TII Instant Update - 2018-TII-INSTANT-ALL-543

CASE LAWS

2018-TII-85-ITAT-MUM-INTL

SYED SERWAT SEVY ALI Vs ITO: MUMBAI ITAT (Dated: March 9, 2018)

Income tax - Section 69A

Keywords - NRO account - overseas remittances - source of income - tax clearence certificate - unexplained money

The Assessee is a non resident who was staying in India since 2005, and was maintaining NRO SB Account with Standard Chartered Bank, Mumbai. In the meanwhile, he applied for VISA extension to the Ministry of Home Affairs, which was rejected. The Ministry therefter directed the office of Dy Commissioner of Police, Mumbai to grant him exit permit after procuring income-tax clearance certificate from the Department. During the course of proceedings, the AO observed that assessee was staying in India since 2005 and also indulged in the activity of film production where he had lent money to the producer to produce a movie. However, assessee neither filed any return of income nor paid any tax in India. The AO also noted that bank statement furnished by assessee reflected credit of Rs.2.85 crores during F.Y 2011-12. During the course of enquiry, the assesse claimed that said amount of Rs.2.85 crores was returned by producer which he had lent to the producer, Mr. Mahesh Bhatt in the year 2004 to produce a movie. The AO, not being satisfied with such explanation, reopened the assessment and asked the assessee to explain the source of advance of Rs.2.58 crores shown in the balance-sheet for A.Y 2005-06. In reply, the assessee contended that the said fund was received from Mr Sohail Khan, CEO of Sohail Khan Productions, Inc, US which was a film and TV production company based in New York. The confirmation letter was also enclosed with fund transfer confirmation for the amount received in USD. The assessee further informed that he had given the advance of Rs.2.85 crores to Vishesh Entertainment Pvt Ltd in the year 2004 for the film, ‘Nazar’. To ascertain the correctness of claim made by assessee, the AO conducted necessary enquiries through proper channel with US tax authority, which confirmed that there was an entity registered in the name of Sohail Khan Productions, Inc, incorporated in the state of New York in 2003, but it was inactive. The company had not reported any tax returns or other reports to the department of Treasury Internal Revenue Service. The letter further stated that Sohail Khan did not have earned any declared income to support transfer of USD 7,50,000 to Shri Syed Servat Sevi Ali. The AO therefore opined that the inflow of money into the company of Mr. Mahesh Bhat was only mentioned to have been sourced from the US company, Telegroup. Inc, but without any concrete evidence regarding the genuinity or creditworthiness of the said company. Accordingly, the AO made addition of Rs.2.85 crores as unexplained money u/s 69A.

On appeal, the CIT(A) observed that assessee was merely trying to explain the sum of Rs.2.85 crores from self generated evidence in the form of affidavit to which the AO had taken note in his assessment order. The facts gathered during the course of assessment proceedings clearly establishes the fact that assessee had failed to establish genuineness of transactions and the source of money received from M/s Vishesh Entertainment Ltd, which had claimed to have received such money in the year 2004 from Sohail Khan Productions, Inc. and the source for such transfer was from Telegroup. Inc, a telecom company situated in UK.

On appeal, the ITAT held that,

Whether remittances received from abroad has to be treated as unexplained u/s 69A, if the abroad based source entity as claimed by Indian receipient was found to be a non existent entity and has not filed any tax return to support transfer of such remittances - YES: ITAT

+ the AO has observed that though the assessee tried to explain the source of money given to Shri Mahesh Bhat, film producer, through transfer of funds from USA from Sohail Khan Productions, Inc., but failed to file necessary evidence to prove the creditworthiness of Sohail Khan Productions, Inc. as enquiries conducted during the course of assessment proceedings revealed that Sohail Khan Productions, Inc. did not file tax returns in US as per the letters addressed by the US tax authorities. The AO further observed that the assessee, though filed an affidavit and also filed confirmations from Sohail Khan Productions, Inc explaining the source of source in respect of amount received from Sohail Khan Productions, Inc by stating that Sohail Khan Productions, Inc has received money from Telegroup Inc., a subsidiary of Sohail Khan Productions, Inc. Mere filing of an affidavit would not be sufficient compliance to discharge the onus of proving the genuineness of transaction and creditworthiness of the parties. Affidavit is a self serving document, to which credence cannot be given so as to accept genuineness of transactions. It is the contention of assessee that the source of money received from M/s vishesh Entertainment Ltd through RTGS in the financial year 2009-10 is refund of advance given to Shri Mahesh Bhat, film producer for production of film ‘Nazar’ which has been returned by Shri Mahesh Bhat. The assessee has filed various documents to prove transfer of funds from US to India in the year 2004 and source of such funds as has been received from Sohail Khan Productions, Inc, who in turn received the funds from Telegroup Inc., a subsidiary of Sohail Khan Productions, Inc;

