Income Tax Appellate Tribunal - Delhi
Acit, New Delhi vs M/S. Blue Scope Steel India (P) Ltd., ... on 1 March, 2018
1ITA No. 5535/Del/2012
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I-1' NEW DELHI
BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER
AND
MS SUCHITRA KAMBLE, JUDICIAL MEMBER
I.T.A .No. 5535/DEL/2012 (A.Y 2007-08)
I.T.A .No. 5536/DEL/2012 (A.Y 2008-09)
I.T.A .No. 5537/DEL/2012 (A.Y 2009-10)
ACIT Vs Blue Scope Steel India (P) Ltd.
Circle-3(1) The Metropolitan, Final Plot NO. 27,
New Delhi Survey No. 21, Wakdewadi, Shivaji
Nagar, Pune
AAACB2855R
(APPELLANT) (RESPONDENT)
Appellant by Sh. Ronak Dashi, CA
Respondent by Sh. Kumar Parnav, Sr. DR
Date of Hearing 06.12.2017
Date of Pronouncement 01.03.2018
ORDER
PER SUCHITRA KAMBLE, JM
These appeals are filed by the Revenue against the order date d31/08/2012 passed by CIT (A)-XX, New Delhi for Assessment Year 2007-08.
2. In all the appeals the grounds are common therefore, the grounds of ITA No. 5535/Del/2012 are taken up which are as under:-
"1. The Ld. CIT(A) has erred on facts and in law in concluding that TPO has accepted ALP at cost plus 7.5% when the actual intention of the TPO was to determine the ALP at higher margin by excluding the salary cost from the cost base.
2. The Ld. CIT(A) erred on facts in law in holding that if AO has allowed the salary to expats expenses against local revenue, the TPO 2ITA No. 5535/Del/2012 cannot disallow it in the internal taxation.
3. The Ld. CIT(A) erred on facts in law in not examining the transaction from an independent perspective and summarily rejecting the TPO's secondary analysis.
4. The Ld. CIT(A) erred on facts in law in deleting the adjustment of Rs.2,32,67576/- as proposed by the TPO ignoring the detailed reasoning given by the TPO in his order u/s 92CA(3).
3. Blue Scope Steel India (P.) Ltd. is a subsidiary of Blue Scope Steel Limited, Australia ("AE or "Holding Company"). During the assessment year, the assessee Company was engaged in providing business support services to its AE and feasibility/ technical consultancy services and project management services to third party. During the year under consideration, the assessee company had undertaken following international transactions with its Holding Company, which were benchmarked and reported in Form 3CEB as under:
Sr. No. Description of transaction Value in Rs.
(a) Provision of business support services- Value in Rs.
Income
(b) Reimbursement of salary cost-Expense 2,21,06,858
2,32,67,567
The terms between the assessee and its Holding Company in relation to the business support services [as reported at (a) above] are governed by the agreement dated April 1, 2004 and the assessee company charged cost plus markup of 7.5% towards such services. The said transaction was benchmarked by the assessee Company using Transactional Net Margin Method. As far as reimbursement of salary cost is concerned, the same was reimbursed to the AE for salary disbursed by the AE in Australia and air ticket, visa charges, etc. incurred by the AE in respect of employees seconded to the assessee Company. Since the Assessee Company reimbursed such cost to its Holding Company on actual basis without any markup and charging of any markup would only result in reduction of the profits of the assessee, the same is considered to be 3ITA No. 5535/Del/2012 at arm's length in view of section 92(3) of the Act. During A.Y. 2005-06, the assessee Company had undertaken to set up a project relating to steel coating facility and to manufacture building products for Indian building and construction industry. However, due to commercial constraints, the assessee Company, in A.Y. 2006-07, sold the said project to Tata BlueScope Steel Limited ["TBSL" (formerly known as BlueScope Steel Building Solutions Private Limited)] which is a joint venture company between Tata Steel Limited and BlueScope Steel Limited, Australia. The sale of the project enabled the assessee Company to recover the cost of the project from TBSL in the form of lump sum consideration of Rs. 7,50,00,000/-at the time of sale and recurrent project management income in the subsequent years, which otherwise would have been 'sunk' costs resulting into huge losses. The sale consideration and the project management income was recognized as revenue in the books of the assessee Company and has been accepted as such by the Tax Department. The abovementioned agreement dated December 1, 2005 also provided that though the project is sold, the Assessee Company, upon receipt of project management fees, shall continue to provide the ongoing project services and business consultancy services to TBSL. Accordingly, the assessee received the project management fees of Rs. 68,79,062/- and Rs. 3,10,57,199/- during A.Y. 2006- 07 and A.Y. 2007-08 respectively from TBSL, which was duly accounted and offered for tax by the assessee. The assessee benchmarked the business support services provided to its AE by applying Transactional Net Margin Method and adopting Operating Profit/Operating Cost as the Profit Level Indicator. The TPO accepted the margin earned by the Assessee Company @ 7.5% on the provision of such services and no adverse inference is drawn by TPO in relation to the same. The assessee reimbursed the salary cost to the AE at cost without any mark-up. The TPO determined the Arm's Length Price ("ALP") of reimbursement of salary cost as 'NIL' based on the following observations:
