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Income Tax Appellate Tribunal, “K” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
IN THE INCOME TAX APPELLATE TRIBUNAL “K” BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER
ITA no.6708/Mum./2011 (Assessment Year : 2007–08)
ExxonMobil Company India Pvt. Ltd. Kalpataru Point, Plot no.107 ……………. Appellant Road no.8, Sion (East) Mumbai 400 022 – AACE3157H v/s Addl. Commissioner of Income Tax ……………. Respondent Range–3(1), Mumbai
Assessee by : Shri Girish Dave a/w Ms. Kadambari Dave Revenue by : Shri Saurabh Deshpande a/w Shri Jayant Kumar
Date of Hearing – 06.12.2017 Date of Order – 21.02.2018
O R D E R PER SAKTIJIT DEY, J.M.
Captioned appeal by the assessee is against the order passed under section 143(3) r/w section 144C(13) of the Income-tax Act, 1961 (for short "the Act") for the assessment year 2007–08, in pursuance to the directions of the Dispute Resolution Panel (DRP).
In ground no.2 with its sub–grounds, the assessee has raised number of issues relating to transfer pricing adjustment made by the
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Transfer Pricing Officer and sustained by the DRP. However, at the time of hearing, learned counsel for the assessee, Shri Girish Dave, has restricted his argument to the following issues:–
(i) Rejection of comparables under technical services segment; (ii) Selection / rejection of comparables in back office support service segment; and (iii) Benefit of working capital and risk adjustment.
Brief facts are, the assessee an Indian company is a subsidiary of ExxonMobil Corporation Group of USA. The assessee is basically involved in providing services of information dissemination, maintaining customer relationship and market development to its overseas Associated Enterprise (A.E) ExxonMobil Chemical Co., USA. It also provides application research and technical services as well as back office support services to its A.E. Though, as per the transfer pricing order, the assessee has entered into various international transactions with its A.E., however, in the present appeal, we are concerned with the international transaction relating to provisions of technical services and back office support services. As far as the provision of technical services to A.E. is concerned, the assessee bench marked such transaction by applying Transaction Net Margin Method (TNMM) as the most appropriate method. In the search process conducted by the assessee, ten companies stated to be functionally
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similar to the assessee were selected as comparable. However, the Transfer Pricing Officer rejected three of the comparables selected by the assessee viz. Pfizer Ltd., ADS Digenetic Ltd., Neeman Medical International (Asia). As a result of which the arithmetic mean of the remaining seven comparables finally retained by the Transfer Pricing Officer worked out to 23.11% as against the margin declared by the assessee of 5.61%. Therefore, an adjustment of ` 67,98,818, was made to the arm's length price declared by the assessee. Insofar as the back office support office segment is concerned, the assessee for bench marking the arm's length price of the internal transaction with its A.E. selected TNMM as the most appropriate method. By undertaking a search process in the data base assessee selected 12 companies as comparables having average arithmetic mean of 12.40%. Since, the margin shown by the assessee at 15.32% was more than the average margin of the comparables, the assessee considered the transaction with the A.E. to be at arm's length. The Transfer Pricing Officer, however, did not accept the comparables selected by the assessee. Eventually, the Transfer Pricing Officer conducted a fresh search and selected 25 companies as comparables which included three comparables selected by the assessee as well. The average margin of 25 comparables selected by the assessee worked out to 30.75% as against the margin of 15.32% shown by the
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assessee. As a result, of the difference in margin of comparables and assessee a transfer pricing adjustment of ` 72,96,346 was made to the arm's length price of the back office support service segment. Of– course, while computing the transfer pricing adjustment the Transfer Pricing Officer did not allow any working capital and risk adjustment. On the basis of transfer pricing adjustment made by the Transfer Pricing Officer the Assessing Officer framed the draft assessment order which was objected to by the assessee before the DRP. As far as the technical service segment is concerned, the DRP upheld the adjustment made by the Transfer Pricing Officer. Similarly, in case of back office support segment also, the DRP upheld the adjustment made by the Transfer Pricing Officer and accordingly, directed the A.O. to complete the assessment.
