CANON INDIA PVT. LTD.,GURGAON vs. ACIT, CIRCLE- 5(2), NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: Bench ‘I-1’, NEW DELHI

BEFORE SHRI R.K.PANDA, ACCOUNTANT MEMBER AND SMT. BEENA A PILLAI, JUDICIAL MEMBER

ITA No. 1672/Del/2017 A.Y. 2012-13 & ITA No. 6742/Del/2017 A.Y. 2013-14 Canon India Pvt.Ltd. ACIT, Circle 5(2) 7th floor, Tower B vs. New Delhi Building No.5 DLF Epitome DLF Phase III Gurgaon

PAN: AAACC4175D (Appellant) (Respondent)

Appellant by Sh. Vishal Kalra, Adv. Sh. S.K.Aggarwal, C.A. Shri Ankit Sahni, Adv. Sh. S.S.Tomar, Adv.

Respondent by Sh. Sanjay I Bara, CIT, DR. Date of Hearing 17.01.2019 Date of Pronouncement 11.02.2019

ORDER PER BEENA A PILLAI, JUDICIAL MEMBER Present appeals have been filed by assessee against final assessment orders dated 31/01/17 and 10/10/17 passed by Ld.ACIT, Circle 5 (2), New Delhi for Assessment Years 2012-13

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT and 2013-14 respectively. It has been submitted by Ld.Counsel that transfer pricing issues raised by assessee in these two appeals are similar and identical. Further it has been brought to our notice that only for Assessment Year 2012-13 there are corporate tax issues raised by assessee. 2. We shall first take up Assessment Year 2012-13 in ITA No.1627/Del/2017. Grounds of appeal raised by assessee for year under consideration are as follows: “Based on the facts and circumstances of the case, Canon India Private Limited (hereinafter referred to as "the Appellant”), respectfully submits in respect of the order passed by the learned Assistant Commissioner of Income Tax, Circle 5(2), New Delhi (hereinafter referred to as the “Ld. AO”) under section 143(3) / read with section 144C of the Income Tax Act, 1961 (hereinafter referred to as the ‘’Act”) the following grounds: A. Transfer Pricing Grounds That on the facts and circumstances of the case and in law, 1. the Assessing Officer (“AO”) has erred in assessing the total income of the Appellant under section 143(3) read with section 144C( 13) of the Act, for the relevant assessment year (“AY”) at INR 146,04,58,050 as against the returned loss of INR 33,76,80,930. That on the facts and circumstances of the case and in law, 2. the AO / Dispute Resolution Panel ('DRP') / Transfer Pricing Officer (‘TPO’) have erred in making adjustment of INR 175,91,11,274 to the arm’s length price (‘ALP’) of alleged international transaction of Advertisement, Marketing and Promotion (“AMP”) expenditure. That on the facts and circumstances of the case and in law, 3. the orders passed by the AO/TPO were bad in law as the pre- requisite for applying Chapter-X, i.e., existence of an international transaction between two Associated Enterprises (“AE”) under section 92B of the Act, was not satisfied or existed as there was no agreement, understanding or arrangement between the Appellant and the AE for incurrence of such expenditure by the Appellant. Further, the DRP erred in upholding the action of the lower authorities.

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT 3.1. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in holding that the unilateral arrangement between the Appellant and Indian third parties for advertisement and promotion would be a “transaction” much less an “international transaction” within the meaning of Chapter X of the Act. 4. Notwithstanding and without prejudice, the orders passed by the AO / TPO were bad in law as the unilateral AMP expenditure incurred by the Appellant was categorized as 'international transaction’ under chapter X of the Act, contrary to law in as much the AO neither granted the Appellant a proper opportunity of being heard, nor recorded his satisfaction in respect thereof. 5. That on the facts and circumstances of the case and in law, the TPO erred in recharacterizing the unilateral AMP expenditure being payments made by Appellant to independent third parties as an ‘international transaction' under chapter X of the Act and particularly when the jurisdiction of the TPO is limited only to compute ALP of the international transaction. Further, the DRP erred in not adjudicating the objections challenging the jurisdiction of the TPO in this regard. 6. That on the facts and circumstances of the case and in law the AO / DRP / TPO have erred in making an adjustment of INR 175,91,11,274 in respect of alleged international transaction pertaining to excess AMP expenditure, alleging that the same to be not at arm’s length in terms of the provisions of sections 92C(1) and 92C(2) of the Act read with Rule 10B of the Income-tax Rules, 1962 (“the Rules”). 7. That on the facts and in the circumstances of the case and in law, the AO / DRP / TPO erred in alleging that AMP expenses paid to unrelated third parties in India are excessive and further erred in holding that the incurring of excessive AMP expenditure has resulted in creation of marketing intangible in favor of AE, for which it should be compensated by the AE. 8. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in re-characterizing the Appellant as service provider rendering brand building services to its AE, without appreciating that it is a full risk bearing distributor incurring AMP expenditure in the course of its own business to promote its sales in India. Notwithstanding and without prejudice to the above grounds that the AMP expenditure incurred by the Appellant does not constitute an international transaction under

