TMI Blog2018 (9) TMI 1812X X X X Extracts X X X X X X X X Extracts X X X X ..... bmits that lower authorities have also erred in law as well as on facts in treating the assessee to be providing information technology enabled services whereas the TPO’s observations hold it to be an entity having provided consultancy including tax regulatory services and software (including resale) as well as related technical services. He refers to a detailed chart of all the relevant heads in both tax regulatory advisory and consultancy services on record. All this assessee’s assertions appear to be prima facie correct. The fact however remains that we have already restored the entire issue of correctness of transfer pricing adjustment back to the TPO for afresh adjudication. We therefore leave it open for him to adjudicate all factual as well as legal issues; as the case may be in consequential proceedings. The assessee’s former five substantive grounds to this effect are accepted for statistical purposes. Ad hoc disallowance @ 40% of the total expenditure claimed - AO disallowed the same alleging assessee’s failure in providing all the relevant particulars of its payees as well as indicating the relevant nexus between its repair and maintenance vis-à-vis the corresponding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid for construction of chamber and commerce building, contribution towards canal construction irrigating sugarcane fields and participation expenditure in a trade, association or fund set up for advancement of business; respectively. No such facts emerge from assessee’s impugned claim. We thus decline the same on this count Disallowance of training expenses in lumpsum as against 25% ad hoc disallowance proposed earlier - as contended that all these expenses have been incurred for upto date knowledge to its work force’s knowledge, forming keyelement of operation efficiency - HELD THAT:- We find force in assessee’s instant claim of staff training expenses in principle. The Revenue fails to indicate any rebuttle regarding first and third heads hereinabove. The only question remain is that of miscellaneous vendor payment whose details are nowhere forthcoming a part from PAN etc. We thus confirm the impugned disallowance of ₹13,93,752/- to the extent of ₹3,23,897/- only. The assessee gets part relief. Addition of PWCDA network form charges - same to have been paid to its eponymous “Dutch” entity incorporated in Netherlands against invoices raised by PWCDA services i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om any source outside India. The assessee’s case therefore is that the main payment instances are squarely covered by the above exception provision itself since it has been paid in respect of services utilized in a business or profession carried on by Bangladesh based payees in the said country only. There is no dispute on this clinching facts as highlighted during the course of hearing at the Revenue’s behest. We thus quote hon’ble Delhi high court’s decision in DIT vs. Lufthansa Cargo Limited [[2015 (5) TMI 873 - DELHI HIGH COURT]] to delete the impugned disallowance. Withholding of tax - HELD THAT:- Payment to M/s Lorman Zyrwa & Maryline Nong Kynrih not inviting TDS deduction in view of nil withholding certificate. . Remaining amount as per assessment order involving payments without non-deduction of TDS out of ₹ 30,19,942/- are stated to be ₹ 22,34,904/-. Coupled with this, the assessee submits that another payment of ₹ 21.24 lacs pertains to payment Bhutan based payee on account of the said nation’s government initiative which is akin to Bangladesh payment provided u/s 9(1)(vii)(b) of the Act. We therefore accept the assessee’s argument to the extent indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment with assessee’s list of foreign tax jurisdiction in consequential proceedings as per law. Needless to say, the assessee’s claim would stand accept in those countries with which no such agreement exists in twin conclusion sec. 91. This substantive ground is treated as accepted for statistical purposes. Granting TDS credit only in respect of sum as claimed in the return of income and in view of its Form 26AS - HELD THAT:- Both parties are ad idem during the course of hearing that instant issue also requires a detailed factual verification. We thus restore assessee’s grievance back to the Assessing Officer for necessary factual verification as per law. - ITA No.483/Kol/2017 Assessment Year :2012-13 - - - Dated:- 12-9-2018 - Shri S.S.Godara and Shri, M. Balaganesh, JJ. By Appellant Shri Kanchan Kaushal, AR By Respondent Shri P.K. Srihari, CIT-DR ORDER S.S.Godara, This assessee s appeal for assessment year 2012-13 arises against the Asstt. Commissioner of Income Tax, Circle-2(2), Kolkata s assessment order dated 30.01.2017, involving proceedings section 144C r.w. 143(3) of the Income Tax Act, 1961; in short the Act . 