| 2017-TII-INSTANT-ALL-410 | 04 January 2017 |
Rubaru with TIOL Tube - Arjun Ram Meghwal, Minister of State for Finance, Govt of India |
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FEMA NOTIFICATION CASE LAWS RBS EQUITIES INDIA LTD Vs ACIT: MUMBAI ITAT (Dated: January 2, 2017) Income Tax - Sections 14A, 40(a)(ia) & 92C. Keywords - Associated entities - Clearing house - Execution Only Broking Services - EOBS - Full Broking Services - FBS - Marketing & research - Transfer pricing. A) The assessee is engaged in the business of broking and trading in shares. For the AYs 2008-09 to 2011-12 it had availed Marketing and Research services form the AE namely ABN Amro Bank NV, Hongkong(Amro-H). The assessee had adopted TNMM as MAM. It was argued that the Net profit Margin earned by it 63.73%, as compared to weighted average NMP of 26.15% earned by the independent comparables, that the margin earned by the assessee was higher as compared to the comparable companies and that same was at arm's length. The TPO, held that CUP was the appropriate method for determining ALP of the ITs, that multiple year data could not be used for computing the operating margin earned by the comparables, that top ten FIIs were to considered for bench marking the ITs for the CH trades, the assessee had failed to bring any evidence on record which could prove that broking services rendered by the unrelated Indian brokers to the AE were same as equity broking services rendered by it to its AEs, that difference in volume or other factors could not have any impact on the brokerage rates charged to different clients, that the assessee had not substantiated the fact that it was rendering 'Execution Only Broking Services'(EOBS) to its AEs, that to other clients it was offering 'Full Broking Services' (FBS), that it had not provided any evidence in that regard. The assessee preferred appeals before the FAA which held that CUP was the traditional method and was more reliable than TNMM. The FAA rejected the request made by the assessee for volume adjustment as well is for research adjustment. With regard to marketing and sales adjustment, the FAA held that the assessee had calculated the marketing adjustment at the rate of 0.03%, that TPO had granted adjustment in respect of marketing function at 0.02%, that the assessee had objected to the not providing any reasons by the TPO for considering combine AE and non-AE trades, that there was no evidence about incurring of marketing cost of Rs. 4.83 Crores only for the third-party clients, that it did not provide details of the employees exclusively engaged in marketing and sales of third parties. B) The assessee adopted CUP as MAM for determining the ALP of the ITs. During the year, the assessee had showed brokers rate @ 0.17 bps, but, TPO arrived at brokerage rate of 0.22%. He further held that the assessee had failed to establish the similarity of functions between the services rendered by it and the unrelated brokers in India to substantiate its argument in that regard, that the assessee had failed to establish that various factors like difference in volume/marketing and sales expenditure had any bearing with regard to chargeability of brokerage, that the risk profile of the unrelated brokers who were rendering broking services to the AE had not been brought on record so as to enable it to use as CUP for benchmarking the transaction of the assessee with the AE on the basis of CUP method, that the rate of brokerage obtainable in the case of non-AE in India could not be accepted as CUP rate for benchmarking the transaction, that arm's length rate of brokerage should be the CUP rate obtainable in case of top-10 FII non-AEs to whom equity broking services were rendered by the assessee. The AO, following the order of the TPO, forwarded a draft order to the assessee. Aggrieved by the draft order of the AO, it filed objections before the DRP which upheld the order of the TPO/AO. C) The assessee availed Marketing Support Services (MSS) and Research Support Services (RSS) from its AEs for which it paid Rs.26.18 Crores. TPO held that the assessee was not required to avail services from its AE and should be taken as NIL. After considering the order of the TPO/AO and the submission of the assessee, the DRP held that AO/TPO had rightly held that is no services were rendered by the AE and that determination of ALP at nil was fully justified. D) During assessment proceedings, AO found that the assessee had claimed reimbursement expenditure, that it had not deducted tax on the said amount. AO held that assessee had not furnished copy of agreement between it and ABN-CF to justify the claim, that apart from providing invoices it had not produced any other evidence/document. Invoking the provisions of section 40(a)(ia) he made a disallowance of for the rent paid to made to ABN-CF. He further held that the assessee had not given any proof to prove that payment to Securities Trading Syndicates Pvt. Ltd. (STSPL) was reimbursement. He disallowed the same. The DRP upheld the order of the AO. On appeal, the Tribunal held that, Whether