9911796707
TMI Blog2019 (2) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... te Limited (hereinafter referred to as "the Appellant"), respectfully submits in respect of the order passed by the learned Assistant Commissioner of Income Tax, Circle 5(2), New Delhi (hereinafter referred to as the "Ld. AO") under section 143(3) / read with section 144C of the Income Tax Act, 1961 (hereinafter referred to as the ''Act") the following grounds: A. Transfer Pricing Grounds 1. That on the facts and circumstances of the case and in law, the Assessing Officer ("AO") has erred in assessing the total income of the Appellant under section 143(3) read with section 144C( 13) of the Act, for the relevant assessment year ("AY") at INR 146,04,58,050 as against the returned loss of INR 33,76,80,930. 2. That on the facts and circumstances of the case and in law, the AO / Dispute Resolution Panel ('DRP') / Transfer Pricing Officer ('TPO') have erred in making adjustment of INR 175,91,11,274 to the arm's length price ('ALP') of alleged international transaction of Advertisement, Marketing and Promotion ("AMP") expenditure. 3. That on the facts and circumstances of the case and in law, the orders passed by the AO/TPO were bad in law as the prerequisite for apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case and in law, the AO / DRP / TPO have erred in re-characterizing the Appellant as service provider rendering brand building services to its AE, without appreciating that it is a full risk bearing distributor incurring AMP expenditure in the course of its own business to promote its sales in India. Notwithstanding and without prejudice to the above grounds that the AMP expenditure incurred by the Appellant does not constitute an international transaction under Chapter X of the Act, the Appellant craves to raise following grounds on merits: 9. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not appreciating that distribution and marketing functions being inter-connected and intertwined should be benchmarked on an aggregate basis. The AO / DRP / TPO further erred in not appreciating that if the two functions are segregated and benchmarked, then the same would result in over taxation and is contrary to the provisions of the Act. 10. That on facts and circumstances of the case and in law, the AO / TPO erred in law and on facts, in applying Profit Split Method ("PSM") to benchmark the alleged international transaction of incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng subsidy from the scope of AMP expenditure while benchmarking the same on segregated basis. 12.1. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not excluding selling / business promotion expenses from the scope of AMP expenditure, particularly when the TPO pursuant directions of DRP for AY 2011- 12 had excluded similar expenses from scope of AMP expenditure. Further AO / DRP / TPO erred in not following the decision of the jurisdictional High Court and Tribunal in Appellant's own case for assessment years 2006-07 to 2008-09 to exclude the selling / business promotion expenses as per the details filed. 13. That on the facts and circumstances of the case and in law, the AO / TPO have erred in not granting the benefit of quantitative / economic adjustments (such as non-payment of royalty / expenditure incurred on new product launches), while computing the alleged excessive AMP expenditure. Further, DRP erred in not adjudicating the objection of the Appellant in this regard. 14. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not providing the Appellant the benefit of 5 percent range as provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expatriates as incurred by Canon Inc., Japan. 1.7. The principle of determining employment relationship through the "economic criteria" is also supported by OECD Commentary on the Model Convention. The Commentary supports the concept of "economic employer" (rather than formal / legal employer) in the context of taxation of dependent personal services. It states that the term "employer" should be interpreted as "the person having rights on the work produced and bearing the relative responsibility and risks". It is the substance that prevails over the form. The real employer is the user of the labour. The Ld. AO / Hon'ble DRP has erred in not relying on the concept of economic and legal employer. 1.8. The Ld. AO / Hon'ble DRP have erred in holding that section 195 of the Act is applicable to the present case and the Appellant is liable to deduct tax at source under that section on the payments made to Canon Inc., Japan towards reimbursement of expenses. 1.9. On the facts and in circumstances of the case and in law, the Ld. AO / Hon'ble DRP have erred in not appreciating that the taxes on salaries reimbursed had been duly deducted and deposited under section 192 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore do not call for any adjudication. 5. Ground No. 3-8 raised by assessee are legal issues wherein assessee is challenging order passed by Ld.TPO/AO to be bad in law, as there did not exist any international transaction between two Associated Enterprises. He submitted these issues now stands fully covered by order of this Tribunal for Assessment Year 2011-12 placed at pages 213-254 of case law paper book. Placing reliance upon order of this Tribunal in ITA No. 832/Del/2016 filed by assessee for Assessment Year 2011-12 he submitted that these grounds are decided as under: " 40. As regards to ground no.2 & 2.2 relating to non-existence of international transaction and ground no.4 relating to no creation of marketing intangible in favour of AE, the same are identical with ground no.4 & 5 of the appeal filed by the assessee for AY 2010- 11. Therefore, the observations made in that respect are applicable in the present appeal as well. This issue is not verified properly by the TPO and therefore, it requires verification as there is no mention of the specific agreements to the effect of the AMP whether is a international transaction or not. Therefore, we direct the TPO/AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254. 