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Date of filing of return for assessees in J&K extended till 30th Sept 2016

CASE LAWS

2016-TII-197-ITAT-MUM-INTL

SEPCO III ELECTRIC POWER CONSTRUCTION CORPORATION Vs ADDL DIT: MUMBAI ITAT (Dated: August 26, 2016)

Income tax - Sections 195, 197 & 234B.

Keywords - Certificate u/s 197 - FTS - fees for technical services - offshore services - PE - permanent establishment - retrospective amendment & TDS obligation.

Whether it is open to the Revenue authority to levy interest u/s 234B upon a non-resident assessee, for non-deduction of TDS u/s 195 on offshore services, on the basis of an amendment made in the provision relating to offshore contract, where the authority itself has granted certificate u/s 197 to the said assessee - NO: ITAT

The assessee is engaged in the activity of construction and erection of thermal power project and infrastructural activity and it had a PE in India. During the subject year, the assessee was awarded contract from Sterlite Energy Ltd. and V.S. Lignite Power Pvt. Ltd. They filed an application u/s 195 before the AO for seeking certificate u/s 197 and the same was granted to them. The assessee filed its return declaring total income of Rs.15,27,40,900/- and the same was selected for scrutiny. The AO while framing the assessment, made addition of Offshore Design & Engineering Services of Rs. 62,76,56,839/-. While making the addition, the AO concluded that Offshore Design & Engineering Services were taxable as fees for technical services both under Income Tax Act as well as Indo-China DTAA. Thus, gross consideration of Rs. 62,76,56,839/- was subject to tax @ 10%. The AO while passing the order also made an order for charging interest u/s 234B.

Having heard the parties, the Tribunal held that,

+ it is seen that the CIT(A) concluded that the payer did not deducted tax at source on the basis of certificate u/s 197 obtained from AO by making incorrect representation regarding taxability of offshore service income. This is not a case where payers failed to deduct tax on their own. In fact, there are no failure of payers regarding TDS. Therefore, interest is not recoverable from payer’s u/s 201 and, hence, interest is recoverable on the payee under the Act for failure to pay tax in time u/s 234B & 234C. Since interest is recoverable either from payer or from payee, one of them and not both. And held that interest u/s 234B is leviable on assessee. The order of CIT(A) is self-contradictory, as the order speaks that certificate u/s 197 was in respect of onshore supply contract and onshore service contract. And on the other hand, the order also speaks that a certificate u/s 197 was obtained from AO by making incorrect representation regarding taxability of offshore service income. We are conscious that interest u/s 234B & 234C are consequential and compensatory in nature. The interest is leviable on account of offshore services which are taxable as per Article 7 r.w. Article 12(5) of Indo-China DTAA. Explanation attached with Section 9(2) was amended by Finance Act 2010 with retrospective effect from 1st June 1976. When the assessee has filed its return, the provisions of law were not on statute book and it was brought into effect only by way of Finance Act 2010;

+ it is noticed that the AO has neither discussed about the issuance of notice u/s 197 nor about its validity while holding that the assessee is liable to tax on offshore services rendered by it. It is to be noted that the certificate u/s 197 was valid till 31st March 2008, wherein the assessee was given concession to receive the payment without deduction of tax. The taxability for the offshore service contract came on the statute book only after the amendment by Finance Act 2010. It is not in dispute that no tax was deducted by payee for services rendered on account of offshore service contract. The AO taxed the assessee for the payments received on account of offshore services. The assessee has principally agreed by not filing the appeal against the tax liability on account of addition for offshore services. The only ground for our consideration is if the assessee is liable to pay interest u/s 234B. The provision of Section 234B applies to the assessee who is liable to pay advance tax in accordance with the provisions of the Act. And the failure to pay such advance tax on the part of assessee was due to the fact that being a non-resident company; the tax was deductable at source u/s 195 for which a certificate u/s 197 was issued by the AO. We may note that the assessee has accepted the tax liability due to subsequent amendment in law with retrospective effect. We are of the considered view that nobody can anticipate the subsequent amendment in law, even with retrospective effect which may or may not create liability that not only with the tax liability but with interest as well. Therefore, we do not endorse the action of AO who was issuing certificate u/s 197 for the relevant AY and while framing assessment, without cancelling the said order fixing the tax liability that too with consequential interest. In the above discussion, the order of AO is modified to the extent that the assessee is not liable for payment of interest u/s 234B.

Assessee's appeal allowed

2016-TII-450-ITAT-BANG-TP

ITO Vs MAXIM INDIA INTEGRATED CIRCUIT DESIGN PVT LTD: BANGALORE ITAT (Dated: March 31, 2016)

Income Tax - Sections 10A & 10B.

Keywords - telecommunication charges - export turnover - total turnover - related party transaction - abnormal profits - selection of comparables.

