Income Tax Appellate Tribunal - Mumbai
Societe Generale, Mumbai vs Dcit (It) Rg 4(2)(2), Mumbai on 19 April, 2017
आयकर अपीलीय अिधकरण, मुबं ई " के " खंडपीठ Income-Tax Appellate Tribunal -"K"Bench Mumbai सव ी राजे ,लेखा सद य एवं पवन सह, याियक सद य Before S/Shri Rajendra,Accountant Member and Pawan Singh,Judicial Member आयकर अपील सं/ ITA No.1854/Mum/2015 : िनधा रण वष /Assessment Year-2010-11 M/s. Societe Generale, Dy. Commissioner of Income Tax (IT), 1901/1902 Tower A, Range: 4(2)(2), Room No. 120, Scindia Peninsula Business Park, House, Ballard Estate, N.M. Road, Vs. Senapati Bapat Marg, Lower Parel, Mumbai- 400 038.
Mumbai - 400 013.
PAN : AABCS 7484C
(Appellant) (Respondent)
राज व क ओर से/ Revenue by: Shri Mahesh Kumar-CIT
िनधा रती ओर से/Assessee by: Shri Brijmohan P. Agarwal
सुनवाई क तारीख / Date of Hearing: 08.03.2017
घोषणा क तारीख / Date of Pronouncement: 19.04.2017
आयकर अिधिनयम ,1961 क धारा 254(1) के अ
तग त आदे श
Order u/s.254(1)of the Inco me-tax Act,1961(Act)
लेखासद
य, राजे
के अनुसार
/ PER Rajendra A.M.-
Challenging the order,dt.29.01.2015 of Assessing Officer(AO),passed u/s.143(3) r.w.s.144C of the Act,in pursuance of the directions of the Dispute Resolution Panel-IV(DRP),Mumbai the assessee has filed the present appeal.Assessee is a foreign company and is engaged in business of banking.It filed its return of income on 30/09/2010,declaring income of Rs. 10.72 crores.The AO completed the assessment,determining its income at Rs.11.39 Crores.
2.First ground of appeal about addition of Rs. 26.56 lakhs,being reimbursement of expenses to the head office(HO)for expenses incurred on behalf of the assessee by the HO.During the assessment proceedings,the AO found expenses to the tune of Rs.26.56 lakhs had been allocated to the assessee by S.G.Singapore(SGS), i.e.other branch of the assessee.It was claimed that the payments represented reimbursement made to SGS and same were made for services on lease line expenses on reimbursement basis,that the payment did not contain any marked up,that the reimbursement were for data communication charges and annual Microsoft Enterprises Products billing,that the Singapore entity had incurred the true-up charges on behalf of the assessee,that TDS u/s.195 of the Act was required to be made only if the income was chargeable to tax,that the income was not chargeable,that question of making TDS would not arise. However, the AO did 1854/M/15(10-11) M/s. Societe Generale not agree with the assessee and held that the HO of the assessee had been providing services to an Indian assessee,that the services were in the nature of Royalty/fees for technical services(FFTS).He relied on the explanation (2)to sub clauses (iv)(vi) as well as explanation 3 to section 9 (1)(vi) for the meaning of the term Royalty and held the payments in question were covered by the definition of the royalty as per the provisions of Article 13(3) and 13(4) of the India France DTAA.Accordingly, he proposed to tax the amount at the rate of 10%.
2.1.Aggrieved by the proposed addition,the assessee filed objections before the DRP and made submissions.After considering the available material,the panel held invoices had been raised by Singapore Telecommunication Limited and Pacnet Global (Singapore) Pte Ltd. on SGS, that the impugned amount had been allocated to various entities including the assessee, that Singapore Telecommunication Limited has charged the assessee group for data communication lines, that the recovery also included software maintenance charges,that it was not clear as to whether any third party had maintained the software or it was the SGS itself who had provided the services, that no application under section 195(2)was made before the authorised officer for not comply - ing with the provisions of Section 195 (1) read with explanation 2,that as per the provisions of Section 9 payments in question would fall under the definition of Royalty / FTS, that same was the position under the DTAA,that the disputed amount had been rightly taxed by the AO, that for non-deduction of TDS the entire expenses claimed by the assessee would be disallowable under Section 40(a)(i) of the Act. Finally,the panel dismissed the appeal filed by the assessee.
2.2.During the course of hearing before us,the Authorised Representative (AR)stated that payments were made by the Singapore Branch to the Singapore Telecommunication, that the assessee had now made direct payment to Singapore Telecommunication,that it was neither Royalty nor FFTS. He referred to the case of Steria (India Ltd.) (386 ITR 390) and WNS Global Services Ltd. [(52)(I) ITCL 0513].He also referred to protocol 7 of the Treaty and argued that the assessee was not a representative assessee.The Departmental Representative(DR)argued that there was difference between the payment and reimbursement,that there was no evidence about rendering of services by Singapore Telecommunication, that it was not known as to what was the exact amount, that income was embedded in the payment was also not known.
