Income Tax Appellate Tribunal - Chennai
Durr Systems Ag , Mumbai vs Dcit,International Taxation -1(1), ... on 29 May, 2024
आयकर अपीलीय अधिकरण, 'डी' न्यायपीठ, चेन्नई।
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH: CHENNAI
श्री महावीर स हिं , उपाध्यक्ष एविं श्री अमिताभ शक्
ु ला, लेखा दस्य के मक्ष
BEFORE SHRI MAHAVIR SINGH, VICE PRESIDENT AND
SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER
आयकर अपील िं./IT(TP)A No.16/Chny/2022
&
SA-34/Chny/2022
ननिाारण वर्ा /Assessment Year: 2012-13.
Durr Systems AG The Deputy. Commissioner of
(formerly known as Durr Vs. Income Tax,
System GmbH) International Taxation-1(1)
Walker Chandiok & Co LLP, Chennai.
th
11 Floor, Tower-II, One
International Centre, SB Marg,
Prabhadevi(W), Mumbai-400013.
[PAN: AACCD4307Q]
(अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent)
अपीलार्थी की ओर े/ Assessee by : Shri Vikaram Vijayaraghavan,
Advocate
प्रत्यर्थी की ओर से /Revenue by : Shri A. Sasikumar, CIT
न
ु वाई की तारीख/Date of Hearing : 01.05.2024
घोर्णा की तारीख /Date of Pronouncement : 29.05.2024
आदे श / O R D E R
PER AMITABH SHUKLA, A.M :
This appeal has arisen out of assessment order u/s 143(3) r.w.s 144C(13) dated 28/2/2022 of the Assessing officer passed in compliance to the directions of the DRP dated 27/12/2021. Aggrieved by the assessment order supra arising from DRP's directions the assesse has raised following three grounds of appeal:-
ITA No.16/Chny/2023:- 2 -:
Research & Development Fees ('R&D' Fees)
1. The AO / DRP erred in considering reimbursement of R&D expenses as Royalty income from Durr India Private Limited ('Durr India') completely ignoring the Cost Allocation Agreement entered between the Appellant and Durr India.
Buy-back of shares from Durr India
2. The AO/DRP erred in subjecting to tax the consideration received by the appellant on account of buyback of equity shares of its wholly-owned subsidiary Durr India ignoring Section 47(iv) of the Act.
Attribution of Income to the Permanent Establishment-Durr India
3. The AO/DRP, on pure conjecture and guesswork, erred in attributing portion of the receipts from Durr India as per Form 26AS towards consideration for alleged supply of goods. The AO/DRP ignored the fact that all the receipts as per the Form 26AS have been offered for tax by the appellant. As such, attribution of income to the alleged PE of the appellant results in double taxation of income.
2.0 Brief facts of the case are that the assesse company M/s. Durr Systems GmbH is a foreign company incorporated under the laws of Germany. The assesse company is primarily engaged in executing contracts for assembly and supervision of paint shop, including supply of materials for various automobile companies. The assesse company filed original return of income for the Assessment Year 2012-13 on 30.11.2021 admitting a total income of Rs.3,11,085/-. The case was selected for scrutiny and notice u/s 143(2) dated 13.08.2013. The assesse company thereafter revised the return was on 14.03.2014 claiming a refund of Rs.54,296,700/-. Subsequently notice u/s 142(1) of the Income Tax Act, 1961 dated 27.06.2014 was issued and served upon the assesse. In the case of the assesse for the AY: 2012-13, draft ITA No.16/Chny/2023 :- 3 -:
assessment order was passed on 31.03.2021 determining the taxable income at Rs.204,01,14,126/-. Against this draft assesse filed objection before DRP on 27.04.2021. The DRP issued its directions vide order dated 27/12/2021 and in compliance thereof the AO passed final orders on 28/02/2022 which is central to the present controversy. 3.0 The ground of appeal number 1 challenges the addition made by the AO of Rs.10,42,89,500/- as Royalty income of the assesse The facts of the case and the decisions taken are evident in following observations of the DRP extracted hereunder :-
"......1.0 Ground of objection no.1. Addition on account of Research & Development (R&D) fees aggregating to Rs.10,42,89,500/- as Royalty income of the assess.
