22 February 2017   

Aman Kapoor, Chief Engagement Officer, Credit Sudhar | Rubaru with TIOL Tube

Aman Kapoor, Chief Engagement Officer, Credit Sudhar | Rubaru with TIOL Tube

CASE LAWS

2017-TII-08-SC-INTL

DIT Vs AP MOLLER MAERSK AS: SUPREME COURT OF INDIA (Dated: February 17, 2017)

Income Tax - Section 9(1)(vii), 115A - India Denmark DTAA - Article 9, 13(4), 17 & 19

Keywords: fees for technical services - shipping business - integral part - cost sharing arrangement & reimbursement

The assessee is a foreign company engaged in the shipping business and is a tax resident of Denmark. There is a Double Taxation Avoidance Agreement (hereinafter referred to as the 'DTAA') between India and Denmark. The Assessing Officer (AO) assessed the income in the hands of the assessee and allowed the benefit of the said DTAA. However, while making the assessment, the AO observed that the assessee had agents working for it, namely, Maersk Logistics India Limited (MLIL), Maersk India Private Limited (MIPL), Safmarine India Private Limited (SIPL) and Maersk Infotech Services (India) Private Limited (MISPL). These agents booked cargo and acted as clearing agents for the assessee. In order to help all its agents, across the globe, in this business, the assessee had set up and was maintaining a global telecommunication facility called Maersk Net System which is a vertically integrated communication system. The agents were paying for said system on pro-rata basis. According to the assessee, it was merely a system of cost sharing and the payments received by the assessee from MIPL, MLIL, SIPL and MISPL were in the nature of reimbursement of expenses. The AO did not accept this contention and held that the amounts paid by these three agents to the assessee was consideration/fees for technical services rendered by the assesses and, accordingly, held them to be taxable in India under Article 13(4) of the DTAA and assessed tax @ 20% under Section 115A of the Income Tax Act, 1961.

On appeal, CIT(A) dismissed the appeal. On further appeal, Tribunal allowed the appeal of assessee following decisions of the Madras High Court in Skycell Communications Ltd. & Anr. v. Deputy Commissioner of Income Tax & Ors. 2003-TII-32-HC-MAD-INTL, and Delhi HC in CIT v. Bharti Cellular Ltd. 2009-TII-11-HC-DEL-INTL. The ITAT considered the nature of the costs incurred by the assessee and observed that the three agents were booking cargo and acting as clearing agents for assessee and were entitled to utilisation of the Maersk Net facility which consisted of a communication system connected to a mainframe and other computer services in each of the countries of operation. These were all connected to Maersk Net Connecting Point (MCP) which were installed in each of the premises.

The High Court dismissed the Revenue's appeal holding that ITAT had correctly observed that utilisation of Maersk Net Communication System was an automated software based communication system which did not require the assessee to render any technical services. It was merely a cost sharing arrangement between the assessee and its agents to efficiently conduct its shipping business. The HC had further held that the principles involved in the decision of The Director of Income Tax (International Taxation)-1 v. M/s. Safmarine Container Lines NV 2014-TII-33-HC-MUM-INTL will also govern the present case and that the Maersk Net used by the agents of assessee entailed certain costs reimbursement. It was part of the shipping business and could not be captured under any other provisions of the Income Tax Act except under DTAA. HC had specifically observed that there was no finding by AO or Commissioner that there was only profit element involved in the payments received by assessee from its agents.

On further appeal, the Apex Court held that,

Whether if once the character of payment made by an assessee is found to be in the nature of reimbursement of expenses, can it be considered as income chargeable to tax subsequently - NO: SC

+ it is clearly held that no technical services are provided by the assessee to the agents. Once these are accepted, by no stretch of imagination, payments made by the agents can be treated as fee for technical service. It is in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. It is re- emphasized that neither AO nor CIT (A) has stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Record shows that the assessee had given the calculations of the total costs and pro-rata division thereof among the agents for reimbursement. Not only that, the assessee have even submitted before TPO that these payments were reimbursement in the hands of the assessee and the reimbursement was accepted as such at arm's length. Once the character of the payment is found to be in the nature of reimbursement of the expenses, it cannot be income chargeable to tax.