2.3.We heard the rival submission and perused the matter before us.We find that the assessee had made payment its sister concern located in Singapore for the services rendered by that entity, that 2 1854/M/15(10-11) M/s. Societe Generale it had claimed the payments were reimbursements only without any mark up, that the AO and the Panel rejected claim made by the assessee,that both the authorities held that the payment made by it were Royalty/FFTS. We find that the assessee had produced the debit note raised by the foreign entity.The invoices issued by the SGS talk about reimbursement,software maintenance charges,data communication charges, EDP consumables and others.If the DRP had some doubt about maintenance of software,it should have called for explanation from the assessee.But,doubt cannot take place of evidence to confirm any addition.Page 24 of the paper book contains detail of various charges paid by the assessee to the foreign entity.The Panel has not brought anything on record to controvert the entries appearing in it.Besides,Protocol 7 to the DTAA also supports the stand taken by the assessee.We would like to reproduce the relevant portion of the judgment of Steria (supra) and same is as under :
The Protocol to the Double Taxation Avoidance Agreement between India and France (see [1994] 209 ITR (St.) 130, 157) provides that if under any Convention, Agreement or Protocol signed after September 1, 1989, between India and a third State which is a member of the OECD, India limits its taxation at source, inter alia, on fees for technical services to a rate lower or a scope more restricted than the rate of scope provided for in this Convention, the same rate or scope as provided for in that Convention Agreement or Protocol shall also apply under this Convention. There is no warrant for the restrictive interpretation placed on clause 7 of the Protocol to the Double Taxation Avoidance Agreement between India and France in such a manner that that if a reference is made to one Convention signed after September 1, 1989 between India and another OECD member State for the purposes of ascertaining if it had a more restrictive scope or a lower rate of tax, then that Convention alone has to be referred to for both purposes or that it is not permissible for the assessee, in terms of clause 7 of the Protocol, to rely upon one Convention between India and an OECD member State for the purposes of taking advantage of a lower rate of tax and then refer to another Convention between India and another OECD member State to take advantage of a more restricted scope. The words "a rate lower or a scope more restricted" occurring therein envisage that there could be a benefit on either score, i.e., a lower rate or a more restricted scope. One did not exclude the other. The purpose of clause 7 of the Protocol is to afford to a party to the India-France Convention the most beneficial of the provisions that may be available in another Convention between India and another OECD country.
The wording of clause 7 of the Protocol makes it self-operational. Once the Double Taxation Avoidance Agreement has itself been notified, and contains the Protocol including clause 7 thereof, there is no need for the Protocol itself to be separately notified or for the beneficial provisions in some other Convention between India and another OECD country to be separately notified to form part of the Indo-France Double Taxation Avoidance Agreement. Clause 7 of the Protocol, which forms part of the Double Taxation Avoidance Agreement between India and France, automatically becomes applicable. .... that the definition of "fee for technical services"
occurring in article 13(4) of the Double Taxation Avoidance Agreement between India and the United Kingdom clearly excludes managerial services. What was being provided by SF to the assessee in terms of the management services agreement were managerial services. It was plain that once the expression "managerial services" was outside the ambit of "fee for technical services", the question of the assessee having to deduct tax at source from payments for the managerial services, would not arise. The payment made by the assessee to SF for the 3 1854/M/15(10-11) M/s. Societe Generale managerial services provided by the latter could not be taxed as fees for technical services and the payments were not liable to withholding of tax under section 195 of the Act. The Hon'ble Bombay High Court in the case of WNS Global Services has also dealt with the issue of International Telecom Operators Lease Lines.
Considering the above,we are of the opinion payment made by the assessee was neither royalty nor FFTS.It was case of pure and simple reimbursement.Secondly, the assessee had not made any payment to Singapore Telecommunication.Therefore,following judgment of Steria (supra) we decide Ground no.1 in favour of the assessee.
3.Second Ground deals with not allowing the TDS credit of Rs.1.58 lakhs on interest income paid to HO of Rs.15,86,609/-in computation of total income.During the assessment proceedings, the AO found that the assessee had paid an amount of Rs.15.86 lakhs as interest to HO /overseas branches on borrowings,that it had deducted the tax at source under the provisions of Section 195 of the Act.It was stated before the AO that as per provisions of Indo France Tax Treaty interest to HO was allowable expenditure, that it had deducted tax on payment of interest made to HO following a conservative approach,that it should be allowed TDS credit for the same.However, the AO held the contention of the assessee to the effect the provisions of Section 40(a)(i) of the Act were not applicable to the payments was unacceptable,that it had deducted tax of Rs.1.58 lakhs.
