TII Instant Update - 2018-TII-INSTANT-ALL-553

CASE LAWS

2018-TII-101-ITAT-MAD-INTL

NISSAN MOTOR INDIA PVT LTD Vs DCIT: MADRAS ITAT (Dated: March 21, 2018)

Income tax - Sections 9(1), 195 & 201(1A)

Keywords - fee for technical services - purchase of software - reimbursement of warranty expenses - technical services - transfer of copyright - tax at source

The Assessee is a resident private limited company engaged in the business of manufacturing and selling motor cars in India as well as abroad. During the course of verification of Form 15CA/CB filed by the assessee for the A.Y 2014-15, it was noticed that the assessee had not deducted ‘tax at source’ with respect to the payment made towards reimbursement of warranty expenses to the assessee’s AEs and payment made towards purchase of software from tax residents of Japan and United Kingdom, abroad. During the course of proceedings, it was noticed by DCIT (International Taxation) that assessee had made payment towards reimbursement of warranty on various dates to various Nissan group of companies aggregating to Rs.86,05,89,763/-. The DCIT was of the opinion that reimbursement of warranty expenditure by the Assessee Company amounted to payment made towards "fee for technical services" outside India which was a taxable income of the recipient in India. On query as to why no TDS was deducted at source, the assessee pleaded that the amount received was in the course of the business and would be treated as business income in the hands of non-resident, due to absence of any business connection/ permanent establishment of the non-resident in India. However, the DCIT relying on the decision in case of SPX India Pvt. Ltd., Vs. CIT - 2013-TIOL-710-ITAT-DEL and the decision in case of Ashok Leyland Vs. DCIT - 2008-TII-17-ITAT-MAD-INTL was of the view of that payment made outside India towards reimbursement of warranty expenditure was a taxable income in the hands of the recipient in India and therefore the assessee was bound to deduct tax at source. For the said reasons the DCIT came to the conclusion that contractual payments made by assessee for obtaining technical services from the dealers for servicing the vehicles manufactured and sold by it, was in the nature of "fee for technical services" as per the Act and the DTAA and therefore it was taxable income in the hands of recipient in India.

As far as purchase of software was concerned, the DCIT opined relying on the provisions of Section 9(1)(vi) clause (v) to Explanation 2, that payment of royalty was nothing but consideration for transfer of all or any rights in respect of any copyright etc. He further opined that though the copy rights vested with the owner of the software, the license allows the assessee to use the software subject to certain terms and conditions, therefore the payment made towards purchase of software could be held to be royalty for usage of software and the income arising out of it was taxable in India in the hands of the non-resident. On appeal, the FAA upheld the order of AO on both counts.

On appeal, the ITAT held that,

Whether warranty expenses reimbursed by an Indian resident company to its sister concerns overseas, for purpose of earning income from source outside India, shall be excluded from the deeming provision of Section 9(1) - YES: ITAT

Whether the resident Indian company is obligated to withhold TDS u/s 195 on such warranty expenses reimbursed to its overseas sister concerns - NO: ITAT

+ as far as reimbursement of warranty expenses are concerned, it is to be noted that the provision of Section 9(1)(vii) and the second limp of clause (b) of the Act, clearly provides that where a resident is liable to pay fees in respect of services utilized in a business or profession carried on by such person for the purpose of making or earning any income from any source outside India, the income arising from such payment shall be excluded from the deeming provision of Section 9(1) of the Act viz., "income accruing or arising in India". In the present case, the assessee is a manufacturer of motor cars in India and exports the motor cars to other countries and sells them in those countries through its sister concerns who acts as the dealer of assessee company. The assessee company also provides warranty to the end customers who purchase the car. The assessee’s sister companies who acts as the dealers of the assessee company maintains the cars sold by them according to the terms of the warranty promised by the Assessee Company, towards which the dealer companies incurs expenditure. As per the contractual obligation, the assessee company reimburses such expenses incurred by its "dealer - sister companies". Thus the assessee company incurs expenditure outside India for the purpose of earning income from source outside India. Therefore by virtue of Section 9(1)(vii)(b), the payment made by the assessee company to a person outside India for earning income from any source outside India, and the income arising from such payment to the recipient shall be excluded from the deeming provision of Section 9(1). Hence, the assessee company will not be liable to deduct tax u/s 195;

Whether simple transfer of "right to use copyrighted material", does not give rise to any royalty income in the hands of transferor and hence, he is not liable for any TDS deduction - YES: ITAT

