| 2018-TII-INSTANT-ALL-520 | 15 January 2018 |
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TII BRIEF FATCA - CBDT issues fresh direction on US TIN for pre-existing accounts... CASE LAWS AVINEON INDIA PVT LTD Vs DCIT: HYDERABAD ITAT (Dated: July 07, 2017) Income Tax - Sections 92CA(3), 115JB, 143(3) & 144C(5). Keywords - ALP - CUP - Intellectual property rights - Medical transcription charges - Production expenses - Reimbursement of expenses & TNMM. The Assessee-comapny, engaged in the business of providing I.T. enabled services and software development services to its AEs. The Assessee had filed its return for the relevant AY declaring its total income and book profit u/s 115JB. In the course of the assessment proceeding, the AO noted that the Assessee had entered into an international transactions with its AEs which exceeded the limits fixed by the CBDT. Accordingly, the matter was referred to the TPO u/s 92CA for derterming the ALP. It was noted that the Assessee had reported ITES provisions and recovery of expenses as international transactions in its TP study and thereby, determined the ALP under TNMM and CUP methods respectively. However, the TPO rejected the said TP study and held that its search process suffered from defects. The TPO selected 13 companies as comparable to the Assessee and arrived at the arithmetic mean margin of 26.51% and thereby, issued SCN. However, the Assessee objected the comparables selected by the TPO and stated that the Accentia Technologies Ltd was providing high end I.T services and therefore, the same could not be a comparable to the Assessee. But, the TPO observed that the Assessee failed to consider the verticals and horizontals of ITES & the high end and low end distinction while selecting the comparables and therefore, the TPO also had not discussed the same distinctions. Further, the TPO noted that the Assessee was the business of providing ITES in the areas of technical data management, storage and retrieval primarily to its AEs which included oftware services in CAD/GIS applications, drawing, MAP conversion and digitalization services, enterprise software services, engineering consultancy & services in the areas of project designing. On the other hand, the Accentia Technologies Ltd was earning income from medical transcription, billing & collection and coding, all of which activities was covered under the category of ITES. Therefore, the TPO concluded that the said comparable and the Assessee were into similar type of services. The TPO had also taken 'Microgenetics Systems Ltd as a comparable in his TP study. It was also found by the TPO that the receipt of reimbursement was not routed through books of account and since no independent party would render such services without any markup, and since recovery of expenses always forms part of operating cost in the case of independent comparable companies, these expenses incurred by the Assessee and subsequently reimbursed by the AEs were added to the operating revenues as well as operating costs for the purpose of aggregation of transactions and determining ALP under TNMM. Accordingly, the ALP was computed by the TPO @ 25.73% and thereby proposed an adjustment and order was passed u/s 92CA(3). On appeal, the DRP reduced the mark-up of 25% to 5%. The DRP also noted that Microgenetics Systems Ltd was engaged in the activity of Medical Transcription and the expenses of 23% was incurred on outsourcing of medical transcription activity. Therefore, the DRP directed to exclude Microgenetics Systems Ltd from the final list of the comparables. However, the DRP confirmed the adjustment so made. On appeal, the Tribunal held that, Whether ownership of comparable companies over significant non routine intellectual properties, will have impact over their margin & FAR analysis - YES: ITAT + the TPO & DRP have held the Assessee also to be a KPO and have not disputed that the Accentia Technologies Ltd is a KPO. However, as regards the intangible assets such as brands/IPRs owned by Accentia Technologies as against the Assessee, which does not own any brands/IPRs, both the TPO as well as DRP have been silent. As regards the Assessee's argument of not owning any intangible assets is concerned, it is found that the Assessee (in its Annual Report) has reported that its AEs owns complete intellectual property rights relating to computer software including the copyright, patent etc., and the mark-up associated with the software and that the Assessee does not own any significant non routine intellectual property thereto; + both the TPO & DRP are silent on this contention of the Assessee. Therefore, this fact would influence/have impact on the FAR analysis and consequently the margin of the respective companies and therefore, is an important factor to be considered while selecting comparables. In view of the same, it is fit and proper to remit the issue of the ownership of Brands/IPRs by Accentia Technologies Ltd as compared to none owned by the Assessee and if it is found that the Accentia Technologies owns the intangibles as stated by the Assessee and if the Assessee does not own any intangible asset at all, then clearly the company cannot be taken as a comparable to the Assessee. With this limited direction, the issue is remitted back to the file of the TPO; Whether any markup is required on reimbursement of travel expenses, in absence of any evidence to show that credit facility has been extended to AEs for such reimbursement of costs - NO: ITAT + the expenses reimbursed are travel and visa processing charges. There could not be any markup on such expenses and particularly in the absence of any material on record that unreasonable credit facility has been extended to the AEs of the Assessee for such reimbursement of costs. Further, the Assessee has also adopted the CUP method to hold the transactions to be at ALP. Except for