Whether in case income generated from use of a common facility given by parent company is an integral part of business conducted, can the same be considered as fees for technical service - NO: SC

+ the Revenue itself has given the benefit of Indo-Danish DTAA to the assessee by accepting that under Article 9 thereof, freight income generated by the assessee in these Assessment Years is not chargeable to tax as it arises from the operation of ships in international waters. Once that is accepted and it is also found that the Maersk Net System is an integral part of the shipping business and the business cannot be conducted without the same, which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, it is only a facility that was allowed to be shared by the agents. By no stretch of imagination it can be treated as any technical services provided to the agents. In such a situation, 'profit' from operation of ships under Article 19 of DTAA would necessarily include expenses for earning that income and cannot be separated, more so, when it is found that the business cannot be run without these expenses. This Court in Commissioner of Income Tax-4, Mumbai v. Kotak Securities Limited 2016-TIOL-37-SC-IT has categorically held that use of facility does not amount to technical services, as technical services denote services catering to the special needs of the person using them and not a facility provided to all. In the present case, a common facility of using Maersk Net System is provided to all the agents across the countries to carry out their work using the said system. We have already mentioned in the beginning the issue raised by the Revenue itself which shows that the only contention raised is as to whether the payment in question can be treated as fee for technical services. Having held that issue against the Revenue, no further consideration is required of any other aspects in these appeals. These appeals are, therefore, bereft of any merit and are accordingly dismissed.

Revenue's appeal dismissed

2017-TII-71-ITAT-HYD-TP

JT INTERNATIONAL INDIA PVT LTD Vs DCIT: HYDERABAD ITAT (Dated: February 17, 2017)

Income Tax - Sections 92CA(3), 143(3) & 144C

Keywords: TNMM - uncontrolled enterprises - qualitative and quantitative criterion - management fee - CUP method & close comparables

The assessee is engaged in the manufacture of cigarettes. It had filed it return admitting NIL income. Assessee is presently known as Polisetty Somasundaram Tobacco Products (I) P. Ltd., by virtue of change of its name. Upon acquisition of RJ Reynolds International by M/s. JT International Inc, the name of the Indian company was changed from Modi RJR Limited to JT International (India) Ltd., and became part of Japan Tobacco International Group. The name was again changed to M/s. JT International India Private Limited on 16-01-2002. Consequently, in March, 2009, the shareholding pattern had changed and it was held by JT International Mauritius Private Limited at 50% and on Indian promoters at 50%.

During the year ended March 31, 2009, assessee was engaged in the business of manufacturing of cigarettes and distributing them within Indian market under the brand name 'Gold Coast' and 'Winston'. Assessee was a licensed manufacturer and does not own any unique intellectual properties related to technology and products which it manufactures in the Indian market. It had adopted transaction by transaction approach under CUP method and carried out Bench marking of transactions. However, in TP proceedings, TPO carried out the bench marking of the transactions by aggregating all the international transactions and adopted TNMM for determining ALP. During the TP proceedings, TPO identified two companies., M/s. Godfrey Philips India Ltd., and M/s VST Industries as being comparable and arrived at an arithmetic mean of 13.40% as being arm's length margin and compared with the margin of assessee. On the total amount of Rs. 16,89,06,452/- paid to AE under various heads, the operating revenue based on the ratio was arrived at 5,11,61,764/-. On this, operating cost was determined at Rs. 4,43,06,088/- adopting to 13.40% of the comparable companies. Since assessee paid Rs. 16,89,06,452/-, the difference of Rs. 12,46,00,364/- was considered as adjustment u/s. 92CA(3). In the TP report, in addition to TNMM adopted by the TPO, he also analysed under CUP method and justified the adjustment taking the same comparables as basis. The DRP did not accept assessee's objections and confirmed TP analysis as made by TPO.