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT Chapter X of the Act, the Appellant craves to raise following grounds on merits: 9. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not appreciating that distribution and marketing functions being inter-connected and intertwined should be benchmarked on an aggregate basis. The AO / DRP / TPO further erred in not appreciating that if the two functions are segregated and benchmarked, then the same would result in over taxation and is contrary to the provisions of the Act. 10. That on facts and circumstances of the case and in law, the AO / TPO erred in law and on facts, in applying Profit Split Method (“PSM”) to benchmark the alleged international transaction of incurring excessive AMP expenditure without establishing as to how PSM was the most appropriate method in terms of section 92C read with Rule 10B of the Rules and had applicability to the facts of the instant case. Further, DRP erred in summarily rejecting such action of AO / TPO without giving any cogent reasons. 10.1. That on the facts and circumstances of the case, AO / DRP / TPO erred in recharacterizing the functional analysis of the Appellant and further erred in alleging that in the instant case the overseas entities is an entrepreneur and AE has assigned vital function that otherwise should have been carried out by itself. 10.2. That on the facts and circumstances of the case and in law, the AO / DRP / TPO erred in holding that the Appellant is contributing to the intangible of the AE and thus, contributing to the global profit and therefore, the PSM is the most appropriate method for benchmarking the alleged international transaction pertaining to excessive AMP spent. 10.3. Without prejudice and notwithstanding to above, that on the facts and circumstances of the case and in law, the AO / TPO have erred in arbitrarily holding taxability of global profits proportionate to AMP expenditure incurred in India and further erred in arbitrarily allocating (2.4% of 35% of global profits) global profits using PSM method alleging that the Appellant is contributing / creating intangible on behalf of the AE and global profits need to be apportioned since various factors are effecting the accrual of income. Further, the DRP erred in not adjudicating the objections of the Appellant in this regard. 11. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in holding that Distribution & Marketing (incurrence of AMP) should be benchmarked separately applying PSM method and further erred in not appreciating that

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT the same would result in over taxation and is contrary to the computation machinery provided in Chapter X. 11.1. That on the facts and circumstances of the case and in law, the AO / DRP/ TPO have erred in not allowing the setoff excess margin earned by the Appellant from distribution function against the adjustment made on account of AMP expenditure even if the same was to be segregated and benchmarked separately. 12. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in including subsidy from the scope of AMP expenditure while benchmarking the same on segregated basis. 12.1. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not excluding selling / business promotion expenses from the scope of AMP expenditure, particularly when the TPO pursuant directions of DRP for AY 2011- 12 had excluded similar expenses from scope of AMP expenditure. Further AO / DRP / TPO erred in not following the decision of the jurisdictional High Court and Tribunal in Appellant’s own case for assessment years 2006-07 to 2008-09 to exclude the selling / business promotion expenses as per the details filed. 13. That on the facts and circumstances of the case and in law, the AO / TPO have erred in not granting the benefit of quantitative / economic adjustments (such as non-payment of royalty / expenditure incurred on new product launches), while computing the alleged excessive AMP expenditure. Further, DRP erred in not adjudicating the objection of the Appellant in this regard. 14. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not providing the Appellant the benefit of 5 percent range as provided by the proviso of section 92C(2) of the Act. Further, DRP erred in not adjudicating the objection of the Appellant in this regard. B. Corporate Tax Grounds 1. The Hon’ble DRP has grossly erred in law and on facts in directing the Ld. AO to enhance the income by disallowing Rs. 3,90,27,709/- being the reimbursement to Canon Inc., Japan of salaries of the seconded employees under section 40(a)(i) of the Act for non-deduction of tax at source under section 195 of the Act. 1.1. The Ld. AO / Hon’ble DRP have erred in holding reimbursement of salary cost of seconded employees as ‘fees for technical services’ (‘FTS’) under section 9(l)(vii) of the Act read with Article 12(4) of the India - Japan Double Taxation Avoidance Agreement (‘DTAA’) and liable to TDS under section 195 of the Act.

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT 1.2. The Ld. AO / Hon’ble DRP have failed to appreciate that the above amount represent reimbursements of actual costs and does not have any element of income and is for services rendered by seconded employees to appellant as employees of appellant company and not services rendered by Canon Inc., Japan and hence not in the nature of FTS and not chargeable to tax in India. 1.3. The Ld. AO / Hon’ble DRP have failed to appreciate that the payments are in the nature of pure reimbursement of administrative costs in consideration of the secondment of expatriates to the Appellant and not towards any services rendered by the Appellant’s parent company, Canon Inc., Japan. 1.4. The Ld. AO / Hon’ble DRP have erred in holding that the expatriates are employees of Canon Inc., Japan and involved in providing technical service to the Appellant on behalf of Canon Inc. Japan. 1.5. The Ld. AO / Hon'ble DRP have failed to appreciate that as per the secondment agreement, the expatriates provide services to the Appellant as employees of the Appellant as they function under the control, direction and supervision and in accordance with the policies, rules and guidance applicable to the Appellant’s employees. The salary was paid by Canon Inc., Japan to the expatriates only for administrative convenience, which has been reimbursed by the Appellant. 1.6. The Ld. AO / Hon’ble DRP ought to have appreciated that there is an employer- employee relationship between the Appellant and the expatriates and that the payments are towards reimbursement of actual administrative costs of the expatriates as incurred by Canon Inc., Japan. 1.7. The principle of determining employment relationship through the “economic criteria” is also supported by OECD Commentary on the Model Convention. The Commentary supports the concept of “economic employer” (rather than formal / legal employer) in the context of taxation of dependent personal services. It states that the term “employer” should be interpreted as “the person having rights on the work produced and bearing the relative responsibility and risks”. It is the substance that prevails over the form. The real employer is the user of the labour. The Ld. AO / Hon’ble DRP has erred in not relying on the concept of economic and legal employer. 1.8. The Ld. AO / Hon’ble DRP have erred in holding that section 195 of the Act is applicable to the present case and the Appellant is liable to deduct tax at source under that section on the payments made to Canon Inc., Japan towards reimbursement of expenses.