aggregating both the transactions at TNMM, the TPO has not been able to bring out any material on record to show that the reimbursement of expenses are excessive and therefore, at a markup. Further, in the case of Kirby Building Systems India Ltd, the issue was of cost sharing exercise in implementing ERP systems in the group and the Tribunal held that it involves services by the said company, but in the case of the Assessee, it is pure reimbursement of expenses incurred by the Assessee and no service element is involved. Thus, DRP's reliance on the said decision is clearly misplaced. In view of the same, the AO/TPO is directed to treat the transaction to be at ALP and adjustment to be made at Rs. Nil. Assessee's appeal partly allowed AMD INDIA PVT LTD Vs DCIT: BANGALORE ITAT (Dated: October 26, 2017) Income Tax - Sections 92CA, 143(3) & 144C. Keywords - ALP - Average cost - Credit period - CUP - Independent international transaction - LIBOR rates - TNMM The Assessee-company, engaged in providing packing solutions. The Assessee had filed its return for the relevant AY. On reference made by the AO, TPO after considering all the details, made adjustments towards working capital. However, later the TPO again made additions on account of interest on receivables and treated the same as an independent transaction. Further, the TPO had allowed interest free period of 30 days as agreed to in terms of the agreement with AE and directed the AO to compute the number of days of delay after allowing credit period of 30 days. Following the TPO's order, the AO completed the assessment and passed the order. On appeal, the DRP also confirmed the assessment order passed by the AO. On appeal, the Tribunal held that, Whether credit period allowed to AE can be treated as 'independent international transaction', if sale price to AE/non AE is inclusive of possible interest on such agreed debt - NO: ITAT Whether subsequent event of allowing extra credit, will require seperate benchmarking, merely because agreed price between Assessee and its AE without considering extra credit period is in excess of ALP - NO: ITAT Whether when profit of tested party is equal or above profit of comparables, even after taking into account effect of working capital adjustment and the ALP is less that price charged by tested party, then extra credit provided to AEs is required to be separately benchmarked - YES: ITAT + the sale price to AE or non AE is inclusive of possible interest on such agreed debt and therefore, for such credit allowed to AE, it cannot be said that this is an independent international transaction. But when extra credit is allowed beyond the agreed credit period, the same is a subsequent independent event and interest for such extra credit period cannot be factored in the price agreed. Only because the agreed price without considering extra credit period is in excess of the ALP, it cannot be said and held that for such independent subsequent event of allowing extra credit also, the agreed prices takes care and this is not an independent international transaction requiring separate benchmarking; + in TP analysis, the purpose is not to compare profit of the tested party with that of the comparables but the purpose is to compare the prices charged by the tested party with the prices charged by the comparables although when TNMM is adopted as MAM, the process of such price comparison is by comparing profits of tested party with that of the comparables and therefore, if the profit of the tested party is equal or above the profit of comparables, even after taking into account the effect of working capital adjustment and the ALP is less that the price charged by the tested party, it cannot be said that the extra credit allowed is not an independent international transaction and not required to be separately benchmarked; + the first requirement is this that it has to be first decided that whether it is an independent international transaction or not and if it is found that it is not so, then obviously, no separate benchmarking is required but if it is found that it is an independent international transaction then separate bench making has to be done and TP adjustment is to be made as per law irrespective of whether any TP adjustment is required to be made in respect of main transaction of sale; + in respect of agreed credit period which is 30 days in the present case, there is no independent international transaction because the effect of the credit to that extent is factored in the agreed prices. But for extra credit, the effect of the credit to that extent cannot be factored in the agreed prices because it is not even known at that stage as to how extra credit will be allowed and therefore, that is an independent international transaction and hence, separate bench making has to be done and TP adjustment is to be made as per law. This is worth noting that by allowing extra credit in excess of agreed period of 30 days, profit shifting is there because if credit period is more, prices go up which is not done in the present case since, the prices are determined on the basis of 30 days credit period; + the aspect of rate of interest for such benchmarking is covered by the Tribunal order rendered in the case of M/s Goldstar Jewellery Ltd. wherein, it was held that "....extra credit allowed can be considered as an independent international transaction and the same be compared with internal CUP being average cost of the total funds available to the assessee...." Respectfully following this Tribunal order, the AO directed to find out the cost of the total funds available to the Assessee and the same should be adopted as internal CUP for benchmarking of this independent international transaction i.e. allowing extra credit in addition to agreed credit period of 30 days. Case Remanded |
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