We have heard rival contentions and perused material on record. Hereinafter, we will deal with contentions raised by the parties and record our finding in respect of each comparable disputed before us. As discussed earlier, as far as technical service segment is concerned, assessee has challenged rejection of three comparables which are as under:–
PFIZER LIMITED
Learned Authorised Representative submitted, this company is functionally similar to assessee, hence, should not have been rejected
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as a comparable. He submitted, in assessee’s own case for assessment year 2006–07, the DRP has accepted this company as comparable. He submitted, even the Transfer Pricing Officer in assessee’s own case for assessment year 2009–10 and 2010–11, has accepted this company as a comparable. He submitted, there being no difference in fact there is no reason why it should be rejected as comparable in the impugned assessment year. In this context, he drew our attention to DRP’s order for the assessment year 2006–07 as placed in the paper book. The learned Departmental Representative drawing our attention to the annual report of the company submitted that none of the segments can compare to the technical service segment of the assessee which is basically in the nature of ITES (Information Technology Enabled Services). Drawing our attention to the financial statement of the company, he submitted, it has huge unallocated expenditure for which reason the Transfer Pricing Officer has excluded the company. Further, he submitted, the company has a financial year different from the assessee, therefore, cannot be considered as comparable.
Findings:– As could be seen, the Transfer Pricing Officer has rejected this company as a comparable basically for the following reasons:–
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i) The sales relating to service segment as a percentage of total sales works out to only 3.48%. Hence, the revenue earned from service segment is insignificant; ii) The unallocated expenditure of the company exceeds the revenue earned from the service segment; iii) If operating profit margin to sales ratio of the company is considered without considering unallocated expenditure, the OP/TC ratio will come against the assessee.
From a perusal of the notes to the financial statements for the relevant financial year it is noticed that the company has maintained its accounts segment–wise and the Revenue earned from service segment has been separately shown. Therefore, it cannot be said that it is not having any service segment to consider as a comparable with the assessee. Moreover, as noted by us, the DRP in assessee’s own case for immediately preceding assessment year 2006–07 has accepted this company as a comparable after verifying annual accounts. Further, the Transfer Pricing Officer himself in assessee’s own case for Assessment Year 2009–10 and 2010–11 has accepted this company as a comparable. In fact, in assessee’s own case for assessment year 2005–06, the Tribunal in ITA no.8798/Mum./2011, dated 27.10.2017, has accepted this company as comparable.
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Therefore, even applying the rule of consistency, this company should be considered as a comparable to the assessee. ADS DIAGNOSTIC LTD.
The learned Authorised Representative submitted, the only reason for which this company was excluded by the Transfer Pricing Officer is, it is a consistent loss making company. Drawing our attention to the annual report of this company, the learned Authorised Representative submitted that in the impugned assessment year company has shown profit, hence, on a factually incorrect finding that the company is a consistent loss making company the Departmental Authorities have rejected this company.
Learned Departmental Representative submitted, though, the company has shown profit in the impugned assessment year, however, such profit is very low. He further submitted, the reason for loss in the preceding years and low profit in the impugned assessment year requires to be examined. Further, he submitted, the company is also not functionally similar to the assessee as it is basically a diagnostic service provider whereas the assessee is providing technical service. Therefore, he justified exclusion of this company.
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We have heard rival contentions and perused material on record. No doubt, the Transfer Pricing Officer has rejected this company purely on the reasoning that it is a loss making company and the DRP has also approved it. It is also a fact that in assessment year 2006–07, the company did report a loss of ` 14.32 lakh, however, from the financial statements of the company submitted in the paper book it is evident that in the impugned assessment year the company has shown marginal profit of ` 23738=68. Therefore, to that extent, the finding of the Transfer Pricing Officer that it is a consistent loss making company is factually incorrect. Having said that, it is required to be examined whether this company can still be considered as a comparable to the assessee. As seen from the materials before us, the comparability of the aforesaid company with the assessee also arose in assessment year 2006–07. The Tribunal while examining the issue in ITA no.8311/ Mum./2010, dated 10th June 2011, has held that the enterprise level profits were taken for comparing and the actual margin of service segment was not identified. Further, the Tribunal held that the main income of the company is from scanning, hence, its functions are not akin to the functions of the assessee. The Tribunal also observed, being diagnostic lab the asset base and the machinery required by the company is different from requirement of the assessee. In view of the aforesaid observations of the Tribunal in assessee’s own case for the
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assessment year 2006–07 as referred to above, we are not in favour of including this company as a comparable. Finding of the Transfer Pricing Officer / DRP on this issue is, therefore, confirmed. However, we direct the Assessing Officer to rectify the error, if any, in computing the margin of this company.