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT 1.9. On the facts and in circumstances of the case and in law, the Ld. AO / Hon’ble DRP have erred in not appreciating that the taxes on salaries reimbursed had been duly deducted and deposited under section 192 of the Act and thus any reimbursement of such payments, cannot be taxed again under section 195 of the Act. 2. On the facts and in the circumstances of the case and in law, after having computed a taxable income in case of Appellant, the Ld. AO has erred in not allowing the credit of Tax Deducted at Source amounting to Rs.5,36,848/-. 3. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in charging interest under section 234A and 234B of the Act. 4. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1 )(c) of the Act. The above grounds are independent and without prejudice to each other. The Appellant craves leave to add, withdraw, amend or vary the above grounds of appeal before or at the time of hearing.

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT assessee with comparables which according to him were best suited. 3.2. Against proposed adjustment on AMP expenditure, assessee raised objections before DRP who upheld benchmarking of AMP expenditure as an international transaction. Ld.AO accordingly passed final assessment order making addition in hands of assessee on basis of transfer pricing adjustment. 3.3. Aggrieved by order of Ld. AO, assessee is in appeal before us now. 4. At the outset, Ld.Counsel submitted that issues pertaining to transfer pricing adjustments stand fully covered by orders passed by coordinate bench of this Tribunal in assessee’s own case for preceding assessment years. 4.1. He submitted that Ground No. 1-2 are general in nature and therefore do not call for any adjudication. 5. Ground No. 3-8 raised by assessee are legal issues wherein assessee is challenging order passed by Ld.TPO/AO to be bad in law, as there did not exist any international transaction between two Associated Enterprises. He submitted these issues now stands fully covered by order of this Tribunal for Assessment Year 2011-12 placed at pages 213-254 of case law paper book. Placing reliance upon order of this Tribunal in ITA No. 832/Del/2016 filed by assessee for Assessment Year 2011-12 he submitted that these grounds are decided as under: “ 40. As regards to ground no.2 & 2.2 relating to non-existence of international transaction and ground no.4 relating to no creation of marketing intangible in favour of AE, the same are identical with ground no.4 & 5 of the appeal filed by the assessee for AY 2010- 11. Therefore, the observations made in that respect are

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT applicable in the present appeal as well. This issue is not verified properly by the TPO and therefore, it requires verification as there is no mention of the specific agreements to the effect of the AMP whether is a international transaction or not. Therefore, we direct the TPO/AO to verify this issue in light of the agreements signed by the assessee with its AEs as well as the main company. Needless to say the assessee be given the opportunity of hearing by following principles of natural justice. Ground no.2, 2.2 and 4 of the assessee’s appeal are partly allowed for statistical purpose.” 6. Ld.CIT,DR though supported order passed by authorities below could not controvert aforestated observations by this Tribunal in assessee’s own case for the preceding Assessment Years.

7.1. It is further observed that, from Assessment Year 2006-07, 2007-08, 2008-09 and 2009-10 this Tribunal consistently restored these issues back to Ld.AO/TPO for determination of ALP of AMP expenses afresh, in light of agreements entered into by assessee with its AE for purchase and resale of Cannon products in India. Respectfully following the same we also set aside this issue back to Ld.TPO for determining ALP of AMP expenses. AO/TPO shall call for all agreements entered into by assessee with its AE for purchase and resale of Cannon products in India. Needless to say that assessee will be allowed reasonable opportunity of hearing during proceedings and Ld.AO/TPO shall

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT call for all necessary evidences/documents which shall be produced by assessee to substantiate its claim. Ld.AO/TPO shall determine the issue by applying law in force. 7.2. Accordingly, these grounds raised by assessee are allowed for statistical purposes. 8. Ground No.9-12 relates to benchmarking alleged international transaction of AMP expenses by using PSM as most appropriate method. 9. It has been submitted by Ld.Counsel that as issue relating to nature of AMP expenses being international transaction or not has been set aside by this Tribunal in preceding Assessment Years and also hereinabove in Grounds 3-8, present grounds also needs to be set-aside to Ld.AO/TPO. He placed reliance upon observations of this Tribunal in preceding Assessment Years in assessee’s own case. 10. Ld.CIT,DR though supported order passed by authorities below could not controvert aforestated observations by this Tribunal in assessee’s own case for preceding Assessment Years. 11. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254. 12. As we have already set aside issue relating to nature of AMP expenditure to Ld.AO/TPO, applicability of most appropriate method relating to same head of transaction also deserves to be set-aside. It is also observed that, this is the consistent view

