| 2018-TII-INSTANT-ALL-559 | 10 April 2018 |
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Pr.CIT Vs ORGANIZING COMMITTEE HERO HONDA FIH WORLD CUP : DELHI HIGH COURT (Dated: March 23, 2018) Income tax - Sections 40(a)(ia) & 195 Keywords - event organising charges - provisional services - reimbursement of expenses - TDS obligation The assessee organisation entered into a contractual relationship with the Federation of International Hockey (FIH) for organising the Men’s Hockey World Cup in the financial year 2009-10. Under the arrangements, the FIH was to act as the facilitator, receiving the amounts and arranging for provisional services connected with the Event. The AO was of the opinion that the reimbursements claimed by the FIH on account of payouts made by it on behalf of the assessee (Event organiser/ sponsor) were tax deductable u/s 195. The assessee contended that the payments made by it to FIH were by way of reimbursement of the expenses claimed by the later. The AO rejected the explanation and held that the payouts by the FIH also included commission which was per se taxable. On appeal, the FAA accepted the assessee’s explanation that the reimbursement claimed was such as the assessee could not hold an independent inquiry into each transaction. On appeal, the HC held that, Whether TDS obligation arises in relation to overseas reimbursements, in absence of any privity of contract - NO: HC + this Court is of the opinion that the findings of fact in this regard are conclusive. The lower Appellate Authorities after considering the submissions, clearly held that the record would indicate that the asessee had no privity of contract with the service provider. Having regard to the overall circumstances, the Court is of the opinion that no substantial question of law arises in this regard. Revenue's appeal dismissed STERIA INDIA LTD Vs DCIT : DELHI HIGH COURT (Dated: April 9, 2018) Income tax - ALP - international transaction - software development services - selection of comparables - segmental reporting - TNMM The Assessee, a subsidiary of Steria UK Corporate Ltd., is engaged in providing software and BPO services to its AE. For the A.Y 2010-11, the Assessee had reported international transaction of provision of software services and had selected TNMM as the MAM for benchmarking the international transaction. The TPO in relation to the same, passed an order u/s 92CA(3) recommending upward transfer pricing adjustment of Rs.93,53,35,000/- to the software development services segment, after rejecting some comparables selected by assessee and adding fresh comparables. On appeal, the DRP passed an order u/s 144C(5) inter-alia, excluding three companies from the final set of comparables drawn by the TPO. Subsequently the DRP passed rectification order excluding one comparable. On further appeal, the ITAT upheld the inclusion of M/s Thirdware Solutions Limited and exclusion of M/s CG-VAK Software and Exports Limited and Quintegra Solutions Limited as comparables for benchmarking the international transaction under the software development services segment. On appeal, the HC held that, Whether a singular segment of any company can form basis for its inclusion/exclusion as comparable, without analysing total segmental reporting in detail - NO: HC Whether substantial differences in employee cost filter and functional profile, renders every company as uncomparable - YES: HC + with regard to the proposed comparable Thirdware Solutions Limited, the TPO held that the said comparable was available in Capitaline database and cleared all the requisite filters referred to. As per P&L Account, Income from Software services/ export of services was 67.56 crores out of total income of 74.82 crores. As per the Segment Reporting in the said Company's operation comprised of software development, implementation and support services. Primary segmental reporting was based on geographical areas. It was further observed that the revenue in the overseas segment came from export of software services, which was comparable to the assessee company. Thus it was held to be comparable by the TPO. Similarly, with regard to Thirdware Solutions Limited as a comparable, the ITAT observed that From the copy of Profit & Loss Account, it could be seen that there were items of income, viz., 'Sales' and 'Other income'. Bifurcation of 'Sales' as per Schedule 12 consisted of Export from SEZ units, Export from STPI unit, Revenue from subscription Sale of Licence & Software services. It was further discernible from the segment reporting, that the figures had, been given on the basis of Geographical segments, viz., 'India' comprising of Products and other services and 'Overseas' comprising of Software services. The TPO had taken only the 'Overseas' segment for the purposes of inclusion in the list of comparables, which encompassed only export of software services. As the segment of the assessee under consideration was also only Software services, said segment of Thirdware Solutions taken by the TPO fully matched and was held to be comparable. These are findings of facts based upon record. Consequently, taking of Thirdware Solutions Limited as a comparable was in order and cannot be interfered with; + with regard to the exclusion of CG Vak Software & Exports Ltd. TPO was of the view that the said company did not qualify employee cost filter as its employee cost was 5.56% which is less than 25% of total cost. Said company was making persistent losses in software services segment, a filter applied by the assessee itself it was found to be not a good comparable. The ITAT considered the Annual report of said company and from the 'Profit & Loss Account' it was that the first item under head 'Income' is Income from Software Development, Services & Products', which had been split into two parts, namely, 'Overseas' and 'Domestic' markets. Under the head 'Significant Accounting Policies', said company had provided under the head 'Revenue recognition'–that the revenue from software development services and products were recognized on completion of contract or stage of completion as per the applicable terms and conditions agreed with customers. Perusal of Schedule-12 detailing 'Income from Software Development, Services & Products' in 'Overseas' market, showed that apart from earning income from Software services, said company also earned income from 'Business process outsourcing services', which