assessee which used to follow CUP method in earlier years for determining ALP can be permitted to switch over to TNMM in subsequent years without giving valid reasons for the same - NO: ITAT + in the subsequent years the assessee itself at applied CUP for determining the ALP of the ITs entered into by it with its AEs. No reason was given by the assessee to switch over the method. Considering the same we hold that the FAA had rightly held that CUP was the appropriate method for the year under consideration to determine the fair market value of the transactions. Similarly, with regard to the denominator of marketing and sales adjustment, we direct that while considering the denominator only non-AE trades should be considered, as considered in the order of the TPO for the AY.2006-07. No evidence was produced before the AO/FAA to prove that expenditure incurred under the heads marketing and sales was only for the third-party clients and that the employees of the assessee did not interact with the AEs, that there is no evidence of furnishing of details like qualification and terms of engagement of the employees who handled the marketing and sales of the assessee for the year under consideration. In absence of any details, we are of the opinion that there is no need to disturb the order of the FAA with regard to marketing and sales adjustment. We have held that while calculating the denominator a uniform policy should be followed for all the AY.s. only non-AE trades should be considered for the denominator. In some of the AYs the TPO/AO has not followed the said principle. We direct the AO to follow our order for the AY. 2003-04 for all the AYs, including the present AY; + the issue of providing EOSB and FBS to the AEs and the non-AEs respectively was also considered while deciding the appeal for the AY 2003-04. Also on perusal of the documents relied upon by assessee it was held that none of these documents prove that the assessee was rendering EOBS to the AE and FBS to non-AEs. Thus, following the order for the aforesaid AY and considering the facts of the present AY, we hold that the FAA had rightly held that the assessee was offering FBS to the AE as well the non AE clients. Applying the provision of Rule 8D of the Income tax Rules, 1962, disallowance was made. In our opinion, the application of Rule 8D for the year under consideration was not as per the provisions of the law. Besides, no disallowance can be made u/s 14A also, if the assessee the has not claimed any expenditure. Neither exempt income was earned by the assessee nor any expenditure was claimed against it during the year under appeal. Therefore, the addition made by the AO was deleted; Whether Intra Group Services being a seperate international transaction have to be benchmarked seperately by the Revenue - YES: ITAT + the margin of the AE for both the services was better than the comparables under TNMM, that NCP of the AE for MSS and for RSS was 20% and 10% as against NCP of 31.22% and 18.77% respectively of the comparables. Intra group services(IGS) being a separate IT, has to be benchmarked separately by the TPO/AO. We find that the Revenue authorities have not benchmarked IGS separately,so,we are of the opinion that the matter needs further verification and re-calculation of ALP of the IT.s under consideration. We also hold that there was no justification for determining the ALP of both the services at Nil. Not paying charges in earlier years for availing services cannot become a stumbling block in claiming the expenditure in subsequent years, provided that the claim is supported by documentary evidences. We have gone through the paper submitted by the assessee and are of the opinion that same require further verification. The file is restored for consideration of AO/TPO; Whether assessee is liable to reimbursement of rent paid by it as a sub-licensee when assessee has paid the same amount of rent that is charged by landlord from the licensee - YES : ITAT + the original leave and license agreement was entered into between the landlord and ABN-CF, that a sub license agreement was signed by the assessee and ABN-CF, that the assessee was paying the same amount of rent that was charged by the owner of the property from ABN-CF. In our opinion,there is no doubt that payment was in the nature of reimbursement. Hence, the assessee was not required to deduct tax. AO/DRP has not taken into consideration the Nil withholding certificate received by assessee from STSPL. Thus, there was no need for the assessee to deduct tax at source. Assessee's appeal partly allowed Dr REDDY'S LABORATORIES LTD Vs ADDL CIT: HYDERABAD ITAT (Dated: January 2, 2017) Income tax - Sections 10A, 10B, 35(2AB), 35D, 37(1), 40(a)(i), 43B(f), 92CA, 143(3), 144C & 195. Keywords - Amortization of expenses - Deferred stock compensation cost - Depreciation on goodwill - Loans to subsidiaries - Notional expenditure - Provision for leave encashment - Rate of interest - Transitional liability - Technical services - Weighted deduction & TDS. A) The assessee, engaged in the business of manufacture