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TMI Blog2018 (5) TMI 1686X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 17. 32 lakhs on the ground that same was incurred for non-business purposes. 2.1. It was brought to our notice that while deciding the appeal for the assessment year 2007 - 08 (ITA/6708/Mumbai/2011, dated 21/02/2018) the Tribunal had dealt with the identical issue. We are reproducing relevant portion of order and it reads as under: 37. In ground no. 3, the assessee has challenged the disallowance of entertainment expenditure of Rs. 3, 44, 138. 38. Brief facts are, while framing the draft assessment, the Assessing Officer noticed that the assessee has debited an amount of Rs. 13, 76, 552 on account of entertainment expenses. After calling for the necessary details, he found that most of these expenses are in the nature of payment made to various hotels towards lunch and dinner of various persons. Alleging that the assessee failed to provide specific reason / purpose for which such expenditure was incurred the Assessing Officer disallowed 25% out of such expenses on ad-hoc basis which worked out to Rs. 3, 44, 138. 39. The DRP also sustained the disallowance taking note of the fact that in assessment year 2006-07, similar disallowance was upheld by them. XXXX 42. We ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60, 485. He, therefore, called upon the assessee to explain the reason for not withholding tax on part of the payment made to EMCAP. In response, it was submitted by the assessee that EMCAP is a non-resident and does not have a P. E. in India. Services were rendered outside India, hence, the payment made cannot be considered as income deemed to accrue or arising in India in view of section 9(1)(i) of the Act. Without prejudice to the aforesaid submissions, the learned Counsel for the assessee submitted that the payment made is not liable for TDS in view of the specific provisions of India Singapore tax treaty as per which fees for technical services is taxable in the hands of the recipients only in case of transfer of technology. The Assessing Officer, however, did not find merit in any of the submissions made by the assessee. He observed that the payment made by the assessee is in the nature of fees for technical services as defined in Explanation-2 to section 9(1)(vii) of the Act, as EMCAP has rendered services of highly technical nature involving in drawing and research. He further observed, since, EMCAP earned such fees by virtue of its business connection in India it is li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s procurement, business line, etc. , which cannot be considered to be in the nature of fees for technical services as defined under Explanation-2 to section 9(1)(vii) of the Act He submitted that as per the agreement, the EMCAP has to charge on cost-to-cost basis without any mark-up. He submitted, the payment made, since, is towards reimbursement of expenditure withholding of tax was not necessary. Further, he submitted that since the assessee has made short deduction of tax and it is not a case of no deduction disallowance under section 40(a)(i) of the Act cannot be made. Without prejudice to the aforesaid contention, the learned counsel for the assessee submitted that as per Article- 12(4)(b) of India Singapore tax treaty fee for technical service means payment of any kind to any person in consideration for service of managerial, technical or consulting nature if such services make available technical knowledge, experience, skill, knowhow, process which enables the person acquiring the services to apply technology contained therein. Learned counsel for the assessee submitted, firstly, the support service provided by EMCAP cannot be regarded as technical services and secondly; if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a research facility at Bangalore. In support of this contention, the learned Departmental Representative relied upon the following decisions:- i) G. V. K. Industries Ltd. v/s ITO, [1998] 96 Taxman 179 (AP) ii) Foster Wheeler France S. A. v/s DDIT, ITA no. 774/Mds. /2014, order dated 05. 02. 2016; and iii) U. S. Technology Resources Pvt. Ltd. v/s ACIT, IT no. 222/Coch. / 2013, order dated 28. 09. 2013. 48. We have heard rival contentions and perused material on record. We have also applied our mind to the decisions relied upon. It is evident, while disallowing the amount in dispute under section 40(a)(i) of the Act, the Assessing Officer has held that the payment made by the assessee to EMCAP towards Global support services is in the nature of fees for technical service as defined under Explanation-2 to section 9(1)(vii) of the Act. It is also relevant to note, under Article-12 of India Singapore tax treaty, fees for technical services, though, is taxable in the hands of the recipient in Singapore, however, it can also be taxed in India under certain circumstances. Applying the said provision, it is necessary to determine whether the payment made can at all be termed as f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. , from the service provider to the service recipient is necessary. Some sort of durability or permanency of the result of the rendering of services is envisaged which will remain at the disposal of the service recipient. In other words, the technical knowledge, experience, skill, etc. , must remain with the service recipient even after the rendering of the services has come to an end. In contrast to Article-12(4)(b) of the India-U. S. tax treaty, Article- 12(4)(b) of India-Singapore tax treaty has made it more specific by providing that technical knowledge, experience, skill, knowhow or process, would not amount to fees for technical service unless it enables the person acquiring the service to apply the technology