| 2016-TII-INSTANT-ALL-383 | 29 September 2016 |
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RBI CIRCULAR CASE LAWS DCIT Vs XANSA INDIA LTD: DELHI ITAT (Dated: September 26, 2016) Income Tax - Sections 10A, 40a(ia), 40A(2)(b), 92C(2), 92CA(3), 143(3) & 195 - India-Singapore DTAA - Articles 12, 13 & 23. Keywords: BPO data - ALP adjustment - TDS deduction - export turnover - subsistence allowance - make available - reimbursement of expenses - allocation of overheads. Whether if for allocation of cost, there are direct costs involved and same are required to be directly attributed to the particular profitability statement of a segment, for indirect costs it is necessary that appropriate allocation keys are adopted for allocating them to the particular business segment to derive its correct profitability - YES: ITAT Whether if in case of revised working, the business support cost is located on the basis of revenue, PLI of the assessee is higher than the PLI of comparables, the original selection of allocation keys without identifying direct & indirect cost is to be considered as erroneous in nature - YES: ITAT Whether in case payment of subsistence allowance by the foreign AE is only a reimbursement of expenditure which is not chargeable to tax in India, no withholding tax is required to be deducted from such payment and hence provisions of section 40a (i) does not apply - YES: ITAT Whether if amount paid to M/s Xansa, Singapore is on account of the reimbursement of professional services rendered by them and not being in the nature of the fees for technical services, no taxability arise in India, hence no TDS liability could arise - YES: ITAT Whether in case an assessee has considered a company as a comparable in its TP study report, it is possible for such assessee to resile the same subsequently on some reasonable basis - YES: ITAT Whether expenses can be considered prior period expenses merely because they pertain to the earlier period to the accounting period, even in case they are admitted by the parties during the current year - NO: ITAT The assessee, a subsidiary of Xansa PLC, UK software Service Company, provides services of system integration, enterprise solution and business process outsourcing services. The 99.276% of the shares of the assessee company were held by the UK Company. It was engaged in business as contract software service provider to its UK parent which obtains all software service contracts from UK based customers. It carries out application maintenance work, which was stated to be at a low-end value chain in application maintenance vertical of the assessee. Assessee filed its return of income declaring a loss of Rs. 166414/-. Subsequently, this return was revised on 29.10.2005. Assessee has entered into certain international transactions during the year. Assessee while bench marking this transaction selected TNMM as the most appropriate method for determining its ALP of the transactions. As a PLI it selected operating margin as a percentage of operating cost. For software services it had earned operating profit by total cost margin of 36.71% and for ITES services it had shown a loss of 19.16%. As a justification for loss it was documented that substantial expansion activity in the BPO segment was carried out during the previous year and therefore there was increase in the fixed cost such as communication expenses, electricity and repair charges, therefore there was a higher fixed cost involved in the current year. The assessee for its ITES segment selected 9 comparables showing the weighted average OP/TC and PLI of 11.43% and submitted that international transaction of IT enables services are at arm's length. For this the assessee projected the profitability of BPO segment at 15.79% which was falling within range variance + 5%. On reference, TPO selected only 4 comparables out of 9 selected by the assessee giving reasons for rejecting 3 comparables. TPO determined the ALP of the international transaction of ITES of Rs. 183035000/- at Rs. 274355537/- and proposed an adjustment of Rs. 91320537/-. Consequently, assessment order u/s 143(3) was framed on 29.12.2006 wherein the total taxable income of the assessee were assessed at Rs. 698929280/- incorporating the above addition on account of TP issues. Addition regarding TP adjustment This ground of appeal of Revenue was TP issue based on the adjustment of Rs. 91320537/- made by TPO which has been restricted to Rs. 11935400/- on account of incorrect allocation between the software and BPO segment and rejecting the comparable Apex Logical Data Conversion Pvt. Ltd without reasoning by CIT (A). It is appropriate to state here that the assessee has also preferred appeal as per ground No. 1 against the confirmation of the addition to the extent of Rs. 11935402/-. The crux of the transfer pricing issue is with respect to incorrect determination of margins of the assessee. Admittedly the assessee in its its TP study report has also considered the margin of the provision of