Income Tax Appellate Tribunal - Bangalore
Yokogawa India Limited, Bangalore vs Deputy Commissioner Of Income Tax, ... on 17 May, 2023
IN THE INCOME TAX APPELLATE TRIBUNAL
'A' BENCH : BANGALORE
BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER
AND
MS. PADMAVATHY S, ACCOUNTANT MEMBER
IT(TP)A No. 849/Bang/2022
Assessment Year : 2017-18
M/s. Yokogawa India
Ltd., The Deputy
Plot No. 96, Electronic Commissioner of
City Complex, Income Tax,
Hosur Road, Circle - 7(1)(1),
Bangalore - 560 100. Vs. Bangalore.
PAN: AAACY0840P
APPELLANT RESPONDENT
Shri Padamchand Khincha,
Assessee by :
CA
Revenue by : Shri D.K. Mishra, CIT (DR)
Date of Hearing : 16-03-2023
Date of Pronouncement : 17-05-2023
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER
Present appeal is filed by assessee against the final assessment order dated 21.07.2022 passed by the Ld.DCIT, Circle - 7(1)(1), Bangalore for A.Y. 2017-18 on following grounds of appeal:
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2. Brief facts of the case are as under:
2.1. Assessee is a company engaged in manufacturing, trading, distribution and installation and servicing of process control system, industrial automation instruments / equipment and electrical measuring instruments. It is submitted that the parent company of assessee is headquarters in Tokyo, Japan and is a leading company of industrial automation products and pioneer in development of distributed control systems for monitoring and control process in a broad range of production facilities.Page 10 of 60
IT(TP)A No. 849/Bang/2022 2.2. Assessee filed its return of income on 30.11.2017 declaring total income of Rs.90,94,42,450/-. The case was selected for complete scrutiny and notice u/s. 143(2) was issued to assessee along with questionnaire in notice u/s. 142(1). The Ld.AO noted that for the year under consideration, assessee had international transactions with its associated enterprises that exceeded Rs. 15 crores. Accordingly, a reference was made to the transfer pricing officer for determining the arms length price of the international transaction undertaken by assessee.
2.3. On receipt of the reference, the Ld.TPO called upon assessee to furnish the economic details of the international transaction in form 3CEB. On receipt of the details filed by the assessee, the Ld.TPO noted that assessee had following international transactions with its AE.
Page 11 of 60IT(TP)A No. 849/Bang/2022 2.4. The Ld.TPO noted that assessee used TNMM as the most appropriate method for manufacturing and trading segments and adopted combined transaction approach under the manufacturing segment.
2.5. The PLI was selected to be OP/OC. The assessee thus computed its margin under manufacturing segment to be 7.8% and trading segment to be 2.18%. The Ld.TPO noted that Page 12 of 60 IT(TP)A No. 849/Bang/2022 assessee used four comparables with average median of 3.15% under the manufacturing segment and two comparables with average median of 1.2% under the trading segment. It thus held the transactions undertaken by it with assessee to be at arms length.
2.6. Comparables selected by assessee under manufacturing and trading segments are as under:
2.7. The Ld.TPO dissatisfied with the comparables selected by assessee, applied various filters and shortlisted a set of 8 comparables with a median of 9.52% under the manufacturing segment and the details of which are as under:Page 13 of 60
IT(TP)A No. 849/Bang/2022 2.8. In respect of the trading segment, two comparables adopted by the assessee stood rejected, and additional two new comparables were considered by the Ld.TPO with average margin of 6.06%.
Weighted PLI SrNo Company Name OP/OR % Innovative 1 5.791505792 Automation Pvt. Ltd.
Telecommunication 2 Consultants India 6.321012203 Ltd.
Average 6.06% 2.9. The Ld.TPO further benchmarked payment towards global sales and marketing activity fee to the AE at Rs.2,19,56,000/-. The Ld.TPO was of the view that, the said payment made by assessee to the AE was made towards the AMP spent and linked to the manufacturing segment.
2.10. The Ld.TPO thus proposed the following additions.
Page 14 of 60IT(TP)A No. 849/Bang/2022 Working Capital adjustment was denied to the assessee by the Ld.TPO.
2.11 On receipt of the order u/s. 92CA, the Ld.AO passed the draft assessment order on 16.09.2021 proposing addition of Rs.20,65,74,000/-.
2.12 The Ld.AO also disallowed a sum of Rs.5,00,74,360/- u/s. 40(a)(i) for non-deduction of tax u/s. 195 being payment made to expat salaries. The assessee had deducted TDS u/s. 192 on the gross salary. The Ld.AO was of the opinion that the amount reimbursed towards the expat salary should also have been subjected to TDS u/s. 195 of the Act. He thus proposed a total addition as under:
Page 15 of 60IT(TP)A No. 849/Bang/2022 2.13 On receipt of the draft assessment order, the assessee filed objections before the DRP. The DRP after considering various submissions of the assessee in respect of the transfer pricing additions, excluded one comparable from the manufacturing segment and also from trading activity. Further, the DRP included one comparable in the trading activity. The DRP did not grant working capital adjustment as was prayed by the assessee. 2.14. In respect of the payment reimbursed by assessee to the AE towards salary expenses of the expat expatriate employees, the DRP upheld that it fall within the ambit of fee for technical services and therefore TDS ought to have been deducted u/s. 195 of the act.
2.15. The DRP thus upheld the disallowance made by the Ld.AO, u/s.40(a)(i) of the act.
On receipt of the DRP directions, the Ld.AO passed the impugned order by making an addition in the hands of assessee at Rs.17,31,94,360/-.
Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal.
3. The Ld.AR submitted that Ground nos. 1 to 5 are general in nature and therefore do not require any adjudication.
4. In Ground no. 6 - The Ld.AR submitted that sub-ground (c) &(d) are the comparables that the assessee is seeking inclusion/exclusion under the manufacturing segment. He submitted that Ground no. 6(a) - (b) are general in nature and therefore do not require adjudication.
Page 16 of 60IT(TP)A No. 849/Bang/2022 Before we undertake the comparability analysis, it is sine qua non to understand the FAR performed under manufacturing segment by the assessee before us:
Functions:
Under the manufacturing/ systems segment, Yokogawa India imports certain components from its AEs which form the basic structure of its finished products in the nature of industrial automation/ process control systems. Yokogawa India also buys supplementary components from unrelated parties, assembles these components, performs engineering work to customise the systems to suit its customer requirements and sells the finished products to unrelated customers. Yokogawa India also performs the installation and commissioning work at the customer's site. The international transactions covered under the manufacturing activity are as follows:
(i) Import of raw materials and components by Yokogawa India from its AEs for manufacturing activity.
(ii) Sale of systems to its AEs
(iii) Payment of Engineering Services Fees to YEC
(iv) Payment of after sales service fees
(v) Purchase of fixed assets
(vi) Payment of engineering support fees Briefly tabulated below are the functions performed by Yokogawa India and its AEs in relation to the manufacturing activity.Page 17 of 60
IT(TP)A No. 849/Bang/2022 Assets:
S.No. Nature of Assets Value in INR Lakhs
1. Freehold land 90.52
2. Buildings 2290.28
3. Plant & Equipment 1812.68
4. Furniture & Fixtures 184.01
5. Vehicles 210.74
6. Office equipment 694.10
Leasehold
7. 161.03
improvements
Total 5443.37
The assessee also owns intangible assets relating to marketing such as trade marks, trade named, brand names, logos etc. It also owns customer related intangible such as customer lists, customer contracts, customer relationship, open purchase orders. It also owns Goodwill related to the intangibles such as institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, etc. Page 18 of 60 IT(TP)A No. 849/Bang/2022 Risk Assumed:
The risk profile of Yokogawa India and its AEs in relation to the manufacturing activity has been summarised below:
Characterisation:
Manufacturing activity:
Based on the results of the functional, risk and asset analysis, Yokogawa India can be characterized as a licensed manufacturer bearing market risks and performing normal functions undertaken by a manufacturer typically. Based on the above we shall undertake the analysis of comparable sought for inclusion/exclusion by the assessee under the manufacturing segment.
4.1. Ground No.6(c): The Ld.AR submitted that, the three comparables sought for inclusion under the manufacturing segment are
a) Amtech Electronics (India) Ltd.
b) Continental Controls Ltd.
Page 19 of 60IT(TP)A No. 849/Bang/2022
c) Supernova Engineers Ltd.
4.2. The Ld.AR submitted that all the 3 comparables passes through the filters applied the Ld.TPO. It is also submitted that in case of Supernova Engineers Ltd., the Ld.TPO had not raised any objections except for mentioning that it is functionally not similar.
