relevant case. Hence, the demand arising from off- shore supplies in case of the assessee are only protectively assessed by this Order. However, in any eventuality, if it is held in any proceedings that taxability do not arise in the case of the referred A.O.P. as above or, in any proceedings the taxability of the A.O.P. gets quashed/deleted, in such circumstances, the above-referred income is liable to be treated as substantially assessed in hands of the assessee foreign company and accordingly, the tax demand will fall due in case of the assessee Accordingly a sum of Rs.1,64,43,813,/- being 5% of total receipts of Rs 32,88,76,266/- is taxed as income from composite contract liable for taxation in India @ 40% (plus cess/surcharge). charge) " 7.1. The Ld.AR submitted that no assessment in the hands of AOP on substantive basis was done by the Revenue and therefore the protective assessment in the hands of the assessee without substantive assessment cannot hold good. In support he placed reliance on the view taken by the coordinate bench in assesses own case for assessment year 2020-21(supra) 7.2. On merits the Ld.AR submitted that, supply of equipment’s took place outside India on CIF basis and therefore the receipts 7.3. It is noted that the Ld.AO treated the assessee and Siemens India Ltd. to be AOP, in whose hands the income arising towards supply of equipments is to be taxed on substantive basis. The Ld.AR submitted that, no substantive assessment is done in the hands of AOP and the revenue did not bring anything on record to substantiate that there has been substantive assessment. The Ld.AR submitted that coordinate bench in assessee’s own case for assessment year 2020-21(supra) while considering this issue relied on decision of coordinate bench of this Tribunal in case of Pegasus Properties (P.) Ltd. vs DCIT reported in (2022) 135 taxmann.com 294 considered this aspect and held that without substantive assessment. Reliance is placed on the observation of this Tribunal in assessee’s own case for assessment year 2020- 21(supra) in para 12.

Ground No.13 to 21 raised by the assessee is with regards to the benchmarking of the transaction with Indian AE on ad hoc 1615/Mum/2022; A.Y. 2017-18 & 2018-19 Siemens Aktiengesellschaft basis without adopting any mechanism to determine the ALP of the transaction. The Ld.AR submitted that the facts that lead to the adjustment for the year under consideration are similar with that of Assessment year 2009-10. He thus relied on the arguments on behalf of the assessee for assessment year 2009-10. The Ld.AR relied on following arguments of the assessee on identical facts for assessment year 2009-10(supra): “64. Before us ld. Sr. Counsel Shri P.J. Pardiwala submitted that assessee has carried out detailed functional analysis and also undertaken such process while undertaking the benchmarking in their TP study report. He further submitted that TP adjustment cannot be made merely on the basis of alleged discrepancy in the amount of transaction reported by the assessee and it's Indian AE. The ld. TPO is bound to determine the arm's length price of the international transaction within the framework of the transfer pricing regulations, by selecting a specific method prescribed in section 92C of the Act and as per laid down in the Rule 10B of the Rules.

He submitted that it is not the case of the TPO and there is not a whisper of allegation in the TP order of the assessee and the Indian AE's that the services were not provided by the assessee or the royalty for use of technical know-how was not made available by the assessee. Despite being so satisfied, the TPO proceeded with an ad-hoc disallowance only on account of alleged discrepancies in the amount of transactions reported by the assessee and its Indian AE's. In support he relied upon the decision of Judgment of the Hon'ble Bombay High Court in the case of CIT vs. Johnson and Johnson Limited reported in (2017) 80 taxmann.com 337, wherein the Hon'ble High Court was dealing with a case of assessee who paid royalty at the rate of 2%. The TPO restricted the royalty to 1% without providing any reasoning. In said facts, the Hon'ble High Court held in favour of the Assessee by making the following important observations: "....We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in Section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical know-how has not been 1615/Mum/2022; A.Y. 2017-18 & 2018-19 Siemens Aktiengesellschaft carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical know-how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% of 2% as claimed by the respondent assessee. This determination instead of ALP of technical know-how how royalty by the TPO was ad-hoc and arbitrary as held by the CIT(A) and the Tribunal In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained".

He also relied upon the following judgments on similar point. • CIT(A) v. Lever India Exports Limited (2017) 246 Taxman 133 (Bombay) • CIT LTU v. SI Group-India Limited (2019] 265 Taxman 204 (Bombay) • CIT v. Merck Ltd (2016) 389 ITR 70 (Bombay) • CIT v. Kodak India (P.) Ltd. [2016] 288 CTR 46 (Bombay) 67. Accordingly, he submitted that adhoc adjustment of 10% o the value of international transaction declared by the assessee is not justified.

In so far as relying on the TP study report of the Indian AEs to justify the arm's length nature of its international transaction, Ld. Sr. Counsel submitted that Indian AEs have benchmarked all the transactions after detailed FAR analysis entered into with the assessee. The Indian AEs have earned Net Cost Plus Margin /Net Profit Margin (after considering services availed from assessee) that are consistent with the margins earned by comparable independent companies. Accordingly, applying the TNMM method and based on the analysis of the Indian AEs, the services rendered by the assessee were considered at arm's length from the perspective of Indian transfer pricing regulations.

He further submitted that, the Indian AEs had demonstrated through their Transfer Pricing Study Reports which are also adopted by the assessee that these transactions meet the arm’s length principle as prescribed by Indian Transfer Pricing Regulations. The copies of Transfer Pricing Study Reports of Indian AEs were also submitted to the TRANSFER PRICING OFFICER vide submission dated 31/08/2012 during the course of TP assessment proceedings. Ld. Sr. Counsel further submitted that under the transfer pricing regulations the Indian AEs (being the recipient of the technical services) are required to document their compliance with the arm's length principle as a payer. And the Indian AEs have documented the same and determined the transaction to be consistent having regards to the arm's length principle.