IT enables services having total value of the transaction of Rs. 181442916/- and taking appellant as tested party of (-) 19.16% and compared it with margins of the comparables computing arithmetic mean at -11.43%. However, before TPO vide letter dated 27.10.2006 the assessee submitted that the assessee should be allowed credit for idle capacity and appropriate allocation of business support cost. It was stated that if these two adjustments are allowed then PLI of the assessee is higher than PLI of the comparables. Vide letter dated 09.10.2006 it was submitted that overheads are allocated on the basis of headcount in each business segments and therefore the mismatch has arisen between the revenue and cost. It was also submitted that in BPO segment at the ends of the year more than 300 employees are employed and therefore the higher cost is allocated. However, TPO rejected the contention of the assessee in para 6.4 of his order stating that the explanation submitted by the assessee are different at different point of time as firstly it was claimed on account of market strategy and subsequently, it is claimed on account of allocation of overheads. Therefore, he rejected the same. Disallowance for non deduction of TDS on subsistence allowance Assessee had incurred an expenditure for payment of subsistence allowance to its employees who were positioned overseas to its holding company. These expenditure was paid on the basis of the actual vouchers and details submitted by the employees to the assessee and it was contended by assessee before AO that this was a reimbursement of the expenditure incurred by the assessee's employees. However AO disallowed 25% of the subsistence allowance paid by assessee stating that deduction for the same was claimed without any supporting evidences and alternatively no tax had been deducted on such sums therefore also the disallowance was sustained. On appeal, CIT(A) deleted the disallowance holding that no tax was required to be withheld in India on such payment as it was merely a reimbursement of the amount of subsistence allowance initially paid by the UK company on behalf of the appellant to its employees and there was no income chargeable to tax in India. It had further held that such subsistence allowance would be taxable in the hands of the employees if it was demonstrated that the entire payment was not actually spent for official purposes by the employees. It had further noted that since 75% of the expenses were supported by the evidence of actual expenditure it was allowed by AO and to the extent of 25% of the amount merely declaration had been furnished with respect to such amount spent in the course of travel abroad. It had held that such expenditure cannot be disallowed when the same was confirmed by way of declaration received from various employees. Disallowance u/s 40(a)(ia) This ground of appeal of the revenue was regarding the disallowance of Rs. 2822882/- made out of legal and professional charges expenses by holding that the said payments made to various non-resident was taxable in India by AO by invoking the provisions of section 40 (a) (ia) was deleted by the CIT(A). Assessee had made the certain payments under the head legal and professional expenditure without deduction of tax under section 195. Therefore invoking the provisions of section 40 (a) (i) the amount was disallowed. Exclusion of comparable company For the admission of the additional ground prayer under rule 11 of the income tax appellate Tribunal Rules 1963 was filed. It was contended by AR that there was no estoppels in law and it was open for the assessee to resile from the position wrongly taken as this comparable had been taken by the assessee in its TP Study report. It was further submitted that above additional ground of appeal does not require any fresh adjudication into facts as the facts relating to these comparable forms part of TP study filed by the assessee and considered by TPO and CIT(A). It was further submitted that in view of the various decision of coordinate benches holding that Fortune Infotech Ltd was not a valid comparable to an assessee engaged in the profession of ITES and therefore the omission to raise the additional ground of appeal was neither willful nor deliberate. Thus, it had submitted that the additional ground of appeal may be admitted. Disallowance on account of prior period expenses During the relevant assessment year, the appellant had disclosed certain prior period expenses. From such expenditure, the appellant had set-off the prior period income. In the return of income, assessee made a net addition of Rs. 3,15,679/- to the total income, on account of prior period expenditure, by reducing net prior period income of Rs. 2,12,941 from export segment and adding back net prior period expenditure of Rs. 5,28,620 in the domestic segment. AO, however, made an addition of Rs.2,12,941, holding that such set-off of prior period income from prior period expenditure is not allowable u/s 37(1). On appeal, CIT(A) confirmed