4.3. It is the submission of the Ld.AR that all the 3 comparables are engaged in manufacturing activities of various products. He submitted that assessee is also into manufacturing of various components and is involved in providing end to end solutions as has been observed by the Ld.TPO while narrating the profile of the taxpayer at page 6 of the order u/s. 92CA. 4.4. He thus submitted that, the reasoning adopted by the DRP to reject inclusion of the 3 comparables do not have any basis. He thus submitted that the comparables may be remanded to the Ld.AO/TPO for reconsideration based on the FAR. 4.5. On the contrary, the Ld.DR though could not controvert the submissions of the Ld.AR however agreed with the proposition of the comparables being remanded.
We have perused the submissions advanced by both sides in the light of records placed before us.
4.6. We note that the Ld.TPO while rejecting the comparables being not given any reasons. The DRP while upholding the rejection of the comparables, simply stated that these companies are involved in manufacturing different products. We note that assessee had adopted TNMM as the most appropriate method under which identical similarities in the functions are not necessary. Broad similarities in the business model and Page 20 of 60 IT(TP)A No. 849/Bang/2022 functioning are only necessary to be compared as the net margin is considering for the purposes of comparing. 4.7. We, therefore remand the comparables back to the Ld.AO/TPO for necessary verification of the FAR of these comparables with that of assessee. In the event, the broad similarities are ascertained under TNMM and passes through the filters applied by the Ld.TPO, the same may be considered for inclusion.
Accordingly ground no. 6(c) raised by assessee stands allowed for statistical purposes.
5. Ground no. 6(d) r.w. ground nos. 8-10 raised by assessee seeking exclusion of following comparables.
(i) Annanya Interface & Controls Pvt. Ltd.
(ii) Abak Elcerofab Engg Pvt. Ltd.
(iii) Dembla Valves Ltd.
(iv) Limitorque India Ltd. (v) Flowserve India Controls Pvt. Ltd. (vi) Koso India Pvt. Ltd.
5.1. The Ld.AR also submitted that some of the comparables have been rejected for non-fulfilment of RPT filter and some others rejected for being functionally not similar with that of assessee.
I) Annanya Interface & Controls Pvt. Ltd.
(a) It is submitted by the Ld.AR that this comparables is not functionally similar with that of assessee as it deals in manufacturing of control panel for machines and installation, erection of machines. He referred to the annual report of this comparable placed at pages 2487-2528 of paper book. The Page 21 of 60 IT(TP)A No. 849/Bang/2022 Ld.AR submitted that this company has not made any export during the year by referring to page 2492. Referring to page 2500 of the paper book, the Ld.AR submitted that this company is 100% into manufacturing of control panel/WTP & STP engineering service and panel manufacturing. Whereas the assessee is engaged in manufacturing of industrial automation instruments / equipments and electrical measuring instruments.
(b) The Ld.AR submitted that the only observation by the DRP to include this company is by stating that it is engaged in manufacturing of control panel for machines and also provides automation solutions for industrial plants which is not correct as per the annual report. The Ld.AR thus submitted for exclusion of this comparable. The Ld.DR on the contrary submitted that the filters applied by the Ld.TPO does not include the export income filter and therefore the fact that this company do not have any export income is of no relevance. He thus submitted that this company is into manufacturing of control panels that are used in machines and accordingly deserves to be included. We have perused the submissions advanced by both sides in the light of records placed before us.
(c ) We note that this company as per the corporate information given at page 2525 of paper book is engaged in manufacturing of control panels for machines and installation, erection of machines. In the profit and loss account, the revenue from operations are from sale of products and sale of services. It is nowhere into manufacturing of any automation equipments / instruments as has been observed by the DRP. It also do not provide any automation solutions for industrial plants. The Page 22 of 60 IT(TP)A No. 849/Bang/2022 assessee before us is into manufacturing of control systems, industrial automation instruments and equipments and electrical measuring instruments. The product that is developed by the comparable company is a small element manufactured by the assessee. The manufacturing activities carried out by the assessee in the varied products cannot be compared with that of the comparable and therefore deserves to be excluded. We direct the Ld.AO/TPO to exclude this company from the final list.
II) Abak Elcerofab Engg Pvt. Ltd.
(a) The Ld.AR is seeking exclusion of this comparable as it is engaged in the manufacturing of electrical distribution and control panels. He submitted that this company is functionally not similar with that of assessee as it is engaged in the business of fabric and assembly of electrical control panels. Referring to the observations of the DRP in para 4.1.3, the Ld.AR submitted that the DRP has wrongly noted that this company is involved in manufacturing of control panels and other electrical panels and thus is functionally similar to that of assessee.
(b) The Ld.AR submitted that though this company is manufacturing electrical equipments that cannot be a reason to include it because assessee is manufacturing electrical measuring equipments.
(c) On the contrary, the Ld.DR submitted that the revenue has been recognised by this company under the head manufacturing sales and therefore this company deserves to be retained. We have perused the submissions advanced by both sides in the light of records placed before us.
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(d) We note that this company as the corporate information given at page 2626 reveals that it is engaged in the business of fabrication and assembly of control panel whereas the principle business activity of the company at page 2609 has stated to be other electrical equipment manufacturing services. As rightly pointed out by the Ld.DR, the revenue has been recognised by this company to be as manufacturing sales. From the annual report, it is not discernible what is the manufacturing activity carried out by this company. We therefore remand this company back to the Ld.AO/TPO to carry out necessary verification and to find out what is the product manufactured by this company and to ascertain whether the manufacturing activity is comparable with that of assessee. In the event, the product manufactured is more or less similar with that of assessee and the same may be retained.
Accordingly this comparable is remanded back to the Ld.AO/TPO for necessary verification in accordance with the directions hereinabove.
III) Dembla Valves Ltd.
(a) The Ld.AR submitted that this company is engaged into manufacturing of various types of valves catering to oil, gas, petrochemicals, power, water treatment and distillation, steel, electricals, pharma, paper and pulp industries. He thus submitted that this company is functionally not similar with that of assessee as the industry to which this company caters is to be as compared to the assessee. He also submitted that even the product manufactured do not mach or is not even similar in nature with that of assessee.
Page 24 of 60IT(TP)A No. 849/Bang/2022
(b) On the contrary, the Ld.DR submitted that assessee is using TNMM as the method to determine ALP and therefore there is no requirement to match the products manufactured thereby narrowing down the perspective of the comparability. He thus supported the inclusion of this comparable. We have perused the submissions advanced by both sides in the light of records placed before us.
(c) We note that admittedly this company is involved in manufacture of various kinds of valves that forms a small part of an equipment used in a particular industry. We therefore do not find it comparable with that of assessee who is involved in manufacturing the entire equipment.
Accordingly we direct this comparable to be excluded from the final list.
IV) Limitorque India Ltd., Flowserve India Controls Pvt.
Ltd. and Koso India Pvt. Ltd.
(a) The Ld.AR submitted that the above three comparables do not satisfy the RPT filter applied by the Ld.TPO. He submitted that the Ld.TPO had applied RPT transaction and excluded companies having more than 25% of RPT. The Ld.AR referring to the chart annexed herewith as annexure -A submitted that the above 3 comparables having RPT that exceeds 25%.
(b) The Ld.DR on the contrary submitted that the same may be remanded to the Ld.AO for necessary verifications. We have perused the submissions advanced by both sides in the light of records placed before us.
(c) Before us, the Ld.AR submitted that the Ld.TPO has adopted a 25% RPT filter whereas Hon'ble Karnataka High Court in case of Page 25 of 60 IT(TP)A No. 849/Bang/2022 CIT vs. Yodlee Infotech Pvt. Ltd. in ITA Nos. 684 & 685/2017 by order dated 28/06/2018 consider among the question of law with regard to application of RPT filter as under:
"1. Whether on the facts and in the circumstances of the case, and in law, the Tribunal was justified by not acknowledging its own orders where the Tribunal has held in stretching RPT% from 15-20% in case of Katera Software India Pvt Ltd?
2. Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that RPT filters should be 15% and not 25%, taken by the TPO?
3. Whether on the facts and in the circumstances of the case, the Tribunal erred in not acknowledging its own decision, where it has held that Bodhtree Consulting Limited to be a valid comparable for SWD?"