NEEMAN MEDICAL INTERNATIONAL AISA
Learned Authorised Representative submitted, the Transfer Pricing Officer has excluded this company only for the reason that it is a consistent loss making company and has not looked into any other aspects. He submitted, only because a company has suffered loss would not make it un–comparable to the assessee. However, he fairly submitted that the Tribunal in assessee’s own case for assessment year 2006–07, upheld the rejection of this company.
Learned Departmental Representative supported the findings of the Transfer Pricing Officer and the DRP.
We have heard rival contentions and perused the material available on record. The facts on record reveal that this company has incurred loss year after year including the impugned assessment year. Therefore, there is no doubt that it is a consistent loss making company. In fact, for this very reason, the Tribunal in assessee’s own
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case for assessment year 2006–07 in ITA no.8311/Mum./2010 dated 10th June 2011, has upheld rejection of this company. That being the case, we do not find any reason to interfere with the decision of the Departmental Authorities on this issue.
As far as the back office support service segment is concerned, the selection of the following comparables have been disputed before us.
HCL COMNET SYSTEMS & SERVICES LTD. APEX KNOWLEDGE SOLUTIONS PVT. LTD.
Seeking exclusion of these two companies, the learned Authorised Representative submitted that both these companies are having Related Party Transaction (RPT) exceeding the threshold limit of more than 15%. Therefore, he submitted that these companies should be excluded.
Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP.
We have heard rival contentions and perused the material available on record. As per assessee’s own submissions, the related party transaction in case of HCL Comnet Systems & Services Ltd. is 22.37%. In many of the orders including the orders where the Judicial
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Member is a party, threshold limit of related party transaction has been accepted at more than 25%. That being the case, we are of the view that HCL Comnet Systems & Services Ltd. cannot be excluded on account of high related party transaction. However, as far as Apex Knowledge Solutions Pvt. Ltd. is concerned, the learned Authorised Representative submitted that the related party transaction in case of this company is 104.38%. It is observed, in the search process adopted by the Transfer Pricing Officer to select comparables one of the criterion is to exclude companies who have more than 25% related party transaction. Therefore, if the related party transaction of Apex Knowledge Solutions Pvt. Ltd. is more than the RPT filter applied by the Transfer Pricing Officer, it cannot be treated as comparable to the assessee. Therefore, we direct the Assessing Officer to examine this fact and decide accordingly.
INFORMED TECHNOLOGIES INDIA LTD. e–CLERX SERVICES LTD. MOULDTEK TECHNOLOGIES LTD. (SEG)
Learned Authorised Representative submitted, Informed Technologies India Ltd. is not comparable to the assessee as it is providing knowledge process outsourcing (KPO) services whereas the assessee is providing Business Process Outsourcing (BPO). To buttress his aforesaid argument, the learned Authorised Representative drew
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our attention to the annual report of Informed Technologies India Ltd. at Page–452 of the paper book. Referring to the directors report, he submitted that this company is providing knowledge based services, therefore, it cannot be treated with the back office support service provided by the assessee.
As far as this company is concerned, as per the order of the Transfer Pricing Officer it appears that the assessee objected to the inclusion of the aforesaid company on the ground that its related party transaction is higher than the threshold limit of 15%. It is not forthcoming from the order of the Transfer Pricing Officer whether at the stage of transfer pricing proceedings, the assessee has objected to selection of the aforesaid company as comparable on the ground that it is a KPO service provider. Even if such an objection has been raised by the assessee it has not been considered either by the Transfer Pricing Officer or by the DRP. Therefore, we direct the Assessing Officer to examine whether this company is a KPO service provider and if it is found so the company should be excluded from the list of comparables.