+ as far as purchase of software is concerned, it is apparent that the assessee has obtained license only for the usage of the software for a limited period and does not have the right to change or modify the software. This issue is squarely covered by the decision of the Chennai Bench of the Tribunal in the case DCIT Vs. Atmel R&D India (P) Ltd., wherein the Bench observed that: "....What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copyrighted material or article which is clearly distinct from the rights in a copyright. The right that is transferred is not a right to use the copyright but is only limited to the right to use the copyrighted material and the same does not give rise to any royalty income and would be business income. Since the issue is squarely covered by the decision of the Chennai Bench of the Tribunal, therefore following the same, the payment made for obtaining license to use the software cannot be held as royalties coming into the ambit of the DTAA or fees for technical services u/s 9(1)(vii) and accordingly no tax need to be deducted at source u/s 195. Accordingly, the assessee is also not liable for payment of interest u/s 201(1A) of the Act.

Assessee's appeal allowed

2018-TII-174-ITAT-PUNE-TP

EATON FLUID POWER LTD Vs ACIT: PUNE ITAT (Dated: March 12, 2018)

Income Tax - Sections 92CA(1), 143(3) & 144C.

Keywords - ALP - Fluid power equipment - IT services - International services - Manufacturing activity - Receipt of services - TNMM - Trading activity.

The Assessee-company, wholly owned subsidiary of Eaton Corporation, engaged in the manufacturing and distribution of fluid power equipment, had filed its return for the relevant AY. During the course of the assessment proceeding, the AO noted that the Assessee had entered into various international transactions with its AE and hence, reference was made to the TPO. During the TP proceeding, the TPO noticed that the Assessee, in its TP study, had applied TNNM method as MAM and had selected certain external companies. Further, it was also found that the Assessee had aslo aggregated the purchase of raw material and export of finished goods and trading activities. Accordingly, the TPO computed the ALP in repect of the international transactions entered into by the Assessee. The TPO also noted that the Assessee had bifurcated its activities into trading and manufacturing. In the manufacturing sector, the Assessee had bifurcated the sales into two parts, one part was the sale to third party where the entire purchases were from the third parties and the same was claimed to be segment which was insulated from the transaction with AEs. The other segment was where either purchases or sale transactions were from or to AEs. The TPO refused the benchmarking analysis proposed by the Assessee by stating that the same did not present actual picture of the transactions. Hence, the TPO believed that internal comparability was possible since in the case of sale of gear pumps and cylinders, the entire material was sourced from the third parties and sale was made to AE as well as non-AE. However, this was also rejected as the sales to AE were only at Rs.1.34 crores as against the sales to non-AE at Rs.34.48 crores. Thereafter, the TPO considered the functional comparability of the different companies. The Assessee had proposed use of multiple year data instead of single year's data which was rejected by the TPO. The TPO thus, drew up the list of final comparables and the arithmetic mean of PLI of said comparables worked out at 16.64% as against the PLI of the Assessee by taking OP/OC at 6.31% and made an adjustment of Rs.4,88,23,152/- to the international transactions pertaining to the manufacturing activity. The second segment was the IT services availed, wherein the TPO was of the view that the Assessee had failed to prove the receipt of services and benefits derived from services with supporting evidence, the ALP of transactions was treated as Nil and hence, adjustment of Rs.50,45,303/- was proposed to be made to the ALP.

Subsequently, the AO in the draft assessment order passed added the proposed upward adjustment to the international transactions pertaining to both the manufacturing activities and the IT services availed. On appeal, the DRP directed the TPO to exclude the comparable Asco Numatics (India) Pvt. Ltd., whose margin was 40.82% and arithmetic mean of the PLI of comparables was worked out to 14.22%. In reply, the TPO reduced the operating cost by Rs.18,64,402/- and intimated the revised operating cost at Rs.54,31,90,198/- by applying the arithmetic mean at 14.22%. The adjustment to international transactions pertaining to manufacturing activity and IT services were worked out.

On appeal, the Tribunal held that,

Whether the internal TNMM method of comparison of operating margins for international transactions emphasizes on absolute product similarity - NO: ITAT

Whether TPO can sit back in the judgment of business module of assessee and its intention to avail or not to avail any services from its AEs - NO: ITAT

Whether transfer of business from one AE in India to another in India itself, will be deemed to be an international transaction, even when the global agreement between the holding company and the AEs has no effect on such transaction - NO: ITAT