(d) We note that Hon'ble High Court observed and held as under:
"3. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to 'Transfer Pricing' and 'Transfer Pricing Adjustments' made by the concerned authorities below. We consider it appropriate to quote from the order of Tribunal rejecting the Application seeking a review before Tribunal as hereunder:-
"7. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. At the outset, we note that the TPO has applied the filter of 25% RPT whereas the assessee has contended that the filter of revenue from RPT should be applied at 15% instead of 25% applied by the TPO. The learned Departmental Representative has submitted that there is no standard rule for applying the filter of 15% regarding the RPT. It is pertinent to note that the ALP as per the provisions of the TP has to be determined by considering uncontrolled comparable prices and therefore only unrelated prices have to be taken into account to bench marked international transactions. However, 0% RPT of the comparable price is an impossible situation and therefore a reasonable tolerance range from revenue from RPT can be considered for selecting uncontrolled comparables. There is no dispute that there cannot be a single Page 26 of 60 IT(TP)A No. 849/Bang/2022 criteria/parameter to be applied as a general rule in all the cases. The tolerance range varies from case to case and depending upon the availability of comparables for a particular case. Thus if the comparables of an international transactions are easily available in sufficient number then this tolerance range of RPT should be restricted to minimum. Though there is no specified range in the provisions of Act or Rules, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, tolerance range of 5% to 25% of total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case of the assessee before us, the TPO/A.O. selected 17 comparables. Therefore, the availability of the comparables of the international transactions of the assessee is not a difficult task. Thus, when a good number of comparables are available then the RPT cannot be allowed to the extreme limit of 25% of revenue. Accordingly, in order to determine the ALP considering by considering the uncontrolled comparable transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the controlled and related prices. This Tribunal in the series of decisions has taken a view that when good number of comparables are available, then the threshold limit of RPT shall not be more than 15% of total revenue. In view of the facts and circumstances of the case when good number of comparables available, then we are of the considered opinion that the RPT filter of 15% is proper in the case of the assessee. By applying this filter of 15% RPT, we modify the impugned order of the CIT (Appeals) and therefore only one company namely Four Soft Limited will be excluded from the said comparable having more than 15% RPT. Accordingly, we direct the A.O./TPO to exclude the Four Soft Ltd. having 19.89% of RPT."
"Considering the functional details as reported in the Annual Report and following the earlier orders of this Tribunal in the case of Kodiak (supra), we direct the A.O/TPO to exclude these five companies namely Bhodtree Consulting Ltd., Exensys Software Solutions Ltd., Sankya Infotech Ltd., Thirdware Solution Ltd. & Tata Elxsi Ltd. from the set of comparables."
4. This Court in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. Vs. M/s. Softbrands India Pvt. Ltd.,) has held that Page 27 of 60 IT(TP)A No. 849/Bang/2022 in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable.
5. The relevant portion of the said judgment is quoted below for ready reference:
" Conclusion:
55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law.
56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed.
57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an 'Arm's Length Price' in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court.
Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court.
Page 28 of 60IT(TP)A No. 849/Bang/2022
58. The appeals filed by the Revenue are therefore dismissed with no order as to costs."
6. Having heard the learned counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present cases also. The appeals filed by the Appellants-Revenue are liable to be dismissed and are dismissed accordingly. No costs."
(e) We note the Coordinate Bench of this Tribunal in case of Etisalat Software Solutions Pvt. Ltd. vs. DCIT in IT(TP)A No. 240/Bang/2022 by order dated 20.09.2022 observed and held as under:
"21.We have heard the ld. DR As far as exclusion of this company Persistent Systems Ltd., on the ground that the related party transaction is more than 15% is concerned, we find that the admitted position with regard to related party transaction in this case of Persistent Systems Ltd., is 39.15%. The DRP in its order proceeded on the basis that the threshold limit for application of the Related Party Transaction filter (RPT filter) would be 25% of the total transaction. The Hon'ble Karnataka High Court in its Judgment 28-6-2018 in Pr. CIT v. Yodlee Infotech (P.) Ltd. [IT Appeal Nos. 684 and 685 of 2017, dated 28-62018] had to consider among other questions of law the following questions of law with regard to application of RPT filter, viz., Whether on the facts and in the circumstances of the case, and in law, the Tribunal was justified by not acknowledging its own orders where the Tribunal has held in stretching RPT% from 15-20% in case of Katera Software India Pvt Ltd? and Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that RPT filters should be 15% and not 25%, taken by the TPO?. The Hon'ble Court held as follows:
'3. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to 'Transfer Pricing' and 'Transfer Pricing Adjustments' made by the concerned authorities below. We consider it appropriate to quote from the order of Tribunal rejecting the Application seeking a review before Tribunal as hereunder:-
"7. We have heard the learned Departmental Representative as well as learned Authorised Representative and considered the relevant material on record. At the outset, we note that the TPO has applied the filter of 25% RPT whereas the assessee has Page 29 of 60 IT(TP)A No. 849/Bang/2022 contended that the filter of revenue from RPT should be applied at 15% instead of 25% applied by the TPO. The learned Departmental Representative has submitted that there is no standard rule for applying the filter of 15% regarding the RPT. It is pertinent to note that the ALP as per the provisions of the TP has to be determined by considering uncontrolled comparable prices and therefore only unrelated prices have to be taken into account to bench marked international transactions. However, 0% RPT of the comparable price is an impossible situation and therefore a reasonable tolerance range from revenue from RPT can be considered for selecting uncontrolled comparables. There is no dispute that there cannot be a single criteria/parameter to be applied as a general rule in all the cases. The tolerance range varies from case to case and depending upon the availability of comparables for a particular case. Thus if the comparables of an international transactions are easily available in sufficient number then this tolerance range of RPT should be restricted to minimum. Though there is no specified range in the provisions of Act or Rules, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, tolerance range of 5% to 25% of total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case of the assessee before us, the TPO/A.O. selected 17 comparables. Therefore, the availability of the comparables of the international transactions of the assessee is not a difficult task. Thus, when a good number of comparables are available then the RPT cannot be allowed to the extreme limit of 25% of revenue. Accordingly, in order to determine the ALP considering by considering the uncontrolled comparable transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the controlled and related prices. This Tribunal in the series of decisions has taken a view that when good number of comparables are available, then the threshold limit of RPT shall not be more than 15% of total revenue. In view of the facts and circumstances of the case when good number of comparables available, then we are of the considered opinion that the RPT filter of 15% is proper in the case of the assessee. By applying this filter of 15% RPT, we modify the impugned order of the CIT (Appeals) and therefore only one company namely Four Soft Limited will be excluded from the said comparable having more than 15% RPT. Accordingly, we direct the A.O./TPO to exclude the Four Soft Ltd. Having 19.89% of RPT." .
4. This Court in ITA No. 536/2015 C/w ITA No. 537/2015 delivered on 25-6-2018 (Prl. Commissioner of Income Tax & Anr. v.
Page 30 of 60IT(TP)A No. 849/Bang/2022 M/s. Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable. ...... ... ... ... ... ...
5. The relevant portion of the said judgment is quoted below for ready reference:
"Conclusion:
55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law.
56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed.
57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an 'Arm's Length Price' in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke section 260-A of the Act before this Court.
58. The appeals filed by the Revenue are therefore dismissed with no order as to costs."
6. Having heard the learned counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present cases also. The appeals filed by Page 31 of 60 IT(TP)A No. 849/Bang/2022 the Appellants-Revenue are liable to be dismissed and are dismissed accordingly.'
22. We are of the view that the facts of the Assessee's case is similar to the case decided by the Hon'ble High Court and in the light of the aforesaid decision of the Tribunal which has been upheld by the Hon'ble Karnataka High Court, the RPT filter has to be applied adopting the threshold limit of 15%. We hold and direct accordingly."
(f) In case of Barracuda Networks India Pvt. Ltd. vs. DCIT reported in (2021) 131 taxmann.com 337, this Tribunal has followed the above decision of Hon'ble Karnataka High Court and has held that the RPT filter has to be applied by adopting the threshold limit of 15%.
(g) We accordingly direct the Ld.AO/TPO to verify the RPT filter of these three comparables and to apply it at threshold limit of 15%. In the event, the RPT of these three comparables exceed 15%. The comparables will stand excluded.
Accordingly these 3 comparables are remanded back to the Ld.AO/TPO for necessary verification considering the directions hereinabove.
Accordingly ground no. 6(d) r.w. ground nos. 8-10 stands allowed.
6. Ground no.7 is in respect of not considering Swati Switchgears India Pvt. Ltd. as a comparable. The Ld.AR submitted that the DRP had directed the Ld.TPO to include this comparable provided it passes all the filters adopted by the Ld.TPO. It is submitted by the Ld.AR that while passing the order giving effect, the Ld.AO/TPO has not discussed or considered the directions of the DRP.
6.1 The Ld.DR on the contrary relied on the orders passed by the authorities below. However could not controvert the arguments advanced by the Ld.AR.
Page 32 of 60IT(TP)A No. 849/Bang/2022 We have perused the submissions advanced by both sides in the light of records placed before us.
6.2. We note that in the order giving effect dated 11.10.2019, the Ld.TPO has not mentioned anything in respect of this comparable as per the directions of the DRP. We therefore remand this comparable back to the Ld.AO/TPO to follow the directions of the DRP and to carry out necessary verification as observed by the DRP.
Accordingly this ground raised by assessee stands allowed for statistical purposes.