+ there is however no merit in the arguments of assessee for the reason that explanations offered by assessee in the light of evidence filed during the course of assessment proceedings has been negated by the AO in the light of enquiries conducted through proper channel with US tax authorities, where they have confirmed that Sohail Khan Productions, Inc is a non existent entity and has not filed any tax return to support transfer of USD 7,50,000 to the assessee. The assessee has not filed any new evidence except evidence filed before the lower authorities. The lower authorities have taken into account all evidences filed by the assessee to come to the conclusion that the assessee has not explained the source of money received in the year 2009-10. Facts remain unchanged. The assessee failed to bring on record any evidence to prove the findings of fact recorded by the lower authorities. Therefore, the CIT(A) was right in confirming addition made by AO towards money received from Vishesh Entertainment Ltd as unexplained money u/s 69A.

Assessee's appeal dismissed

2018-TII-143-ITAT-DEL-TP

DCIT Vs VODAFONE ESSAR DIGILINK LTD: DELHI ITAT (Dated: March 14, 2018)

Income tax - ALP - AMP expenses - benefit test - CUP - functional similarity - economic benefit - internatonal transaction - payment of royalty fee - use of trade mark

A) The Assessee company is engaged in the business of providing cellular mobile telephony services in the telecom circles of Rajasthan, Haryana and Uttar Pradesh (East). During the relevant year, the assessee reported two international transactions in Form no. 3CEB including 'Payment of Royalty fee for use of trade name and mark' amounting to Rs.11,47,16,908/-. The AO accordingly made reference to the TPO for determining the ALP of the international transactions, who then noticed that assessee had paid royalty amounting to Rs.7,64,77,939/- to Vodafone Ireland Marketing Ltd. for use of the brand name 'Vodafone' and Rs.3,82,38,969/- to M/s Rising Group Ltd. for use of brand name 'Essar'. However, both the companies agreed not to charge any royalty till May 31, 2008, and only after such date, the assessee was required to pay royalty @ 0.15% of net service revenue to Rising Group Ltd. for use of brand name 'Essar' and @ 0.30% to Vodafone Ireland for use of brand name 'Vodafone.' The assessee claimed that since the payment @ 0.15% and 0.30% for use of brand names, Essar and Vodafone, was lower than 7% paid by Forward Industries Inc., USA to Motorola Inc., USA, its international transactions were at ALP. Though the TPO accepted the use of CUP as the MAM, he however declined to treat payment of royalty @7% of the net sales of Forward Industries Inc., USA to Motorola Inc., USA, as comparable because of the functional dissimilarity. Considering the fact that assessee was not earlier paying royalty for use of Essar and Vodafone trademarks up to May 31, 2008, the TPO determined Nil ALP of the international transaction, by holding that there was no cost benefit analysis and no economic benefit was derived by the assessee.

B) The Assessee during the relevant year, also incurred huge amount of AMP expenses which was for the promotion of brand owned by the AEs. Applying the bright line test, the TPO proposed transfer pricing adjustment amounting to Rs.284,68,27,994/-. On appeal, the DRP upheld the order passed by TPO. The AR contended that the incurring of AMP expenses was not an international transaction at all and, hence, there could be no question of determining the ALP of this transaction or making any addition thereon.

On appeal, the ITAT held that,

Whether an arrangement for no payment of royalty between AEs during past, can be a reason to treat the ALP of royalty at Nil in later years - NO: ITAT

+ simply because no royalty was paid in the past, can be no reason to treat the ALP of royalty at Nil in later years. Chapter-X of the Act dealing with the transfer pricing provisions, contemplates making a comparison of the international transaction with the comparable uncontrolled transactions. If such a comparison demonstrates that the payment under the international transaction is at ALP in comparison with the other comparable uncontrolled transactions, then the transacted value of the international transaction has to be accepted. A comparison has to be made with comparable uncontrolled transactions and not with the assessee's past practice. In so far as the use of the 'Benefit test' for determining the ALP of such services at Nil is concerned, it is noticed that Punjab & Haryana High Court in Knorr-Bremse India P. Ltd. vs. ACIT, has held that the question whether a transaction is at an ALP or not is not dependent on whether the transaction results in an increase in the assessee's profit. A view to the contrary would then raise a question as to the extent of profitability necessary for an assessee to establish that the transaction was at an arm's length price. A further question that may arise is whether the ALP is to be determined in proportion to the extent of profit. Thus, while profit may reflect upon the genuineness of an assessee's claim, it is not determinative of the same. Reverting to the facts of the extant case, it is established beyond doubt that brand names of Essar and Vodafone have in fact been used by the assessee, which deciphers that the international transaction entered in to by the assessee with its AEs was genuine and bona fide;