fell in the realm of I.T. enabled services. This court finds that the TPO found that said company did not qualify the employee cost filter. It was making persistent losses in software services segment. Apart from earning income from Software services, said company also earned income from 'Business process outsourcing services', which fell in the realm of I.T. enabled services. TPO found that there was no segmental information qua the software services alone. Consequently, exclusion of CG Vak Software & Exports Ltd. was in order and cannot be interfered with. Assessee's appeal dismissed ALCATEL-LUCENT INDIA LTD Vs ITO : DELHI ITAT (Dated: April 6, 2018) Income tax - ALP - functional similarity - marketing support services - selection of comparables - TNMM The Assessee company is engaged in manufacture, distribution and sale of digital switching equipments, cellular exchange equipments and other telecommunication equipments and also in the provision of related services. It also provides intra-group marketing, technical support and contract software development services. Consequent to filing of its return, the matter was referred to the TPO u/s 92CA for determination of ALP in respect of international transaction of 'Rendering of Marketing support services' whose transacted value was shown at Rs.21,50,07,391/-. The assessee in its study report applied TNMM with the PLI of OP/TC for demonstrating that its international transaction was at ALP. During TP proceedings, the TPO rejected all the comparables selected by assessee and adopted ten new comparables. Considering the adjusted mean margin after incorporating working capital adjustment of these comparables at 22.55%, the TPO proposed transfer pricing adjustment of Rs.2,64,17,933/-. On appeal, the ITAT held that, Whether mere nomenclature of rendering 'Consultancy services' will not make two functionally different model companies as comparables - YES: ITAT Whether an engineering consultancy firm can be compared to a technical support service provider - NO: ITAT Whether companies engaged in R&D activities can be compared to a mere captive managerial service provider - NO: ITAT + as far as selection of Mahindra Consulting Engineers Ltd is concerned, it can be seen from the Director's report that the company provided consultancy services in the areas of Special Economic Zones, water supply and sewage, solid waste management, urban infrastructure, agro infrastructure, social infrastructure, port and harbor and offshore terminal and industrial infrastructure etc. This company also worked on innovative projects like centre of excellence of horticulture, dedicated offshore terminal for coal handling. This description of the consultancy services rendered by this company divulges that the same are quite diverse in nature. As against this, the assessee is providing services of installation and post-implementation of telecommunication equipments along with after-sales support and maintenance. It is apparent that nature of services rendered by assessee is quite different from those rendered by Mahindra Consulting Engineers Ltd. The mere nomenclature of rendering 'Consultancy services' does not make two companies comparables; + as far as selection of STUP Consultants Pvt Ltd is concerned, the segmental information of its Annual Report shows that it is carrying on profession of Civil Engineering and Architecture Consultancy'. Thus it is evident that the nature of civil engineering and architecture consultancy services provided by this company are quite different from the services of installation and post-implementation of telecommunication equipments along with after sales support and maintenance rendered by the assessee company. Therefore, this company is directed to be excluded from the list of comparables; + as far as selection of Semac Ltd is concerned, the Annual report of this company shows that this company operates mainly in one business segment, viz., engineering consultancy of industrial projects being primary segment and all other activities revolved around the main activity. Thus, it is apparent that this company is engaged in providing 'Engineering consultancy for industrial projects'. As against this, the assessee in appeal is rendering technical support services mainly in installation and commissioning of telecommunication equipments and also providing after sales support services. Obviously, there can be no match of the technical consultancy services provided by the assessee with those rendered by Semac Ltd. Therefore, this company cannot be included in the list of comparables; + as far as Intarvo Technologies Ltd is concerned, a copy of its annual report shows that under the head 'Segment reporting', this company has mentioned that the services provided by different segments include 'Call centre services of technical support' to various clients, such as, Hewlett Packard, IBM, Lenovo and Acer etc. These services cater to hardware of computers, which is not the case under consideration. In addition, this company is also engaged in providing services of installation of BTS equipments for telecom towers for customers, such as, Nokia, Hutch, Idea, Reliance and Ericsson etc. A brief description of the nature of services provided by this company reveals that these are not similar to installation and testing of telecommunication equipments along with after-sales support and maintenance services etc. provided by the assessee. Therefore, this company was rightly excluded; + as far as Microland Ltd is concerned, it is manifest from the perusal of annual report of this company that this company provides 'end-to-end IT infrastructure management services', which is obviously not the case insofar as the assessee is concerned. Further, Director's report deciphers that this company is also engaged in Research and development of 'Infrastructure management service' domain. The assessee is not into any research and development activities. These factors makes Microland Ltd. incomparable to the assessee company. the impugned order is set aside on the issue of addition towards transfer pricing adjustments and the matter is remitted to the file of AO/TPO for a fresh determination of the ALP of the international transactions of 'Rendering of marketing support services' and 'Technical support service' in consonance with observations/directions. Case remanded |
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