Having heard the matter, the Tribunal held that,

Whether payments made to AE can be taken as the basis for computing downward adjustment u/s 92CA, if TNMM is adopted as a method at operating level of the company - NO: ITAT

+ when TNMM is adopted as a method at operating level of the company, instead of making adjustments on total sales or total revenue or on the basis of the operating cost, the TPO surprisingly took the payments made to AE as the basis and by backward working of amount, arrived at operating cost allowable at Rs. 4,43,06,088/- and the difference between the amount paid and this allowable cost was taken as downward adjustment for the purpose of 92CA. Inspite of giving our best efforts to understand this methodology, it must be admitted that we fail to understand the logic in the method adopted by the AO/TPO while completing the TP study. In our humble opinion, the method adopted is not a prescribed method as we have been observing in various other TP cases. Since the very basis for arriving at the TP adjustment is not verifiable either on the figures adopted or on the method adopted, we are not in a position to examine and affirm the TP study made by the TPO on this fundamental issue itself;

Whether a company can be held as a valid comparable for TP analysis when it is engaged in various activities with segmental details not available in public domain- NO: ITAT

++ both M/s. Godfrey Philips India Ltd., and M/s VST Industries are in the business of manufacturing of cigarettes but as rightly submitted by assessee, M/s. Godfrey Philips India Ltd., is also involved in manufacturing of various other non-tobacco products. Not only that even if the segmental reports of tobacco business is concerned, then that company is also having lot of trading activity and it certainly fails the RPT filter. Thus, M/s. Godfrey Philips India Ltd., cannot be considered as a comparable company unless the cost pertaining to manufacturing activity of tobacco is exclusively obtained by the AO. When no such information is available on record, therefore, adopting the information from the public domain without segmental results of manufacturing activity alone cannot be adopted for the purpose of comparability analysis. This gives skewed results. Similar objections are also with M/s VST Industries, wherein also there is trading activity and segmental details of manufacturing activity are not available in public domain. Thus, selection of the two comparable companies fails on functional differences and so the adjustments made based on the above data cannot be sustained;

Whether when an assessee has produced quotations from closely related transaction in order to apply CUP method, is it possible for the TPO to reject it out rightly - NO: ITAT

Whether a TPO is allowed to exceed his brief in determining management and SAP charges at NIL as per the benefit test without considering assessee's submissions - NO: ITAT

+ assessee is also objecting to rejection of the quotes submitted by it as well as the sale invoices from third party which are passed on to assessee without any markup while purchasing raw-material either of tobacco or other raw-materials. In our opinion, the TPO has not examined this issue and has rejected out-rightly without examining the assessee's contentions. Even the law has been amended subsequently to provide adoption of hypothetical price in the absence of any actual price. Thus, the TPO's observation that these quotes cannot be relied is not proper. Moreover, the quotes were obtained during the year from Bommidala brothers and it is a contemporaneous quote, veracity of which should have been examined by the TPO instead of rejecting it out-rightly. Not only that assessee also furnished quote from third party during the proceedings before the DRP; even those were rejected. In our view, the procedure adopted by the TPO is not appropriate and he should have considered assessee's contentions on CUP method since the purchase of tobacco and payment of processing charges are closely related transactions. As far as the management charges and SAP charges are concerned, the genuineness of the expenditure has not been doubted as the said expenditure was not disallowed u/s. 37(1). Even though assessee's operations have resulted in loss, there is no disallowance of any such expenditure, as not pertaining to assessee's business. Therefore, TPO's analysis on benefit test and determining the amount at NIL cannot be accepted. Delhi HC in the case of CIT Vs. EKL Appliances Ltd 2012-TII-01-HC-DEL-TP has already held that the Revenue cannot assume the role of assessee to decide how much is the reasonable expenditure having regard to the circumstances of the case. It is also held that it is not open to TPO to question the judgment of the applicant as to how it should conduct its business regarding the necessity or otherwise of incurring expenditure in the interest of its business. As already pointed out earlier, the AO has not questioned the expenditure per se in the assessment order. Therefore, in our opinion, TPO has exceeded his brief in determining the management and SAP charges at NIL on the so called benefit test. We do not approve the stand taken by the TPO on this and agree with assessee's contentions on this issue;

++ even assessee's contentions that some of the expenditure like reimbursement expenditure was with a nominal markup is not examined by the TPO at all. Since the amounts adopted by the TPO as well as the method adopted is not proper and since assessee's contentions of CUP method has not been correctly appreciated by the TPO, we have no option than to set aside the entire order of the TPO. Moreover, the two comparable companies selected by the TPO also fail on functionality test. Therefore, comparing assessee-company's AE transactions on that basis cannot be approved. In view of that, we set aside the orders of the TPO and DRP and restore the TP study to the file of AO/TPO to consider it afresh and re-examine assessee's contentions in the light of the submissions before us and the case law relied upon.