As far as ., e–Clerx Services Ltd. is concerned, in the course of transfer pricing proceedings, the assessee did object to inclusion of this company on the ground that it is a KPO service provider. However,
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the Transfer Pricing Officer without properly considering the objection of the assessee has selected this company which has been upheld by the DRP without proper application of mind. It is relevant to observe in a number of decisions of different Benches of this Tribunal, it has been held that e–Clerx Services Ltd. being a KPO service provider is not comparable to BPO service provider. In this context, we may refer to following decisions of the Tribunal, Hyderabad Bench:–
i) Capital IQ Information Systems India Pvt. Ltd. v/s DCIT, [2013] 32 taxmann.com 21; and ii) HSBC Electronic Data Processing India Pvt. Ltd. v/s ACIT, [2014] 52 taxmann.com 136.
In fact, in case of Rampgreen Solution Pvt. Ltd., 377 ITR 533, the Hon'ble Delhi High Court referring to the decision of the Tribunal, Hyderabad Bench, in case of Capital IQ Information Systems Pvt. Ltd. (supra), has held that e–Clerx Services Ltd. being a KPO service provider cannot be compared to BPO service provider. In view of the aforesaid, we direct the Assessing Officer to exclude e–Clerx Services Ltd. from the list of comparables.
As far as Mouldtek Technologies Ltd. (SEG) is concerned, it is observed in the course of transfer pricing proceedings, the assessee has objected to inclusion of this company by specifically stating that it is engaged in providing KPO services in the field of engineering
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services involving structural engineering drawing using 3D/2D software. Further, in the relevant previous year, it has issued initial publication offering. Further, as per the annual report of this company, the I.T. Division has been specifically mentioned as KPO division. Further, in the relevant previous year, the company has acquired an overseas KPO company which is evident from the annual report of the company. The aforesaid factors have been totally ignored by the Transfer Pricing Officer and the DRP while selecting / retaining the aforesaid company which, in our view, is not correct. In fact, while considering the comparability of the aforesaid company in case of Capital IQ Information Systems India Pvt. ltd. and HSBC Electronic Data Processing India Pvt. Ltd. (supra) for the very same assessment year, the Tribunal has held that this company cannot be considered as comparable to a BPO service provider as it is a KPO company. In view of the aforesaid, we direct the Assessing Officer to exclude this company from the list of comparables.
BODHTREE CONSULTING LTD. (SEG)
Learned Authorised Representative objecting to the inclusion of the aforesaid information submitted that the company is involved in software development, hence, not comparable to the assessee. Drawing our attention to the annual report of the company at Page–
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481 of the paper book, he submitted that the company has only one segment i.e., software development segment, whereas, the assessee is providing back office support service. He, therefore, sought exclusion of the aforesaid company from the list of comparables.
Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP.
As could be seen from the observations of the Transfer Pricing Officer in his order, the assessee sought exclusion of this company on the ground of extra ordinary profit. However, before us, the learned Counsel for the assessee submitted that the company is functionally different from the assessee as it is engaged in software development. Further, on a perusal of the director’s report forming part of the annual report of this company, a copy of which is at Page–481 of the paper book, it is stated that the company has only one segment which is software development. Considering the aforesaid factor, the Tribunal, Hyderabad Bench, in case of HSBC Electronic Data Processing India Pvt. Ltd. (supra), directed the Assessing Officer to examine this aspect. In view of the aforesaid, we direct the Assessing Officer to examine the functionality of this company and exclude the same if it is found that the company is engaged in the software development.
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ASIT C. MEHTA FINANCIAL SERVICE LTD.
Learned Counsel for the assessee objected to selection of this company as a comparable on the ground that the company lacks segmental details. Further, he submitted that the company has a low employee cost of 24.78%, hence, cannot be comparable to the assessee.
Learned Departmental Representative relied upon the findings of the Transfer Pricing Officer and the DRP.
We have heard rival contentions and perused the material available on record. As could be seen in the course of transfer pricing proceedings, in response to the show cause notice issued by the Transfer Pricing Officer the assessee has accepted this company as a comparable. Further, it appears before the DRP also, the assessee has not specifically objected to the exclusion of this company. Thus, it is evident, the Departmental Authorities never had any occasion to examine the contention now raised before us by the assessee. That being the case, we are inclined to restore the issue relating to the comparability of this company to the Assessing Officer / Transfer Pricing Officer for fresh adjudication.