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT taken by this Tribunal in case of assessee for preceding Assessment Years, copies of orders are placed before us. 12.1. Respectfully following same, we also set aside this issue back to Ld. AO/TPO. 12.2. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 13. Ground No. 12.1 & 13 have been raised by assessee as Ld. TPO has included selling/business promotion expenses in scope of AMP expenditure when DRP for Assessment Year 2011-12 excluded similar expenses. 13.1. Ld.Counsel submitted that issue stands squarely covered by order of this Tribunal in assessee’s own case for Assessment Year 2006-07 to 2008-09 and 2010-11 as under: “53. As regards to ground no.8 and 8.1 relating to exclusion of certain selling and distribution expenditure and subsidy, the same are identical with ground no.8 of the appeal filed by the assessee for A.Y. 2010-11. Therefore, the observations made in that respect are applicable in the present appeal as well. Thus, following the order of the Tribunal for A.Y. 2006-07 to 2008-09 read with the subsequent directions of the Hon’ble Delhi High Court in assessee’s own case, it will be appropriate to direct the TPO to exclude Trade discount, commission, selling and administrative expenses and special purpose subsidy from the ambit of the AMP expenditure, as given in the tabulated form by the Ld.AR alongwith the synopsis at the time of hearing after verifying the same in accordance with the records available with the TPO/AO. Thus, this issue is remanded back to the file of the TPO/AO. Needless to say, the assessee be given opportunity of hearing by following

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT principles of natural justice. Ground no.8 of the assessee’s appeal is partly allowed for statistical purpose.’ 13.2. Ld.CIT,DR though supported order passed by authorities below could not controvert aforestated observations by this Tribunal in assessee’s own case for preceding Assessment Years. 14. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254. 14.1. Admittedly this Tribunal in orders for preceding Assessment Years directed Ld.TPO to exclude sales related expenditure/subsidies received by assessee. Insofar as business promotion expenses are concerned, Ld.TPO shall consider the same after perusal of relevant agreements entered into by assessee with its AE and to decide this issue as per law. 14.2. Accordingly we set aside this issue back to Ld.TPO for reconsideration as per law. 15.Ground No. 14 is relating to 5% range benefit. Ld.Counsel submitted that these are consequential in nature and therefore do not require any adjudication.

B. Corporate tax issue

For purposes of briefing corporate tax issues, Sh.S.K Agarwal CA appeared before us. Ground No. 1-1.9 16. Brief facts are that assessee distributes/trades in high-tech office automation, entertainment photographic products etc. In

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT addition it is also engaging export of software from STPI unit and also by way of sub contract it projects. 17. DRP issued vide order sheet entry dated 26/12/16 show caused assessee a notice for enhancement and case was fixed for hearing on 27/12/16. DRP observed that assessee made payments in respect of reimbursement of salaries of seconded employees amounting to Rs.3,90,27,709/-, without deducting TDS under section 195 of the Act. DRP was of the opinion that decision of Hon’ble Supreme Court in case of Centrica India Offshore Pvt.Ltd., squarely covers issue against assessee.

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT 19. Ld.AR thereafter, took us through paper book and submitted that employees from Cannon Inc., (being Overseas entity) were seconded at request of assessee for a specified tenure of 3 years or more during which they worked wholly and exclusively for assessee only. He submitted that during assessment year under consideration following expatriates were seconded to assessee:

S. Name of seconded Designation of Period (3 or Part of salary No. employee seconded more years paid by CINC on employee given starting from) behalf of by appellant in CIPL(Appellant) Japan which is reimbursed by appellant 1. Shimogawa Yoshitaka Director, ICP 1 Sept.2010 7,272,240 2. Hirata Takashi Director, ISDC 20 Nov.2008 7,620,983 Asst.Director, 3. Himanishi Seiji 1 April,2011 2,395,862 ICP 4. Matsuda Katsuyuki Asst.Director, 14 July,2011 2,958,734 F&A 5. Harabayashi Satoshi Asst.Director, 1 July 2011 3,087,454 cSP 6. Kuwahara Toshihiko Sr.Manager,OIS 1 May,2011 3,087,454 7. Momoi Akiyoshi Manager ISDC 1 May 2011 2,962,886 8. Nagai Katsuyuki Manager, ICP 1 Oct.2010 4,344,407 9. Imoto Takehiko Manager, 1 April 2010 2,984,606 Markets 10. Senda Shunichi Director, 13 Feb., 2008 1,438,889 ICPDivn. Total: 39,027,709