3.1.Aggrieved by the order of the AO,the assessee filed objections before the DRP.After considering the proposed draft order and submission of the assessee the panel held that under the DTAA the income of the non-resident was characterised under various heads,that in case of business profits income would be taxed only if the non-resident had a permanent establishment (PE)in India and the income attributable to such PE was taxable in India, that in case of banking companies interest payment was allowable, that interest received by the HO from the PE would be taxable under Article 12 of the treaty at a lower rate of taxation.Referring to the CBDT Circular No.740 issued on 17/04/1996 and commentary of K.Vogel the panel held that "in the computation of income of the branch,as per the domestic laws,interest has to allowed as per the provision of Section 40(a)(i)."
3.2.During the course of hearing before us, the AR stated the assessee had paid interest to the HO for which TDS was paid, that the departmental authorities had denied to give credit for the 4 1854/M/15(10-11) M/s. Societe Generale taxes paid,that AO should be directed to give the credit for the tax paid by it, the DR left the issue to the discretion of the Bench.
After hearing the rival submissions, we are of the opinion that matter should be sent back to the file of AO.He is directed to give credit for the taxes paid after verification. Second Ground is allowed in favour of the assessee,in part.
4.Last Ground of appeal is about adjustment of Rs.67.28 lakhs to the sales credit commission earned on sale of treasury products on behalf of the AE.During the course of hearing before us,it was brought to our notice,by the representatives of both the sides,that identical issue stands decided in favour of the assessee by the order of the Tribunal for the AY.2008-09 (ITA / 7658/ Mum/2012,dated 22/11/2013).We find that the Tribunal has dealt with the issue as under:
"10. The issue raised in ground No. 3 relates to the addition of Rs. 66,80,02,000/- made by the A.O. to the total income of the assessee by way of transfer pricing adjustment in respect of income earned by the assessee from the marketing of derivative products on behalf of its Associated Enterprise.
11. During the year under consideration, the assessee had received commission of Rs. 21.49 crores on account of sale of fixed income and derivative products made in India on behalf of its Associated Enterprise (AE) Societe Generale (SG), Paris. It was submitted that the assessee was compensated in terms of the agreement with the SG, Paris for its performance activity whereby sales credit was paid to the assessee by SG, Paris as gross sales less counterpart risk less cost of capital. It was submitted that the same formula had been consistently applied by the assessee in the earlier years and since the same was accepted in the earlier assessments being at arm's length, the transaction should be accepted as at arm's length in the year under consideration. It was also pointed out that the commission received by the assessee as net sales credit was 64% of the total income booked in India for SG, Paris as against 66%, 43% and 61% in assessment years 2004-05, 2005-06 and 2006-07 respectively. When a reference was made by the A.O. to the TPO for determining the ALP of these international transactions of the assessee with its AEs in respect of commission received on account of sale of its fixed income and derivative products, the TPO found that the commission of 64% claimed to be received by the assessee on the income booked in India by SG, Paris was not the net profit of the assessee and it was the total value against which various expenses were standing. He, therefore, proceeded to determine the ALP of the transactions of the assessee with its AEs by following TNMM taking OP/TC as the price level indicator to benchmark the said transaction. In this regard, he selected 25 comparables and found that their average OP/TC was 59.95% as against the OP/TC of 16.38% shown by the assessee. Accordingly, applying the OP/TC of 59.95% to the total operating cost of the assessee at Rs. 153.30 crores, he worked out the arm's length profit at Rs. 91.91 crores and since the net profit shown by the assessee was only Rs. 25.11 crores, adjustment of Rs. 66.80 crores was proposed by the TPO. The addition on account of transfer pricing adjustment as per the order of the TPO was made by the A.O. in draft assessment issued on 15-10-2011. Against the said draft order, objections were filed by the assessee before the DRP and after considering the submissions made by the assessee in support as well as the material available on record, the DRP directed the TPO to recompute the ALP on the basis of certain directions. The core direction given by the DRP was pertaining to the value of total revenues from derivative contracts and verification of correctness of profits calculation/allocations as made by the assessee and determination of ALP 5 1854/M/15(10-11) M/s. Societe Generale on the basis of comparable margins. According to the direction of DRP, the TPO considered the issue of determination of ALP afresh and held that there was no case of any relief to the assessee. Accordingly, the addition of Rs. 66.80 crores was made by the A.O. by way of TP adjustment in the final assessment order passed u/s 14393) r.w.s. 144-C(13) of the Act.