Whether there must be a complete identity between the international transaction and the uncontrolled transaction, with which comparison is sought to be made, for purpose of application of CUP method of benchmarking - YES: ITAT

Whether transaction between two foreign parties can be considered for comparing an international transaction with Indian assessee as a tested party - NO: ITAT

+ it is manifest that the TPO has applied the CUP method for determining ALP of the international transaction. While applying the CUP method, it was obligatory upon him to bring on record some comparable uncontrolled instance as per the mandate of rule 10B(1)(a)(i). Not even a single comparable instance has been brought on record to facilitate a comparison between the price for the use of brand by the assessee vis-à-vis that paid by other comparables in similar uncontrolled circumstances. It is further found that the assessee has used only one foreign comparable instance in which royalty at the rate of 7% of net sales was paid by Forward Industries Inc., USA to Motorola Inc. USA. This is not a comparable instance because of the functional dissimilarity. Motorola Inc. is in the business of designing and selling wireless network infrastructure equipments, such as, cellular transmission base stations and signal amplifiers. As against this, the assessee is engaged in providing cellular mobile telephony services. There can be no comparison of a company dealing in hardware with a company providing telephony services. Pre-requisite for application of the CUP method is that there must be a complete identity between the international transaction and the uncontrolled transaction, with which comparison is sought to be made. That apart, it is a transaction between two foreign parties and hence cannot be considered for comparing an international transaction with the Indian assessee as a tested party;

Whether the TPO is required to simply determine the ALP of the international transaction, unconcerned with the fact, if any benefit accrued to the assessee - YES: ITAT

+ the action of the TPO in determining Nil ALP of the international transaction on the ground that no benefit accrued to the assessee and then the AO making addition simply on the basis of recommendation of the TPO, is not in accordance with the judgment of jurisdictional High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd - 2014-TII-07-HC-DEL-TP, in which it has been held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such service exists or benefits did accrue to the assessee. On adverting to the facts of the present case, it is found that the TPO proposed the transfer pricing adjustment equal to the stated value of the international transaction at Rs.11.47 crore and odd, inter alia, by holding that no benefit was received by the assessee and hence no payment on this score was warranted. The AO in his draft order has taken the ALP of the international transaction at Nil on the basis of such recommendation of the TPO without carrying out any independent investigation for the deductibility or otherwise of such payment in terms of section 37(1). However, as per the ratio decidendi of Cushman & Wakefield India (P.) Ltd., the TPO is required to simply determine the ALP of the international transaction, unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1). Therefore, this issue is remanded bac to the file of TPO for deciding it in conformity with the law laid down by jurisdictional High Court;

Whether the ALP of AMP expenses comes up for determination, then Selling expenses should not be considered as a part of AMP expenses - YES: ITAT

+ as far as AMP expenses are concerned, it is found that when the TPO held AMP expenses to be an international transaction, he did not have any occasion to consider the ratio laid down in several judgments of jurisdictional High Court, which are now available for consideration. Respectfully following the predominant view taken in several Tribunal orders of co-ordinate benches, this Tribunal is of the considered opinion that it would be in the fitness of things if the impugned order on this issue is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter will end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO will determine the ALP of such an international transaction in the light of the relevant judgments after allowing a reasonable opportunity of being heard to the assessee. However, it is made clear that if the ALP of the AMP expenses comes up for determination, then Selling expenses should not be considered as a part of AMP expenses. In this regard, the jurisdictional High Court has consistently held that Selling expenses cannot be included in the ambit of AMP expenses. Simply because the Department has not accepted the judgments of jurisdictional High Court and SLPs have been admitted, the binding nature of such judgments is not mitigated in any manner. It is, therefore, directed that selling expenses should be excluded from the overall purview of the AMP expenses for the benchmarking exercise, if necessity arises.

Revenue's appeal dismissed