TII Instant Update - 12 February 2018

CASE LAWS

2018-TII-10-HC-DEL-TP

PR CIT Vs ORACLE (OFSS) BPO SERVICES PVT LTD: DELHI HIGH COURT (Dated: February 5, 2018)

Income tax - ALP - BPO services - comparable entity - multiple year data - related party transactions - TNMM

The Assessee company engaged in the business of providing call centre services / BPO services to the clients of its parent company, Equinox Corporation, USA, had filed its return reporting three categories of international transactions with its AE. The first being 'provision of services'; the second related to 'recovery of expenses' and the third related to 'sale of call manager phones'. The TP report filed by assessee included 22 comparables chosen by way of TNMM. During TP proceedings, the TPO accepted the adoption of TNMM as the MAM for determination of ALP. However, he excluded 13 companies on the basis that they were not premised upon the relevant single year data but rather based upon multiple years’ data. The OP/TC yielded an operating margin to the AE at 11.61% within the tolerable range of +/-5% of the three years weighted average of OP/TC, which was computed at 12.51%. The average margin considered by the TPO of comparables was 22.09%. Therefore, on the basis of application of settled statutory principles, the TPO made an upward adjustment of Rs. 3,25,93,468/-.

On appeal, the DRP arrived at a margin of 23.62%, which resulted in an adjustment of Rs. 7,21,92,932/-. The assessee’s appeal to the ITAT however resulted in deletion of the adjustments made by the DRP. These were primarily based upon the ITAT’s fresh assessment and appraisal of the circumstances. It also took into account the RPT and excluded certain comparables by applying a broad ballpark threshold of taking into account the functioning and profits of comparable entities, whose unrelated transactions were in equal to or in excess to 75% of their business. The ITAT did so on the basis that the entity had a significant brand presence in the market and could not be deemed to be a comparable entity.

On appeal, the HC held that,

Whether RPT filter is relevant in case of a transfer pricing study premised primarily on comparing light entities having similar if not identical functions - YES: HC

Whether the brand value of an entity has a significant role in its ability to garner profits and negotiate contracts - YES: HC

Whether the likelihood of profits attributable to the brand having regard to the consistency of the quality of services that an entity is able to offer, is relevant while making selection of comparables - YES: HC

+ this Court is of the opinion that the RPT filter is relevant and fits in with the overall scheme of a transfer pricing study which is premised primarily on comparing light entities having similar if not identical functions. Therefore, if a particular entity predominantly has transactions with its associate enterprise, in excess of a certain threshold percentage, its profit making capacity may resulted in a distorted picture, either way. In these circumstances, the ITAT, in the present case, followed a previous precedent and was of the opinion that a broad threshold figure of 25% RPT in the case of comparables was essential. Applying that rationale, the ITAT excluded some comparables listed in the TPO’s report. There is no error of law per se in this approach. As to the exclusion of M/s Wipro Limited, here too, the Court is of the opinion that the brand value of an entity has a significant role in its ability to garner profits and negotiate contracts. Thus, while considering the comparables, the likelihood of profits derived or attributable to the brand having regard to the consistency of the quality of services that an entity is able to offer would be relevant; although functionally, the two entities may be similar in terms of the services or products they offer, brand does play its own role in price or cost determination. If this singular aspect is kept in mind, the ITAT’s approach cannot be faulted with.

Revenue's appeal dismissed

2018-TII-54-ITAT-DEL-INTL

DALER SINGH MEHNDI Vs DCIT: DELHI ITAT (Dated: December 20, 2017)

Income Tax - Sections 80RR, 90(3), 143(3), 148 & 263 - DTAAs between India-USA, Canada, Netherlands & Hong Kong - Articles 17 & 18 - CBDT notification No. 91/2008.

Keywords - Activities performed abroad - Foreign shows - Residential status - Royalty on music - Source based taxation - Treaty benefits

The Assessee, an individual, engaged in the profession of singing, music, and performed stage shows in India as well as abroad. Consequent to filing of his return, the same was processed u/s 143(1). Subsequently, the AO issued notice u/s 148 in order to repon the Assessee's case. The AO examined the Assessee's return stating that during the year under reference, the Assessee had performed foreign shows in countries like USA and UAE. The Assessee submitted that as per Article Nos. 17 and 18 of the DTAA with the respective countries, the income derived by him from his personal activity was to be taxed in the state in which such activities were performed. Further, the Assessee stated that the main source of income was derieved from such public entertainment performed outside India and the Assessee was also entitled to the benefits of DTAA. The Assessee had also filed some of the agreements for the performances in foreign countries, which showed that the tax in the foreign country was to be borne by the organizer in those countries. The AO examined the Assessee's claim with respect to the taxation of the income vis-a-vis his residential status and held that Assessee's case was covered under the clauses of the DTAA. In respect to the Assessee's claim of the expenses, the AO noted that Assessee had allocated Rs. 883427/- attributing to the foreign shows in proportion to the number of days spent in the foreign countries considering it as attributable to foreign shows. However, if the income pertaining to foreign shows performed in those countries with which India had DTAA was reduced from the income offered by the Assessee, it would brought the assessed income below the originally returned income, which could not be envisaged in section 148. Therefore, the AO accepted the Assessee's claim in reassessment.