++ the first issue raised by the Assessee is against the TP adjustment made in the manufacturing segment. The similar issue of adoption of internal TNNM method arose before the Tribunal in ITA No.1623/PN/2011, relating to AY 2007-08 wherein, it was held that "....the bifurcation of Manufacturing segment into AE and the third parities done by the Assessee is fair and apt. The TNMM method does not envisage an absolute product similarity but rather emphasizes on functional similarity. Quite clearly, in the AE segment as well as the third party segment in the Manufacturing segment there is a functional similarity and therefore the internal TNMM Method comparable professed by the Assessee was wrongly rejected by the TPO...." The Assessee in the present case has also applied internal TNMM method of comparison of operating margins for international transactions of purchase of raw material and components from AE as well as sale of finished goods effected to AE. On the basis of the said benchmarking, the profitability under the AE segment was 6.31% which was higher than profitability of transactions under third party segment. Accordingly, this Tribunal held that no adjustment on account of ALP is required to be made in the hands of Assessee;

++ the Assessee had entered into five international transactions with its AE namely, import of raw material, trading goods and components; export of finished goods; income from services; information technology services availed and reimbursement of expenses were benchmarked together by using TNMM method. During the course of TP proceedings, the Assessee also filed copy of shared service agreement which was between the Assessee and Eaton China describing the nature of services rendered and basis of charge for services. The agreement which was entered into in 2009 was made effective from Jan 01, 2005. The terms of said agreement were at variance with the terms earlier agreed upon by the parties and the TPO on such analysis was of the view that no services were availed by the Assessee. The Assessee's stand in relying on the said agreement dated Nov 16, 2009 to establish its case of availing services in FY 2007-08 is misplaced. The agreement was entered into much after the close of accounting period and even after the due date of filing the return for AY 2008-09 and hence, the terms of said agreement cannot be relied upon to establish the case of availment of services by the Assessee from Eaton China. Accordingly, this Tribunal finds no merit in the Assessee's stand and Revenue in relying on the said agreement and ignore the same for adjudicating the issue raised in the present appeal;

++ the TPO cannot sit in the judgment of business module of Assessee and its intention to avail or not to avail any services from its AE. The role of TPO is to determine the ALP of international transactions undertaken by the Assessee and whether the same is at ALP when compared with similar transactions undertaken by external entities or internal comparables. This Tribunal have already addressed similar issue in the case of Emerson Climate Technologies (India) Limited. The Assessee is a group concern of worldwide Eaton group of companies and the intention to avail the said services is to carry out his business on worldwide platform. The total turnover of Assessee for the year was Rs. 173 crores and the services availed from AE were intermingled to the extent that the Tribunal in earlier years has directed that for benchmarking international transactions undertaken by the Assessee, import of raw materials for manufacturing purpose and export of finished goods should be aggregated;

++ the information technology services availed by the Assessee also relate to the said business carried on by the Assessee and hence, this Tribunal finds merit in the plea of Assessee in aggregating the same with other international transactions undertaken by the Assessee with its AE. In any case, the Assessee in the reasons for filing additional evidence has pointed out that information was filed before the TPO along with agreement and certificate of Eaton China, but thereafter, no other query was raised by TPO or any clarification was sought in respect of information technology services availed. The Assessee thus, was under the bonafide belief that the documents and explanation furnished by it has been accepted. Further, the Assessee has pointed out that though it is filing additional evidence but because of confidentiality clause, such information cannot be shared as it would affect the business transactions of Assessee. This Tribunal have gone through the additional evidence filed by the assessee and this Tribunal is of the view that the Assessee has established its case of availment of said services in the field of information technology. In addition, the Assessee has also filed certificate from its AE during the course of TP proceedings, under which there is certification of factum of provision of services by Eaton China to the Assessee and also basis for charging of such charge i.e. cost plus 5% markup. It was also confirmed by Eaton China that similar services were availed by other Eaton group companies and they were charged on the same basis as in the case of Assessee. The Assessee had also filed on record copies of debit notes and other JV vouchers raised during the year under consideration justifying its case of availing the said services and payment in lieu thereof;

++ the international transactions of IT services availed has to be aggregated with other transactions being intrinsically linked to other international transactions undertaken by the Assessee during the year and the same has to be benchmarked applying internal TNMM method as in the case of other international transactions. Further, this Tribunal also reverse the order of TPO in holding that the Assessee has not availed any services in view of various documents filed by the Assessee and also certificate of Eaton China, which was filed during the course of TP proceedings evidencing not only the availment of services but also the basis of cost for such services. Similar services were availed by other Eaton group entities from Eaton China and its certificate that the same has also charged at the same rates as charged to the Assessee. In the entirety of the said facts and circumstances, the order of TPO/Assessing Officer in taking the value of international transactions of IT services availed at Nil is reversed and delete the adjustment made.

Assessee's appeal partly allowed