7. Ground no. 11 raised by assessee is general in nature and therefore do not require adjudication.
7.1. Before we undertake the comparability analysis, it is sine qua non to understand the FAR performed under trading segment by the assessee before us:
Functions:
Briefly tabulated below are the functions performed by Yokogawa India and its AEs in relation to the trading activity.
Yokogawa
Type of functions AEs
India
Strategic
management Yes Yes
functions
Corporate services
Yes Limited
functions
Marketing strategy /
Business Yes Limited
development
Inventory
Yes No
management
Warranty and after
Yes Yes
sales services
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IT(TP)A No. 849/Bang/2022
In relation to direct sales by the AEs to third party customers in India, Yokogawa India renders support to the AEs for which Yokogawa India is remunerated by way of commission. The commission is generally computed as the difference between the final sale price to the customers offered by the AE and the transfer price (which is arrived at as standard price X transfer factor).
Assets:
The tangible assets that are employed by Yokogawa India for carrying on its business activities are as follows:
S.No. Nature of Assets Value in INR Lakhs
8. Freehold land 90.52
9. Buildings 2290.28
10.Plant & Equipment 1812.68
11.Furniture & Fixtures 184.01
12.Vehicles 210.74
13.Office equipment 694.10
Leasehold
14. 161.03
improvements
Total 5443.37
The assessee also owns intangible assets relating to marketing such as trade marks, trade named, brand names, logos etc. It also owns customer retaed intangible such as customer lists, customer contracts, customer relationship, open purchase orders. It also wens Goodwill related to the intangibles such as institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, etc. Risk Assumed:
Type of risks Yokogawa India AEs
Business risk /
Yes Limited
Market risk
Contract risk Yes Limited
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IT(TP)A No. 849/Bang/2022
Price risk Yes Yes
Foreign exchange
Yes Yes
risk
Product liability risk Yes Limited
Credit and collection
Yes No
risk
Characterisation:
Trading activity:
Based on the results of the functional, risk and asset analysis, Yokogawa India can be characterized as a distributor bearing market risks and performing functions undertaken by an independent distributor.
7.2. Based on the above we shall undertake the analysis of comparable sought for inclusion/exclusion by the assessee under the trading segment.
8. Ground no. 12 - The Ld.AR submitted that assessee is only seeking inclusion of Remi Sales & Engineering Ltd. in ground no.
12(c) and exclusion of Innovative Automation Pvt. Ltd. in ground no. 12(d).
a) Remi Sales & Engineering Ltd. (sought for inclusion)
(i) The Ld.AR submitted that this comparable was accepted by the Ld.TPO in assessment year 2015-16 under the trading segment. The Ld.AR referred to page 6163 of the paper book wherein the relevant observations of the Ld.TPO in respect of this comparable for A.Y.2015-16 has been placed. He further referred to the order u/s.92CA for A.Y. 2016-17 placed at page 6188 of the paper book wherein, this comparable was included in the TP study which was not disputed by the Ld.TPO.
(ii) On the contrary, the Ld.DR relied on the orders passed by authorities below. He submitted that every year is different A.Y. Page 35 of 60 IT(TP)A No. 849/Bang/2022 and therefore has to be independently considered based on the facts and circumstances that prevails.
We have perused the submissions advanced by both sides in the light of records placed before us.
(iii) We note that DRP rejected this comparable for the reason that this company is trading in different types of products and is not similar with those manufactured and sold by the assessee. We note that in the present case, largely DRP has been blowing hot and cold at the same time. While considering the comparables, objected by the assessee for exclusion in the manufacturing segment, the DRP has not considered the product manufactured and has taken a view that assessee is following TNMM wherein a narrow observation cannot be used for exclusion/inclusion of comparable. However, while considering the trading segment, the DRP is strictly following the product similarity that is manufactured and traded between the assessee and the comparable company. Such approach by the DRP cannot be accepted.
(iv) We are of the view that that the revenue accepted this comparable in the preceding assessment year. Without there being a cogent reason, the comparable cannot be excluded. There is nothing placed on record to establish that this company is functionally not similar to the assessee. We therefore direct inclusion of this comparable.
b) Innovative Automation Pvt. Ltd.(sought for exclusion)
(i) The Ld.AR submitted that this company is to be excluded as it is engaged in the business of manufacturing of gas trains/gas Page 36 of 60 IT(TP)A No. 849/Bang/2022 pressure reducing stations, motorized dampers and trading of gas filters, gas pressure regulators etc.
(ii) The Ld.AR submitted that the trading activity by this company is only in respect of small component used in safety equipments like gas filters, gas pressure regulators and gas valves etc. thereby making it functionally not similar with that of assessee. He submitted that the assessee is into trading of finished products in the nature of transmitters, recorders, flow meters, oscilloscopes, digital power analysers, optical spectrum analysers etc. from its AEs for resale to unrelated parties. It is further submitted that there is no value addition carried out by the assessee in the trading segment in respect of the products sold.
(iii) He thus submitted that there is no similarity in the functions under the trading segment by assessee as well as the comparable company.
(iv) On the contrary, the Ld.DR relied on the orders passed by authorities below.
We have perused the submissions advanced by both sides in the light of records placed before us.
(v) We note that assessee is also into sale of finished goods without any value addition. The plain activity carried by this comparable is trading of a finished product. This is functionally similar with the assessee under the trading segment. We therefore do not find any infirmity in this comparable to be included.
Accordingly we direct retaining this comparable in the final list.
Page 37 of 60IT(TP)A No. 849/Bang/2022
9. Ground no. 13 is in respect of correcting the margin of the comparable Innovative Automation Pvt. Ltd. The Ld.AR submitted that the DRP in its para 5.1.3 had directed the Ld.TPO to adopt the correct margins which has not been followed while passing the OGE dated 26.10.2018.
9.1 We accordingly direct the Ld.AO/TPO to follow the directions of the DRP and recomputed the margin of this comparable in accordance with law.
Accordingly this ground raised by assessee stands allowed.
10. Ground nos. 14-15 are general in nature and therefore do not require adjudication.
11. Ground no. 16 - This ground is raised by assessee is for providing with appropriate working capital adjustment that was not granted while computing the margins of of the assessee under both trading and manufacturing segment. 11.1. It has been submitted by Ld.AR that working capital was been denied to the assessee on the ground that assessee failed to demonstrate such differences could have any impact on assessee's profit. It has been submitted by Ld.AR that the submissions advanced by assessee demonstrating computational impact has not been considered by the Ld.AO/TPO. 11.2. Before us, Ld.AR submitted that it is an accepted principle upheld in various decisions of this Tribunal that working capital adjustment should be allowed on actual. It has been submitted that all relevant details for computation of working capital was provided to the Ld.AO/DRP which has been disregarded. He placed reliance upon the decision of coordinate bench of this Tribunal in case of Huawei Technologies India (P.) Ltd. v. Jt.
Page 38 of 60IT(TP)A No. 849/Bang/2022 CIT reported in (2019) 101 taxmann.com 313, wherein it has been held that the working capital has to be granted in actual. 11.3. On the contrary, Ld.CIT DR placed reliance upon orders passed by authorities below.
We have perused submissions advanced by both sides in light of records placed before us including the decision relied upon by 11.4. Ld.AR in case of Huawei Technologies India Pvt. Ltd. (supra). A reading of Rule 10B(l)(e)(iii) of the Rules read with sec. 92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market.
11.5. Chapters I and III of OECD Transfer Pricing Guidelines contain guidelines on comparability analyses for transfer pricing purposes. Guidlines on adjustments to be provided is found in paragraphs 3.47-3.54 and in the Annex to Chapter III. The guidelines must be followed for computing arm's length principle, and for comparing comparable uncontrolled transactions. Reasonably accurate adjustments should be made to eliminate effect of any such differences.
11.6. Paragraphs 13 to 16 of OECD guidelines, emphasizes need for working capital adjustment in terms of receivables and payables as under:
"13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the Price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a Page 39 of 60 IT(TP)A No. 849/Bang/2022 relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect.
14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect.