During the year under consideration, the assesse was in receipt of Rs. 10, 42, 89,500/- from Durr India Private Limited (Durr India) for reimbursement of R&D expense based on the terms of Cost Allocation Agreement (CAA).
The AO has erred in considering the receipts from Durr India on account of reimbursement of R&D expenses aggregating to Rs.10,42,89,500/- as Royalty income of the assesse for the year under consideration in complete disregard with the provisions of section 5 and section 9 of the Act. The AO has completely ignored the nature of CAA between the Durr Systems AG (Durr Germany) and Durr India, pursuant to which the said amount was received.
In connection with the reimbursement of R&D cost, the assesse had filed an application with the Authority for Advanced Ruling (Income tax), New Delhi, on 27 December 2010. The application was disposed with an adverse ruling on 22 March 2012. Aggrieved by the Ruling of the AAR, the assesse, has preferred a Writ Petition with the Hon'ble Madras High Court on 31 August 2012 currently, the Petition is pending adjudication......ITA No.16/Chny/2023
:- 4 -:
..........On the said issue, the assesse had filed an application before the Hon'ble Authority for Advance Ruling(AAR). By order dated 12.09.2011 the Hon'ble AAR allowed the application u/s 245R (2) of the Income Tax Act, 1961.
The details of the transaction as discussed in the AAR ruling is as under:
1. Whether pursuant to the Cost Allocation Agreement (CAA) the payments to be made by Durr India Private Limited ("Durr India") to the applicant, representing the Durr India's share of the costs incurred towards Research and Development ("R&D") activities, constitutes "Income in the hands of the Applicant within the meaning of the term ("the Act") liable to tax under the Act?
2. If the answer to question No.1 is in the affirmative, will the amount received by the applicant under the CAA constitute business income of the applicant. If so, in view of the facts as in ANNEXURE II and ANNEXURE III is there a Permanent Establishment in India under "Agreement between the Government of the Republic of India and the Government of Federal Republic of Germany for the avoidance of double taxation with respect of taxes on income ('India-Germany Tax Treaty) in connection with the R & D activity of the Applicant and any part of the amount received by the Applicant from Durr India under CAA, is attributable to such Permanent Establishment in India under the India-Germany tax treaty and hence taxable in India?
3. If the answer to Question No.2 is in the affirmative are the expenses connected with Permanent Establishment (i.e. expenses, if any in connection with R & D activities) be allowable as a deduction from the amount so received?
4. In the answer to Question No.1 is in the affirmative i.e. there is "income" accruing to Durr Germany and answer to Question No.2 is negative, then whether the amount is taxable as "Fees for Technical services" under the Income Tax Act read with the India Germany Tax Treaty?
5. In the answer to Question No.2 & 4 is negative, i.e. there is "income taxable under the Act accruing to Durr Germany but there is not in the nature of "Business Income or "Fees for Technical services", then whether the same is taxable as "Royalty" under the Income Tax Act read with the India - Germany Tax treaty?ITA No.16/Chny/2023
:- 5 -:
6. Based on the answers to the above queries what is the rate and on what amount should the tax be deducted at source by Durr India on the payments made under CAA to the Applicant.
The Hon'ble AAR vide its order dated 22.03.2012 held the following which is reproduced as below:
"We rule that what is paid is royalty income in terms of the act and the DTAC. We may notice that on the facts as set out, the applicant is only an administrator (clearing centre) of the settlement of the Cost Allocation Agreement as regards Research and development. The income received is passed on to the concerned party to the agreement who has expended monies for the research and development. We feel that this question is relevant only as regards the actual receiver of the payment as per the so-called allocation key. We have ruled that this payment would be royalty in terms of paragraph 3 of article 12 of DTAC and under section 9(1)
(vi) of the Act. It will, hence, be royalty income liable to be taxed in India under article 12.2 of the DTAC between India and Germany.
