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2015 (6) TMI 591 - AT - Income TaxDisallowance of payment for preliminary warranty and reworking costs - Non deduction of TDS u/s 195 - reimbursement of reworking cost paid - Disallowance of reimbursement of Information Technology costs being expenses on connectivity and software charges - Transfer pricing adjustments - Held that:- Disallowance of payment for preliminary warranty and reworking costs - A perusal of the decision of the Hon’ble Supreme Court in the case of Tejaji Farasram Kharawalla Limited [1967 (7) TMI 6 - SUPREME Court], clearly shows that Hon’ble Supreme Court has categorically held that the reimbursement of the actual expenses would not be taxable in the hands of the person receiving the reimbursements. Further Hon’bel Karnataka High Court in a recent judgment in the case of DIT v. Sun Microsystems India P. Ltd. [2014 (10) TMI 100 - HIGH COURT OF KARNATAKA] exactly on the similar issue interpreting article 7 of the DTAA between India and Singapore, which is identically worded to article 7 of DTAA between India and Austria. The Explanation only explains the provision. The main provision of section 195(1) of the Act uses these specific words “any other sum chargeable under the provisions of this Act”. Therefore, for the invocation of the provisions of section 195(1) of the Act, the main condition is that the payment must be of the sum chargeable under the provisions of the Indian Income Tax Act, 1961. Admittedly there is a DTAA between India and Austria. As per the Article 5 read with Article 7 of the DTAA, it is categorical in so far as if the assessee in the contracting State does not have a PE in the other State, then the income of the assessee in the contracting State is liable to tax only in that contracting State and not in the other State. The facts in the present case clearly show that AT & S Austria is carrying out the re-working of the products of the assessee at its own manufacturing plant at Austria and there is no connection between the manufacturing activities done by AT & S Austria with the manufacturing process done by the assessee at its manufacturing facility in Nanjangud. Consequently the income, if any, generated by AT & S Austria on account of the repairing operations or manufacturing operations done by AT & S Austria at its manufacturing facility outside India cannot be held to generate any income taxable in India under the Indian Income Tax Act, 1961. Admittedly even as per the provisions of section 9(1)(vii) of the Act and the Explanation (2) thereto clearly excludes the consideration for the assembly undertaken by AT & S Austria from the rigours of section 9(1)(vii) of the Act.In these circumstances, as the income of AT & S Austria is not chargeable to tax under the Indian Income Tax Act, 1961, the requirement of deduction of tax at source under section 195 of the Act would not be applicable and consequently no disallowance under section 40(a)(ia) of the Act can be made. - Decided in favour of assessee. Disallowance of reimbursement of Information Technology costs being expenses on connectivity and software charges - Hon’ble Karnataka High Court in a recent judgment in the case of DIT v. Sun Microsystems India P. Ltd. [2014 (10) TMI 100 - HIGH COURT OF KARNATAKA] exactly on the similar issue interpreting article 7 of the DTAA between India and Singapore, which is identically worded to article 7 of DTAA between India and Austria held that the parent company has not made available to the assessee the technology or the technological services which was required to provide the distribution, management and logistic services. We further noticed that in the said order the Tribunal has taken into consideration the decision of the Hon’ble Jurisdictional High Court in the case of CIT v Dunlop Rubber Co. Limited [1982 (2) TMI 24 - CALCUTTA High Court ] and in the similar circumstances that of the assessee to hold that the reimbursement of the expenditure does not generate any income in the hands of the recipient and consequently there was no requirement of deduction of TDS and consequently the provisions of section 40(a)(ia) could not be invoked. - Decided in favour of assessee. Transfer pricing adjustments - The DRP admittedly has not specified as to which is the appropriate profit level indicator? Whether it is a cash profit margin or whether it is operating profit margin. However, the DRP repeatedly talks of applying the cash profit margin. If cash profit margin is to be considered as the most appropriate profit level indicator, then obviously the NFA to sales ratio cannot be applied as that would be a filter which is more appropriate when adopting the operating profit to sales method for arriving at the PLI. Admittedly, perusal of Transfer Pricing Study and orders for AYs 2004-05, 2005-06 and 2008-09 show that the cash profit margin to sales is the method adopted for arriving at the appropriate PLI for the said AYs. In these circumstances, admittedly the principles of consistency would have to be followed and the methodology followed for the earlier years cannot be tinkered with or modified just for the purpose of assessment years in between with no variation in the facts and circumstances are available for the two AYs. In these circumstances, we direct that in the assessee’s case most appropriate PLI is to be arrived at by applying the cash profit margin to sales ratio. - Decided in favour of assessee.
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