15. A company with high levels of inventory would similarly need to either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Note that the interest rate July 2010 Page 6 might be affected by the funding structure (e.g. where the purchase of inventory is partly funded by equity) or by the risk associated with holding specific types of inventory)
16. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. The underlying reasoning is that:
A company will need funding to cover the time gap between the time it invests money (i.e. pays money to supplier) and the time it collects the investment (i.e. collects money from customers) This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts in suppliers"
11.7. The reverse applies to huge accounts payable. By having high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold should include an element to reflect these payment terms and compensate for the timing effect. A company with high levels of inventory would similarly need to Page 40 of 60 IT(TP)A No. 849/Bang/2022 either borrow to fund the purchase, or reduce the amount of cash surplus which it is able to invest. Making a working capital adjustment is an attempt to adjust for the differences in time value of money between the tested party and potential comparables, with an assumption that the difference should be reflected in profits. Methodology to compute working capital adjustment is given in Paragraphs 13 to 16 of the aforesaid OECD Guidelines (supra). These guideline also indicate factors that needs to considered like;
11.8. The point in time at which the Receivables, Inventory and Payables should be compared between tested party and comparables, and whether it should be the figures of receivables, inventory payable at the yearend or beginning of the year or average of these figures that should be considered;, 11.9. In the matter of determination of Arm's Length Price, it cannot be said that the burden is on the assessee or the Department to show what is the Arm's Length Price. The data available with the assessee and Department should be the starting point and depending on the facts and circumstances of a case, further details can be called for. As far as the assessee is concerned, the facts and figures with regard to its business must be furnished. In so far as applying inventory, receivables and payables for computing working capital adjustment alleged by DRP/TPO in case of certain comparables, Hon'ble Delhi Bench in case of ITO v. E Value Servc.com reported in (2016) 75 taxmann.com 195 held that, insisting on daily balances of working capital requirements to compute working capital adjustment is not proper, as it will be impossible to carry out Page 41 of 60 IT(TP)A No. 849/Bang/2022 such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. 11.10. It must not be forgotten that transfer pricing analysis is estimation and not an exact science. One has to see that, reasonable adjustment must be made where ever it is needed, so as to bring both comparable and test party on same footing. In present facts of case, DRP may be correct in denying working adjustment due to unavailability required data, however there is no merit in observations of DRP/TPO as supported by Ld.CIR DR, in denying working capital adjustment due to absence of details for working out adjustments in comparable companies chosen. If we appreciate the argument advanced by Ld.CIT.DR, there would remain no comparables for the purpose of comparability analysis to determine ALP of an international transaction, and this would be fatal to entire exercise of transfer pricing analysis. 11.11. Regarding comparable companies, one has to fall back upon only on information available in public domain. If that information is insufficient, it is beyond the power of the assessee to produce correct information about comparable companies. Revenue on the other hand has sufficient powers u/s.133(6) to compel production of required details from comparable companies. If this power is not exercised to find to get information required, then it is no defense to say that Assessee has not furnished required details to deny any adjustment on account of working capital differences. Therefore this objection of DRP is not sustainable. Therefore in, endeavor should be made to bring in comparable companies for the purpose of broad Page 42 of 60 IT(TP)A No. 849/Bang/2022 comparison and working capital adjustment claimed by Assessee should be analysed, keeping in mind, OECD guidelines (supra). 11.13. Based on the above discussions, and respectfully following decision of coordinate Bench of this Tribunal in the case of Huawei Technologies India (P.) Ltd. (supra), we direct working capital adjustment to be computed and to allow as per actual, after considering exclusion/inclusion of comparable companies in the final set of comparables as discussed hereinabove. Accordingly Ground no. 16 raised by assessee stands allowed.
12. Ground nos. 17-19 has been raised by assessee against the addition made on global sales and marketing activity expenses incurred by assessee to be in the nature of AMP spent. 12.1. The Ld.AR at the outset submitted that this issue stands squarely covered by the order of Hon'ble High Court in assessee's own case for A.Y. 2010-11 in ITA No. 940/2017 by order dated 28/08/2018. The Ld.AR referred to pages 5691-5698 of the paper book wherein the order of the Hon'ble High Court is placed. 12.2. At page 5692, following substantial questions of law was framed by Hon'ble High Court.
"Whether the Hon'ble Tribunal is justified in setting aside the determination of Arms Length Price done by assessing authority and has directed the assessing authority to the file of the TPO/AO by considering the payment in respect of management fees and global sale and marketing activity fees as part of the operating cost and allocating the same in the ration of the turnover of the other international transactions when each transaction is different and should be analyzed separately and without appreciating that duplication of services and benefit analysis is very important to bench mark the transaction in transfer pricing?"
12.3. The Ld.AR submitted that Hon'ble High Court referring to various observations of the Tribunal's order observed and held as under:
Page 43 of 60IT(TP)A No. 849/Bang/2022 "3. The learned Tribunal, after discussing the rival contentions of both the Appellants- Revenue and Respondent- Assessee, has returned the findings as under:
"4. We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. We find that the assessee has carried out multiple and diversified international transactions in different segments. The international transactions of the assessee involve charges for raw material and components, sales and manufacturing goods, reimbursement of expenses, payment towards royalty and management fees, charges of capital equipment, payment of intra-goods services, charges of material, commission income, rendering of software services, reimbursement of expenses and Global Sale and Marketing Activity Fees. The TPO has accepted all other transactions except the international transactions regarding Global Sale and Marketing Activity Fees. It is pertinent to note that the international transactions of the assessee are comprising of revenue receipt from the AE as well as revenue payment to the AE. Therefore in these facts and circumstances of the case, we find that when the other international transactions regarding revenue receipt from the AE are tested under the TNMM analysis then the transaction of fee payment by the assessee towards the services rendered by the AE should not be separately tested but all the international transactions having receipt from the AE and payment to the AE shall be clubbed together and then has to be analysed under TNMM. We further note that the DRP has directed the TPO to determine the ALP in respect of the Global Sale and Marketing Activity Fees instead of considering the ALP at NIL. Therefore in principle we do not find any error or illegality in the directions of the DRP however having regard to the peculiar facts and circumstances of the case wherein the assessee is having multiple and diversified international transactions involving receipt as well as payment, we are of the considered view that the payment in respect of management fees as well as Global Sale and Marketing Activity Fees shall be considered as operating cost and has to allocated in the ratio of turnover of the other international transactions and then the ALP of the other international transactions has to be determined under TNMM analysis. Hence we set aside the entire issue of determination of ALP and TP Adjustment to the record of the TPO/A.O. for carrying out fresh exercise of determination of ALP in respect of international transactions by considering the payment Page 44 of 60 IT(TP)A No. 849/Bang/2022 in respect of management fees and Global Sale and Marketing Activity Fees as part of the operating cost and allocating the same in the ratio of the turnover of the other international transactions."
4. However, this Court in a recent judgment in I.T.A. Nos.536/2015 c/w 537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. -v- M/s Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable.
The relevant portion of the said judgment is quoted below for ready reference:
"Conclusion:
55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law.
56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 2CO-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed.
57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an `Arm's Length Price' in the case of the Page 45 of 60 IT(TP)A No. 849/Bang/2022 assessees with which the assessees may not be satisfied and have filed such appeals before this Court.
Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court.
58. The appeals filed by the Revenue are therefore dismissed with no order as to costs."
5. Having heard the learned counsel appearing for the Appellants-Revenue, we are therefore of the opinion that no substantial question of law arises in the present case also. The Appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs." 12.4. The Ld.DR on the contrary relied on the observations by the DRP.
We have perused the submissions advanced by both sides in the light of records placed before us.
12.5. As the issue has been decided in favour of assessee by Hon'ble High Court upholding the view taken by the Tribunal, it has been reproduced in para 3 of the order of the Hon'ble High Court (supra). Respectfully following the same, we are of the view that the expenditure incurred by assessee towards global sales and marketing activity has to be treated as operating cost and has to be allotted in the ratio of the turnover of the other international transaction for determining the ALP under TNMM analysis.
Accordingly ground nos. 17-19 raised by assessee stands allowed.
13. Ground nos. 20-28 is in respect of the expat salary reimbursement disallowed by the Ld.AO u/s. 40(a)(i) of the act. The Ld.AR submitted that this issue also stands covered in assessee's own case for A.Y. 2015-16 by order dated 14.02.2023 wherein this Tribunal held and observed as under:
"Corporate grounds Page 46 of 60 IT(TP)A No. 849/Bang/2022
26. The AO during the course of assessment called for to submit copies of Form 15CA and to provide ledger extract commenting on the nature of Form 15CA payments. The assessee vide submission dated 10.12.2018 provided the details of expat salary reimbursement amounting to Rs.4,53,92,631 and submitted that no TDS was deducted on the salary reimbursement. The AO held that the salary cost of seconded employees form an integral part of fees for included services and they are not just reimbursements. Therefore, the AO held that tax should have been deducted on the payments and since no tax has been deducted at source, disallowed the amount u/s. 40(a)(i). The DRP held that the assessee could not prove its claim with reliable evidence and confirmed the order of the AO. Aggrieved, the assessee is in appeal.
27. The ld. AR submitted that the issue of TDS on reimbursement of salary of seconded employees is settled now with the decision of the Hon'ble Karnataka High Court in the case of Flipkart Internet Pvt. Ltd. v. DCIT (International Taxation), WP No.3619/2021(T-IT) dated 24.6.2022. The ld. AR further submitted that the coordinate Bench in the case of Goldman Sachs Services P. Ltd. v. ACIT , IT(IT)A No. 362 to 369/Bang/2020 dated 29.4.2022 has considered the similar issue and held that there is no violation of provisions of section 40(a)(ia).
