TII Instant Update - 2018-TII-INSTANT-ALL-535

NOTIFICATION

CASE LAWS

2018-TII-66-ITAT-PUNE-INTL

T-3 ENERGY SERVICES INDIA PVT LTD Vs JCIT: PUNE ITAT (Date of Decision: February 02, 2018)

Income Tax - Sections 9, 40(a)(i), 92CA(3), 194J, 195 - India-USA DTAA - Article 12 & CBDT Circular No.10/DV/2013.

Keywords - FTS - Lease line charges - Overseas remittances - Pure reimbursement of expenses - Royalty & TDS.

The Assessee- company, engaged in manufacturing of industrial valves & valve components used in oil field service industry, had filed its return for the relevant AY claiming an expenditure of towards the amount paid on account of reimbursement of expenses to its AE. In the course of assessment proceeding, the AO noted that the Assessee had paid lease line charges to Qwest Communications Inc, USA through its AE namely, T-3 Energy Services Creekmont. The Assessee was asked as to why no TDS u/s 195 was deducted on the said amounts while remitting the same to non-residents. In reply, the Assessee pointed out that the said expenses were pure reimbursement of expenses, having no profit element. The Assessee also produced the expenses bills and was claimed that the lease line charges did not constitute fees for technical services within the meaning of Explanation 2 to sec 9(1)(vii). Further, it was also stated that the lease line charges were not 'Fees for included services' under Article 12 of DTAA between India-USA. The Assessee then, claimed that where if any sum paid or payable to non-resident was chargeable to tax under any provisions of the Act, then TDS u/s 195 was to be deducted. However, in the absence of the same, no TDS was required to be deducted. However, the AO being dissatisfied, contended that the Assessee was not correct since it was not reimbursement of expenses to the AEs for any services provided by them to the Assessee rather it was payment made to third party Qwest Communication Inc, through the AEs. The AO further observed that in the absence of AE, if the Assessee intended to take services of Qwest Communications, Inc, services would be provided to him at similar rates as charged by AE. Thus, the amount remitted to third party was income in its hands for the services provided and thereby, would attract the provisions of sec 195. It was also found that in the year under consideration, the Assessee had made payment pertaining to AYs 2009-10 and 2010-11. Therefore, the same was disallowed u/s 40(a)(i) for default of payment of TDS on 'royalty' u/s 195. The international transactions with AE of reimbursement of expenses on account of lease line charges was reported in the Assessee's TP study report. On reference made by the AO, TPO had accepted different international transactions undertaken by the Assessee with its AE at ALP and no adjustment was made in the hands of Assessee on this count.

On appeal, the Tribunal held that,

Whether the amount received as reimbursement of lease line charges paid to AEs, will qualify as 'royalty' under Article 12 of India–UK Treaty - NO: ITAT

Whether therefore, such payment made on account of lease line charges is liable for deduction of TDS within the meaning of DTAA with USA r/w the provisions of Income-tax Act - NO: ITAT

Whether AO is permitted to analyse the decision of TPO, once the question of nature of expenditure has been accepted by TPO - NO: ITAT

+ it is seen that in the ratio laid down in the case of Asia Satellite Telecommunications Co. Ltd., it was observed that the question was whether in an attempt to interpret the two definitions uniformly i.e. domestic definition and the treaty definition, the amendments will have to be read into the treaty as well. The High Court held that: "....a clarificatory or declaratory amendment, much less one which may seek to overcome an unwelcome judicial interpretation of law, cannot be allowed to have the same retroactive effect on an international instrument effected between two sovereign states prior to such amendment. In the context of international law, while not every attempt to subvert the obligations under the treaty is a breach, it is nevertheless a failure to give effect to the intended trajectory of the treaty...." Further, referring to the decision of Apex Court in the case of Azadi Bachao Andolan & Arn. and The Vienna Convention on the Law of Treaties, 1969, the High Court held that: "....the amendments to a treaty must be brought about by an agreement between the parties. Unilateral amendments to treaties are therefore, categorically prohibited. It was thus, held that mere amendment to sec 9(1)(vi) could not result in a change and it was imperative that such amendment was brought about in the agreement as well and hence, the amendments were not applicable to DTAA....";

