CASE LAWS

2016-TII-52-HC-MUM-INTL

DSP HMK HOLDING PVT LTD Vs DCIT: BOMBAY HIGH COURT (Dated: September 21, 2016)

Income tax - Sections 80A & 92BA.

Keywords - donation to charitable trust & specified domestic transaction.

Whether if under similar circumstances in the previous years, an issue as to the treatment of 'donation to a charitable trust' as 'specified domestic transaction u/s 92BA' has been remanded to the AO for re-examination, the same would follow in the current year too - YES: HC

The assessee had preferred the present petition challenging the order, whereby it was held that the assessee's donation to a charitable trust would be "specified domestic transaction" covered by Section 92BA.

Having heard the parties, the High Court held that,

+ it is an agreed position between the parties that the two petitions, filed by assessee's sister companies challenging an identical order, were allowed by way of remand to the AO. We find that impugned order is without any reasons in support of its conclusion, just as the order in the earlier petitions by the sister companies. Therefore, it is an agreed position that the facts and circumstances in the present case are identical to those in the writ petitions filed by the sister companies. Therefore, for the reasons indicated therein, the present writ petition is also disposed of by setting aside the impugned order and restoring the issue to the AO to pass a fresh order on his notice. Such notice called upon the assessee to respond his prima facie view that a donation made to a charitable trust would be a transaction covered by Section 92BA and would warrant a reference to the TPO. However, as the period to make a reference to the TPO would have in the normal course expired on 31 March 2016, the period commencing from 24 February 2016 till today would be excluded to compute the period of limitation. It is made clear that the AO will apply his mind independently while disposing of the show cause notice and will not be influenced in any manner by the order passed today.

Case disposed of

2016-TII-211-ITAT-MUM-INTL

KOTAK MAHINDRA BANK LTD Vs ITO: MUMBAI ITAT (Dated: August 25, 2016)

Income Tax - Sections 9(1)(vi), 248 - India UK DTAA - Article 13 & 15.

Keywords: royalty - legal fees - fees for technical services - liable for TDS - deduction - foreign branch - legal fees - deduction - new source of income.

Whether in case payment has been made to a foreign entity with a view to carry on business outside India in the form of a branch office, such payment falls within the exceptions of Section 9(1)(vi)/(vii) , hence no TDS need to be made on such payment - YES: ITAT

Whether when the expenditure incurred in the course of trade which is un-remunerative, even then it has to be considered as a proper deduction if wholly and exclusively made for the purposes of the trade - YES: ITAT

The assessee company is engaged in the banking business and paid certain legal fees amounting to USD. 37318.87 to one legal firm situated in UK. As per the agreement, withholding tax @20% on gross amount amounting to USD. 9329.72 was the liability of the assessee which was duly deposited. Subsequently, the assessee filed an appeal u/s 248 before CIT(A) and contended that the impugned payment was not liable to be taxed in India as per the Treaty provisions and also as per domestic laws hence there was no liability to deduct tax at source in respect of this payment. These contentions were considered but dismissed by CIT(A) on the ground that no new source of income ever came into existence by obtaining these legal services and hence the impugned payment constitute 'Royalty'/'FTS' as per Section 9(1)(vi)/(vii) of the Income Tax Act. Further, impugned payment constitute royalty as per Treaty provisions on the ground that assessee is provided with specialized knowledge, skill and experience in the field of regulatory norms prevalent in the US which can be utilized independently by the assessee on his own without recourse to the service provider. Finally, CIT(A) concluded that impugned payment are taxable both under domestic laws as well as under the Treaty provisions. Aggrieved, by the stand of CIT(A), the assessee is in appeal before us.

Having heard the matter, the Tribunal held that,

+ assessee has remitted the impugned payments for Phase-1 relating to education where bank officials visited USA and M/s Reed Smith made presentation and discussed with them various legal/regulatory requirement of USA for setting up of a Bank Branch or acquisition of banking company etc. The nature of services are nowhere disputed by the revenue and accordingly, the perusal of documents shows that the payments are, in fact, being made for creating/earning a new source of income outside India by way of establishment of new Bank Branch or acquisition of a Bank. With these objectives, the legal/professional fees have been paid to the attorneys. Therefore, as observed by us in preceding paragraph, the payment has been made with a view to carry on business outside India and create a new source of Income outside India, and therefore, these payment falls within the exceptions of Section 9(1)(vi)/(vii) and accordingly, not taxable under the domestic law. Further, as per the observation of SC in CIT Vs. Rajendra Prasad Moody, it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned. Expenditure in the course of the trade which is un-remunerative is nonetheless a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of receipt on credit side to justify the deduction of an expense. It is nowhere necessary that the purpose must be fulfilled to qualify the expenditure for deduction and it is not necessary that the expenditure must fructify into any benefit by way of return in the shape of income. Therefore, we are of the considered opinion that the impugned payments are not taxable under Section 9(1)(vi)/(vii). The above facts are nowhere disputed/confronted by the revenue and there is no adverse material on regard in this respect. Therefore, the payment in question do not get covered by Section 9(1)(i) due to the fact that the payee has neither business connection in India nor any PE in India;