a. There is no agreement between the assessee Company and its AE relating to secondment of employees and nothing was been submitted 4ITA No. 5535/Del/2012 with regard to role of employees for rendering business support services to the AE.
b. The expats are the employees of the overseas AE and were deputed for project related work to the assessee Company but after the sale of the project, their services was deputed to TBSL but through the assessee Company.
c. The role of the assessee Company after the sale of the project on December 1, 2005 remained to watch the interest of the AE and for the same, role of these employees is incomprehensible. The assessee Company and its AE made an arrangement to drain out the money from India by burdening the assessee Company with a liability which is actually of TBSL, where the AE is a partner.
d. No services relating to payroll management services rendered by AE to the assessee Company for which claim was made. The payment of salary and other costs of expats did not constitute any service; rather can be said as an arrangement. During the year under consideration, nothing was charged by the AE to the assessee Company towards payroll management services.
The AO after giving an opportunity to the assessee Company, confirmed the action of the TPO and made the addition of Rs. 2,32,67,567/- to the total income towards reimbursement of salary cost.
4. Being aggrieved by the assessee filed appeal before the CIT(A). the CIT(A) allowed the appeal of the assessee.
5. The Ld. AR submitted that the assessee company employed expats seconded by the Australian AE and the assessee company is engaged in providing business support services to AE and project management services to TBSL through such expatriate employees. The Ld. AR further submits that the role of the expats in providing such services along with their professional qualification was duly submitted before the TPO and the said fact was also 5ITA No. 5535/Del/2012 acknowledged by the TPO in his order. The Ld. AR submitted that the following facts cannot be disputed:
(1) employees were seconded by the AE to the assessee company (2) Assessee company was paying them salary.
While the Indian component of expat's salary is not disputed only the foreign component disbursed by the AE in Australia for convenience purpose of such expats was disallowed. The assessee company deducted tax at source on entire salary paid to employee (Indian & Australian Disbursement). The said facts was taken into account by the TPO in his order and accepted that such highly technical force is needed for the project development work. Such seconded employees also filed return of income in India. The Ld. AR further submits that the seconded employees with high qualification and experience enabled the assessee company to render business support services to AE and project management services to TBSL and thereby earn income from such services. It is a settle law that an agreement between two parties need to be returned and should be inferred from the conduct by the parties. The Ld. AR further submits that the assessee company employed such expats on secondment basis in the past and there was no dispute on such secondment and rendering of business support services in Assessment Year 2005-06 and 2006-07. Thus, the Ld. AR submitted that the Revenue is first time changing its stand only post sale of project.
6. The Ld. AR further submits that the expats are on the pay role of the assessee company since many years and the assessee company provided business support services to its AE and project Management Services to TBSL through such expats and the corresponding business support service income and project management income was duly offered for taxation and accepted by the Revenue Department. The Ld. AR further submitted that the TPO on mere surmises and conjectures held that post sale of project such previous were 6ITA No. 5535/Del/2012 debited to TBSL without any documentary evidence and without cross confirmation from TBSL. The Transfer Pricing Officer did not bring on record any evidence with substantial's the allegation that post sale of project employees were deputed to TBSL.