+ in the present case also, though definition of 'Royalty' under the Act had been amended, but the term 'Royalty' under the DTAA between India-USA is not amended. In the absence of the same, this Tribunal held that in view of the definition of 'royalty' under DTAA, the Assessee is not liable to withhold tax on the payments made to its AE on account of lease line charges. The Tribunal is not going into different decisions of the Tribunal on this aspect, in view of the ratio laid down by the Delhi High Court, which though is not jurisdictional High Court but the issue raised in the said appeal is similar to the issue raised in the present appeal. It was also pointed out that the High Court of Delhi had also taken note of the ratio laid down by the Bombay High Court in the case of Seimens Aktiongesellschaft, which in turn, has applied the ratio of the Supreme Court of Canada in R Vs. Melford Developments Inc. Therefore, applying the principle laid down by the High Court of Delhi in the case of New Skies Satellite BV, this Tribunal held that where the provisions of DTAA overrides the provisions of Income-tax Act and the definition of 'royalty' having not been undergone any amendment in DTAA, the Assessee was not liable to withhold tax on the lease line charges paid by it. The amended provisions of sec 9(1)(vi) brought into force by the Finance Act, 2012 are applicable to domestic laws and the said amended definition cannot be extended to DTAA, where the term has been defined originally and not amended;

+ the basic principle underlying the same is that where reimbursement of expenses do not include any income element, then the same is not subject to tax in India. The Assessee in this case has filed extensive evidence in this regard i.e. Qwest Communications Inc had raised charges upon T-3, USA and the portion allocable to the Assessee was charged on cost to cost basis. Hence, it cannot be said that there was any income element which has arisen in the case and consequently, this Tribunal hold that where the Assessee had reimbursed the expenses having no income element, there is no requirement to withhold tax out of such payments. The case of Revenue in this regard is that it is not case of reimbursement but is a case of payment to third party through its AE and hence, the need for withholding tax. This issue is already being dealt by the Tribunal wherein it was stated that under the provisions of DTAA, the term 'royalty' is defined and it does not cover any such services availed and payment made and hence, there is no merit in the stand of Revenue;

+ in any case, the privity of contract is between Qwest Communications Inc, the service provider and T-3, USA, who in turn had received bandwidth and passed on the services to various entities of group on cost to cast basis. The Assessee as recipient of services had reimbursed the same and in the absence of profit/income element, there is no liability to deduct TDS. Hence, the Assessee cannot be held to be in default. Once the transaction with AE had been accepted to be at ALP and the transaction in question was reimbursement of expenses, the order passed by the TPO is binding on the AO, not only in respect of determination of ALP of transactions but also vis-à-vis nature of international transactions. The Assessee had declared the same in its TP study report to be reimbursement of expenses on account of lease line charges which has been verified by the TPO as an international transaction and has been accepted as such i.e. nature of expenses i.e. reimbursement of expenses to AE on account of lease line charges. Once the nature of expenses has been so accepted by the TPO, the AO cannot sit in judgment of the TPO order since under the provisions of the Act, the order passed by the TPO is binding upon the AO. He at best could have invoked the provisions of Income Tax Act perse and not question the nature of expenditure i.e. after the TPO accepted to be reimbursement of expenses, the AO challenged the same and held it to be 'royalty'. There is no merit found by this Tribunal in the order of AO in this regard and hence, the Assessee succeeds on the alternate plea also. Accordingly, there is no merit in the disallowance made towards payment made to AE on account of reimbursement of lease line charges by invoking provisions of sec 40(a)(i).

Assessee's appeal allowed

2018-TII-113-ITAT-MAD-TP

KPR MILL LTD Vs ACIT: CHENNAI ITAT (Dated: January 24, 2018)

Income Tax - Sections 80-IA, 92CA & 92E

Keywords - ALP - Captive power plant - Energy wheeling agreement - Specified domestic transaction - Market price - Threshold limit

The Assesse-company, engaged in the business of manufacturing cotton yarn and knitted garments. The Assessee had filed its return for the relevant AY. In the course of the assessment proceeding, the AO noted that the Assessee had installed windmill at various places so that the electricity generated out of the windmill could be utilised for the manufacturing activity. Further, the Assessee entered into an agreement namely "Energy Wheeling Agreement" with Tamil Nadu Electricity Board for transmitting the electricity from windmill to the Assessee's factory and charged fees for such transmission. Accordingly, the matter was transfered to the TPO for determination of ALP. During the TP proceeding, TPO reduced the tax incentive provided for captive power plant omitting to consider the auditor's report filed u/s 92E along with TP study report. Thereafter, the TPO believed that the power generated by the Assessee's captive power plant was not saleable to State Electricity Board hence, valued the same at regulated rate. On appeal, the DRP upheld the conclusion made by the TPO and stated that the power generated by captive power plant of the Assessee was non-saleable, therefore, the only buyer could be the TNEB.