+ the assessee has obtained the legal services and such services find specific treatment as per Treaty Article 15 and therefore, not covered by Article 13 which deals with 'Royalty and Fees for Technical Services'. This view has also been upheld in the case of Maharashtra State Electricity Board Vs. DCIT (ITAT Mumbai) wherein it has been observed that the provisions of Article 13 have to give way to more specific provisions of Article 15 which will hold field in the present case. In this view of the matter, we are unable to uphold the stand of the authorities below that Article 15 will govern the fact situation in this case. It is also not in dispute that in case Article 15 does not apply to this case, the payments to Freshfields will not be exigible to tax in India as, in view of the uncontroverted and unchallenged findings of the CIT(A), the condition of Article regarding stay in India are not satisfied. We are, therefore, of the considered view that the payment of fees for legal consultancy services to the UK based firm of solicitors is taxable only in United Kingdom and is not exigible to tax in India. Moreover, Article 15 applies not only to individual but to firms also as upheld by Special Bench of the Tribunal in the case of M/s Clifford Chance Vs. Asstt. DIT (IT). Therefore, in the absence of any business connection in India or permanent establishment of India and considering the fact that services are rendered outside India and no employee of the attorneys were present in India for more than 90 days, we are of the considered view that impugned payments are not taxable in India as per Treaty provisions Hence, the assessee was not liable for tax deduction at source from impugned payment. Accordingly, the appeal of the assessee is allowed.

Assessee's appeal allowed

2016-TII-501-ITAT-DEL-TP

DCIT Vs ERICSSON INDIA PVT LTD: DELHI ITAT (Dated: September 12, 2016)

Income tax - ALP - AE - reimbursement of cost - supply of equipment - sale support services - TNMM.

Whether a transaction between an assessee and its AE in respect of cost recharge for supply of hardware, is a mere pass through cost which is regularly reimbursed to the assessee by the AE and cannot entail a markup, if the agreement between the assessee & the AE shows that the former acts only as a facilitator for its AE - YES: ITAT

The assessee, a wholly owned subsidiary of Telefonaktiebolaget LM Ericsson, Sweden (LME), was engaged in the business of manufacturing of electrical apparatus for line telephone or telegraphy including such apparatus for carrier current line system and parts thereof, marketing of telecommunication equipment, implementation and commissioning of telecommunication equipment meant for mobile telephony, internet services and rendering technical services in connection therewith and development of telecommunication related software. For the year under consideration, the assessee filed its return of income on 31st October 2005 declaring a total income of Rs.56,17,34,062/-. The AO noted that the assessee had undertaken various iternational transactions with its AEs, comprising of wireless segment and softeare segment. In its TP study, the assessee selected TNMM as the MAM for determination of its ALP in each of the aforementioned business segments. The TPO accepted the margins earned by the assessee in each of the three business segments. However, in respect of transaction pertaining to reimbursement of cost related to wireless segment by AE to assessee for purchase and supply of ancillary/non-core equipment such as antennas/filters to customer of EAB in India, was objected by TPO. He considered the supply of equipment to the AE as sales and support services and added a markup of 6% on such costs to cost reimbursements thereby enhancing the total income by Rs.3,19,22,989/- contending that the transaction must be benchmarked separately. On appeal, the CIT(A) deleted the adjustment made by the TPO.

Having heard the parties, the Tribunal held that,

+ perusal of the agreement entered between the AE and the assessee clearly shows that the later acts only as a facilitator for its AE and does not undertake any transaction on a regular basis. The main purpose of undertaking such a transaction was to achieve administrative convenience for the AE. The assessee merely acts as an intermediary or facilitator for administrative convenience of the AE. Therefore, the transaction of cost recharge for supply of hardware is a mere pass through cost which is timely reimbursed to the assessee by the AE and cannot entail a markup since no service is being rendered. It is observed that the CIT(A) has dealt with the issue a length and has examined the scope and nature of services rendered by the assessee to its AEs in each segment. He has observed that: "....In the instant case the appellant by way of any FAR analysis has clearly demonstrated that it did not undertake any significant functions, employed significant assets and borne significant risks. Ericsson India Pvt. Ltd. Further, the assessee has also submitted sample copies third party invoices for the said international transactions which also mentions the name of the customer to which it is supplied....The primary contract has been entered into between the AE and Bharti and the assessee purchases and supplies the equipment at the instruction of AE. The above extracts clearly indicates that the primary contract has been entered into between the AE and the appellant purchases and supplies the equipment at the instruction of the AE. Based on the facts present and the material placed on record, it is accepted that the cost reimbursement transaction was undertaken by the assessee only for administrative convenience and the assessee had not undertaken any significant activity in this regard...." Therefore, this Tribunal does find any infirmity in the findings of the CIT(A).

Revenue's appeal dismissed