7. The Ld. AR further submits that the role of the assessee company after sale of the project to TBSL as defined in the agreement dated December 1st, 2005, was to provide ongoing project services and Business Consultancy Services to TBSL in order to avoid increased cost and to ensure smooth functioning of the project the lump sum consideration amounting to Rs.7,50,00,000/- received on the sale of the project and the recurring Project Management income was duly offered for tax by the assessee company which was not disputed by the Revenue Department. The Ld. AR further submits that the employee cost of these expats comprises of the local expenditure and the foreign component which was disbursed by the AE in Australia for convenience purposes and subsequently, reimbursed by the assessee company to its AE. The TPO allowed the local expenditure. However, he determined the ALP of the foreign component as NIL. The assessee company did not make any arrangement to drain out the money from India and it cannot be said that the liability of such expats was of TBSL as the company had developed the project and the income on sale and corresponding project and management income was accounted for the in the books of the assessee company. The assessee company was under contractual obligation to provide such services as per the agreement dated December 1st 2005. The TPO cannot rewrite the terms of any commercial agreement and cannot step into the shoes of the assessee to determine the exigencies of the expenditure to the incurred by the assesse as per the submissions of the Ld. AR.
8. The Ld. AR submits that no Pay Roll Management Services were rendered by the AE to the assessee company in the year under consideration and accordingly nothing was charged by the AE to the assessee on this account.
7ITA No. 5535/Del/2012The fact that the reimbursement of salary cost is under Pay Roll Management Services Agreement was before the CIT(A). The correct fact is that the assessee company had employed seconded employees from Australia and the same set of employees were rendering business support services and Project Management Services to the AE and TBSL respectively. The Ld. AR further submits that rendering of Pay Roll Services by the AE and the secondment of employees from AE are independent and the same cannot be said that since no Pay Roll Management Services were rendered by the AE, the salary cost of the seconded employees through which the assessee company earns income can be disallowed.
9. The Ld. DR submitted that as per Ground No. 1 to 4, the CIT(A) has erred in deleting the TP Adjustment of Rs.2,32,67,576/- and ignored the detailed reasons given by the TPO at pg no. 19 and 20 of the TPO's order for determining ALP at NIL. The Ld. DR further submitted that no benchmarking was done by the assessee for the said international transaction. The assessee is earning service income from only two services - "business support services"
and "technical services". The assessee was not able to substantiate the fact either before the AO/TPO or before the CIT(A) that these six expats worked for the assessee in providing "business support services" to the AE or to "technical services" to the JV (where AE is 50% partner). Thus, the ALP was correctly determined at NIL under CUP as no independent party would have paid such amounts to the AE on account of salaries without deriving any benefit. The Ld. DR further submitted that there is no agreement between the assessee and AE in respect of providing the services of the above six expat employees. There are no individual agreements between the assessee and the above six expat employees regarding the amount of salary to be paid and nature of services required. The AE paid merely on the basis of the debit notes raised by the AE. The Ld. DR submits that the TPO correctly held that the above six persons are not the employees of the assessee as there is no agreement or appointment 8ITA No. 5535/Del/2012 letter of any sort between the assessee and the expats. In fact, there is no such agreement of the assessee with the AE as well. It is evident that these six expatriate employees are employees of AE and not of assessee who might be working on the project (sold by the assessee to the JV in the earlier financial year) on behalf of the AE. Since they are not employees of the assessee hence there is no question of paying any Salary to them. This fact has not been appreciated by the CIT(A).