therein. A perusal of the agreement between the assessee and EMCAP makes it clear that as per the terms of the agreement EMCAP would provide management consulting, functional advice, administrative, technical, professional and other support services to the assessee either itself or through any affiliate or through third parties. However, there is nothing in the agreement to conclude that in the course of such provision of service, EMCAP has made available any te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such technical knowledge, skill, knowhow, etc. , must remain with the recipient even after the contract comes to an end. The Court has observed, the technology will be considered to have been made available when the person acquiring the service enable him to apply the technology. Further, the Court went on to hold that the payment can be considered as fees for technical services only if the twin test of rendering service and making technical knowledge available at the same time is satisfied. If we apply the aforesaid tests laid down by the Hon'ble Karnataka High Court to the facts of the present case it becomes clear that it has not been established on record that while rendering the services, EMCAP has made available technical knowledge, knowhow, skill, etc. , to the assessee in a manner to enable him to apply them independently or on its own. Therefore, the payment made by the assessee cannot be considered as fees for technical services as defined under Article 12(4)(b) of the India- Singapore tax treaty and for this reason also we do not have to examine taxability of the same under section 9(1)(vii) of the Act. Moreover, it is a fact on record that the payment of global sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in the AIS Statement amount was reflected against Sales tax Department/Professional tax department, that it was not clear as to whether the payment was under the central sales tax or state sales tax, that it had not made any payment to sub brokers during the year under consideration as alleged by the AO, that the AO was requested to cross check the details of payment with the concerned department / agency before making addition, that the AO did not make any enquiry in that regard, that there was no mixing up of details between assessee and its group entities, that the assessee was engaged in the business of market development, research etc. , that additions should not have been made merely on the basis of AIR without bringing any evidence on record, that the AO had not provided necessary details to the assessee though a specific request was made, that assessee had not made any sales during the year, that question of making payment under the head sales tax would not arise. He referred to page no. 216-218 of the paper book. The DR supported the order of the FAA. 4. 3. We have heard the rival submissions and perused the material before us. We find that AO had made an addition of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e he rejected two comparables namely Neeman Medical International Asia Ltd. (NMIAL) and Pfizer Ltd. (Service Segment). He added TCG Life Science Limited as one of the comparables. He considered OP by TC of the following 8 companies which was 23. 79%, as final comparable set. The working the same is given below:- SN. Name of the Company OP/TC 1. Alphageo (India) Ltd. 41. 05% 2. Choksi Laboratories Ltd. 29. 95% 3. Dolphin Medical Services Ltd. 2. 24% 4. Medinova Diagnostic Services Ltd. 4. 47% 5. N. G. Industries Ltd. 21. 56% 6. Vimta Labs Ltd. 15. 84% 7. TCG Lifesciences Ltd. 29. 97% 8. Transgene Biotech Ltd. -Diagnostic Services 38. 21% Arithmetic Mean 23. 79% Accordingly, he proposed an adjustment of Rs. 81. 51 lakhs under head TS as under :- Particulars Year ended 31/03/2008 Total cost 5, 92, 43, 957 OP/TC as per comparable @ 23. 79% Total income as per comparable (A) 1, 40, 94, 137 Actual income of BRDTC (B) NIL Difference (C)=(A)-(B) 1, 40, 94, 137 Adjustment offered by assessee to tax (D ) 59, 34, 376 Amount of adjustment total income (E)=(A)-(B) 81, 59, 761 He found that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OSS transactions. 5.1. During the appellate proceedings the assessee made detailed submissions before the FAA and relied upon certain case laws. It was argued that while calculating the margins of comparables the TPO had taken wrong margins, that after considering the correct margin of the comparables the margin would be 23. 94% against 27. 53% as adopted by TPO, that out of 22 comparables 4 companies- namely Coral Hubs Ltd. , (50. 68%), Eclerx Services Ltd. (50. 41%), Genesys International Corporation Ltd. (47. 3%) and Mold Tek Technologies Ltd. (96. 66%)- had abnormally high margins, that after removing companies with abnormally high margins the revised average margin would come to 15. 61 %, that various Tribunal ruling had excluded Accentia Technologies Ltd. , (segment), Acropetal Technologies (segment), Coral Hubs Ltd. , Crossdomain Solutions Ltd. , Eclerx Services Ltd. , Genesys International Corporation Ltd. , HCL Comnet Systems and Services Ltd. (segment) and Mold Tek Technologies Ltd. , that if the above referred companies were removed from final list the revised average margin of comparables would be 10. 68% it was also argued that TPO had selected companies that were not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... From a perusal of the notes to the financial statements for the relevant financial year it is noticed that the company has maintained its accounts segment-wise and the Revenue earned from service segment has been separately shown. Therefore, it cannot be said that it is not having any service segment to consider as a comparable with the assessee. Moreover, as noted by us, the DRP in assessee's own case for immediately preceding assessment year 2006-07 has accepted this company as a comparable after verifying annual accounts. Further, the Transfer Pricing Officer himself in assessee's own case for Assessment Year 2009-10 and 2010-11 has accepted this company as a comparable. In fact, in assessee's own case for assessment year 2005-06, the Tribunal in ITA no. 8798/Mum. /2011, dated 27. 