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ICRA TECHNICAL ANALYSIS
Objecting to the selection of this company, learned Counsel for the assessee submitted that the company is also in the field of software development and the segmental details relating to software development segment and service segment are not available. Therefore, due to lack of relevant information / data, it cannot be considered as a comparable.
Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP.
We have heard rival contentions and perused the material available on record. As per the annual report of this company, a copy of which is at Page–446 of the paper book it appears that the company has two reportable segments viz., software development segment and sales and service segment. However, the financial statement of the company are in consolidated form and do not reveal segment–wise data. We, therefore, direct the Assessing Officer to examine this aspect and exclude this company as a comparable if relevant segmental data relating to both the segments are not available.
VISHAL INFORMATION TECHNOLOGIES LTD.
Objecting to the inclusion of this company, the learned Counsel for the assessee submitted that the company cannot be considered as
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a comparable to the assessee since it is functionally different as it out sources major part of work relating to service segment to third parties which is evident form its low employee cost as reflected in the annual report for the relevant assessment year a copy of which is at Page– 471 of the paper book.
Learned Departmental Representative relied upon the findings of the Transfer Pricing Officer and the DRP.
We have heard rival contentions and perused the material available on record. As far as comparability of this company is concerned, the issue is now fairly well settled that it cannot be considered as a comparable because of its functional difference. It is evident from facts on record that this company does not carry out the activity relating to service segment itself but out sources the entire work to third parties. This is evident from low employee cost of the company. Considering the aforesaid aspect different Benches of the Tribunal have unanimously held that the company cannot be considered as a comparable. In this context, we may refer to the decision of the Tribunal, Hyderabad Bench, in Capital IQ Information System Pvt. Ltd. and HSBC Electronic Data Processing Pvt. Ltd. (supra). In fact, taking note of the aforesaid factual position, the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra),
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has held that this company cannot be considered as a comparable. In view of the aforesaid, we direct the Assessing Officer to exclude this company as a comparable. 34. It is relevant to note in the course of hearing, learned Authorised Representative contended before us that the Transfer Pricing Officer has wrongly computed the margin of the comparable companies under both the segments. In this context, he drew our attention to the working of the correct margin as submitted in two separate charts. We direct the Assessing Officer to examine the aforesaid aspect and compute the arm's length price under both the segments by correctly computing the margin of the comparables.
One more contention of the assessee before us relates to working capital adjustment and risk adjustment.
Learned Authorised Representative submitted before us that in its transfer pricing study assessee has provided for working capital adjustment and risk adjustment on a reasonable and scientific basis which was not properly considered either by the Transfer Pricing Officer or by the DRP. After considering the submissions of the parties, we direct the Assessing Officer to consider assessee’s claim with regard to working capital adjustment & risk adjustment and decide the
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same after providing due opportunity of being heard. These grounds are partly allowed.
In ground no.3, the assessee has challenged the disallowance of entertainment expenditure of ` 3,44,138.
Brief facts are, while framing the draft assessment, the Assessing Officer noticed that the assessee has debited an amount of ` 13,76,552 on account of entertainment expenses. After calling for the necessary details, he found that most of these expenses are in the nature of payment made to various hotels towards lunch and dinner of various persons. Alleging that the assessee failed to provide specific reason / purpose for which such expenditure was incurred the Assessing Officer disallowed 25% out of such expenses on ad–hoc basis which worked out to ` 3,44,138.
The DRP also sustained the disallowance taking note of the fact that in assessment year 2006–07, similar disallowance was upheld by them.
Learned Counsel for the assessee submitted, only because the assessee did not contest the disallowance in assessment year 2006– 07, it has to be made in the impugned assessment year as well. He submitted, in the course of assessment proceedings, the assessee has
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submitted all necessary details of the expenditure incurred including the date of expenditure, bill number, places where the expenditure is incurred, nature of expenditure and business purpose, number of persons present and amount of entertainment expenses. In this context, the learned Counsel for the assessee drew our attention to the submissions made before the Assessing Officer along with the necessary supporting evidence. He submitted, without properly examining the evidence brought on record, the Assessing Officer should not have made disallowance on ad–hoc basis.
Learned Departmental Representative relied upon the findings of the Assessing Officer and the DRP.