28. The ld. DR relied on the order of the Supreme Court in the case of C.C.,C.E& ST, Bangalore v. Northern Operating Systems (P) Ltd. [Civil Appeal No.2289 to 2293 of 2021) dated 19.5.2022.
29. We have heard the rival submissions and perused the material on record. We notice that the The Hon'ble Karnataka High Court in the case of Flipkart Internet Pvt. Ltd(Supra) while considering the issue of NIL TDS certificate towards reimbursement of salary cost held as follows:-
"33. In the present case, the stand taken on the material available is on the construction of legal position As pointed out in the discussion earlier that the understanding of the legal position being erroneous, the only conclusion that could be arrived at is to allow the application.
34. Though the Revenue has raised numerous contentions that further information is required to record a detailed finding, such stand is taken up for the first time in the present proceedings A perusal of the file of the Department does not make out any instance where the Department had sought for further information which was not furnished On the contrary, the petitioner has made out detailed representation on the legal position and record does not reflect any requisition for further information remaining unanswered In fact, the Page 47 of 60 IT(TP)A No. 849/Bang/2022 Apex Court in GE India Technology Centre (P.) Ltd. (supra) has rightly observed at para-16 as follows:-
"16. The fact that the Revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all..."
35. Further, it must be noticed that the finding as regards deduction of tax at source under section 195 of the IT Act is tentative insofar as the Revenue is concerned Even if the Revenue orders that there was no obligation to make deduction under section 195, the question of liability of the recipient still remains to be decided subsequently Accordingly, the question of prejudice to the Revenue at the stage of section 195 order is unavailable to it
36. Curiously, the file contains a note by the same DCIT who has eventually passed the impugned order, which note dated 10.03.2020 addressed to the CIT seeks for granting approval for granting deduction of TDS at the rate of zero per cent on cost-to-cost reimbursement However, the opinion was directed to be reconsidered as per the endorsement found in the file and eventually an order was passed by DCIT contrary to the earlier view and has rejected the application
37. Accordingly, the findings in the impugned order and the conclusion regarding the employer-employee relationship is based on a wrong premise and is liable to be set aside As observed by this Court in DIT (International Taxation) v. Abbey Business Services India (P.) Ltd. [2020] 122 taxmann.com 174 (Kar.), "it is also pertinent to note that the Secondment Agreement constitutes an independent contract of services in respect of employment with assessee" Hence, the DCIT in the impugned order has missed this aspect of the matter and has proceeded to consider the aspect of rendering of service as to whether it was 'FIS'
38. In light of setting aside of the impugned order in the context of legal position as noticed, the only order that can now be passed is of one granting 'nil tax deduction at source'.
39. Accordingly, in light of the above discussion, the impugned order at Annexure-A dated 1-5-2020 is set aside and the respondent No.1 is directed to issue a Certificate under section 195(2) of IT. Act to the effect of 'Nil Tax education at Source' as regards the petitioner's application dated 15-1-2020."
30.We also notice that the coordinate bench of the Tribunal in the case Goldman Sachs Services Pvt. Ltd.(supra) has considered a similar issued and held that - 26.9. Admittedly, the assessee deducted tax at source u/s.192 of the Act, on the 100% salary paid to the Page 48 of 60 IT(TP)A No. 849/Bang/2022 seconded employees, and paid the same to the credit of the Central Government. The assessee only reimbursed part of the salary cost of the seconded employee to overseas entity that has already subjected to TDS under section 192 of the Act. And therefore, at the time of making such reimbursement, to overseas entity, no taxes were deducted at source by the assessee in respect of reimbursements made as, according to the assessee, it was in the nature of cost-to-cost reimbursement, and, no element of income was involved.
26.10. The assessee in India does the TDS on 100% salaries u/s 192 and pay the same to the credit of the Central Government. Form 16 at page 228- 230 issued to Christopher Roberts of PB Vol I, by the assessee in Indian, Certificate under section 203 of TDS having deducted at source and further indicates the following - Employee has a PAN number in India Total taxable salary is Rs 9,761,581 (this corresponds to the US$ 130,000 as total compensation indicated in the local employment contract at para 4 The Indian company does full TDS on 100% of the salaries, although 25% is paid in India and balance 75% outside India TDS done is Rs 2,834,300/-, which translates to 30.8% of Rs 9,761,58 Employee also contributes to Indian provident fund Rs.2,57,885/-
26.11. From conjoint reading of Article 15 of the OECD Model Convention and the articled referred to herein above, there is no doubt in our minds that the assessee in India is the economic and de facto employer of the seconded employees. It is an admitted fact that all the seconded employees are in India for more that 183 days in a 12 month period. Further all the seconded employees have PAN card as well as file their returns in India in respect of the 100 % salary, though the assessee pays only part of the salary in India.
26.12. The definition of FTS under the Act is given in Explanation 2 to Sec.9(1)(vii) of the Act that reads as follows:-
"Income deemed to accrue or arise in India.
9. (1) The following incomes shall be deemed to accrue or arise in India :-
(i) to (vi)
(vii) income by way of fees for technical services payable by--
(a) the Government ; or Page 49 of 60 IT(TP)A No. 849/Bang/2022
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.
Explanation 1.--For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2.--For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".
26.13. The definition of FTS under the Act excludes "consideration which would be income of the recipient chargeable under the head salaries." If the seconded employee is regarded as employee of the assessee in India, then the reimbursement to overseas entity, by the assessee in India would not be in the nature of FTS, but would be in the nature of 'salary', and therefore, the reimbursements cannot be chargeable to tax in the hands of overseas entity, and therefore there would be no obligation to deduct tax at source at the time of making payment u/s.195 of the Act.
26.14. Article 12(4)-(5) of India USA, DTAA deals with "Fees for technical services', as under:
"4. For purposes of this Article, "fees for included services" means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:
(a) are ancillary and subsidiary to the application or enjoyment Page 50 of 60 IT(TP)A No. 849/Bang/2022 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, or consist of the development and transfer of a technical plan or technical design.
5. Notwithstanding paragraph 4, "fees for included services"
does not include amounts paid:
(a) for services that are ancillary and subsidiary, as well as inextricably and essentially linked, to the sale of property other than a sale described in paragraph 3(a);
(b) for services that are ancillary and subsidiary to the rental of ships, aircraft, containers or other equipment used in connection with the operation of ships or aircraft in international traffic;
(c) for teaching in or by educational institutions;
(d) for services for the personal use of the individual or individuals making the payment; or
(e) to an employee of the person making the payments or to any individual or firm of individuals (other than a company) for professional services as defined in Article 15 (Independent Personal Services)."
27. Rendering of managerial, technical and consultancy services is governed by Article 12 on 'Fees for included services' of the Double Tax Avoidance Agreement, between India and US. Payments made to 'individual or firm of individuals for service rendered by them in independent professional capacity are specifically excluded since they are covered by Article 15 on Independent Personal Services. Likewise, Article 12 specifically excludes payments made towards services rendered by an 'employee' of the enterprise since services rendered under employment are covered by Article 16 on Dependent Personal Services.
28. The relevant portion of para 5(e) of Article 12 of the DTAA between India and US reads as follows: -
"Fees for included services does not include payments made - to an 'employee' of the person making the payment or - to any individual or firm of individuals (other than a company) for professional services as defined in article 15 (Independent Personal Services).
The payments made by the Indian entity to the overseas entity is towards reimbursement of salary paid by the overseas entity to the seconded personnel. As discussed in para 14.2 to 14.7 above, for the purpose of Article 15 of the OECD Model Commentary (corresponding to Article 16 of the DTAA between India and US), the seconded personnel are employees of the Indian entity, being the economic employer. It is to be noted that the understanding as to who is the 'employee' in order to be excluded from, "fees for technical services", cannot be inconsistent with the Page 51 of 60 IT(TP)A No. 849/Bang/2022 understanding of employee for the purpose of Article 15 on income from employment, especially when Article 15 is an anti-abuse provision. 29. The Ld.DCIT placed reliance on the decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore Pvt.Ltd. reported (2014) 44 taxmann.com 300 concluded that the reimbursement was FTS and that services provided make available technical skill or knowledge for use by the assessee.
29.1. In case of the decision of Hon'ble Delhi High Court in the case of Centrica India Offshore Pvt.Ltd vs. CIT(supra) dealt with identical case of reimbursement of salaries paid to expatriate employees. The Hon'ble Court held that, overseas entities had, through seconded employees, undoubtedly provided 'technical' services to Centrica India and that, the expression rendering technical services expressly includes provision of services of personnel. The Hon'ble Court held that the Seconded employees, were provided by overseas entities and work conducted by them thus, i.e. assistance in conducting business of assessee of quality control and management was through overseas entities. The Hon'ble Court also held that, mere fact that secondment agreement, phrases payment made by Centrica India to overseas entity as 'reimbursement' could not be determinative. It was also held that, the fact that overseas entity did not charge mark- up over and above costs of maintaining secondee could not negate nature of transaction.