10. The Ld. DR further submits that the CIT(A) erroneously held that cost base in the calculation of mark-up of 7.5% pertaining to the "business support services" comprised of the salaries paid to the expatriate employees and since no adverse view was taken by the TPO in case of "business support services"
hence no such TP adjustment can be made in case of reimbursement of salaries. The assessee itself has submitted that out of total payment of salaries of Rs.2,32,67,567/- made to the six expatriate employees payment of only Rs.47,86,261/- (refer pg no. 6 of the TPO's order) pertained to the "provision of business support services" and balance, i.e. Rs. 1,84,81,306/-, pertained to "provision of technical services" to the JV. The Ld. DR further submitted that the TPO has excluded salary to expats while benchmarking the provision for business support services using internal TNMM. The agreement of the assessee with the JV is w.e.f. December 2006 i.e. for the part of the FY 2006-07 whereas the payments were made to the expats for the entire financial year 2006-07. From the perusal of the agreement of the assessee with the JV it has been observed that the rates for Marketing and Business Development Manager (effective date December 2006), Operations Manager(effective date December 2006), Engineering Manager(effective date October 2007) and President Solutions Business (effective date October 2007). None of the expat employees fall into the above categories. The assessee has not furnished the details at which it has charged the JV for the services of the six expat employees.
11. The Ld. DR further submits that from the analysis of the audited 9ITA No. 5535/Del/2012 accounts of the assessee also it is evident that the assessee has not utilized the services of the six expatriate employees for generating service incomes in respect of "business support services" or in respect of "technical services", i) The assessee has only two sources of revenue - "provision of business support services to the AE" and "provision of technical services to the JV". As per the agreement with the AE the "provision of business support services" is at cost plus mark-up of 7.5%. Thus, total cost incurred in respect of the provision of these services can be identified. The assessee has incurred total employee cost of Rs.5,92,59,906/- (payment of Rs.2,32,67,567/- to the expatriate employees and payment of Rs.3,59,92,339/- to Indian employees) and total establishment expenses of Rs.3,04,38,634/-. The assessee has earned total Service income of Rs.5,31,94,119/- as mentioned in the Audited Accounts which includes Rs.2,21,06,858/-, in respect of "business support services" (at mark-up of 7.5% of the cost) , and Rs.2,99,26,552/- in respect of "technical services". Since total cost after mark-up of 7.5% in respect of "business support services"
is Rs.2,21,06,858/- hence the actual cost (without mark-up) is Rs.2,06,60,615/-. Now the assessee itself has claimed that cost of salaries to the expatriate employees for providing "business support services" is Rs.47,86,261/- thus it means that the balance Salary cost to expats for providing the above services is Rs.1,58,74,354/- (Rs.2,06,60,615 - Rs.47,86,261).
12. The Ld. DR further submits that assuming that the entire cost of the assessee is only on account of employee cost (ignoring the huge establishment expenses which is more than 50% of the salary expenses), the payment on account of salaries made to the Indian employees for providing "business support services" is Rs. 1,58,74,354/-. Since total payment to Indian employees is Rs.3,59,92,339/- hence payment made to Indian employees for providing "technical services" to the JV is Rs.2,01,17,985/-. The Assessee has received service income from JV amounting to Rs.2,99,26,552/-. Thus, if it is accepted that the expatriate employees are providing services to the JV as well 10 ITA No. 5535/Del/2012 then the assessee has paid salaries of Rs.3,85,99,291/- (Rs.2,01,17,985/- paid to Indian employees + Rs. 1,84,81,306/- paid to expatriate employees) to earn service income of Rs.2,99,26,552/- in spite of the fact that the assessee is billing the JV on the basis of provision of manpower. The above analysis has been done without accounting for the huge "Establishment Expenses" of Rs.3,04,38,634/-. If these costs are also proportioned then the difference between the cost and revenue for the provision of technical services to the JV will be approximately equal to the salary paid to expats. Thus, it is quite evident that the expatriate employees are not providing "technical services" to the JV and thus the payment of salaries to the expatriate employees is not at arm's length as held by the TPO."