10. 2017, has accepted this company as comparable. Therefore, even applying the rule of consistency, this company should be considered as a comparable to the assessee. " As far as NMIAL is concerned, we find that the Tribunal had held that it was not a good comparable. We are reproducing the order of the Tribunal which reads as follows :- 10. Learned Authorised Representative submitted, the Transfe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & Services Ltd. is 22. 37%. In many of the orders including the orders where the Judicial Member is a party, threshold limit of related party transaction has been accepted at more than 25%. That being the case, we are of the view that HCL Comnet Systems & Services Ltd. cannot be excluded on account of high related party transaction. However, as far as Apex Knowledge Solutions Pvt. Ltd. is concerned, the learned Authorised Representative submitted that the related party transaction in case of this company is 104. 38%. It is observed, in the search process adopted by the Transfer Pricing Officer to select comparables one of the criterion is to exclude companies who have more than 25% related party transaction. Therefore, if the related party transaction of Apex Knowledge Solutions Pvt. Ltd. is more than the RPT filter applied by the Transfer Pricing Officer, it cannot be treated as comparable to the assessee. Therefore, we direct the Assessing Officer to examine this fact and decide accordingly. INFORMED TECHNOLOGIES INDIA LTD. e-CLERX SERVICES LTD. MOULDTEK TECHNOLOGIES LTD. (SEG) 17. Learned Authorised Representative submitted, Informed Technologies India Ltd. is not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hyderabad Bench, in case of Capital IQ Information Systems Pvt. Ltd. (supra), has held that e-Clerx Services Ltd. being a KPO service provider cannot be compared to BPO service provider. In view of the aforesaid, we direct the Assessing Officer to exclude e-Clerx Services Ltd. from the list of comparables. 21. As far as Mouldtek Technologies Ltd. (SEG) is concerned, it is observed in the course of transfer pricing proceedings, the assessee has objected to inclusion of this company by specifically stating that it is engaged in providing KPO services in the field of engineering services involving structural engineering drawing using 3D/2D software. Further, in the relevant previous year, it has issued initial publication offering. Further, as per the annual report of this company, the I. T. Division has been specifically mentioned as KPO division. Further, in the relevant previous year, the company has acquired an overseas KPO company which is evident from the annual report of the company. The aforesaid factors have been totally ignored by the Transfer Pricing Officer and the DRP while selecting / retaining the aforesaid company which, in our view, is not correct. In fact, while c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26. Learned Departmental Representative relied upon the findings of the Transfer Pricing Officer and the DRP. 27. We have heard rival contentions and perused the material available on record. As could be seen in the course of transfer pricing proceedings, in response to the show cause notice issued by the Transfer Pricing Officer the assessee has accepted this company as a comparable. Further, it appears before the DRP also, the assessee has not specifically objected to the exclusion of this company. Thus, it is evident, the Departmental Authorities never had any occasion to examine the contention now raised before us by the assessee. That being the case, we are inclined to restore the issue relating to the comparability of this company to the Assessing Officer / Transfer Pricing Officer for fresh adjudication. ICRA TECHNICAL ANALYSIS 28. Objecting to the selection of this company, learned Counsel for the assessee submitted that the company is also in the field of software development and the segmental details relating to software development segment and service segment are not available. Therefore, due to lack of relevant information / data, it cannot be considered as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company as a comparable. 34. It is relevant to note in the course of hearing, learned Authorised Representative contended before us that the Transfer Pricing Officer has wrongly computed the margin of the comparable companies under both the segments. In this context, he drew our attention to the working of the correct margin as submitted in two separate charts. We direct the Assessing Officer to examine the aforesaid aspect and compute the arm's length price under both the segments by correctly computing the margin of the comparables. 35. One more contention of the assessee before us relates to working capital adjustment and risk adjustment. 36. Learned Authorised Representative submitted before us that in its transfer pricing study assessee has provided for working capital adjustment and risk adjustment on a reasonable and scientific basis which was not properly considered either by the Transfer Pricing Officer or by the DRP. After considering the submissions of the parties, we direct the Assessing Officer to consider assessee's claim with regard to working capital adjustment & risk adjustment and decide the same after providing due opportunity of being heard. These g ..... X X X X Extracts X X X X X X X X Extracts X X X X
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