29.2 Hon'ble Pune Tribunal in case of M/s.Faurecia Automative Holding (supra) has observed as under:
"4.10. We have gone through the facts of the case obtaining in Centrica India (supra). The assessee therein contended that payment to foreign party towards seconded employees was only reimbursement and hence, no income was chargeable to tax in its hands. The Authority for Advance Ruling (AAR) held that payment made by the petitioner to the overseas entity was in the nature of income in view of the existence of Service Permanent establishment (PE) in India and hence liable for tax withholding. Overturning the view of the AAR that Service PE was constituted, the Hon'ble High Court held that the payment to AE was in the nature of `fees for technical services' and not reimbursement of expenses and further laid down that the nomenclature of reimbursement was not decisive. It noted that: 'Money paid by assessee to overseas entity accrues to overseas entity, which may or may not apply it for payment to secondees, based on its contractual relationship with them.' It is perceptible that in that case money paid by the Indian entity accrued to overseas entities only, which could or could not have been paid to the secondees depending upon the terms of contract. Per Page 52 of 60 IT(TP)A No. 849/Bang/2022 contra, we are confronted with a situation wherein the money never accrued to the assessee. It initially paid money to Mr. Franck in advance and then M/s.Faurecia Automotive Holding recovered the same from the Indian entity without any mark-up. There can be no question of the assessee receiving money in its own independent right. Rather, it is a case of discharge by the Indian entity of its own liability towards salary payable to Mr. Franck. It is thus manifest that this decision has no application to the facts of the instant case."
29.3 We also note that, reliance is placed on the decision of Hon'ble Madras High Court in case of Verizon Data Services India (P) Ltd. v. AAR and Ors(supra), wherein it is held that, the reimbursement of salary of expatriates to foreign co by Indian company results in taxable income in the hands of the foreign company. Hon'ble High Court also upheld the observations of AAR, wherein it characterized the secondment of personnel as provision of managerial services. However, the Hon'ble Court set aside the ruling of Hon'ble AAR, wherein it held that, the reimbursement of salary of expatriates constitutes fees for included services in terms of Article 12(4) of India USA DTAA. Therefore, reliance placed on this decision is of no assistance to revenue.
29.4 There is another decision of Hon'ble Supreme Court in case of DIT v. Morgan Stanley reported in (2007) 162 Taxman 165, wherein, it is held that, in case of deputation, the entity to whom the employees have been deputed cannot be regarded as employer of such employees as the employees continue to have lien on his employment with the entity which deputes him. Entity seconding the employee is the employer as it retained the right over seconded employee is also held by Hon'ble AAR in case of AT & S India Pvt Ltd., reported in 287 ITR 421.
29.5 The observations of the Hon'ble Supreme Court in the case of Morgan Stanley (supra) were in the context of existence of service PE. This is clear from a reading of the relevant portion of the judgment of the Hon'ble Supreme Court, which is as follows:-
"As regards the question of deputation, 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 the MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the UN 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 Page 53 of 60 IT(TP)A No. 849/Bang/2022 that where the activities of the multinational enterprise entail 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. Applying the above tests to the facts of this case, it is found that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under art 5(2)(l). There is no infirmity in the ruling of the AAR on this aspect. In the above situation, MSCo is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a service PE in India (MSAS)."
29.6 Per contra, in the present facts of the case there is no finding, of their existing PE, in any form by the revenue and therefore is of no assistance to the revenue. 29.7 As far as the decision of Hon'ble AAR in the case of AT & S (supra) is concerned, the facts of the said case were that AT&S, a company incorporated in Austria, offered services of technical experts to applicant, a resident company, pursuant to a foreign collaboration agreement on the terms and conditions contained in secondment agreement. Under the secondment agreement the applicant is required to compensate AT&S for all costs directly or indirectly arising from the secondment of the personnel, and the compensation is not limited to salary, bonus, benefits, personal travel, etc. but also includes other items. On the above facts, Hon'ble AAR ruled that the Contention that the payments are only in the nature of reimbursement of actual expenditure is not supported by any evidence and there is no material to show what actual expenditure was incurred by AT&S and what was claimed as reimbursement. A part of the salary of seconded personnel is paid by the applicant in Indian rupees and the remaining part is paid by the applicant to AT&S in Euro. While working with the applicant, the seconded personnel are required to comply with the regulations of the applicant, but they would go back to the AT&S on the expiry of assignment. Aforesaid terms and conditions show that the Page 54 of 60 IT(TP)A No. 849/Bang/2022 seconded personnel in effect continue to be employees of AT&S. Recipient of the compensation is AT&S and not the seconded employees. Further contention was that AT&S is not engaged in the business of providing technical services in the ordinary course of its business is also not tenable. Therefore, payments made to AT&S by the applicant are for rendering "services of technical or other personnel" and are in the nature of fees for technical services within the meaning of Explanation 2 to sub clause (vii) of section 9(1) and Article 12(4) of the relevant DTAA and are subject to deduction of tax at source under section195. 30.1 The ruling of Hon'ble AAR is on the factual finding that payments were not only reimbursement of actual salary, bonus etc., but was also included other sums. 30.2 Per contra in the present facts of the case, it is not at all the contention of the revenue that, something over and above what was paid as salary, bonus etc. 30.3 Liability under section 195 to deduct tax at source when making payment to a non-resident arises, only if, sum paid is chargeable to tax in India. Payment of salaries is not covered under section 195. Thus, it is necessary to take into consideration following aspect to determine Payments to enterprise seconding employees, the Indian entity has an obligation to deduct tax source u/s 195:
(i) Payment of fees by an enterprise (Indian entity) to foreign entity for seconding employees;
(ii) Reimbursement of salaries to the entity seconding the employees (foreign entity) from the entity to whom employees have been seconded (Indian entity).
31. Payment for supplying skilled manpower cannot be regarded as payment towards managerial, technical and consultancy services as per dictionary meanings of these terms. Hon'ble AAR in Cholamandalam MS General Insurance Co. Ltd., reported in 309 ITR 356, took the view that, merely supplying technical, managerial or personnel with managerial skills cannot be regarded as rendering technical services by the person supply such personnel. The following were the relevant observations of Hon'ble AAR:-
"It is debatable whether the bracketted words - "including provision of services of technical or other personnel" is independent of preceding terminology - "managerial, technical or consultancy services" or whether the bracketted words are to be regarded as integral part of managerial, technical or consultancy services undertaken by the payee of fee. In other words, is the bracketted clause a stand alone provision or is it inextricably connected with the said services? HMFICL itself does not render any service of the nature of managerial, technical or consultancy to the applicant and it has not deputed its employee to carry out such services Page 55 of 60 IT(TP)A No. 849/Bang/2022 on its behalf. There is no agreement for rendering such services. In this factual situation, it is possible to contend that merely providing the service of a technical person for a specified period in mutual business interest not as a part of technical or consultancy service package but independent of it, does not fall within the ambit of S.9(1)(vii)."
32. Hon'ble Bombay High Court in case of Marks & Spencer Reliance India Pvt.Ltd. VS. DIT reported in (2013) 38 taxmann.cm 190, upheld the view of Hon'ble Mumbai Tribunal which held that, payment towards reimbursement of salary expenditure without any element of profit, would not be taxable under the provisions of the Act. Hon'ble Court also held that, when the entire salary has been subjected to tax in India at the highest average tax rate, the assessee could not held to be in default for not without tax under the provisions of the Act.
33. Hon'ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. reported in (2005) 144 Taxmann 492 (Delhi) upheld the order of Hon'ble Delhi Tribunal which held that, when an Indian company had already deducted and remitted taxes under Sec.192 of the Act on salaries paid abroad to the technical personnel and when such salary is reimbursed on a cost to cost basis without any profit element, the provisions of Sec.195 of the Act cannot be applied to reimbursement of salaries made to foreign company, once again.
34. Coordinate bench of this Tribunal in case of IDS Software Solutions v. ITO reported in (2009) 32 SOT 25, Abbey Business Services (P.) Ltd v. DCIT reported in (2012) 23 taxmann.com 346, took the view that expats are deputed to work under the control and supervision of the Indian company and that the oversees entity is not responsible for the actions of the expatriate employees. Thus, oversees entity does not render any technical service to the Indian company, since such payment are towards reimbursement of salary cost borne by oversees entity, and that, no income can be said to accrue to oversees entity in India. The decision of this Tribunal in case of Abbey(supra) has been upheld by Hon'ble Karnataka High Court in DIT vs. Abbey Business Services India (P.)Ltd., reported in (2020) 122 taxmann.com 174.