and trading of pharmaceutical products, filed its return and the same was processed u/s 143(1) of Act. Thereafter, the assessee filed a revised return on account of the fact that the ADR expenses were amortized and a claim of 20% of the same was made in the original return, whereas the entire expenditure was claimed as allowable in the revised return. Further, tax credit of Rs. 24,58,58,086 was also claimed in case of income from USA of Rs.163,90,53,906/- following Article 2 of Indo-US Treaty wherein royalty income of $21,440,666 in 2006 was subject to WHT @ 15%. The revised return was processed and a refund of Rs.26,62,44,270/- was issued to the assessee. Further, by virtue of the High Court order, M/s. Perlecan Pharma Pvt Ltd got merged into the assessee and the said company had filed its return declaring loss of Rs.(-) Rs.46,04,54,630 after declaring interest income of Rs.7,37,49,337 as its business income. This return was processed u/s 143(1) and refund of Rs.1,85,35,287/- was issued. Subsequently, the assessee's return was selected for scrutiny. During TP proceedings, the TPO observed that there are 28 transactions entered into by the assessee with its AEs classified under 7 categories and out of these 28 transactions, interest received on loans given to the subsidiaries constitutes 5 transactions while the investment made in subsidiaries represent 4 transactions. He observed that the assessee has applied the CUP method as the MAM and the approvals received from RBI for investment in subsidiaries were taken as bench mark. After perusing the requisite details of the loan a/c in respect of the transactions with its AEs, the TPO observed that the assessee has charged rates of interest differently on different loan accounts with its AEs and that the rates of interest charged are lower as compared to the ALP. Finally, he held that RBI's approval does not put the seal of approval on the true character of the transaction from the perspective of T.P. regulations as the substance of the transaction has to be judged as to whether the transaction is at Arm's Length or not, and came to the conclusion that the interest @ 14% per annum would be reasonable and representative of the market, resulting in computation of total adjustment at Rs.28,10,53,472/-. B) The assessee claimed deduction for an amount of Rs.10,42,90,167 towards the expenses on issue of American Depository Shares (ADS). The AO was of the opinion that the expenditure incurred on public subscription of shares is for increase of its share capital and as such, is not allowable u/s 37. He however, held that section 35D is the specific provision under which amortization of the expenditure is allowable, if it falls within the domain of section 35D(2)(c) and meets the conditions laid down u/s 35D(3). Further, he also observed that audit fee paid to KPMG is not covered by the expenses mentioned in section u/s 35D(2)(c) and hence even if the deduction is allowable, a sum of Rs.1,45,91,200 being the fee paid to KPMG does not qualify for deduction. On appeal, the DRP held that the increase in the share capital results in expansion of the capital base of the company and incidentally though that would help in the business of the company and also in the profit making, the expenses incurred in that connection still retain the character of the capital expenditure, since the expenditure is directly related to the expansion of the capital base of the company. As regards amortization of the expenditure u/s 35D, the DRP held that the assessee has not fulfilled the conditions laid down in clause (c) of sub section-2 as well as sub section 3 of section 35D and hence disallowed the said claim. C) During the concerned year, a company by name Perlecan Pharma Private Ltd merged with the assessee w.e.f. 1.1.2006. The assessee claimed weighted deduction of 150% u/s 35(2AB) in respect of expenditure on scientific research incurred by Perlecan Pharma P Ltd. The AO observed that before merger, Perlecan was a separate undertaking and each R&D undertaking needs to be approved by the DSIR in 3CL format for getting the benefit for weighted deduction. Observing that M/s Perlecan Pharma P Ltd did not have such approval, weighted deduction claim on R&D expenditure of Perlecan is not to be allowed. He therefore, disallowed the claim of Rs.18,63,20,735 and proposed to bring it to tax in the draft assessment order. D) Upon examination of payments made by the assessee for the technical services received by it, the AO noticed that some payments are being made to foreign companies without making TDS u/s 195. He observed that under Articles 12 &15 of the DTAA with USA, payments made to companies under the above head are taxable in the source country and therefore, TDS u/s 195 was to be done. He therefore, proposed to disallow the same u/s 40(a)(i). E) The assessee granted a loan to its subsidiary in Cyprus and the subsidiary paid interest amount of Rs.81,39,222/- to the assessee and as per Article 11 of the DTAA with Cyprus, 10% on a gross amount of interest is chargeable to tax in Cyprus. It is submitted