On appeal, the Tribunal held that,

Whether auditor's report filed u/s 92E in Form No.3CEB should not be rejected in case of specified domestic transaction relating to "sale of electricity", merely on basis of presumption that captive power plant is not saleable to State Electricity Board - NO: ITAT

Whether the price at which the State Electricity Board sells the electricity to its consumer, should be considered as market price for the purpose of computing deduction u/s 80-IA - YES: ITAT

Whether the cost of generation & purchase price can be fixed at a lower rate, merely because the "power" has been purchased from subsidiary company - NO: ITAT

+ it has been contended that the Parliament has amended the Electricity Act by introducing various reforms by Electricity Act, 2003. The key feature was the policy of encouraging private sector participation in generation, transmission and distribution of electricity. Further, generation of electricity was being de-licensed and captive generation of power is being freely permitted, all the distribution companies were mandated by law to provide open access to their networks to the generating companies to sell power directly to consumers. Therefore, where there is a direct commercial relationship between power generating company and consumer or a trader, the price of power would not be regulated. The sale of power to industrial consumers were freed from all price controls and captive power plants could sell power to industrial consumers at free market prices subject to payment of wheeling charges to the distribution companies. Moreover, captive power plant was exempted from payment of surcharges and cross subsidy charges, therefore, captive power plant is one of the beneficiaries from AY 2013-14;

+ referring to sec 80-IA(8), the Counsel for the Assessee submitted that the profit of the eligible business shall be computed as if the power generated by captive power plant was transferred to manufacturing industry at the market value. Referring to Explanation to sec 80-IA(8), it was submitted that "market value" means the price that the electricity would ordinarily fetch in the open market. In the open market, the TNEB supplies power at Rs.6.03 per unit. Referring to observation made by the TPO and the DRP, the Counsel for the Assessee submitted that the reasoning of the TPO and DRP that the power generated by captive power plant of the Assessee is non-saleable, therefore, the only buyer could be the TNEB. According to the Counsel, when the power generated by captive power plant is not intended to be sold, there is no question of any presumption that the Assessee would have sold only to State Electricity Board;

+ it is further seen that on an identical situation, the issue of deduction u/s 80-IA was elaborately considered by the Mumbai Bench of this Tribunal in M/s Reliance Industries Limited, wherein it was found that the price at which the Electricity Board sells the electricity to its consumer has to be taken as market price for the purpose of computing deduction u/s 80-IA. Further, the Kolkata Bench of this Tribunal in the case of Birla Corporation Ltd., after following the decision of the Mumbai Bench of this Tribunal, has held that: "....the method adopted by the Assessee viz. to take the average rate charged by the State Electricity Board for the previous month is quite appropriate and reasonable for determining the market value for the month of supply. The Tribunal held that the annual weighted average adopted by the CIT(A) would result in variations occurring during the year at different times being made applicable uniformly for the whole year and therefore, the Assessee's method is more appropriate as it factors in variations as and when they take place...." Therefore, this Tribunal is unable to uphold the orders of the authorities. Accordingly, the orders of the authorities are set aside and the AO is directed to adopt the ALP of electricity at Rs. 6.03 per unit;

+ it is also to be noted that the Assessee had purchased power from subsidiary company, namely, KPR Sugar Mills at Karnataka. The purchase of power is not in dispute. Had the Assessee purchased power from State Electricity Board or Karnataka State Electricity Board, it would have paid the price fixed by the respective Electricity Board. Merely because the Assessee purchased the power from subsidiary company that cannot be a reason to fix the cost of generation and also the purchase price. When the Tamil Nadu Electricity Board sells power at Rs.6.03 per unit, this Tribunal is of the considered opinion that the Assessee could not have paid in the open market at 7 per unit. Therefore, there is no justification in fixing the ALP at 3.59 per unit. Therefore, the orders of the lower authorities are modified and the AO is directed to fix the purchase price of power from subsidiary company, namely, KPR Sugar Mills Ltd. at 6.30 per unit.

Assessee's appeal partly allowed