35. Hon'ble Ahmedabad Tribunal in the case of Burt Hill Designs (P) Ltd. vs. DDIT(IT) (2017) 79 taxmann.com 459, on identical facts, as in the case of the present assessee before us, took the view that, there was no liability to deduct tax at source u/s.195 when payments were made by way of reimbursement.
Based on the above detailed analysis of various contrary decisions on the issue, we are of the view that the decisions relied by revenue are distinguishable with the present facts of the case.
Further, in the present facts we note that, the concept of make-available is not satisfied in the instant case. As per Page 56 of 60 IT(TP)A No. 849/Bang/2022 para 4(b) of Article 12 of the India-US DTAA on 'Royalties and fees for included services':
"4. For purposes of this Article, "fees for included services"
means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services a. .... b. make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design."
Thus, even if, the rendering of service by the seconded personnel constitutes a contract for service, in the absence of making available any technical knowledge or skill to the Indian entity, the same shall not constitute fees for technical services.
In support we refer to the decision of Hon'ble Karnataka High Court in the case of CIT vs. De Beers India Minerals Pvt. Ltd. reported in (2012) 21 taxmann.com 214, on the concept of 'make available', observed and held as under:
"What is the meaning of 'make available'. The technical or consultancy service rendered should be of such a nature that it 'makes available' to the recipient technical knowledge, know-how and the like. The service should be 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, skills, 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 be 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 the 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 Page 57 of 60 IT(TP)A No. 849/Bang/2022 consideration would be regarded as 'fee for technical/included services' only if the twin test of rendering services and making technical knowledge available at the same time is satisfied.
36. The Ld.AR has placed before this Tribunal a decision rendered by Hon'ble CESTAT, Bangalore, wherein the Hon'ble CESTAT was deciding, whether the assessee in India, was required to pay service tax demand (on reverse charge basis) on the secondment reimbursements, on the basis that the same amounts to "manpower recruitment & supply agency services", placed at page 66-86. The Hon'ble CESTAT, Bangalore, held that employer-employee relationship exist between the seconded employee and the assessee in India in para 14 of the order passed by Hon'ble CESTAT, Bangalore. The Hon'ble CESTAT, Bangalore, further held that, there is no manpower supply services since assessee in India is the real employer by reason of the employment contract. Service tax demand was deleted.
The relevant extracts are below -
6. Submitting on the demand of Service Tax under the category "Manpower Recruitment & Supply Agency Service", the learned counsel states that the employer- employee relationship exists between the Appellant and Seconded Personnel who have been sent on secondment to the Appellant; the Appellant has entered into separate employment contract with the Seconded Personnel. The seconded Personnel, during the period of secondment, work under the control and supervision of the Appellant; In terms of the employment contract, the appellant is under obligation to pay salary (including other entitlements) to the Seconded Personnel during the period of secondment in foreign exchange in his home country; for administrative convenience, the Appellant remits the salary payable to the Seconded Personnel in his home country in Foreign Exchange through the Seconder Company; the Seconded Personnel, as required under the Income Tax Act, 1961, files their respective returns under Section 139 of Income Tax Act, 1961 and shows the entire salary paid by the Appellant (including part of the salary paid in Foreign Exchange) as his/her income as salaries and pays the income tax thereon.....
14. Coming to the third issue of payment of salary, allowances and expenses of the personnel drawn from different global entities to work with the appellant, we find that learned Counsel submits that the employer-employee relationship exists between the Appellant and Seconded Personnel who have been sent on secondment to the Appellant; the Appellant has entered into separate employment contract with the Seconded Personnel. The Page 58 of 60 IT(TP)A No. 849/Bang/2022 seconded Personnel, during the period of secondment, work under the control and supervision of the Appellant; In terms of the employment contract, the appellant is under obligation to pay salary (including other entitlements) to the Seconded Personnel during the period of secondment in foreign exchange in his home country; for administrative convenience, the Appellant remits the salary payable to the Seconded Personnel in his home country in Foreign Exchange through the Seconder Company; the Seconded Personnel, as required under the Income Tax Act, 1961. We find that the issue is no longer res integra and is covered by decision of Volkswagen India Pvt. Ltd. Vs CCE, Pune-I, 2014 (34) STR 135 (Tri. Mumbai) [maintained by Apex Court in 2016 (42) S.T.R. J145 (S.C.)] wherein it was held that:
5.1 In view of the clauses of agreements noticed herein above and other facts, we hold that the global employees working under the appellant are working as their employees and having employee employer relationship. It is further held that there is no supply of manpower service rendered to the appellant by the foreign/holding company.
The method of disbursement of salary cannot determine the nature of transaction.
15. The learned Counsel for the appellants submits that the Department was fully aware of the facts when the SCN dated 27.10.2009 was issued and therefore no suppression of facts with an intent to evade payment of duty can be alleged in the subsequent SCN dated 15.04.2013. He relies upon Nizam Sugar Factory case (supra). We find that the argument is acceptable and for this reason, the second SCN is liable to be set aside ab initio.....
16. In view of the above, Appeal No. ST/25566/2013 & Appeal No. ST/21705/2016 are allowed.
Thus, the above decision of Hon'ble CESTST Tribunal further strengthens assessee's case. We therefore, hold that, the amount reimbursed by the assessee to the overseas entity cannot be subjected to tax in India as there does not involve any element of income embedded in it.
37. Respectfully following the above views expressed by Hon'ble Karnataka High Court in DIT vs. Abbey Business Services India (P.)Ltd.(supra), Hon'ble AAR in Cholamandalam MS General Insurance Co. Ltd. (supra), Hon'ble Bombay High Court in case of Marks & Spencer Reliance India Pvt.Ltd. vs. DIT (supra), Hon'ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. (supra), Coordinate bench of this Tribunal in case of IDS Software Solutions vs. ITO (supra), Hon'ble Pune Tribunal in case of M/s.Faurecia Automative Holding(supra), Hon'ble Ahmedabad Tribunal in the case of Burt Hill Designs (P) Page 59 of 60 IT(TP)A No. 849/Bang/2022 Ltd. vs. DDIT(IT) (supra), we are of the view that the reimbursement made by the assessee in India to overseas entity, towards the seconded employees cannot be regarded as "Fee For technical Services"
Once there is no violation of provision of section 195, assessee cannot be held to be an assessee in default under section 201(1) of the Act for all the years under consideration. We therefore direct the Ld.AO to delete the interest levied under section 201(1A) of the Act for all the years under consideration."
31.The ld AR submitted that the DRP has upheld the disallowance on the ground that the secondment agreement and assignment letters were produced and whatever was produced was rejected stating the same to be unreliable. The ld AR submitted that same set of documents which are already produced before the lower authorities is now submitted before the Tribunal as additional evidence including the initial secondment agreements. The ld AR prayed for the admission of additional evidence as these evidences when considered would substantiate the claim of the assessee. With regard to disallowance made towards secondment cost, the additional evidences now produced go the root of the issue and the core reason for not allowing the deduction by the lower authorities. For a proper adjudication of the issue and for substantial cause, the additional evidence is admitted and taken on record.
32. We accordingly remit the issue back to the AO/TPO for verification of the evidences and allow the deduction keeping in mind the ratio laid down by the Hon'ble Karnataka High Court and also the decision of the coordinate bench of the Tribunal in this regard. This ground is allowed for statistical purposes." 13.1 In the present facts of the case, the Ld.AO has recorded that TDS u/s. 192 has been deducted on gross salary however the same has not been verified by the Ld.AO. We accordingly remand this issue to the Ld.AO for necessary verification in accordance with the observations hereinabove.
Accordingly ground nos. 20-28 raised by assessee stands allowed.
14. Ground nos. 29-30: We note that this issue has been now decided by the Hon'ble Mumbai Special Bench in case of DCIT vs. Total Oil India Pvt. Ltd. reported in (2023) 149 taxmann.com 332.
Page 60 of 60IT(TP)A No. 849/Bang/2022 Accordingly, the Ld.AO is directed to follow the decision of Hon'ble Special Bench and consider this claim in accordance with law.
Accordingly, these grounds raised by assessee stands partly allowed for statistical purposes.
15. Ground no. 31 is consequential in nature and therefore do not require any adjudication.
In the result, the appeal filed by the assessee stands allowed on the issues argued by the assessee hereinabove. Order pronounced in the open court on 17th May, 2023.
Sd/- Sd/-
(PADMAVATHY S) (BEENA PILLAI)
Accountant Member Judicial Member
Bangalore,
Dated, the 17th May, 2023.
/MS /
Copy to:
1. Appellant 2. Respondent
3. CIT 4. DR, ITAT, Bangalore
5. Guard file
By order
Assistant Registrar,
ITAT, Bangalore