that the domestic law at Cyprus provides the tax incentives for the promotion of economic development in Cyprus and therefore, there was no withholding of tax on interest amount remitted to the assessee in India. Relying upon Article 25 of India Cyprus DTAA, the assessee claimed tax credit @ 10% on gross amount on tax received from Cyprus amounting to Rs.8,13,92,220/-. The DRP observed that the contracting state in Cyprus did not levy any tax and therefore, the provisions of Article 11(2) does not apply and therefore, the claim for credit of tax payable in Cyprus was rejected. With regard to the credit of TDS deducted by Canara Bank, the DRP directed the AO to allow the same in part subject to verification as whether the Bank has remitted it to the Govt. A/c. On appeal, the Tribunal held that, Whether RBI's approval for charging a specific rate of interest on advances made to AEs, can be treated as benchmark for arriving at ALP - NO: ITAT + there is no dispute as regards the most appropriate method being the CUP method for determining the ALP of the interest on loans advanced by the assessee to its AEs. The assessee has charged different rates of interest for different transactions as the AEs are located in different jurisdictions. The TPO/AO has arrived at 14% per annum as the ALP interest by adopting the rate of interest that could be charged on the basis of unrelated corporate bonds in India. The assessee is relying on the RBI approvals as a bench mark, but we do not agree with the assessee's contention thereon. The RBI approvals are on a different criteria and are for different purposes as held by the Coordinate Bench at Delhi. Though, it may be one of the aspects to be considered for determination of the ALP, it cannot by itself be considered as a bench mark or ALP. Further, we have also gone through various decisions and found that in those decisions, the Tribunal has held that in case of loans/advances in foreign currency and where the transaction is an international transaction, then, the transactions would have to be considered on the commercial principles in the international market and the domestic prime earning rate would have no applicability and the international interest rate fixed being LIBOR linked interest rate comes into play. Therefore, we direct the TPO/AO to adopt LIBOR +2% or 7% whichever is higher as the ALP interest; Whether expenses incurred for issuance of depository receipts to international investors, would be allowable as business expenditure u/s 37(1), if such public offering has resulted in growth of shareholding of the company - NO : ITAT + it is found that the assessee has made a public offering of its American Depository Shares (ADS) shares to international investors in Nov. 2006. By virtue of the said issue, the share capital has increased and securities premium a/c has also increased and the equity shares represented by the ADS carry equivalent rights with respect to voting and dividend as the ordinary equity shares. Thus, it can be seen that the entire capital raised by way of ADS has not been advanced to the subsidiaries. Therefore, the assessee's contention that the funds raised on ADS issue have been used towards working capital requirement of the subsidiaries is not entirely correct. Further, it is also seen that the ADS issue has increased the share capital of the assessee and therefore, the capital base of the assessee company has increased. We are, therefore, in agreement with the findings of the DRP that where the expenditure has been incurred for increasing the capital base of the company, the said expenditure is capital in nature. However, as regards alternate contention of the assessee that the same should be allowed u/s 35D, we find that the AO as well as the DRP have disallowed the claim of the assessee on the ground that the assessee has not furnished the details of the said expenditure and also as to how the assessee has satisfied condition of cl.(c) of sub section 2 of 35D. In view of the same, we deem it fit and proper to remand the issue to the file of the AO for denovo consideration in accordance with the law; Whether the R&D expenditure incurred by an entity post merger, can be reduced while allowing the deduction u/s 35(2AB), if the said facility and also the expenditure has already been approved by the relevant authority - NO: ITAT + section 35(2AB)(1) states that a company which is engaged in the business of Biotechnology or in any business of manufacture or production of any article or thing incurs any expenditure on scientific research on in house research and development facility as approved by the prescribed authority, then they shall be allowed a deduction of a sum equal to one and ¼th time of the expenditure so incurred. The only dispute is whether the expenditure incurred by Perlecan towards research and development in the assessee's facility is eligible for deduction u/s 35(2AB). As pointed out by the AR, the in house R&D facility of the assessee is approved by the DSIR as provided u/s 35(2AB). From perusal of paper book, it is seen that expenditure