However, while examining the records, notice u/s 263 was issued by the CIT proposing to revise the order passed by the AO because the CIT believed that the order passed by the AO was erroneous and prejudicial to the interest of the Revenue. The CIT dealt with Article 18 of DTAA with USA and observed that the provision was only for allowing credit to the income tax paid in the other contracting state and did not permit exempting the income from tax in India. Therefore, the CIT held that deduction was allowable from income tax in India only of the amount of tax actually paid in that country by an Indian resident and the income did not became 'not chargeable to tax' in India. While examining the issues, the CIT noted that the AO had not applied his mind to the manner of allocation of expenditure incurred by the Assessee on foreign shows since, the CIT believed that most of the expenditures were debited to the P&L account related to such foreign programs. The AO had accepted Rs. 7.31 lakhs allocated by the Assessee. According to the CIT such expenditure, even if allocated pro rata on the basis of income earned in foreign currency and the income earned in Indian currency, then such expenses would have been Rs. 38.80 lacs. Therefore, the income eligible for deduction u/s 80RR would get reduced by Rs. 38.80 lacs and hence, such deduction was required to be withdrawn to that extent. Secondly, the CIT noted that the AO had misinterpreted the provisions of section 90 read with DTAAs entered into with the respective countries. The CIT believed that the global income of a resident was taxable in India and therefore, the income earned in such foreign country if they were not taxed in that country, then the same were taxable and includible as the taxable income in India of the Assessee.

On appeal, the Tribunal held that,

Whether where relevant article of DTAA uses an expression 'may be', without specifying any rate for other Contracting State to collect tax, then the same has to read as 'shall be' - YES: ITAT

Whether therefore, only the source country has a right to tax such income, without having any right of taxation with the home country to tax such receipt - YES: ITAT

Whether amended section 90 provides the rights to the govternment of home country to define any expression used in the treaty, to be prospective in nature only and will not have applicability in the preceding AYs - YES: ITAT

+ it is seen that with respect to the availability of the benefit of DTAA to the Assessee, it was submitted that the AO has given improper finding that Assessee's income from the foreign source is not chargeable to tax despite Assessee being an Indian resident and his global income is chargeable to tax. He submitted that Assessee can get the benefit of DTAA only if the income is charged to tax in the foreign country from which the income is sourced. If that income is not charged to tax in the country, this shows, the income will be taxed in India. He therefore, submitted that the Assessee, though eligible for the benefit of DTAA, but as that income has not been charged to tax in the foreign country the income is rightly charged to tax in India. This Tribunal upheld the order of the CIT u/s 263 on the issue of allocation of expenditure for allowability of the claim of the deduction u/s 80RR as well as observation on applicability of DTAA. Therefore, Assessee's appeal filed for AY 2000 – 01 is dismissed accordingly;

+ it is also seen that where the stage shows performed by the Assessee outside India and with those countries, the DTAA exists where the taxation rights are given to the source countries using the term 'may be taxed' , the Assessee is eligible for DTAA and such income cannot be taxed in India. However, the senior area changes for AY 2004-05, by which the provisions of section 90(3) has been introduced and further notification was issued vide notification No. 91/2008 wherein the term 'may be taxed' is explained. Further, the coordinate bench in case of Essar Oil Limited Ltd vs. Additional Commissioner of Income Tax held that "... while interpreting the expression 'may be taxed' it can be stated that once the tax is payable or paid in the country of source, then country of residence is denied of the right to levy tax on such income or the said income cannot be included in return of income filed in India, would no longer apply after the insertion of provision of sub-section (3) of section 90 w.e.f. 1st April, 2004 ...";

+ it is to be noted that the benefit of DTAA is not available to the Assessee for AY 2004 – 05 and income earned by the Assessee from stage shows performed outside India shall be included in the total income chargeable to tax in India in accordance with the provisions of the act and relief shall be granted to the Assessee in accordance with the method for elimination or avoidance of double taxation provided in those agreements. Hence, the cross objection filed by the Assessee is set aside to the file of the AO to consider the income of the Assessee earned from foreign stage shows and grant necessary relief in accordance with the method for elimination or avoidance of double taxation provided in those agreements. Needless to say that Assessee may be granted an opportunity of explaining the amount of taxes paid in those countries, if any, for the purpose of claiming relief or avoidance of double tax.

Case Remanded