We have heard rival contentions and perused the material available on record. As could be seen, the Assessing Officer disallowed 25% of the expenditure claimed on ad–hoc basis alleging that the assessee failed to explain the purpose for which such expenditure was incurred. It is also evident that the disallowance was made taking note of the fact that similar disallowance was also made in the assessment year 2006–07. In our view, only because the disallowance of similar nature was made in assessment year 2006–07 either for lack of evidence or some other reasons and the assessee accepted it, disallowance cannot be made in subsequent assessment years. If the
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assessee through proper documentary evidence is able to prove the genuineness of the expenses, there is no reason to disallow the same. In the facts of the present case, it appears that in the course of assessment proceedings, the assessee did produce sufficient documentary evidences to prove the genuineness of the expenses. However, without properly examining the evidence brought on record, the Assessing Officer has disallowed part of expenditure that too on ad–hoc basis. DRP has also simply relying upon the fact that similar disallowance was made in assessment year 2006–07 has upheld the disallowance. There being no basis for disallowance of part of the expenses, we delete the disallowance made by the Assessing Officer. This ground is allowed.
In ground no.4.1 to 4.4, the assessee has challenged disallowance of ` 1,25,60,485 under section 40(a)(i) of the Act.
Brief facts are, during the assessment proceedings, the Assessing Officer noticed that in the relevant previous year, the assessee had paid an amount of ` 1,93,17,325 to M/s. ExxonMobil Chemical Asia Pacific Pte. Ltd., Singapore, (for short “EMCAP”) towards global support service fees. Further, he found that out of the aforesaid amount, the assessee has deducted tax on an amount of ` 67,56,840, while not doing so in respect of ` 1,25,60,485. He, therefore, called
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upon the assessee to explain the reason for not withholding tax on part of the payment made to EMCAP. In response, it was submitted by the assessee that EMCAP is a non–resident and does not have a P.E. in India. Services were rendered outside India, hence, the payment made cannot be considered as income deemed to accrue or arising in India in view of section 9(1)(i) of the Act. The assessee submitted, the payment made to EMCAP cannot be considered to be in the nature of fees for technical services (FTS) so as to bring it within the ambit of section 9(1)(vii) of the Act. Without prejudice to the aforesaid submissions, the learned Counsel for the assessee submitted that the payment made is not liable for TDS in view of the specific provisions of India Singapore tax treaty as per which fees for technical services is taxable in the hands of the recipients only in case of transfer of technology. The Assessing Officer, however, did not find merit in any of the submissions made by the assessee. He observed that the payment made by the assessee is in the nature of fees for technical services as defined in Explanation–2 to section 9(1)(vii) of the Act, as EMCAP has rendered services of highly technical nature involving in drawing and research. He further observed, since, EMCAP earned such fees by virtue of its business connection in India it is liable to be taxed in India. Therefore, the assessee was required to withhold the tax while making such payments. As far as the contention of the assessee
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that the payment made is not subject to TDS in view of specific provision of the tax treaty between India and Singapore, the Assessing Officer observed that the service rendered by EMCAP are crucial in carrying out the business activity and while rendering such service EMCAP had made available the technical skill and expertise to the assessee. Further, the Assessing Officer observed that the assessee under the provision of section 195 of the Act was duty bound to deduct tax at source while making the payment. It was not for the assessee to decide the taxability of income at the hands of EMCAP in India. Thus, the Assessing Officer disallowed the amount of ` 1,25,60,485. Being aggrieved of such disallowance, assessee raised objections before the DRP.
However, the DRP, did not find merit in the submissions of the assessee and confirmed the disallowance made by the Assessing Officer except the reimbursement of expenditure amounting to ` 6,72,753. In view of the aforesaid direction, of the DRP, the addition was made final by the Assessing Officer in the impugned assessment order.