12. As we have already set aside issue relating to nature of AMP expenditure to Ld.AO/TPO, applicability of most appropriate method relating to same head of transaction also deserves to be set-aside. It is also observed that, this is the consistent view taken by this Tribunal in case of assessee for preceding Assessment Years, copies of orders are placed before us. 12.1. Respectfully following same, we also set aside this issue back to Ld. AO/TPO. 12.2. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 13. Ground No. 12.1 & 13 have been raised by assessee as Ld. TPO has included selling/business promotion expenses in scope of AMP expenditure when DRP for Assessment Year 2011-12 excluded similar expenses. 13.1. Ld.Counsel submitted that issue stands squarely covered by order of this Tribunal in assessee's own case for Assessment Year 2006-07 to 2008-09 and 2010-11 as under: "53. As regards to ground no.8 and 8.1 relating to exclusion of certain selling and d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry dated 26/12/16 show caused assessee a notice for enhancement and case was fixed for hearing on 27/12/16. DRP observed that assessee made payments in respect of reimbursement of salaries of seconded employees amounting to Rs. 3,90,27,709/-, without deducting TDS under section 195 of the Act. DRP was of the opinion that decision of Hon'ble Supreme Court in case of Centrica India Offshore Pvt.Ltd., squarely covers issue against assessee. 18. Ld.AR submitted that assessee during year filed its return of income at loss of Rs.(-)33,76,80,930/-. He submitted that in draft assessment order Ld.AO had not made any proposal for disallowance of amount of reimbursement made by assessee to Cannon Inc., in respect of secondment of employees. He submitted that DRP vide its order dated 30/12/16, for first time held reimbursement of part of salary paid by Cannon Inc., in Japan to seconded employees on behalf of assessee, is in nature of fee for technical services (FTS), and sum is chargeable to tax, both under section 9 (1) (vii) of the Act, as well as Article 12 (4) of India Japan DTAA. Ld.AR submitted that DRP while opining so, relied upon observations of Hon'ble Delhi High Court in case of Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of salary to such seconded employees under section 192 of the Act, and has issued Form 16 to them, which has been enclosed at page 11-40 of paper book. 22. Ld.AR further submitted that relationship between assessee and seconded employees was of employer employee as per terms of agreement it clearly provides that these employees will work wholly and exclusively for assessee only. Further he submitted that, as per agreement seconded employees were under an obligation to perform from time to time such duties as has been directed by assessee. Referring to cost reimbursement agreement entered into between Canon Inc., and assessee, Ld.AR submitted that it clearly states that assessee is hiring these employees during the tenure of 3 years who will be under payrolls of assessee. 23. Referring to Clause 4 of Cost Reimbursement Agreement, Ld.AR submitted that it is only for sake of administrative convenience that during period of employment of these seconded employees, Cannon Inc., would pay them salary for services rendered by to assessee, and such payment is made on behalf of assessee. Ld.AR also referred to Clause 6 and 7 wherein it has been agreed by assessee that it shall reimburse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Indian vendors. * That according to terms of agreement Centrica India charged cost plus markup of 15% from overseas entities. * That it was at request of Centrica India that overseas entity provided staff with appropriate expertise and knowledge about process and practices implemented at Centrica UK with an intent to seek support during initial years of setup. And Centrica India subsequently entered into individual agreement with seconded employees. 28. He submitted that, it was on above aforestated factual background that Hon'ble Delhi High Court, held that there was no purported employment relationship between Centrica India and seconded employees, and Centrica UK was providing services to Indian company through seconded employees to ensure quality control and management of their vendors of outsourced activities. He submitted that Hon'ble High Court, thus held that, reimbursement of salaries paid to seconded employees was in nature of FTS. Ld.AR submitted that DRP relied upon Hon'ble Supreme Court's decision in case of Morgan Stanley, and opined that where employees continues to be on payroll of overseas entity or they continued to have their lien on their jobs with mul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and functions were dictated by the instructions and directions of the CIOP. Two sample cost reimbursement agreements have been furnished i.r.o Mr. Takehiko Imoto and Mr. Katsuyuki Matsuda. While it is stated that the said persons would work under the directions of the tax payer, the subsisting relationship with Canon Inc. whose regular employees they are is defined by S.No.1 and 2 of the cost reimbursement agreement (refer Annexure-3) which states, 1. Mr.Takehiko Imoto is an employee of Canon Inc. 1. Canon Inc transfers Mr Takehiko Imoto to Canon India Private Limited as the Manager Market Engineering Division for a period of3 years, for the purpose of its business operations in India. Similarly in the agreement pertaining to Mr.Katsuyuki Matsuda: 1. Mr.Katsuyuki Matsuda is an employee of Canon Inc. 2. Canon Inc transfers Mr.Katsuyuki Matsuda to Canon India Private Limited as the Manager Market Engineering Division for a period of 3 years, for the purpose of its business operations in India. In both cases Canon Inc transfers the employee for a period of 3 years, for the purpose of its business operations in India, the subsisting relationship with Canon Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remuneration it is stated that Canon India P Ltd. Shall reimburse and repay to Canon Inc the actual cost responsible (in terms of the agreement) for their failures, these limited and sparse factors cannot displace the larges and established context of employment abroad. (Page 42 para 36). of remuneration paid to the seconded employee-thus the terms of agreement simply mention salary in JPY and INR. (Refer Annexure 3) Thus clearly the employees retained their entitlement to participate in the overseas entities retirement and social security plans and other benefits in terms of its applicable policies, and their salary was properly payable by the overseas entities, which claimed the money from taxpayer. 