approved by the DSIR includes a sum of Rs.1054.314 lakhs on account of Perlecan Pharma Pvt Ltd. By virtue of merger w.e.f. 1.6.2006, all the activities of the Perlecan are also the activities of the assessee. As the facility and also the expenditure has already been approved by the relevant authority, we are of the opinion that post merger, the said expenditure cannot be reduced while allowing the deduction u/s 35(2AB). Therefore, the deduction u/s 35(2AB) is allowable even on the expenditure incurred on Perlecan Pharma after 1.1.2006 i.e. the date of its merger; Whether overseas payment for rendering technical services can be taxed in the source country only if such services make available any technical knowledge & expertise - YES: ITAT Whether the assessee can be held liable for not deducting TDS on such payments, when the taxable event itself ceases to exist in the source country - NO: ITAT + as far as assessee's obligation to deduct TDS on the overseas payment is concerned, it is found that in the assessee's own case for the A.Ys 2003-04 & 2004-05, the Co-ordinate Bench has held that: "....Even though the AO considered that the payments were made by way of 'fee for technical services' as per Article 12 of the DTAA, the same is taxable in the source country only if such services make available any technical knowledge, expertise, etc. or there is transfer of technical plan or design. In this case, as rightly considered by the CIT(A), the assessee was conducting clinical trials through the CROs in USA to comply with the regulations therein and the CROs who are experts in this field were only conducting studies and submitting the reports in relation thereto. They are neither transfer of technical plan or technical design nor making available of technical knowledge, experience or know-how by the CROs to the assessee company. In fact, the assessee company did not get any benefit out of the said services in USA and assessee was only getting a report in respect of field study on its behalf, which would help it in getting registered with the Regulatory Authority. Since there is no making available of technical skill, knowledge or expertise or plans or designs in the present case, the amounts paid by the assessee do not fall under Article 12, but come within the purview of Article 7 of the DTAA. Therefore, the amounts paid are to be considered as business receipts of the said CROs and since they do not have any PE in India on which aspect there is no dispute, there is no need to deduct tax at source...." The Facts and circumstances in the case before us being similar, respectfully following the decision of the Coordinate Bench in the assessee's own case, this ground of assessee's appeal is allowed; Whether an assessee is entitled to relief of tax credit on the interest income under Article 25(2) of the Indo Cyprus DTAA, when there is no actual withholding of tax on interest amount remitted to the assessee in India - NO: ITAT + as far as reliance on Article 25 of Indo Cyprus DTAA for not witholding tax on the interest amount remitted to assessee in India, is concerned, it is found that the DRP for the A.Y 2008-09 has held that: "....The tax payer has given a loan to its subsidiary and received interest of Rs.13.06 crores. This interest income is taxable under Article 11 of the DTAA both in India and also in Cyprus. Cyprus did not impose tax on the interest income under its domestic Law and treated the interest income as 'tax incentive' for the purpose of promotion of economic development of that country. Under Article 25(4), the tax 'that would have been payable in Cyprus @10% shall be deemed to be the tax paid under Article 25(2) of the DTAA. However, article 25(2) puts a cap on the total deduction of tax under Article 25(2) which shall not exceed the total tax payable on interest income in India....Under the DTAA, India shall allow as a deduction from the tax on the income of the resident, an amount equal to the Income tax paid in Cyprus whether directly or indirectly by way of deduction. Such deduction, however, shall not exceed that part of income tax which is attributable to the income which may be taxed in Cyprus. In India, first, the AO has to compute the tax on interest income and allow the tax attributable to interest income under Article 25(2) read with Article 25(4) of the DTAA. From the facts of the case, it is not known whether tax payer has paid 30% tax on interest income or claimed entire interest income as deduction u/s 108, 8018 or 801e. In case, tax payer has paid 30°% of tax on interest income, then, the 10% tax, which it would have been paid in Cyprus requires to be allowed as a deduction...." Thus, since the facts and circumstances before us are similar, we deem it fit and proper to remand the issue to the file of the AO to verify whether the taxpayer has paid tax on interest income in India and if so, to allow the deduction of the tax admitted to have been paid under Article 25(2) of the DTAA r.w. article 25(4) of the Act of the DTAA. Case remanded |
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