Learned counsel for the assessee submitted that by virtue of an agreement entered with EMCAP on 1st January 2003, the assessee received certain services from the said company. Drawing our
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attention to the details of services rendered by EMCAP and nature thereof, the learned counsel for the assessee submitted that since the payment made towards Global Information System (GIS) amounting to ` 67,56,840 was in the nature of royalty as provided under section 9(1)(vi) and Article–12 of India–Singapore Tax Treaty, the assessee deducted tax at source. However, as far as payment made towards global support service amounting to ` 1,25,60,485, the assessee did not deduct tax at source, since, such payment was not in the nature of fees for technical services. Inviting the attention of Bench to the exact nature of global support service provided by EMCAP as described in schedule to the agreement, the learned counsel for the assessee submitted they are administrative service in the nature of controller, treasurers, public affairs, tax, human resources, law, safety, health and environment services, medical security, business procurement, business line, etc., which cannot be considered to be in the nature of fees for technical services as defined under Explanation–2 to section 9(1)(vii) of the Act He submitted that as per the agreement, the EMCAP has to charge on cost–to–cost basis without any mark–up. He submitted, the payment made, since, is towards reimbursement of expenditure withholding of tax was not necessary. Further, he submitted that since the assessee has made short deduction of tax and it is not a case of no deduction disallowance under section 40(a)(i) of
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the Act cannot be made. Without prejudice to the aforesaid contention, the learned counsel for the assessee submitted that as per Article– 12(4)(b) of India Singapore tax treaty fee for technical service means payment of any kind to any person in consideration for service of managerial, technical or consulting nature if such services make available technical knowledge, experience, skill, knowhow, process which enables the person acquiring the services to apply technology contained therein. Learned counsel for the assessee submitted, firstly, the support service provided by EMCAP cannot be regarded as technical services and secondly; if they are considered as managerial or consultancy services they do not make available technical knowledge, expertise, knowhow, skill or process so as to enable the person acquiring the services to apply the technology contained therein. Learned counsel for the assessee submitted that, since, the treaty provisions override the domestic law, as per the provisions of treaty payment made cannot be regarded as fees for technical service. He submitted that the Assessing Officer has failed to establish that the services availed by the assessee has enabled it to apply the technology contained therein. Learned counsel for the assessee submitted, once the payment made is not treated as fees for technical service under Article–12(4)(b) of the tax treaty it cannot be taxed at the hands of EMCAP in view of Article–7 of the tax treaty as it has no P.E. in India.
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Learned counsel for the assessee submitted, the expression “make available” would mean recipient of such service would derive an enduring benefit and utilise knowledge or knowhow on his own in future without the aid of the service provider. He submitted, if the terms of the agreement were carefully analysed it does not authorise the assessee to utilise any technology, knowledge or knowhow on his own in future without the aid of service provider. In support of his contention, learned counsel for the assessee relied upon the decision of the Hon'ble Karnataka High Court in CIT v/s De Beers India Mineral Pvt. Ltd., [2012] 21 taxmann.com 214 (Kar.). Learned counsel submitted, the agreement with EMCAP in terms of which the global support service fee was paid is continuing from the year 2003 and in the preceding assessment years, though, similar nature of payment was made to EMCAP no disallowance was made under section 40(a)(i) for non–deduction of tax. Therefore, applying rule of consistency no disallowance should be made in the impugned assessment year.
Learned Departmental Representative strongly supporting the reasoning of the Assessing Officer and the DRP submitted that the services rendered by EMCAP to assessee involves transfer of technology which is evident from the fact that training is provided to the employees of the assessee to apply such technology. Learned Departmental Representative referring to Article–5 of India Singapore
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tax treaty the assessee does have a P.E. in India since it maintains a research facility at Bangalore. In support of this contention, the learned Departmental Representative relied upon the following decisions:–
i) G.V.K. Industries Ltd. v/s ITO, [1998] 96 Taxman 179 (AP) ii) Foster Wheeler France S.A. v/s DDIT, ITA no.774/Mds./2014, order dated 05.02.2016; and iii) U.S. Technology Resources Pvt. Ltd. v/s ACIT, IT no.222/Coch./ 2013, order dated 28.09.2013.
We have heard rival contentions and perused material on record. We have also applied our mind to the decisions relied upon. It is evident, while disallowing the amount in dispute under section 40(a)(i) of the Act, the Assessing Officer has held that the payment made by the assessee to EMCAP towards Global support services is in the nature of fees for technical service as defined under Explanation–2 to section 9(1)(vii) of the Act. It is also relevant to note, under Article–12 of India Singapore tax treaty, fees for technical services, though, is taxable in the hands of the recipient in Singapore, however, it can also be taxed in India under certain circumstances. Applying the said provision, it is necessary to determine whether the payment made can at all be termed as fee for technical services as defined under Article– 12 of India Singapore Tax Treaty. In our considered opinion, we have
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to address this issue at the very outset. Article–12(4) of India Singapore tax treaty defines fee for technical services as under:–
“12.4 the term “fees for technical “services” as used in this Article means payments of any kind to any person in consideration of services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know–how or processes, which enables the person acquiring the services to apply the technology contained therein; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.”
