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Income Tax Appellate Tribunal, HYDERABAD BENCHES “A”, HYDERABAD
Before: SHRI MANJUNATHA G. & SHRI PRAKASH CHAND YADAV
सुिवधई की तधरीख/Date of hearing: 09/09/2024 घोर्णध की तधरीख/Pronouncement on: 25/09/2024 आदेश / ORDER PER PRAKASH CHAND YADAV, J.M:
Present appeal of the assessee is arising out of order of the learned Assessing Officer dated 18.11.2019 and relates to Assessment Year 2015- 16. The facts leading to the filing of the present appeal are as under:
The assessee, Company has filed it’s return of income for the impugned year on 23.11.2015, declaring current year loss of Rs.1,69,97,48,675/-. Thereafter the case of the assessee was selected for complete scrutiny through CASS. Accordingly statutory notices under section 142(1) and 143(2) were issued to assessee.
During the course of assessment proceedings, the Assessing Officer ( AO) observed that the assessee company entered into international transactions of Rs.17,43,44,386/- and specified domestic transactions of Rs.8,59,38,647/- with associate enterprises(AE) during the year and accordingly with the prior approval of Pr.CIT-2, Hyderabad, reference was made to Transfer Pricing Officer for determining the ‘Arm’s Length Price’. The Transfer Pricing Officer (TPO) passed an order u/s 92CA(3) of the Act, dated 30.10.2018.
Ld TPO interalia proposed an adjustment of Rs.98,99,600/- on the international transactions entered into by the assessee with the associated enterprises. Which adjustments were incorporated by the AO in draft assessment order.
Aggrieved with the draft order assessee filed its objection before the Dispute Resolution panel(DRP). The Ld DRP vide its order dated 30.09.2019 dismissed the objections of the assessee and directed the AO to complete the assessment.
Aggrieved with the order of the Assessing Officer the assessee filed the present appeal and has raised as many as twelve grounds of appeal. However, at the time of hearing, the learned counsel for the assessee has only argued Ground No.1 to 3 and Ground Nos. 7,8 and 9.
7. With respect to Ground No.1, the learned counsel for the assessee has mainly contended that during the course of transfer pricing proceedings the Ld. TPO has not made any adjustment qua ground No.2-3. It is submitted by him that the Ld. DRP while hearing the objections of the assessee has observed that the assessee has paid an amount of Rs.5,26,73,215/- to the secondment employees of the parent companies. The learned DRP further observed that these payments have been made without deducting TDS as per the provisions of section 195 of the Act. Accordingly, the learned DRP has issued a show cause notice, asking for the explanation of the assessee as to why these payments would not attract the provisions of section 40(a)(i) in as much as the assessee has not deducted the TDS in terms of provisions of section 195. In response to the show cause notice, the assessee replied that the assessee has made the payments to the employees in the capacity of employer and employee relationship and not in the capacity of professionals / technicians providing any technical assistance or know-how to the assessee company. The Ld. DRP after perusing the contract of agreement between Assessee and Toshiba Japan vis-à-vis placement of employees in India, formed a view that there was no employer employee relationship between the assessee and secondment employees and the amount which has been paid was in the nature of Fee for Technical Services (FTS) and hence the assessee ought to have deducted the TDS u/s 195 of the Act.
8. Learned counsel for the assessee argued that in order to substantiate the claim of the assessee before the DRP, the assessee has filed the following documents : a) A copy of the secondment agreement dated 01.04.2014 b) A copy of the Assignment letter to Mr. Isac HIOKI with Form 16 c) A copy of the Assignment letter to Dr. Katsu moshi Toda with Form 16 9. Learned counsel for the assessee at the outset brought the attention of the Bench towards the agreement entered into with secondment employees( annexed at Page Number- 187-198 of the Paper Book), as well as the appointment letters issued by the assessee company to the secondment employees and contended that there was an employer employee relationship between the assessee and the secondment employees and hence the observations of the DRP that these employees have not worked in the capacity of employee rather executed their services in the capacity of technical assistants is factually incorrect. Ld. Counsel for the assessee has also contended that the assessee has also filed an application for additional evidence on 24-09-2021 along with complete set of documents related to employees and prayed that the matter may be restored to the file of AO/ DRP for fresh examination. Alternatively, the learned counsel for the assessee argued that the fact of the matter is that the assessee has deducted TDS vis-à-vis salaries paid to these employees in terms of provisions of section 192 of the Act at higher rate than the rates prescribed under section 195 of the Act and hence there is no loss to revenue.
The learned DR relied upon the orders of the DRP and the learned Assessing Officer.
The second issue which the assessee agitated before us is regarding disallowance of Rs.98.99 lakhs incurred by the assessee towards technology licensing fees. Learned counsel for the assessee pointed out that the assessee has incurred this expenditure on account of royalty paid to it’s parent company for exploiting the technology license granted by the parent company to the assessee. However, the TPO has disallowed this expense on the ground that the assessee failed to establish the benefits derived by the assessee by incurring these expenses. Before the learned DRP, the assessee has filed certain additional evidences as mentioned hereunder: ▪ Memorandum about the provision of technical documents to (TTDI) ▪ Memorandum about provision of end-user license of technical calculation software license to (TTDI) ▪ Email communication pertaining to training of employees in Japan ▪ Photographs of employees ▪ Invitation letters and visa applications of Toshiba India’s employees for travelling to Japan to participate in technical meetings ▪ Sample email correspondence between Toshiba India and Toshiba Japan in Japanese language with English translation.