the disallowance. Having heard the matter, the Tribunal held that, TP adjustment + on perusal of this allocation keys it is apparent that most of the expenses incurred by the assessee has been allocated which are directly related to the particular segment and whenever there are indirect cost involved, they are allocated on the basis of 'head count' only. The only difference is that in case of the cost of space which is allocated on number of desk in each segment and vacant seats are allocated to the IT segment. This method of allocation was also appropriate for the reason that BPO segment is in a primitive stage or in a start-up stage. In any case it may be an idle capacity created and therefore for the working out of the PLI of the BPO segment that particular cost also requires to be eliminated. We do not see any infirmity in the revised working of allocation of direct cost of business support services as well as allocation of indirect business support cost based on headcount and space cost on the basis of number of desk. Further with respect to the change in the stand of assessee on various allocation keys, we are of the view that object is to find out whether the international transactions have been carried out by the assessee with its AE was at arm's length or not. Determination of the cost incurred for the purpose of determining ALP is an important task. There may be direct and indirect cost involved in performing certain services. Where there are direct costs are involved they are required to be directly attributed to the particular profitability statement of that segment however when indirect costs are involved it is necessary that appropriate allocation keys which are rational and quantifiable are adopted for allocating them to the particular business segment to derive its correct profitability. This exercise can be carried out by the authorities as well as the appellant to fulfill the object of determination of ALP of an international transaction. As the allocation keys for allocating indirect cost earlier adopted by assessee was 'headcount' and now also the assessee for most of the indirect expenditure has retained the same allocation key and out of indirect expenses some of the direct expenses have been identified and are allocated to a particular business segment, further when neither the remand report nor before us any infirmity was pointed out with respect to the allocation keys adopted by the appellant before CIT appeal, we see no infirmity in the order of CIT (A) in arriving at ALP of the international transaction of the appellant. Further we also reject the argument of the DR that the issue may be set aside to the file of AO for verification of the correctness of allocation keys, because in the remand report AO could not point out any infirmity or irrationality involved in adoption of the allocation keys suggested by the assessee further even the 1st appellate authority is also convinced about the appropriateness of the allocation key and before us DR could not point out any error in the order of the keys adopted by the assessee in the order of CIT(A). It is also important to note that even if the business support cost is located on the basis of revenue then also PLI of the assessee is higher than the PLI of comparables. This fact also suggest that original selection of allocation keys without identifying direct cost and indirect cost and also allocation of space cost was erroneous; Disallowance for non deduction of TDS on subsistence allowance + assessee produced the bills/ vouchers/ declaration but according to AO, assessee did not clearly establish that the bills are in connection with employees of the assessee as on none of the bills name of employees are appearing and in the breakup many expenses pertain to earlier years. Furthermore according to AO such subsistence allowance should have been reflected in form No. 16 issued by the appellant to its employees, which is not included. Therefore the addition was made. CIT(A) had deleted disallowance on various issues except the issue of prior period expenses for which the issue is set aside. On perusal of the above decision it is apparent that the 1st appellate authority has considered the provisions of section 195 and held that that this payment of subsistence allowance is only a reimbursement of expenditure which is not chargeable to tax in India and hence no withholding tax was required to be deducted from such payment and hence provisions of section 40a (i) does not apply. Even otherwise he held that such payment of subsistence allowance if not fully spent for the official purposes of the employees then it would be chargeable to tax in the hands of the employees only, and as it is an expenditure of the employer incurred wholly and exclusively for the purposes of the business, which cannot be disallowed in parts. We also concur with the reasons given that such subsistence allowance is supported by the evidence of the actual expenditure incurred for official purposes