The Assessing Officer has treated the payment made as fees for technical services on the reasoning that under the agreement EMCAP has made available managerial and technical services to the assessee. The expression “make available” which also appears in Article 12(4)(b) of the India–US tax treaty would mean the recipient of such service is able to apply or make use of the technical knowledge, knowhow, etc., by himself in his business or for his own benefit and without recourse to the service provider in future and for this purpose a transaction of the technical knowledge, experience, skills, etc., from the service provider to the service recipient is necessary. Some sort of durability
30 ExxonMobil Company India Pvt. Ltd.
or permanency of the result of the rendering of services is envisaged which will remain at the disposal of the service recipient. In other words, the technical knowledge, experience, skill, etc., must remain with the service recipient even after the rendering of the services has come to an end. In contrast to Article–12(4)(b) of the India–U.S. tax treaty, Article–12(4)(b) of India–Singapore tax treaty has made it more specific by providing that technical knowledge, experience, skill, knowhow or process, would not amount to fees for technical service unless it enables the person acquiring the service to apply the technology therein. A perusal of the agreement between the assessee and EMCAP makes it clear that as per the terms of the agreement EMCAP would provide management consulting, functional advice, administrative, technical, professional and other support services to the assessee either itself or through any affiliate or through third parties. However, there is nothing in the agreement to conclude that in the course of such provision of service, EMCAP has made available any technical knowledge experience, skill, knowhow, or process which enables the assessee to apply the technology contained therein on its own without the aid of EMCAP. The Hon'ble Karnataka High Court while explaining the true import of expression “make available” in case of De Beers India Mineral Pvt. Ltd. (supra) has observed as under:–
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“What is the meaning of "make available". The technical or consultancy service rendered should he of such a nature that it “makes available" to the recipient technical knowledge, know-how and the like. The service should he aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skill, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should he imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered "made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing inc service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available, in other words, payment of consideration would be regarded as "fees for technical/included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.”
A careful analysis of the observations of the High Court, makes it clear that “make available” not only would mean that recipient of the service is in a position to derive an enduring benefit out of utilisation of the knowledge or knowhow on his own in future without the aid of the service provider but such technical knowledge, skill, knowhow, etc., must remain with the recipient even after the contract comes to an end. The Court has observed, the technology will be considered to have been made available when the person acquiring the service
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enable him to apply the technology. Further, the Court went on to hold that the payment can be considered as fees for technical services only if the twin test of rendering service and making technical knowledge available at the same time is satisfied. If we apply the aforesaid tests laid down by the Hon'ble Karnataka High Court to the facts of the present case it becomes clear that it has not been established on record that while rendering the services, EMCAP has made available technical knowledge, knowhow, skill, etc., to the assessee in a manner to enable him to apply them independently or on its own. Therefore, the payment made by the assessee cannot be considered as fees for technical services as defined under Article 12(4)(b) of the India– Singapore tax treaty and for this reason also we do not have to examine taxability of the same under section 9(1)(vii) of the Act. Moreover, it is a fact on record that the payment of global support service fee was made under the agreement which has continued from the year 2003. It is a matter of record that in the preceding assessment years though the assessee has paid global support service fees to EMCAP without deducting tax at source, no disallowance under section 40(a)(i) was ever made. Therefore, there being no difference in facts in the impugned assessment year, considering that the payment was made under the same contract, even, applying the rule of consistency, no disallowance under section 40(a)(i) can be made in
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the impugned assessment year. Accordingly, we delete the disallowance made by the Assessing Officer. These grounds are allowed.
In the result, assessee’s appeal is partly allowed. Order pronounced in the open Court on 21.02.2018
Sd/- Sd/- SAKTIJIT DEY RAMIT KOCHAR ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 21.02.2018
Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary
(Dy./Asstt. Registrar) ITAT, Mumbai
.