Additional evidences filed by assessee were forwarded to the TPO for his comments by the learned DRP and then the learned DRP has decided the issue against the assessee observing as under :
2.1.5. Having considered the submissions, we note, at the outset the assessee has not given any basis for the lumpsum payment paid towards royalty and the benefit derived on such lumpsum payment. It was not even clarified whether the technology said to be transferred was patented and details thereof. In regard to determination of ALP of lumpsum payment towards royalty, the following crucial factors are relevant : the cost incurred by the AE in developing the technology, the usage of the technology by the various entities, the revenue impact from such technology etc. But none of these factors were placed before us. We also note that the assessee failed to prove the benefit derived on such lumpsum payment. The additional evidence filed do not prove these. There is no information supplied to show that the training conducted was in relation to these technology transfers, as there is another transaction for payment towards training. The assessee’s attempt to justify the payment with reference to the future sale is untenable for two reasons – (i) The TPO is questioning the lumpsum payment when no benefit is derived. This cannot be answered with reference to future sales, as this payment is not at all linked to the sales (ii) The payment to be made under the Agreement is lumpsum payment of 4,60,60,000 JPY and 90,000 JPY of which only a small portion was paid during the year. Such part payment cannot be justified with future sales. As the assessee has not satisfied the benefit, test, for the lumpsum payment, we approve the TPO’s approach and the proposed adjustment.
Before us, the learned counsel for the assessee has reiterated the submissions made before the lower authorities and contended that the TPO has failed to conclusively prove that the assessee has received and utilized the technology developed and owned by the parent company. During hearing, the Bench has raised a query for the counsel of the assessee that is whether the technology was patented, whether the assessee has provided details before the lower authorities about the expenses incurred in developing the so-called technology and getting it patented by the concerned authorities. However, the learned counsel for the assessee requested that the matter be restored to the file of the Assessing Officer for examining afresh.
The learned DR relied upon the orders of the lower authorities below.
We have heard the rival submissions and perused the orders of authorities below, we observe that the first issue which require adjudication is that as to whether the assessee has made payments in the nature of FTS or salaries to the secondment employees. The assessee in order to prove his case has filed the appointment letters issued to the secondment employees. Perusal of these letters issued by the assessee company to the secondment employees, (paper book pages 205 to 206, 207, 208 and pages 340 to 344), would show that the designation given to these employees have been verified as Director, Chief Adm. Officer, General Manager of Switchgear production division, etc. However, only on the basis of mere designation it cannot be assumed that the payments made to them were in the nature of FTS. The assessee has also filed Form 16A to establish that the assessee had duly deducted TDS on the amount credited to the employees accounts. The assessee has also drawn the attention of the bench towards the agreement entered into between the assessee and the parent company to contend that the perusal of these settlement agreements would show the following things: (a) The employees were under direct control of the assessee (b) Their appraisal was in the hands of the assessee (c) That the salary amount was paid by the parent company because of administrative convenience. But the fact is that the actual salaries were paid by the assessee including other benefits. We find force in the arguments of the learned counsel for the assessee. However, when we go through the agreement then we find that there are certain other clauses like clause No.3.8 which says that tools, equipment, infrastructure and other information necessary for the international assignees (secondment employees) to carry out their duty would be provided by the assessee. Similarly, clause 11 would show that the assessee has also agreed to indemnify the parent company with respect to all claims remedies arising out of the Acts of international assignees (secondment employees). Similarly other clauses of the agreement would show that the international assignees would have lien to their jobs in the parent company after the termination of the secondment employment agreement. All these clauses are required to be investigated by the AO to find out the true nature of the payments made to the secondment employee. Therefore, in the interest of justice, we remit the entire issue to the file of Assessing Officer for denovo examination considering additional evidences filed by the assessee before us. We also direct the AO to consider the alternative plea of the assessee.
Coming to the next issue i.e. the disallowance of technology fees paid by the assessee to the parent company is concerned, we observe that the DRP/A. O have disallowed these payments on two counts – i) The assessee could not be able to establish with cogent material that the AE had actually rendered services to the assessee. ii) The assessee has also failed to derive any benefits from these payments. So far as the benefits factor is concerned, the courts have time and again held that the TPO/DRP/A.O cannot disallow the genuine expenses on the ground that no benefits have been received by an assessee. A reference can be made to the judgment of Hon’ble Delhi High Court in the case of Ekal Application 345 ITR 241(Del). So far as rendering of services from the parent company to the assessee is concerned, the assessee has simply filed some e-mail correspondence between the parent company and the assessee. In our view these e-mail correspondences are not enough to hold that the parent company had rendered technical services/assistance to the assessee. It is pertinent to observe that before us, the assessee has also filed an application dated 24.09.2021 praying to admit certain evidences to establish the receipt of services from the parent company. Considering the totality of the facts and circumstances of the case, we remit this issue also to the file of A.O./TPO for deciding afresh in accordance with law after considering all the evidences filed before us.
In the result, appeal of the assessee is allowed for statistical purpose.
Order pronounced in the open court on this the 25th day of September, 2024.