to the extent of 75% and for the balance 25%, employees have submitted a declaration of having spent in the said amount in the course of travel abroad. Therefore when the assessment order does not mention about the vouchers and declaration which are pertaining to earlier years, then in that case that verification needs to be done by the lf AO only, hence there is no infirmity in the order of CIT (A) in directing AO to verify the claim of the assessee form that aspect and quantify the disallowance, if any. In view of this, we confirm the order of the first appellate authority deleting the disallowance of subsistence allowance expenses and dismiss ground No. 3 of the appeal of the revenue; Disallowance u/s 40(a)(ia) + CIT appeal has correctly held that the above test of make available is not satisfied in terms of the provisions of article 13 of the Indo UK DTAA hence the fees paid by appellant to the UK company would not be taxable in India. Similarly with the fees paid to the E&Y Singapore was on account of professional services rendered by them, which are not in the nature of the fees for technical services but on account of the professional services rendered by them. Similarly the amount paid to M/s Xansa, Singapore was also on account of the reimbursement of the professional services rendered by them and not being in the nature of the fees for technical services. DR could draw our attention towards the fact that how these services have been made available to the assessee by the various service providers. We also do not find content of any services where AO has shown that such services have been made available to the assessee in terms of the requirement of the DTAA. Therefore we do not find any infirmity in the order of CIT(A) in holding that that these income are not chargeable to tax in India in terms of the double taxation avoidance agreement and therefore no tax is required to be withheld on such payments and hence he deleted the disallowance. Regarding the argument of DR that article 23 shall apply with respect to these payments, we are of the opinion that this argument is deserves to be rejected for the reason that article 23 of India UK DTAA. In the present case it was not the case of AO that recipient of such income has any PE in India further the argument of AR has also not been disputed that none of the services have been rendered in India. In view of this according to the article 7 of DTAA as none of the recipient is carrying on business in India through any PE same shall also not be taxable in India. Therefore we reject the contention of revenue on this account. In the result ground No. 5 of the appeal of the revenue is dismissed; Exclusion of comparable company + assessee has taken Fortune Infotech Ltd as a comparable in its TP study report,TPO also accepted this as a valid comparable and on this hypothesis the TPO framed his order u/s 92C (3). Now assessee wants its exclusion. As held by special bench in case of DCIT versus Quark systems private limited 4 ITR (trib) 606 wherein it is held that assessee is not estopped from pointing out at any stage that a comparable is wrongly selected. Therefore we reject the contention of DR that though assessee has taken the same comparable into its TP study report now it cannot resile from that stand contending for its exclusion. Further, as assessee has already taken this comparable into its TP study report, we are of the opinion that additional ground of appeal needs to be admitted, as no further facts are required to be adduced. In the result we admit the additional ground of appeal for adjudication. Regarding the additional ground of appeal, we respectfully follow the decision of the special bench of the tribunal in case of DCIT versus Quark systems private limited, hence we deem it fit and proper to remit the matter to the file of AO for consideration of claim of the taxpayer and make a de novo adjudication of ALP deciding about this comparable in view of various decisions of the coordinate benches cited before us, after providing a reasonable opportunity of being heard to the assessee; Disallowance on account of prior period expenses + it is an accepted proposition that the expenses are not considered prior period expenses merely because they pertain to the earlier period to the accounting period as they may be admitted by the parties during the current year. This is also the basic principle of the mercantile system of accounting that when the parties admit the liabilities the right to recover the expenses arises. Therefore when the bills are approved and are accounted for in the books of a assessee, they accrue for the payment. However in the present case it is not possible to ascertain at this stage that when the bills were approved and admitted by the assessee as except the ledger accounts no details are available. Further this argument is also not considered by lower authorities. Therefore in the interest of justice we set aside this issue to the file of AO to determine when the