Reliance was also placed on the decision of Hon'ble Karnataka High Court in the case of CIT v. UE Development India (P.) Ltd. [IT Appeal Nos. 52 to 55 of 2014, dated 12-7-2018] which was also subsequently followed by other Coutts and Tribunals 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 AEs, then no transfer pricing adjustment should be made in the hands of the Assessee company with respect to the same transaction.

On the other hand Id. DR submitted that assessee should have done independent benchmarking instead of relying upon benchmarking activity carried out by the Indian AEs. The determination of arm's length price has to be done separately because what is required to be seen whether assessee payment received is at arm’s length price independently. Apart from that, he submitted that the reason for making the TP adjustment was on account of difference in the amount reported by the assessee as well as Indian AE and therefore, the arm’s length ALP determined in the case of assessee on this issue cannot be accepted on the transaction of royalty received by the assessee 74. In rejoinder, Id. Sr. Counsel had explained reasons for differences reported by the assessee in its Indian AE in the following manner:- -The assessee reports the amount on receipt basis whereas the Indian AEs report transaction on accrual basis. This is a consistent position followed by the assessee basis the provisions of the tax treaty. This position has also been upheld by the Bombay High Court in the assessee's own case. Therefore, amounts received by assessee and amounts recorded by Indian AE's would not be identical. - The assessee reports only those transactions that are subject to tax in India e.g. fees for technical services, whereas Indian AEs report all the transactions like purchase / sale of goods. provision and availing of services, reimbursement / recovery of expenses whether income/expense. It is thus natural that these would be differences in the transactions reported by the assessee and the AE's.

Thus, he submitted that reconciling the amounts reported by itself and its Indian AEs was unfeasible due to the provision of manual TDS 1615/Mum/2022; A.Y. 2017-18 & 2018-19 Siemens Aktiengesellschaft certificates issued by payers during the relevant period. This made it challenging to match individual invoices with TDS certificates which were issued at a consolidated level Nonetheless, it has been able to achieve a substantial reconciliation of the transactions, which were placed on record during the TP proceedings before the TRANSFER PRICING OFFICER vide submission dated 31/08/2012 as well as 27/09/2012. 8.1 As noted in the preceding paragraphs, we note that the facts that led to the adjustment in the present assessment years are identical with assessment year 2009-10 (supra). It is noted that this Tribunal for 2009-10 (supra) read as under : 76. We have heard the rival submissions and perused the relevant finding given in the impugned orders. One of the reasons given by the Id. TPO and the Id. DRP is that assessee has been earning to reconcile the value of transaction disclosed by the Indian AEs in the Form 3CEB if the value disclosed by the assessee in its return of income. The assessee had explained that the difference is for the reason that assessee accounts the amount on receipt basis whereas the Indian AE's reports the transaction on accrual basis and this assessee has been doing in accordance with the provisions of the tax treaty. It is important to note here that, this position has also been upheld by the Hon'ble Bombay High court in assessee's own case that it should be taxed on receipt basis. It was for this reason amounts recorded by the Indian AE cannot be the same. Apart from that, the assessee reports only those transactions that are subject to tax in India, i.e., element of Fees for Technical Services only, whereas Indian AEs report all the transactions like purchase / sale of goods, provision and availing of services, reimbursement / recovery of expenses whether income/expense. It is thus quite natural that there would be differences in the transactions reported by the assessee and the AE’s. Once this fact has been brought on records and assessee has given this explanation for reconciliation, then this cannot be the reason or the ground for making adhoc adjustment @10% by taking 10% mark-up on the value of international transaction. Such an exercise is completely against the concept of transfer pricing revelation. The Id. TPO was bound to determine the ALP in accordance with the Rules after analyzing the nature of transaction and the arm's length price after applying method provided under the Rules. If in the case of the Indian AE, the same transaction has been benchmarked and has been accepted to the ALP, then, unless there are different factors which need to be analyzed on the same transaction, it 1615/Mum/2022; A.Y. 2017-18 & 2018-19 Siemens Aktiengesellschaft cannot be held that the same ALP cannot be accepted in the case of recipient foreign company. In fact it has been informed that Id. TPO has made adjustment under various heads which also includes payment of royalty. Any further adjustment is not called for in the case of the assessee to adopt a different ALP. Though the true course would have been that ALP of FTS and royalty should have been benchmarked separately as per the Rules, however, when assessee had carried out and furnished TP study report and also relied upon the margins declared by the Indian AEs after carrying out different study report, then without finding any defect in such TP analysis and determination of ALP by the assessee, Id. TPO could not have resorted to adhoc mechanism for adding 10% mark-up on adhoc basis. Thus, in absence of any contrary inference drawn by the Id. TPO on the TP study report of the assessee and at the same time in the case of Indian AE, same transaction has been benchmarked and ALP has been determined then we do not find any reason for taking adhoc 10% mark-up. Accordingly, the same is deleted. In the result, grounds No.12-19 are allowed.” 8.2 Respectfully following the above decision of the Co-ordinate Bench, for assessment year 2009-10 (supra), without there being any defect identified by the Ld.TPO in the TP analysis, we are of the opinion that adhoc disallowance cannot be resorted to. Accordingly grounds 13 to 21 raised by the assessee stands allowed.

The assessee also raised additional ground on the legal issue of the final order of the Ld.AO being barred by limitation as per the provisions of section 153(1) of the Act. The said ground is left open in view of our decision on merits as decided here-in- above.

The grounds raised by the assessee for assessment year 2018-19 are on identical facts and similar to the grounds raised for A.Y: 2017-18 herein above. Accordingly, the view adopted for A.Y. 2017-18 shall apply mutatis mutandis.