Whether when CIT (A) has not fixed any threshold limit of RPT, can the AO or TPO be directed by such CIT(A) to completely ignore the companies having related party transactions, for the purpose of selecting comparables - NO: ITAT

Whether merely a company or entity having high profit margin or high loss can be a reason for exclusion or inclusion in the list of comparables for the purpose of making selection - NO: ITAT

Whether classification of comparables on the basis of companies selected on turnover basis can be considered as appropriate and acceptable filter even if there is no reasonable parameter to apply the difference of turnover between the assessee and the comparable - NO: ITAT

The assessee is a 100% captive unit providing software design and development services to its parent company earning revenue from its services on a 'Cost Plus Model'. The assessee claimed benefit u/s 10A. The AO did not accepted the case of the assessee on the ground that the application filed before STPI on 20.12.2002 was, for seeking approval to establish a new unit and not for recognizing an existing unit. Therefore, it declined to grant benefit u/s 10A. The CIT(A) held that the undertaking of the assessee in question was not formed by splitting and therefore it was a maiden business which was commenced on 01.05.2002 and the provisions of Section 10A(ii) are not applicable to the assessee's ease. Therefore, he granted the relief to the assessee as provided u/s 10A. The Tribunal dismissed the Revenue's Appeal. On Appeal before the HC, Revenue Counsel contended that it was a case of reconstruction and therefore the assessee is not entitled to the benefit of Section 10A. Regarding selection of comparables, CIT(A) has directed AO/TPO to exclude 5 comparable companies on the ground that their turnover exceeds Rs.200 crores.

Having heard the matter, the Tribunal held that,

Exclusion of comparable companies having Related party transaction

+ this ground is regarding the direction of DRP in excluding the comparable companies having RPT. It has been pointed out by DR that CIT(A) directed the TPO to exclude the companies which have RPT without specifying the exact percentage of RPT to be taken as threshold limit. We find that the TPO has not applied any filter of RPT for selection of comparable companies. CIT(A) while passing the impugned order held that there is no need for inclusion of the companies which have RPT and accordingly directed the AO to exclude the companies having RPT from the comparables. It is pertinent to note that in the normal circumstances the Tribunal has considered 15% as threshold limit of RPT, when there is no difficulty of finding the comparable companies. Therefore, in view of the fact that the CIT (A) has not fixed any threshold limit of RPT, we modify the impugned order of the CIT(A) and direct the AO/TPO to apply 15% RPT as threshold limit for the purpose of selecting comparables. This ground of the Revenue's appeal is partly allowed;

Exclusion of comparable companies having abnormal/high profit margin

+ we note that an identical issue was considered by the Special Bench of the Mumbai Tribunal in the case of Maersk Global Centres (India) (P.) Ltd. V. ACIT, 2014-TII-52-ITAT-MUM-SB-TP. Thus, it is clear that merely a company or entity having a high profit margin or high loss cannot be a reason for exclusion or inclusion in the list of comparables. However, if the high profit or high loss is as a result of some abnormal event or circumstances in a particular comparable company, the same is to be investigated and examined, and if it is found that due to the said particular extra-ordinary or abnormal circumstances the said company cannot be regarded as functionally comparable to that of assessee, then only it is to be excluded from the list of comparables. Accordingly, we direct the AO/TPO to further verify and investigate the actual reason of the high profit margin of the company and then decide the issue in the light of the finding of the Special Bench in the case of Maersk Global Centres (India) (P.) Ltd.;

Exclusion of comparable companies by applying the turnover filter

+ CIT(A) has applied turnover slab of Rs.1 crore to Rs.200 crores for excluding these companies, whereas there is an inherent difficulty in applying such a turnover slab of Rs.1 crore to Rs.200 crores because the said classification on the basis of slab of the turnover gives unrealistic results, as an entity having Rs.1 crore turnover can be compared with any entity having Rs.200 crores turnover, but at the same time an entity having Rs.200 crores turnover cannot be compared with an entity having Rs.201 crores turnover. Thus, as it is clear from the above illustration that it gives ambiguous result as two entities having difference of Rs.1 crore cannot be considered as comparable, whereas on the other hand difference of Rs.199 crores can be considered as comparable company. Therefore, such classification of comparables on the basis of companies selected on turnover basis is not appropriate and acceptable. The turnover, no doubt, is a relevant factor to be taken into account, but there should be some proper and reasonable parameter to apply the difference of turnover between the assessee and the comparable which may be a multiple in the range of 2 times, 3 times, X times or any other number of times which should be applied to all the comparable companies, instead of taking a slab from Rs.1 crore to Rs.200 crores. Thus, if appropriate multiple to say 10 times is applied, then the assessee having turnover of Rs.8.15 crores can be compared with a company which is having a turnover of Rs.81.5 crores. Accordingly, in view of the above facts of the case, we set aside this issue to the record of the AO/TPO to apply appropriate multiple or differential factor regarding the turnover of the comparable and the assessee. In the result, the appeal by the Revenue is partly allowed.

Revenue's appeal partly allowed