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT  Employment Contract entered into between assessee and seconded employees more particularly placed at pages 41- 59 of paper book;  Cost Reimbursement Agreement entered into between assessee and Cannon Inc more particularly placed at pages 79-98 of paper book 21. Referring to certain specific clause in above referred agreements, Ld.AR submitted that, assessee took into account both portions of salary paid in Indian Rupees as well as Japanese Yen for purposes of deducting tax at source, on payments of salary to such seconded employees under section 192 of the Act, and has issued Form 16 to them, which has been enclosed at page 11-40 of paper book. 22. Ld.AR further submitted that relationship between assessee and seconded employees was of employer employee as per terms of agreement it clearly provides that these employees will work wholly and exclusively for assessee only. Further he submitted that, as per agreement seconded employees were under an obligation to perform from time to time such duties as has been directed by assessee. Referring to cost reimbursement agreement entered into between Canon Inc., and assessee, Ld.AR submitted that it clearly states that assessee is hiring these employees during the tenure of 3 years who will be under payrolls of assessee. 23. Referring to Clause 4 of Cost Reimbursement Agreement, Ld.AR submitted that it is only for sake of administrative convenience that during period of employment of these seconded employees, Cannon Inc., would pay them salary for services

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT rendered by to assessee, and such payment is made on behalf of assessee. Ld.AR also referred to Clause 6 and 7 wherein it has been agreed by assessee that it shall reimburse and repay to Cannon Inc actual cost of remuneration paid to such employees without any markup/profit. 24. Referring to Form 16 issued by assessee to these employees, Ld.AR submitted that assessee treats entire payments made to seconded employees (both in Indian Rupees as well as Japanese Yen) as salary and deducts TDS under section 192. He thus submitted that TDS on total payments made to such seconded employees have been duly deposited with revenue authorities and has been accepted. 25. Ld.AR referred to Explanation 2 of Section 9 (1) (vii) of the Act, and submitted that “Fees for Technical Services” means, any consideration (including any lump sum consideration) for rendering of any managerial, technical or consultancy services (including provision of services of technical or other personnel) but does not include consideration for any construction, assembling, mining or like project undertaken by the recipient or consideration, which would be income of the recipient, chargeable under the head salaries.

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT the Act. In support of his argument, Ld.AR placed reliance upon following decisions:  AT & T Communication Services vs. DCIT in ITA No. 1653/del/2016 & 354/del/2017 for Assessment year 2011- 12 and 2012-13 respectively, vide order dated 31/10/18;  DCIT vs DLF Projects Ltd in ITA No. 5178/del/2014 for assessment year 2009-10 vide order dated 27/11/18;  Assessee also placed reliance on opinion sought from Sh. RV Easwar Sr. Advocate (former Judge Delhi High Court). 27. Ld.AR further submitted that, facts in case of Centrica India Offshore Pvt. Ltd., (supra) are different from that of assessee on following grounds:  that Centrica UK outsourced back-office support functions like debt collections, consumer billing, monthly jobs to third-party vendor is in India for which the Indian subsidiary had entered into a service agreement (seconded agreement) with overseas entities, thereby acting as an interface between overseas entities and Indian vendors.  That according to terms of agreement Centrica India charged cost plus markup of 15% from overseas entities.  That it was at request of Centrica India that overseas entity provided staff with appropriate expertise and knowledge about process and practices implemented at Centrica UK with an intent to seek support during initial years of setup. And Centrica India subsequently entered into individual agreement with seconded employees. 28. He submitted that, it was on above aforestated factual background that Hon’ble Delhi High Court, held that there was no

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT purported employment relationship between Centrica India and seconded employees, and Centrica UK was providing services to Indian company through seconded employees to ensure quality control and management of their vendors of outsourced activities. He submitted that Hon’ble High Court, thus held that, reimbursement of salaries paid to seconded employees was in nature of FTS. Ld.AR submitted that DRP relied upon Hon’ble Supreme Court’s decision in case of Morgan Stanley, and opined that where employees continues to be on payroll of overseas entity or they continued to have their lien on their jobs with multinational enterprises a service PE can emerge and on completion of their tenure they are repatriated to their parent job. Under such circumstances they retain their lien on their employment with overseas entity. 29. Ld.AR, while distinguishing facts with that of Morgan Stanley (supra) submitted that, in case of present assessee, seconded employees are working wholly and exclusively for assessee, and Canon Inc., is not responsible for work of seconded employees. He further submitted that relationship between assessee and seconded employee is that of employee employer, irrespective of whether such seconded employees continue to have lien with Canon Inc., or not. He submitted that this is duly substantiated from terms of agreement which clearly provides that seconded employee will work wholly and exclusively for assessee and are under an obligation to perform such duties as assessee directs them to perform from time to time. Relying upon Cost Reimbursement Agreement entered into between