12. The ld. counsel for the assessee in support of the assessee's case on this issue raised very limited and specific contentions. He submitted that the assessee is not disputing either the TNMM followed by the TPO as most appropriate method or the OP/TC taken by him as PLI for this purpose. He submitted that the assessee is also not disputing its OP/TC worked out by the TPO at 16.38%. He submitted that what the assessee is disputing is the comparables selected by the TPO for the purpose of calculating the average margin at 59.95%. He invited our attention to the specific objections raised by the assessee in this regard in the written submission filed before the DRP placed at page 111 and 113 of his paper book and submitted that the same have not been considered either by the DRP and even by the TPO during the course of remand proceedings. He contended that the average margin of the comparables thus is required to be recomputed after taking into consideration the said objections specifically raised by the assessee. He further contended that the average margin of the comparables as recomputed after taking into consideration the objection of the assessee is required to be applied only to the total cost of the assessee relating to its international transactions with its AEs and not to the entire cost of the assessee as done by the TPO. He submitted that the commission received by the assessee on account of sale of fixed income and derivative products to SG, Paris is only Rs. 21.49 crores and the relevant cost thereof only should be considered for applying the average margin of the comparables as recomputed.
13. The ld. D.R., on the other hand, did not dispute the position that the objections raised by the assessee before the DRP as regards the comparables selected by the TPO and their margins taken to compute the average margin at 59.95% have not been considered either by the DRP or even by the TPO in the remand proceedings. He also did not dispute the position that such average margin of comparables is required to be applied only to the total cost pertaining to the relevant international transactions of the assessee with its AEs to work out the ALP of the said transactions. He, however, contended that this matter should be remanded to the A.O./TPO to consider the objections of the assessee in respect of comparables in order to recompute the average margin of the said comparables as well as to quantify the TP adjustment.
14. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the TP adjustment in question has been made by the A.O./TPO by following TNMM and taking OP/TC as price level indicator. The average OP/TC of the twenty five comparables taken by the TPO is worked out at 59.95% and the same being higher than 16.38% OP/TC of the assessee as worked out by the TPO, the TP adjustment of Rs. 66.80 crores has been made by applying the average OP/TC at 59.95% of the comparables to the total operating cost of Rs. 153.31 crores to the assessee. As contended by the ld. counsel for the assessee and accepted even by the ld. DR, the average margin of comparables is required to be applied to the total cost of the assessee relating to its relevant transactions with its AEs in order to determine the ALP of the said transactions as well as TP adjustment and not to the entire operating cost of the assessee as done by the TPO. The assessee has not disputed the TNMM followed by the TPO as most appropriate method as well as the OP/TC taken as PLI. He has also not disputed the OP/TC as worked out by the TPO at 16.38%. The twenty five comparables selected by the TPO as well as their OP/TC taken by the TPO, however, were specifically disputed by the assessee by raising specific objections before the DRP, which were as under:-
XXXXXX
15. A perusal of the order of the DRP as well as that of the TPO passed in the remand proceedings, however, shows that these objections specifically raised by the assessee have not been considered and this position is not disputed even by the ld. DR at the time of hearing before us. We, therefore, consider it fair and proper and in the interest of justice to set aside this matter 6 1854/M/15(10-11) M/s. Societe Generale to the A.O./TPO with a direction to consider the said objections of the assessee and recompute the average margin of the comparables after taking into consideration the said objections. We also direct the A.O./TPO to apply the average margin of comparables so recomputed to the operating cost of the assessee relating to its relevant transactions with its AEs in order to determine the ALP of the said transaction as well as the TP adjustment to be made in respect of such transactions.Needless to observe that the A.O. shall offer proper and sufficient opportunity to the assessee of being heard on this matter.Ground No. 3 of the assessee's appeal is accordingly treated as allowed for statistical purpose."
Respectfully,following the above last ground is decided in favour of the assessee.
As a result, appeal filed by the assessee stands partly allowed.
फलतः िनधा रती ारा दािखल क गई अपील अंशतः मंजूर क जाती है.
Order pronounced in the open court on 19th April, 2017.
आदेश क घोषणा खुले यायालय म दनांक 19 अ ैल, 2017 को क गई ।
Sd/- Sd/-
(पवन सह /Pawan Singh) (राजे / Rajendra)
याियक सद य / JUDICIAL MEMBER लेखा सद
य / ACCOUNTANT MEMBER
मुंबई Mumbai; दनांकDated : 19.04.2017.
Jv.Sr.PS.
आदेश क ितिलिप अ ेिषत/Copy of the Order forwarded to :
1. Appellant /अपीलाथ 2. Respondent / !यथ
3. The concerned CIT(A)/संब% अपीलीय आयकर आयु(, 4.The concerned CIT /संब% आयकर आयु(
5. DR "K " Bench, ITAT, Mumbai /िवभागीय ितिनिध, खंडपीठ,आ.अ.अ.मुंबई
6. Guard File/गाड फाईल स!यािपत ित //True Copy// आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपीलीय अिधकरण, मुंबई /ITAT, Mumbai.
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