Questioned No.2 is ruled on thus. Question nos. 3 & 4 stand answered in the light of our rulings on Questions 1 & 2, the question of Permanent establishment does not arise, the question whether the applicant has a Permanent Establishment in India is left open. It is also not necessary to rule on the question whether the payment is free for technical services. On Question no.5, our ruling is that the payment which is income at the hands of the recipient, is royalty and is taxable as such in India. On Question No.6, we rule that the deduction of tax at source should be at the prescribed rates as provided by the Act......
1.1 Panel: This panel has carefully considered and perused the objections and submissions filed by the assesse. This panel finds that the receipts from Durr India private limited for reimbursement of R&D has to be treated royalty as income in terms of the Act and the DTAC. It may be noted that the applicant is only an administrator (clearing Centre) cost allocation agreement as regards Research and Development. The income received is passed on to the concerned party to the agreement who has expended monies for the research and development. We feel that this question is relevant only as regards the actual receiver of the payment as per the so called allocation key.
ITA No.16/Chny/2023:- 6 -:
1.2 Hence, this panel is of view that this payment shall be royalty in terms of paragraph 3 of article 12 of DTAC and under section 9(1)(vi) of the Act. It will, hence, be royalty income liable to be taxed in India under article 12.2 of the DTAC between India and Germany. Accordingly, the above ground is rejected.
1.3 During the course of DRP proceedings, the panel observed that the assesse filed a writ petition before Hon'ble High Court of Madras against the Ruling of AAR. Hence, this panel is of opinion that the ruling of the Hon'ble AAR is binding on the Income Tax authorities as per section 245(S) of the Income Tax Act, 1961. The said receipt is therefore treated as royalty income of the assesse and taxed accordingly. Hence, the decision of the AO is upheld..." 4.0 We have heard the rival submissions on the matter in the light of facts of the case, evidences placed on records and the judicial decisions relied upon. The order of the Ld.AO passed in consequence to DRP's directions heavily places reliance upon decision of the AAR. The Ld.AR fairly conceded that it has not succeeded before the AAR & is presently before the Hon'ble Jurisdictional High Court which is yet to pronounce its verdict. The Ld. DR placed reliance upon the orders of AAR & the DRP.
We are also of the view that the ruling of the AAR is binding upon the AO within the meanings of section 245 (S) of the Act. In view of the same we confirm the additions made by the Ld. AO in the assessment order dated 28/02/2022 and accordingly the ground of appeal number 1 is dismissed.
ITA No.16/Chny/2023:- 7 -:
5.0 The ground of appeal number 2 challenges the addition made by the AO of Rs.19,18,00, 000/- on account of long term capital gain earned the assesse on account of buy back of 14,00,000 shares of Durr India The facts of the case and the decisions taken are evident in following observations of the DRP extracted hereunder :
".....At the outset, it is pertinent to note that during the year under consideration the assesse was in receipt of sales consideration on account of buy back of 14,00,000 shares of Durr India aggregating to Rs.19,18,00,000/- (Rs.19.18 crores) and not 191.80 crores (Rs.1,91,80,00,000/-) as considered by the AO in the Draft Assessment Order ("DAO"). The same will be evident from the annexure to our submission dated 31 March 2021 (refer page no
231).
The AO erred in considering the total sales consideration on account of buyback of shares of Durr India as long-term capital gain of the assesse ignoring the fact that as per section 47(iv) of the Act, the said buy-back is not a transfer and consequently, the capital gains, arising on the transfer of equity shares by the assesse to its wholly owned subsidiary in the course of buyback of shares would not be taxable in India.