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT Canon Inc., and assessee, Ld.AR submitted that assessee is hiring these employees during the tenure of 3 years under assessee and it is only for sake of administrative convenience that during such period Canon Inc. would pay salary for services rendered by such employees to assessee. He further submitted that such payment is being made by Cannon Inc on behalf of assessee as has been agreed into in Clause 4 of such agreement. Ld.AR further relying upon Clause 6 of cost reimbursement agreement submitted that assessee shall without any markup or profit reimburse salary paid by Canon Inc to seconded employees. 30. Ld.AR also submitted that nature of business carried on by assessee is independent trading of Canon products in India and export of in-house developed software. It has been submitted that seconded employees are engaged mainly in core business functions of assessee and since assessee is economic employer of seconded employees, assessee bears economic burden of salary cost of such seconded employees. 31. Ld.AR thus submitted that decisions relied upon by DRP for making addition in hands of assessee is not justified under peculiar facts in assessee’s case. 32. On the contrary, Ld.CIT,DR placed reliance upon distinguishing factors brought on by DRP which is as under: S.No. Centrica Reference Taxpayer Secondment Agreement Ref 1. Seconded employees duties and Two sample cost reimbursement functions were dictated by the agreements have been furnished i.r.o instructions and directions of the Mr. Takehiko Imoto and Mr. Katsuyuki CIOP. Matsuda. While it is stated that the said persons would work under the directions of the

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT tax payer, the subsisting relationship with Canon Inc. whose regular employees they are is defined by S.No.1 and 2 of the cost reimbursement agreement (refer Annexure-3) which states, 1. Mr.Takehiko Imoto is an employee of Canon Inc. 2. Canon Inc transfers Mr Takehiko Imoto to Canon India Private Limited as the Manager Market Engineering Division for a period of3 years, for the purpose of its business operations in India. Similarly in the agreement pertaining to Mr.Katsuyuki Matsuda: 1. Mr.Katsuyuki Matsuda is an employee of Canon Inc. 2. Canon Inc transfers Mr.Katsuyuki Matsuda to Canon India Private Limited as the Manager Market Engineering Division for a period of 3 years, for the purpose of its business operations in India.

In both cases Canon Inc transfers the employee for a period of 3 years, for the purpose of its business operations in India, the subsisting relationship with Canon Inc. whose regular employees they are is clearly specified and the temporary nature of the assignment is highlighted as also the fact that it is for the purpose of the business operations of Canon Inc in India. 2. However crucially they retained their Apropos remuneration it is stated that

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT entitlement to participate in the Canon India P Ltd. Shall reimburse overseas entities retirement and and repay to Canon Inc the actual cost social security plans and other of remuneration paid to the seconded benefits in terms of its applicable employee-thus the terms of agreement policies, and their salary was properly simply mention salary in JPY and INR. payable by the overseas entities, (Refer Annexure 3) which claimed the money from CIOP Thus clearly the employees retained (page 40 para 34) their entitlement to participate in the overseas entities retirement and social security plans and other benefits in terms of its applicable policies, and their salary was properly payable by the overseas entities, which claimed the money from taxpayer,

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT responsible (in terms of the of remuneration paid to the seconded agreement) for their failures, these employee-thus the terms of agreement limited and sparse factors cannot simply mention salary in JPY and INR. displace the larges and established (Refer Annexure 3) context of employment abroad. Thus clearly the employees retained (Page 42 para 36). their entitlement to participate in the overseas entities retirement and social security plans and other benefits in terms of its applicable policies, and their salary was properly payable by the overseas entities, which claimed the money from taxpayer.

32.1. Placing reliance upon page 79, a sample of Cost Reimbursement Agreement, entered into by Cannon Inc., with an employee, Ld.CIT DR referred to Clause 1 of terms of agreement wherein, the seconded employee has been held to be employee of Canon Inc. By placing reliance upon Employment Contract between expatriates with assessee, he submitted that work to be performed by these employees and post held by them with assessee has not been mentioned. Referring to submissions of Ld.AR from synopsis, Ld.CIT DR submitted that, admittedly

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT seconded employees are involved in core business functions of assessee. From functions performed by assessee, under Provision of Software Development Services, he submitted that quality assurance are being evaluated and observed by personnel sent by these Associated Enterprises to facilitate assessee. He submitted that assessee nowhere explains what exactly it means by ‘core business functions’ performed by these seconded employees referred in the agreement. 32.2. He thus supported order of DRP wherein, direction has been given to Ld.AO to apply decision of Hon’ble Supreme Court in case of Centrica India offshore Pvt. Ltd., (supra) in respect of reimbursements of salaries for seconded employees. 33. We have perused submissions advanced by both sides in light of records placed before us. In facts of present case, Ld.AO in impugned order disallowed reimbursement u/s 40(a)(ia) by holding the payments to be in the nature of FTS on which no TDS u/s 195 was deducted. 34. We have perused at length and in detail all submissions advanced by both sides in light of decision of Hon’ble Delhi High Court in case of Centrica India Offshore Pvt.Ltd vs. DCIT (supra). We are in agreement with submission of Ld.AR that, applicability or otherwise of ratio of Hon'ble Delhi High Court in case of Centrica India offshore Pvt. Ltd., (supra), is a fact specific question to be determined with reference to functions performed and conduct of seconded employee with reference to business of assessee, vis-a-vis activities performed by Canon Inc. Thus to analyse, moot question that arises before us is to decide, whether amount paid by assessee to its overseas entity,

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT equivalent to salary and other benefits paid to seconded employees by overseas entity, reimbursement of such salaries and whether withholding of tax thereon was contemplated by Section 195 of the Act. 34.1. At the outset, we observe that assessee is 100% subsidiary of Canon Singapore PTE Ltd., which in turn is a wholly owned subsidiary of Canon Inc Japan.