bills have been approved and admitted by the appellant, if they are admitted by assessee in the current previous year then though they may pertain to the earlier previous year the expenses are allowable. In the result ground No. 3 of the appeal of the assessee is allowed with above direction. Revenue's appeal dismissed DDIT Vs PANASONIC AVATION CORPORATION: MUMBAI ITAT (Dated: September 28, 2016) Income Tax - Sections 44C, 143(3) & 144C. Keywords: charging interest - res integra - TDS liability - employees working abroad - head office expenses - payer - reimbursement of expenses. Whether when the duty is cast on the payer to deduct tax at source, on failure of the payer to do so, no interest can be charged from the payee assessee u/s 234B - YES: ITAT Whether if the amount incurred represents expenses incurred by head office employees exclusively for rendering services in India, can the same be still covered within the ambit of section 44C - NO: ITAT The assessee, a US based company, is engaged in the business of maintenance of small TVs in Aircrafts. It set up branch office in India to provide technical, maintenance services in respect of in-flight entertainment system installed in aircrafts operated by Jet Airways India Limited. In its return of income,the assessee, on its own offered certain disallowances including disallowance on account of head office expenses u/s 44C. Having heard the matter, the Tribunal held that, ++ AR placed on record order of the Tribunal 2013-TII-83-ITAT-MUM-INTL in assessee's own case for AY 2007-08, wherein both the issues were decided in favour of the assessee. The issue with regard to leviability of interest u/s. 234B in case of non-resident, has been decided by Tribunal where it has been observed that the issue of charging interest u/s 234B in the present case is no more res integra in view of the judgment of the jurisdictional HC in the case of DIT (International Taxation) v. NGC Network Asia LLC 2009-TIOL-43-HC-MUM-IT in which it has been held that when the duty is cast on the payer to deduct tax at source, on failure of the payer to do so, no interest can be charged from the payee assessee U/S 234B. The same view has been reiterated in DIT (IT) v, Krupp UDHE GmbH 2010-TII-04-HC-MUM-INTL. As the assessee before us is a non-resident, naturally any amount payable to it which is chargeable to tax under the Act, is otherwise liable for deduction of tax at source. In that view of the matter and respectfully following the above precedents, we hold that no interest can be charged u/s 234B and 234C of the Act. This ground is allowed; ++ ground with regard to applicability of section 44C has been decided by Tribunal, where it was observed that certain employees of assessee from USA frequently traveled in India for undertaking activities as per contract with Jet Airways. It is in this connection that the said sum was incurred on such employees visiting India. The first question is as to whether the amount spent on air tickets, domestic expenses in respect of loading, boarding and conveyance of such employees from USA should be considered u/s 44C. It has been recorded by AO in para 6 of the order that: "This expenditure was incurred by the employees of PAC, US in India, in Indian currency, and subsequently reimbursed to them in foreign currency". Section 44C talks of deduction of head office expenses in the case of non-residents. Clause (iv) of Explanation to this section defines "head office expenditure" to mean "executive and general administration expenditure incurred by the assessee outside India, including.". A bare perusal of the definition of head office expenditure in section 44C makes it manifest that only the expenditure incurred outside India can be brought within the purview of this provision. From the reproduction of the part of the assessment order, it is clear that the Assessing Officer himself admitted that this amount was spent by the employees of PAC, US "in India, in Indian currency". In view of this it is vivid that the provisions of section 44C cannot apply. More over it is seen that section 44C refers to common head office expenses and cannot encompass the expenses exclusively incurred by the head office for Indian branch. As the amount in question represents the expenses incurred by head office employees exclusively for rendering services in India, this cannot be covered within the ambit of section 44C from this angle also. It is pertinent to mention here that appeal filed by the revenue against the order of Tribunal dated 28.3.2013 before Bombay HC has been dismissed by Bombay HC vide its order dated 5-10-2015 with regard to the addition made u/s.44C. As the facts and circumstances during the year under consideration are same, respectfully following the order of the Tribunal in assesee's own case, as quoted above, we do not find any infirmity in the order of CIT(A). In the result, appeal of the revenue is dismissed. Revenue's appeal dismissed |
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