Case remanded

2017-TII-34-ITAT-MUM-INTL

DDIT Vs GUJRAT PIPAVAV PORT LTD: MUMBAI ITAT (Dated: February 10, 2017)

Income Tax - Sections 9(1)(vi), 90(2), 195(2), 248, 253 & India-USA DTAA - Article 12

Keywords: Build Own Operate Transfer (BOOT) - proprietary software - Shrink wrapped - off the shelf' - tax deduction & copyrighted packaged software

The assessee is a company, engaged in the business of developing, constructing, operating and maintaining the port on a Build Own Operate Transfer (BOOT) basis, filed an application before the AO u/s 195(2). In the application, assessee contended that they entered into agreement with Zebra Enterprise Solutions, LLC (ZES) for procurement of certain standardized proprietary software in the form of a fully integrated solution for port operations. Assessee further contended that ZES was tax resident of USA and it does not have any PE in India. According to assessee the license fees payable to ZES does not fall within the ambit of royalty as per the provisions of explanation 2 to section 9(1)(vi) as well as Article 12 of DTAA between India and USA. Assessee further contended that tax was not required to be withheld on the payments made to ZES under the provisions of Act as well as under the DTAA. On the application, AO passed order holding that license fees payable to ZES can be considered as royalty as per the explanation 2 to section 9(1)(vi) as well as Article 12 of DTAA. Therefore, the income earned by ZES was taxable in India. AO while passing order relied upon the decision of Karnataka HC in the case of Samsung Electronics Company Limited. It had further observed that section 90(2) provides that assessee shall be taxed under the provisions of the Act or under the provisions of tax treaty whichever was more beneficial to them. As per DTAA the tax rate was 15% whereas the Income-tax provide 10%, therefore, assessee was directed to deduct tax @ 10%. On appeal, CIT(A) allowed assessee's appeal holding that AO was not justified in directing assessee to deduct TDS @ 10% on the payment to ZES treating it in the nature of royalty. CIT(A) further hold that payment under consideration was in the nature of business income of ZES. Since, ZES had no PE in India, the consideration paid was not taxable in India.

Having heard the matter, the Tribunal held that,

Whether payment made in respect of a 'Shrink wrapped' or 'off the shelf' copyrighted packaged software readily available, which is not customized to meet specific requirement of assessee, can be termed as royalty payment - NO: ITAT

+ AO while deciding application of assessee u/s 195(2) observed that license fees payable to ZES can be considered as Royalty as per the provisions of Explanation 2 to section 9(1)(vi) as well as under article 12 of DTAA between India and USA and income earned by ZES is taxable in India. AO relied upon the decision of Karnataka HC in case of Samsung Electronics Co Ltd dated 24th September 2009. AO directed the assessee to deduct the tax at the rate of 10% plus applicable surcharges. On appeal, CIT(A) held that payment under consideration is in the nature of Business Income of ZES. As the ZES has no PE in India, thus, the consideration paid to it is not taxable India and granted full relief to the assessee. The only issue for our consideration is if the assessee is liable for the payment to ZES for the use of copy right or for copyrighted article. Or in other words the payments made to ZES are its business income or Royalty. AR throughout his submission urged that, ZES provided the assessee a license to use its software on perpetual, nonexclusive, known as assignable, terminable and known sub licensable basis. ZES software is a 'Shrink wrapped' or 'off the shelf' copyrighted packaged software readily available and which has not been customized to meet specific requirement of the assessee. The assessee will have no right to use, copy, and display or print the software or documentation in whole or in part. Similarly the assessee is prohibited from using the software on a service bureau basis or otherwise providing data catching and /or management functionality to third party except or otherwise permitted in the agreement. AO has not brought any quantity material on record to prove it otherwise. The above referred decision was further followed by the coordinate bench in Reliance Industries Ltd. Thus, considering the above legal discussion we find that the grounds of appeal raised by the revenue in the present appeal is covered against revenue by the decision of coordinate bench as discussed above. Hence, we do not find any merit in the grounds of appeal raised by revenue. In the result appeal filed by revenue is dismissed.

Revenue's appeal dismissed

 

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