34.2. It is observed that overseas entity is to assign relevant individuals to perform duties at location of assessee, for a specified period at assesssee’s request. Assessee was to designate seconded employees to fill certain position in its organization, integrate them into its organization and authorize them to perform duties during specified period in accordance with agreement. It is also observed that assessee had right to specify scope and nature of work allocated to seconded employees. It is also observed that assessee has entered into separate agreement with each one of seconded employees. Thus it is clear that seconded employees were to be integrated into organization of assessee during secondment period, and was subjected to supervision and control of assessee. All rules, regulations, policies and other practices established by assessee for its employees was to apply. It has been submitted that seconded employees were bound by instructions and directions of assessee throughout specified period, and was to strictly perform duties assigned by assessee with due diligence in a competent and professional manner in accordance with applicable laws and regulations, standard and practices and under supervision and control of assessee. The overseas entity is not to be responsible

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT for errors/omissions or for work performed by seconded employees. Assessee was to bear all risk in respect of work performed by seconded employees and also had benefit from output. The seconded employees were to retain their entitlement in overseas entities. Either party to agreement could terminate agreement by giving written notice to other party three months before termination date. What is relevant to note is that assessee is given right to terminate secondment agreement with seconded employees and not services of seconded employees sent over by oversees entity. 34.3. It is observed from agreements relied upon by Ld.AR that none of agreements specifies what functions are performed by these seconded employees for assessee in India. This is clear from Clause 8 of Cost Reimbursement Agreement wherein, seconded employees are transferred back to Canon Inc., as and when agreement expires. 34.4. In our considered opinion, from these agreements it is difficult to find nature of services rendered by seconded employees to assessee for which overseas entity is reimbursed, as sought to be emphasized by LdAR. It is also observed that obligation to pay part of salary rested with overseas entity and right of seconded employee to claim such part is only against overseas entity. Further from agreement it is not clear if seconded employees conferred any right to claim salary from assessee or whether assessee is burdened with obligation to pay that part of salary to these employees directly. 34.5. It is difficult to accept argument advanced by Ld.AR that what is paid by assessee to its overseas entity in view of its

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT sending its employees to assessee for rendering service, is reimbursement of salary paid by overseas to seconded employees. Merely because overseas entity is not charging assessee anything more than what it has paid by way of salary to seconded employees, does not alter the situation. The fact that in accounts of assessee, this is entered as reimbursement of cost, or, it is not shown as income in account of overseas entity, cannot be conclusive of question. What Model commentary on Article 15 concerning “Taxation of Income from Employment” says that, where a comparison of nature of services rendered by the individual with business activities carried on by his former employer and by the enterprise to which services are provided points to an employment relationship that is different from former contractual relationship, then certain additional factors may be relevant to determine whether the remuneration of the individual is directly charged by the former employer to the enterprise to which the services are provided. 34.6. On a look at list of employees, it is seen that persons seconded are concerned with managerial functions as they held positions in assessee like Director, Asst.Director F&A, Manager Markets, Director ISDC, Director ICP, Asst.Director CSP. This, therefore, appears to be a case where some employees qualified in processes and procedures of overseas entity are lent to assessee, a subsidiary, to perform managerial/technical functions envisaged for it. What is paid by assessee to overseas entity in view of this lending of service of certain employees, would spell in the realm of compensation paid for managerial/technical services.

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT 34.7. Obligation to pay salary to an employee is different from obligation undertaken to compensate their employer by tendering amount equal to what is paid by former employer to seconded employees. In absence of any obligation on assessee to pay salary of seconded employees, such contention cannot be accepted. It is under this context that DRP placed reliance upon following paragraph from decision of Hon’ble supreme Court in case DDIT vs Morgan Stanley, reported in (2007) 162 Taxmann 165: "As regards the question of deputation, we are of the view that 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 MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the U.N. 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 entails 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."

34.8. In our considered opinion, it is for this reason, DRP concluded that “attachment of the secondees was not fleeting as concluded by the Hon'ble High Court in Centrica and that on facts it is established that employees seconded, continued to retain their lien with their parent organization who continued to pay them for the period of their secondmeant on terms where they transferred and made available their technical knowledge, and the 27