(B) Computation of capital gain With prejudice to the assessee's contention that the said receipts are exempt in nature and hence not taxable, it is humbly submitted that the action of the AO is completely unjust in considering total sales consideration on account of buyback of shares as capital gain without allowing deduction on account of cost of acquisition of such shares as per the provisions of section 48 of the Act. After allowing deduction on account of the cost of acquisition, the long-term capital gains amount to Rs.17,17,29,896/-........
2.2. Apart from this mistake apparent from record, this panel also carefully considered the objection and submission of the assesse on this ground. The basic allegation of the assesse is that AO/TPO has erred in considering the total sales consideration on account of buyback of shares of Durr India as long-term capital gain of the ITA No.16/Chny/2023 :- 8 -:
assesse. The AO / TPO ignored the fact that as per section 47(iv) of the Act, the said buy-back is not a transfer and consequently, the capital gains, arising on the transfer of equity shares by the assesse to its wholly owned subsidiary in the course of buyback of shares would not be taxable in India.
However, it is seen that the assesse filed an application before Hon'ble AAR for advance Ruling(AAR). The details of the same is reproduced as below:
" The application is admitted by AAR on 17th May, 2013, the questions relating to the transaction on which the advance rulings are required as under:-
1. Whether in the facts and circumstances of the case, would the transfer of shares in Durr India Private Limited (Durr India) by the Applicant to wholly owned subsidiary, Durr India, in the course of the proposed buy-back of shares, be exempt from tax in India in the hands of the Applicant, in view of the provisions of Section 47(iv) of the income tax Act, 1961(the Act)?
2. On the facts and in circumstances of the case, whether minimum alternate tax (MAT) as contemplated under section 115JB of the Act is applicable to the capital gains arising to the Applicant from the proposed buy back of shares?
3. Where, on the facts in circumstances of the case, the gains arising to the Applicant on account of proposed transfer of shares, in the course of buy-back of shares by Durr India, is not taxable in India under the Act, whether the applicant is entitled to receive the amount on buy back of shares without any deduction of tax at source.
The Hon'ble AAR vide Ruling dated 3rd Day of October, 2019 A.A .R No.1195 of 2011 ruled as below:-
77. For the aforesaid reasons, we hold on the facts and circumstances of the case, the share buy-back transaction is taxable under section of 46A and exemption under section 47(iv) is not eligible.
During the course of DRP proceedings, this panel has considered the above AAR Ruling. This panel is of the opinion that the Section 46A of the Income Tax Act clear says that this transfer is deemed to be capital gain. The relevant paras of the 46A of Income Tax Act are as under.ITA No.16/Chny/2023
:- 9 -:
"Where a shareholder or a holder of other specified securities receives any consideration from any company for purchase of its own shares or other specified securities held by such shareholder or holder of other specified securities, then, subject to the provisions of section 48, the difference between the cost of acquisition and the value of consideration received by the shareholder or the holder of other specified securities, as the case may be, shall be deemed to be the capital gains arising to such shareholder or the holder of other specified securities, as the case may be, in the year in which such shares or other specified securities were purchased by the company".
In view of the above discussion, this panel has considered that the AO / TPO has rightly decided the issue and we find no merit in interfering the action of the AO. Accordingly, this Ground of objection is rejected.
2.3 (B) Computation of capital gain Having considering the submissions of the assesse, wherein the assesse contended that AO has not this panel is of the opinion considering total sales consideration on account of buyback of shares as capital gain without allowing deduction on account of cost of acquisition of such shares as per the provisions of section 48 of the Act. However, the Section 48 of the Income Tax Act, Clearly Says that "Mode of computation.
48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :-
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto;94
Provided that in the case of an assesse, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full vaue of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially ITA No.16/Chny/2023 :- 10 -:
utilized in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company; Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of an Indian company referred to in the first provision, the provisions of clause (ii) shall have effect as if for the words "cost of acquisition"
and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any o,[rpve,emt" had respectively been substituted;
Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government;
Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section;
Provided also that no deduction shall be allowed in computing the income chargeable under the head "Capital gains" in respect of any sum paid on account of securities transaction tax under Chapter VII of the of the Finance (No.2) Act, 2004".
