2017-TII-INSTANT-ALL-443
31 March 2017   

2017-TII-115-ITAT-DEL-TP

MARS INTERNATIONAL INDIA PVT LTD Vs DCIT: DELHI ITAT (Dated: March 29, 2017)

Income Tax - Sections 143(3), 144C & 154

Keywords: expatriate employees - reimbursement - salary earned - cost contribution - uncontrolled CUP - intra group services & allocation keys

The assessee is engaged in manufacturing and sale of pet foods in India. It also imports snack foods confectionary and certain pet foods brands for resale. It was a subsidiary of worldwide mars group based in USA. On a reference by A.O, TPO has made an upward adjustment of Rs. 9,20,98,565/- in respect of ALP of international transactions. The adjustment made was in respect of cost contribution/reimbursement paid by assessee to its AEs. TPO asked assessee to explain the nature of the services received by it and benefits accrued to it from the amount of cost contribution and reimbursement of expenses paid to AEs. TPO observed in his TP analysis that assessee did not prove the details of the services received by it and the benefits it had obtained from the intra group services. It did not prove whether services for which the cost contribution were made constituted intra group services and that assessee even failed to furnish basic critical data like total cost incurred by AEs and the details of allocation keys used for allocation uncontrolled CUP, its claim in TP report that cost allocation was benchmarked on the basis of the CUP method was a false statement. TPO proceeded to examine assessee’s claim for reimbursement of expenses on account of reimbursement of salary, consultancy charges and cross charges claimed by assessee. TPO examined assessee’s claim in respect of every item of reimbursement. TPO held that in absence of any evidence with respect to any benefit received by assessee from rendering of various alleged services and in absence of these services being benchmarked by assessee, ALP of the items for which reimbursement of expenses had been made was taken by TPO at nil.

DRP observed that in most of the cases, assessee did not filed any evidence to show if these services were actually rendered at all by the AEs to it. DRP further observed that in none of the cases, assessee furnished any evidence to prove that the assessee had derived any economic or commercial benefit from these alleged services. Thus DRP held that the assessee failed to furnish the total quantum of the cost incurred by the AEs and the use of any reliable keys for allocating the expenses to the assessee. TPO found that assessee had sufficiently strong infrastructure of employees for project and plant operation, marketing and commercial operation, logistic research and development and HR development. In absence of any complete failure on part of assessee to prove that AEs had actually referred any services and assessee had drawn any benefit for the same and that any reliable and credible allocation keys has been used for allocation of the expenses to the assessee for which the assessee has reimbursed its AEs and the cost of which the assessee has shared with its AEs the TPO was fully justified in arriving at the ALP of these transaction at nil.

Having heard the matter, the Tribunal held that,

Whether seconded employees of foreign Head Office possessing expert domain knowledge, are rightfully entitled to the same level of salary as they were earning in their country origin, provided they are actually rendering any services in India - YES: ITAT

+ the remuneration has been agreed upon between two independent parties, i.e., the assessee and expatriate employees, and the same has actually been paid to employees (initially by AEs which were subsequently reimbursed by Mars India). The payment made by assessee towards reimbursement of salary of seconded employees has to be accepted to be at arm’s length. Assessee in its TP report has benchmarked the reimbursement by applying CUP method and therefore, the statement made by TPO is without any basis. AR has made out the case that for the salary expenses paid to AEs, the assessee has not received any service from its AEs. AR submitted that the services were received from employees based in India and it is only for administrative convenience that their salaries were paid outside India by AEs, which were subsequently reimbursed by assessee. Therefore the question of receiving benefits as stated by TPO does not arise at all. These facts has to be verified by TPO in consonance with evidence given by Assessee before DRP. Further in TP order, TPO has also disallowed salary expense paid to expatriate employees on the ground that Mars India was not able to demonstrate that salary paid to the expatriates was in line with the salary paid to its own senior management personnel. Assessee submits that quantum of emoluments paid to any employee is a subjective matter depending on a host of factors, such as ones educational qualifications, work experience, last salary drawn etc. The expatriate employees were originally based overseas and were paid salaries/emoluments based on the abovementioned variable factors. Thus while the employees were sent to India for a certain period of time, the employees were still rightfully entitled to the same level of salary as they were earning in their country origin. This fact has to be verified by TPO. Further AR pointed out that both the employees brought with them the valuable expertise and experience for assessee company. AR demonstrated the same with the relevant documents which was before DRP, but DRP has not taken cognizance of the same. During the hearing, DR pointed out that all the relevant documents in support of AR’s submissions related to salary expenses of two expatriate employees, the same was not tendered before TPO in the aforementioned. There is no finding to that effect in TPO’s order but though it was submitted before DRP, who also failed to look into this crucial evidence. Therefore, this issue needs to be looked into and these documents have to be verified. DRP order is non speaking order. Therefore, this issue is remanded back to TPO/A.O. As relates to reimbursement of actual expenses, TPO has disallowed this expenses by making adjustment with respect to consultancy charges of Rs.2.68 crores which was totally ignored by AO while giving effect to its order. AO is directed to make proper adjustment as relates to consultancy charges and then quantify the addition. We order accordingly.