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT reimbursement of salaries of seconded employees was thus in the nature of FTS.” 35. It is observed that documents filed by assessee do not throw any light on these questions. In our considered opinion, inference that could be drawn from documents filed by assessee does not distinguish present case from Centrica offshore India (P.) Ltd. case (supra) and documents produced by assessee are no substitute for Secondment Agreement and fails assessee in discharge of its burden of proof. It would be relevant to go through secondment agreement before coming to a conclusion. 35.1. Neither before DRP nor before us assessee filed Secondment Agreement. Assessee is therefore directed to file Secondment Agreement before Ld.AO and Ld.AO is then directed to verify the same. In the event assessee is not able to demonstrate through the Secondment Agreement that the payment made to A.E. is in nature of reimbursement of salary paid by A.E. to seconded employees in India, Ld.AO shall consider the issue as per law. We are therefore remitting the issue back to file of ld.AO to verify nature of reimbursement as per law. 36. Accordingly these Ground Nos. 1 to 1.9 raised by assessee stand allowed for statistical purposes. 37. Ground No. 2 is in respect of TDS credit not being granted to assessee amounting to Rs.5,36,848/-. Ld.AO is directed to look into the same and considerate as per law. 37.1. Accordingly this ground raised by assessee stands allowed for statistical purpose.

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT 38. Ground No. 3 is consequential in nature. Ground No. 4 is premature at this stage and accordingly do not require any adjudication. 40. In the result appeal for A.Y. 2012-13 stands allowed for statistical purposes. 41. Assessment Year 2013-14 Ground No. 1 and 2 are general in nature, therefore, do not require adjudication. 42. Ground nos. 3 to 6: These grounds relate to whether AMP is an International transaction or not and whether TPO had jurisdiction to re-characterise it as international transaction. 43. Both parties submit that this issue is covered by ground nos. 3 to 8 for A.Y. 2012-13 and needs to be set aside to ld.AO. 44. Both parties refers to and rely upon submissions advanced while arguing ground nos. 3-8 of Appeal for A.Y. 2012-13. 45. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254.

45.1. It is further observed that, from Assessment Year 2006-07, 2007-08, 2008-09 and 2009-10 this Tribunal consistently restored these issues back to Ld.AO/TPO for determination of ALP of AMP expenses afresh, in light of agreements entered into by assessee with its AE for purchase and resale of Cannon products in India. Respectfully following the same we also set aside this issue back to Ld.TPO for determining ALP of AMP expenses. AO/TPO shall call for all agreements entered into by assessee with its AE for purchase and resale of Cannon products

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT in India. Needless to say that assessee will be allowed reasonable opportunity of hearing during proceedings and Ld.AO/TPO shall call for all necessary evidences/documents which shall be produced by assessee to substantiate its claim. Ld.AO/TPO shall determine the issue by applying law in force. 46. Accordingly, these grounds raised by assessee are allowed for statistical purposes. 47. Ground No.7 to 8.2 have been raised against bench marking the alleged international transactions of AMP, by using PSM instead of allowing set-off or following aggregated approach. 47.1. Both parties submits that these issues are covered by ground no.9 to 12 for A.Y. 2012-13 which needs to be set aside for re-consideration. 47.2. Both parties refers to and relies upon submissions advanced while arguing ground no.9 to 12 in appeal for A.Y. 2012-13. 48. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254. 48.1. As we have already set aside issue relating to nature of AMP expenditure to Ld.AO/TPO, applicability of most appropriate method relating to same head of transaction also deserves to be set-aside. It is also observed that, this is the consistent view taken by this Tribunal in case of assessee for preceding Assessment Years, copies of orders are placed before us. 48.2. Respectfully following same, we also set aside this issue back to Ld. AO/TPO. 48.3. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 30

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT 49. Ground nos. 9 and 10: These grounds have been raised for excluding selling and distribution expenditure and subsidy. 49.1. Both parties submit that these issues are covered by ground no. 12.1 and 13 for AY 2012-13. Both parties refer to and relies on the submissions advanced while arguing ground no.12.1 and 13 in appeal for A.Y. 2012-13. 50. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254. 50.1. Admittedly this Tribunal in orders for preceding Assessment Years directed Ld.TPO to exclude sales related expenditure/subsidies received by assessee. Insofar as business promotion expenses are concerned, Ld.TPO shall consider same after perusal of relevant agreements entered into by assessee with its AE and to decide this issue as per law. 50.2. Accordingly we set aside this issue back to Ld.TPO for reconsideration as per law. 51. Ld.Counsel submitted that ground no.11, 12, 13 are consequential in nature and do not require adjudication. 52. In the result appeal for A.Y. 2013-14 stands allowed as indicated above. Order pronounced in the open court on 11th February, 2019.

Sd/- Sd/-

(R.K.PANDA) (BEENA A PILLAI) Accountant Member Judicial Member

Dated: 11th February, 2019.

 GMV 31

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT

Copy of the Order forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard File

By Order

Asst. Registrar ITAT, Delhi Benches, New Delhi

ITA 1672/Del/2017 AY 2012-13 ITA 6742/Del/17 AY 2013-14 Canon India P.Ltd. vs. ACIT

Date Draft dictated on 29.01.2019, 05.02.2019 06.02.19 Draft placed before author 29.01.2019 05.02.2019 08.02.19 Draft proposed & placed before the second member Draft discussed/approved by Second Member. Approved Draft comes to the Sr.PS/PS Kept for pronouncement on 11.02.19 & Order uploaded on : File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.