6. Even the OECD commentary on Article 15 notes that the situation is different if the employee works exclusively for the Enterprise in the state of employment and was released for the period in question by the Enterprise in his state of residence. This was clearly and critically not done this case. The cost reimbursement agreement is completely silent about release of the employee and since S.No.2 clearly states that: 1. Canon Inc transfers _________ to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee to its overseas entity, equivalent to salary and other benefits paid to seconded employees by overseas entity, reimbursement of such salaries and whether withholding of tax thereon was contemplated by Section 195 of the Act. 34.1. At the outset, we observe that assessee is 100% subsidiary of Canon Singapore PTE Ltd., which in turn is a wholly owned subsidiary of Canon Inc Japan. 34.2. It is observed that overseas entity is to assign relevant individuals to perform duties at location of assessee, for a specified period at assesssee's request. Assessee was to designate seconded employees to fill certain position in its organization, integrate them into its organization and authorize them to perform duties during specified period in accordance with agreement. It is also observed that assessee had right to specify scope and nature of work allocated to seconded employees. It is also observed that assessee has entered into separate agreement with each one of seconded employees. Thus it is clear that seconded employees were to be integrated into organization of assessee during secondment period, and was subjected to supervision and control of assessee. All rules, regulations, polic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uation. The fact that in accounts of assessee, this is entered as reimbursement of cost, or, it is not shown as income in account of overseas entity, cannot be conclusive of question. What Model commentary on Article 15 concerning "Taxation of Income from Employment" says that, where a comparison of nature of services rendered by the individual with business activities carried on by his former employer and by the enterprise to which services are provided points to an employment relationship that is different from former contractual relationship, then certain additional factors may be relevant to determine whether the remuneration of the individual is directly charged by the former employer to the enterprise to which the services are provided. 34.6. On a look at list of employees, it is seen that persons seconded are concerned with managerial functions as they held positions in assessee like Director, Asst.Director F&A, Manager Markets, Director ISDC, Director ICP, Asst.Director CSP. This, therefore, appears to be a case where some employees qualified in processes and procedures of overseas entity are lent to assessee, a subsidiary, to perform managerial/technical functions envisag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India (P.) Ltd. case (supra) and documents produced by assessee are no substitute for Secondment Agreement and fails assessee in discharge of its burden of proof. It would be relevant to go through secondment agreement before coming to a conclusion. 35.1. Neither before DRP nor before us assessee filed Secondment Agreement. Assessee is therefore directed to file Secondment Agreement before Ld.AO and Ld.AO is then directed to verify the same. In the event assessee is not able to demonstrate through the Secondment Agreement that the payment made to A.E. is in nature of reimbursement of salary paid by A.E. to seconded employees in India, Ld.AO shall consider the issue as per law. We are therefore remitting the issue back to file of ld.AO to verify nature of reimbursement as per law. 36. Accordingly these Ground Nos. 1 to 1.9 raised by assessee stand allowed for statistical purposes. 37. Ground No. 2 is in respect of TDS credit not being granted to assessee amounting to Rs. 5,36,848/-. Ld.AO is directed to look into the same and considerate as per law. 37.1. Accordingly this ground raised by assessee stands allowed for statistical purpose. 38. Ground No. 3 is consequential in na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254. 48.1. As we have already set aside issue relating to nature of AMP expenditure to Ld.AO/TPO, applicability of most appropriate method relating to same head of transaction also deserves to be set-aside. It is also observed that, this is the consistent view taken by this Tribunal in case of assessee for preceding Assessment Years, copies of orders are placed before us. 48.2. Respectfully following same, we also set aside this issue back to Ld. AO/TPO. 48.3. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 49. Ground nos. 9 and 10: These grounds have been raised for excluding selling and distribution expenditure and subsidy. 49.1. Both parties submit that these issues are covered by ground no. 12.1 and 13 for AY 2012-13. Both parties refer to and relies on the submissions advanced while arguing ground no.12.1 and 13 in appeal for A.Y. 2012-13. 50. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
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