Case remanded

2017-TII-58-ITAT-MUM-INTL

DCIT Vs VALENTINE MARITIME GULF LLC: MUMBAI ITAT (Dated: March 29, 2017)

Income Tax - Sections 44BB, 143(3), 144C - India-UAE DTAA - Article 5(2)(h) & 7

Keywords: business profits - PE - extraction & production of oil - contractual receipts - royalty income & shipping income

The assessee company was incorporated in Abu Dhabi. It was engaged in the business of installation, fabrication of onshore and offshore pipelines in connection with prospecting for and extraction of mineral oil products and other services relating to areas concerning natural gas and oil fields. For A.Y. 2010-11, the assessee filed a return of income on 14.04.2011 declaring Nil income. The case was taken up for scrutiny. In the course of assessment proceedings it was submitted that in the year under consideration the assessee had entered into the various projects regarding charter hire about which assessee was of the view that receipts/income was not exigible to tax since the period of contract was less than nine months under Articles of the India-UAE DTAA. Another project was started regarding for charter hire of Cargo Barge VML 3. The income was not offered to tax. The Barge was chartered at Abu Dhabi, used for transporting material from Mussafah Jetty Abu Dhabi to West Coast of India and barge was delivered back at Abu Dhabi. The assessee contended that this was business income under Article 7 of the India-UAE DTAA and since VMGL did not have a PE in India, this income/revenue was not liable to be taxed in India.

Assessee argued that since none of the above two projects exceeded a period of nine months under Article 5(2)(h) of the India-UAE DTAA and the profits earned by it from the project in India were business profits under Article 7 of DTAA, therefore no business profits were liable to be taxed in India. AO held that the assessee had a PE in India for Leighton Projects and therefore its income from this project would be taxable as business income. Though assessment was completed u/s 143(3) r.w.s. 144C and it was held that receipts from Leighton Contractors (India) P. Ltd. was brought to tax as business income u/s 44BB and receipts from M/s. MPSEZ Ltd. was brought to tax as ‘Royalty’ income. On appeal, CIT(A) held that assessee had no PE in India for the project with Leighton Contractors (India) P. Ltd. and the assessee’s income cannot be taxed in India u/s 44BB. But it upheld the AO’s finding that receipts from MPSEZ Ltd. was taxable as ‘Royalty’ income.

Having heard the matter, the Tribunal held that,

Whether in case the contracts executed by an assessee were in connection with prospecting, extracting and production of mineral oil, the same are squarely covered by the provisions of section 44BB of the Act - YES: ITAT

Whether the provisions of Article 5(2)(h) and Article 7 of the India-UAE DTAA, can be applied to shipping income also, even if there are specific provisions for the same in the domestic Act - NO: ITAT

+ in its grounds raised, Revenue assails the impugned order of CIT(A) in holding that the assessee cannot be taxed u/s 44BB. According to DR, CIT(A) grossly erred in holding that the assessee’s income from its contract with Leighton Contractors (India) P. Ltd. was not taxable u/s 44BB; when it was the assessee itself which put up the alternate claim that its income from the contract be taxed u/s 44BB as its activities in this contract executed by it was in connection with prospecting, extracting and production of mineral oil that fall squarely within the purview of the provisions of section 44BB. DR also submitted that CIT(A) was wrong in applying Article 5(2)(h) of the India-UAE DTAA, as it does not apply to ships. It is contended that assessee’s case in respect of its income from project executed with Leighton Contractors (India) P. Ltd. clearly falls within the purview and realm of the provisions of section 44BB and assessment thereunder was done by AO acting on the alternate plea of assessee. DR further submitted that issue of whether or not the assessee is liable to be assessed for such income u/s 44BB has already been considered and decided by the Coordinate Bench of the Tribunal in the assessee’s own case for A.Y. 2007- 08 in its order dated 18.01.2017 reported in (2007) 78 taxmann.com 109 (Mum-Trib) holding that its income received from M/s. Leighton Contractors (India) P. Ltd. is liable to be taxed u/s 44BB. It was prayed that Revenue’s plea be accepted and CIT(A)’s order be reversed on this issue. We have heard DR and perused and carefully considered the material on record, including the judicial pronouncement cited. We find that the Coordinate Bench of the Tribunal in the assessee’s own case for A.Y. 2007-08 dated 18.01.2017 2017-TII-16-ITAT-MUM-INTL has considered this issue of the exigibility to tax u/s 44BB of assessee’s income from its project with M/s. Leighton Contractors (India) P. Ltd. in that year at paras 11 to 16 thereof and held that the same is also liable to be taxed in terms of section 44BB. Following the decision of the Coordinate Bench in the assessee’s own case for A.Y. 2007-08 we reverse the impugned order of the CIT(A) and hold that the amount received from M/s. Leighton Contractors (India) P. Ltd. is also liable to be taxed in terms of section 44BB.

Revenue's appeal allowed

 

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