2.4 After careful consideration of the objections filed by the assesse. This panel is of view that the AO has rightly computed the Capital Gains and the action of the AO is upheld. Accordingly, this ground of objection is rejected.
6.0 We have heard the rival submissions on the matter in the light of facts of the case, evidences placed on records and the judicial decisions relied upon . The order of the Ld.AO passed in consequence to DRP's directions heavily places reliance upon decision of the AAR.The Ld.AR ITA No.16/Chny/2023 :- 11 -:
fairly conceded that it has not succeeded before the AAR & is presently before the Hon'ble Jurisdictional High Court which is yet to pronounce its verdict . The Ld. DR placed reliance upon the orders of AAR & the DRP. We are also of the view that the ruling of the AAR is binding upon the AO within the meanings of section 245 (S) of the Act. In view of the same we confirm the action of the Ld. AO in treating buy back of shares as taxable in the hands of the assesse as long term capital gains and making additions to the returned income , in the assessment order dated 28/02/2022 and accordingly the ground of appeal number 2 is dismissed .
7.0 The ground of appeal number 3 challenges the action of the AO in attributing portion of the receipts from Durr India as per Form 26AS towards consideration for alleged supply of goods. It is the case of the assesse that the Ld. AO ignored the fact that all the receipts as per the Form 26AS have been offered for tax by the appellant. As such, attribution of income to the alleged PE of the appellant results in double taxation of income.
8.0 We have heard the rival submissions on the matter in the light of facts of the case, evidences placed on records and the judicial decisions relied upon. The ld.AR of the assesse has argued that the amount of Rs 1,28,56,846/- added by the assesse being 7.33% of Rs 17.54 crores includes LTCG of Rs 17.17 crores which has been subjected to tax ITA No.16/Chny/2023 :- 12 -:
separately . Further, Rs 5.59 lakhs represents mere reimbursement of expenses and Rs 31.10 lacs is in the nature of fees for technical services which has been offered to tax by the assesse. There are clear indications in the assessment order and the DRP proceedings that there was some inaction on the part of the assesse to make timely compliance to issued notices. The assesse on its part has argued inadequacy of time granted for compliance. Be that as it may , we are of the view that ends of justice would be met if the issue at hands is set aside to the file of the AO for re- consideration of the matter in the light of material placed by the assesse on records and after affording due opportunity of being heard to the assessee. The Ld. DR concurred with the views of the Bench. The assesse is directed to tender all assistance and cooperation to the Ld. AO in this regard. Accordingly, the ground of appeal is partly allowed for statistical purposes only.
9.0 In the result, the appeal is partly allowed.
10.0 Since we have heard the appeal and decided, the Stay petition SA-
34/Chny/2022 for Assessment Year: 2012-13 becomes infructuous and hence, is dismissed.
ITA No.16/Chny/2023:- 13 -:
11. In the result, the appeal filed by the assessee is partly allowed for statistical purposes and the stay petition is dismissed as infructuous.
Order pronounced on 29th May, 2024.
Sd/- Sd/-
(महावीर स हिं ) (श्री असमताभ शक्
ु ला)
(Mahavir Singh) (Amitabh Shukla)
उपाध्यक्ष / Vice President लेखा सदस्य /Accountant Member
चेन्नई/Chennai, ददनािंक/Dated: 29th May, 2024. KB/-
आदे श की प्रनतसलपप अग्रेपर्त/Copy to:
1. अपीलार्थी/Appellant
2. प्रत्यर्थी/Respondent
3. आयकर आयुक्त/CIT, Chennai / Madurai / Coimbatore / Salem
4. विभागीय प्रविविवि/DR
5. गार्ड फाईल/GF