13. The Ld. AR as rejoinder submitted that the entire allegation that the six expats were not Assessee's employees is baseless without any evidence. The Assessee has clearly stated that the employees were seconded. Also the entire Tax Deducted at Source ("TDS") on salary was deducted by the Assessee and Form 16 was duly issued. Even the expat employees have filed their Return of Income in India. Even the Transfer Pricing Auditors in the Form 3CEB and Transfer Pricing Report have accepted the reimbursement of salary etc. of the seconded employees. Letters filed before the TPO clearly provided that the TDS has been deducted by the Assessee. The DR wrongly concluded that as per TPO, the six expat employees were of AE and not of the Assessee. The AO or the TPO have not disputed that the six expats were employed by the Assessee but their entire case is that post sale of project such expats ought to have been shifted on payroll of the Joint Venture ("JV"). This is also substantiated at pg. 16, wherein the TPO has accepted that for rendering technical project development work, such technical work force is required. The AO or the TPO have not disputed that the six expats were employed by the Assessee but their entire case is that post sale of project such expats ought to have been shifted on payroll of the Joint Venture ("JV"). This is also substantiated at pg. 16, wherein the TPO has accepted that for rendering technical project development 11 ITA No. 5535/Del/2012 work, such technical work force is required. In so far as the allegation that Rs. 3.59 crore is salary paid to Indian employees is concerned, the Assessee submits that the said allegation is also misunderstanding of facts. During the year under consideration, the Assessee had employed six expats and besides them there was only one Company Secretary (Mr. T. S. Sundareswaran upto June 30, 2006 and Mr. Satyajit Joshi thereafter). The same was also stated before TPO. The Indian component is salary expenditure of six expats and Company Secretary, which has been allowed by the AO.
14. We have heard both the parties and perused the material available on record. The assessee Company has rendered business support services to its AE and project management services to TBSL through its employees and also derived income by rendering such services, which has been offered for tax. The role of the assessee Company post-sale of the project was to provide ongoing project and business consultancy services to TBSL to ensure that the development of the project is not stalled resulting into increased costs. The Business Support Services Agreement, Payroll Management Services Agreement, Agreement between the assessee Company and TBSL, TDS returns, Form 16 issued by the assessee to expats, etc. was before Revenue authorities. From the records it can be seen that the expats were the seconded employees of the assessee Company and not of its overseas AE. These expats were responsible for providing business support services to the AE as well as project management services to TBSL. Thus, there is no need to allow local expenditure of these expats and denying the foreign component of salary disbursed by the AE in Australia by the TPO/AO. The Assessee Company had earned income on the sale of the project and also project management income in the subsequent years. The Assessee Company was under contractual obligation to provide project management services and business consultancy services to TBSL post-sale, and also the income earned from such services has been offered for tax. In fact, the TPO has allowed the Indian component of salary paid to such employees, however, denied the deduction of foreign 12 ITA No. 5535/Del/2012 component by determining the ALP of such cost as 'Nil'. The TPO has accepted the business support income and project management income earned by the Assessee through employment of such expats. This action of the TPO is not just and proper when it is accepting the salary paid to such employees in India should not deny the deduction on foreign component of the same. The same set of expats were also engaged in providing business support services and the income from such services has been offered for tax and accepted by the TPO. Also, post-sale of the project, the Assessee Company has charged to TBSL towards provision of project management services which has also been offered for tax and accepted by the Department. Since the income earned through these expats has been accepted by the TPO and the local expenditure also against the said income has been allowed, only the foreign component which was disbursed in Australia for convenience of such expats cannot be disallowed. These factual aspects where never rebutted by the TPO/AO. The CIT(A) has taken cognizance of all these factors and given a detailed findings in respect thereof. There is no need to interfere with the finding of the CIT(A). All the three appeals filed by the Revenue are identical. Therefore, all the appeals are dismissed.
15. In result, all the three appeals of the Revenue are dismissed.
Order pronounced in the Open Court on 01st March, 2018.
Sd/- Sd/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 01/03/2018 R. Naheed * 13 ITA No. 5535/Del/2012 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI Date 1. Draft dictated on 07/12/2017 PS 2. Draft placed before author 07/12/2017 PS 3. Draft proposed & placed before .2018 JM/AM the second member 4. Draft discussed/approved by JM/AM Second Member. 5. Approved Draft comes to the PS/PS Sr.PS/PS 05.03.2018 6. Kept for pronouncement on PS 7. File sent to the Bench Clerk 06.03.2018 PS 8. Date on which file goes to the AR 9. Date on which file goes to the Head Clerk. 10. Date of dispatch of Order. 14 ITA No. 5535/Del/2012