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2016 (8) TMI 1001 - ITAT DELHI

2016 (8) TMI 1001 - ITAT DELHI - TMI - Treatment to project work as separate profit centre - segmental approach - Held that:- The inferences drawn by the TPO are incorrect and quite clearly the assessee was not doing a simple support service per se for the project work undertaken by its AEs. The assessee did act as an entrepreneur and developed this field quite substantially, and the segmental approach of the assessee has been accepting in preceding and succeeding assessment year as well. On the .....

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l be rendered infructuous and academic, we see no need to deal with other issues, on ALP determination, raised by the assessee. - TDS U/S 195 - Disallowance under section 40(a)(i) - Held that:- The requirements of tax deduction at source under section 195 do not come into play simply because an amount is being remitted abroad. The income embedded in such a payment must also be taxable in nature, and unless that is established, the tax deduction at source requirements do not come into play. H .....

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ty provisions, and since treaty provisions override the provisions of the Income Tax Act- unless the latter was beneficial to the assessee, the tax withholding requirements of Section 195 were not triggered on the facts of this case. Since the assessee did not have any tax withholding obligations, non-deduction of tax at source by the assessee cannot lead to any disallowance under section 40(a)(i). We, therefore, delete the impugned disallowance. - I.T.A. No.3336/Del/12 - Dated:- 25-7-2016 - Pra .....

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in upholding (i) the impugned arm s length price adjustment of ₹ 2,96,58,519; and (ii) the disallowance of reimbursement of recruitment expenses to the tune of ₹ 6,53,850. 3. So far the arm s length price adjustment of ₹ 2,96,58,519 is concerned, one of the fundamental issues that the learned counsel has raised is against rejection of segmental results by the TPO. It is contended that the learned CIT(A) erred by not taking cognizance of the basic business model, functional resp .....

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ng, environmental and construction servicesmainly transmission and distribution engineering, including planning and feasibility studies, design and construction management. Stanley Group also renders specialized services such as load forecasting, rate design, financial analysis, contract and economic evaluations. Stanley Group has two entities in India- first, the project office as a PE, and - second, the assessee company before us. It is stated that the purpose of the assessee company being inc .....

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ndia and MP Road Development Corporation Ltd. The AE undertaken five such major projects in association with the assessee as also in association with the independent enterprises. The business model adopted by the AE was is to be this. The customer opens a tender in the market and invites quotes from various service providers. The quotes for the services to be rendered are prepared by the AE, for their part of services, and the assessee, for its part of services- which are confined to the technic .....

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. So far as the year before us is concerned, the nature of work performed by the assessee was supervision of project . As for the billing arrangement, the AE raises a consolidated bill on the customer even though such a bill contains complete breakup of the work done by different parties to the contract, and, with the consent of the AE, the customer makes direct payments to the assessee. In this transaction structure, the crucial entrepreneurial and market risks and functions are with the AE, wh .....

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the latter accounts for business development and administrative expenses. The case of the assessee is that the business is still in its infancy inasmuch as its only second year of operation and that a substantial portion of expenses being incurred at this stage are for long term business development and securing independent contracts as an entrepreneur. Allocating all these expenses to the project revenues will give a distorted picture of business results, rendering it inherently incomparable wi .....

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for the basis of allocation, it was explained by the assessee that segregation of expenses into two segments was on actual basis . The TPO was of the view that as per transfer pricing report main business of SCIPL (i.e. the assessee before us) is to act as advisors and/or consulting engineers . The TPO further relied upon the transfer pricing study which is said to have inter alia stated that the assessee company was set up to support operations of Stanley USA in India and throughout Asia. A ref .....

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pendent entrepreneur which will be operating for the purpose of seeking independent business . He further noted that the segregation and treatment of certain expenses as administrative and nonoperational is not borne out of any agreement between the assessee and its AE, nor from the terms of Memorandum of Association and Articles of Association of the assessee and that this is also not borne out of functional analysis submitted by the assessee . He further noted that as per no accounting standar .....

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s provided to AE as per agreement and that no income stream gas been shown with respect to the non-invoice expenses It was in this backdrop that the TPO rejected the segmental results and proceeded to take entire costs incurred by the company as operating cost, and compute operating profits accordingly. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The assessee is not satisfied and is in second appeal before us. 6. We have heard the rival contentions .....

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t there has to consistency in approach about such a fundamental aspect which permeates from year to year. We have also noted that the basic reason for rejecting the segmental results in this year is that there were no separate streams of revenues so far as non -project expenses are concerned. However, it is important to bear in mind the fact that whether or not there are existing separate streams of revenue for non-project expenses is wholly irrelevant because what is material is whether the exp .....

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xpenses incurred by it, as an entrepreneur, for business development expenses, taking into account such business development expenses, for the purpose of computing operating profits from the business activity of providing these technical services in question, will make the assessee inherently incomparable. It is not even the case of the revenue that the assessee is a captive service provider forbidden from rendering such services to other entities. If that be the case, the idle capacity risk mus .....

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osts- save and except for the identification on item to item, i.e. actual, basis. That is precisely what the assessee has done. The detailed basis of allocation in respect of each item has been set out, and the TPO has not dealt with these specific allocation basis. Similarly, the basis of allocation cannot be found in the agreement and the Memorandum of Association or Articles of Association either. The observations made by the TPO are thus wholly unsustainable in law and inappropriate to the f .....

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ject work undertaken by its AEs. The assessee did act as an entrepreneur and developed this field quite substantially, and the segmental approach of the assessee has been accepting in preceding and succeeding assessment year as well. On these peculiar facts, the approach of the assessee, in treating project work as separate profit centre, is justified. The plea of the assessee was, therefore, indeed well taken and we approve the same. With these observations, the matter goes back to the TPO for .....

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