2. The assessee appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k note of that assessee having selected PWECDA as tested party. He was of the view that the assessee s said detailed profile of including services having performed was nowhere available nor was there any material suggesting the same to be a least complex entity. He therefore rejected PWCDA as a tested party. The TPO thereafter observed that gross profit computation differed from one tax jurisdiction to another be very subjective phenomenona. He therefore proposed to apply the Transactional Net Margin Method TNMM qua assessee s international transactions in question. 5. The TPO s show-cause notice hereinabove then zeroed on to relevant segment to be that of software and IT services. Next came choice of the relevant filters i.e. availability of data for financial year 2011-12, companies having income from software services less than 75% of their total revenues, those with more than 25% related party transactions, persistent loss making entities, those with different financial years ending than that on 31.03.2012, functional different and turnover not between 5 to 500 crores; respectively were ordered to be excluded. 6. The assessee had chosen operating profits / over total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arty. The assessee claimed that its AEs of margin was very much at par with those engaged in distribution or trading activities. 9. We now advert to TPO s finding in his order dated 29.01.2016. He attributed assessee s failure in specifying the relevant services rendered so as to dispute the earlier show-cause notice. We notice that TPO s order para 5.2.2 contains the following findings regarding the exact nature of services to be self-contradictory as follows:- 5.2 TPO s comment: 5.2.1. The submission of the assessee in it s entirety has been perused. The assessee stated certain details o functions of the PwCPL, which was already mentioned in the TPSR. However the assessee choose to avoid mentioning the details of services rendered as per it s submission dated 04/09/2015, which the undersigned has mentioned in the SCN, which clearly indicated that the primary nature of the services rendered to the AE was in nature of IT services. Thus there was no fault regarding functional profile as arrived at by the undersigned. 5.2.2 The assessee had reiterated selection of PwCDA as the tested and conducting benchmarking analysis using foreign comparables. The services provided b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 20.02 and 7.03; respectively for reducing the earlier proposed PLI @ 20.98% to 18.71%. All this culminated in the impugned ALP adjustment of ₹345,51,562/- as per TPO s order dated 29.01.2016. 13. The Assessing Officer framed his draft assessment on 31.03.2016 on the same lines. 14. The assessee preferred its objections before the Dispute Resolution Panel DRP thereafter to the Learned panel decline assessee s all pleas as follows:- 2. That on the facts and in the circumstances of the case, the Ld. TPO and the Ld. AO have erred in selecting the Assessee as a tested party and not its AE (PwC DA). DRP Directions: Tested party has been defined in the OECD guidelines as the entity on which transfer pricing method can be applied in a reliable manner and good and reliable comparables can be found. It can be the entity with less complex functional profile so as to enable less complex analysis. The tested party may have (a) reliable and accurate data, (b) least complex data and (c) the data is usable without much adjustments, The Ld AR stated that the AE was selected as the tested party as it was performing simpler function in the set interaction. The fact rema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hence dismissed as untenable. 3. That on the facts and in the circumstances of the case, the Ld. TPO and the Ld. AO have erred in rejecting Resale Price Method ( RPM ) selected by the Assessee. DRP Directions: Resale price method is applied when the product is delivered/ resold without any value addition in the deliverable. The TPO has altered the tested party selection by the assessee and in view of the functional profile basis the material on record. Resale Price Method is to be applied when the reseller buys and sells the product as it is without adding any value to the product. In this case, the assessee, through the AE, is delivering services upon qualitative addition or adding value to the same. The deliverables are processed and the handed to the end user. If the assessee is not doing any such value addition, the whole purpose of such contract/assignment is defeated. Such a scenario is a commercial impossibility. A perusal of the functions performed by the assessee for the UK based AE indicate a clear value addition to the services. Besides, it is incomprehensible as to how services denuded of value addition can be delivered. The details of services rendered and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elcged by the assessee allk ertain to the IT and ITES services. In view of the foregoing, the AO has, therefore, rightly rejected RPM in this case, apart from rightly taking the assessee as tested party. 4. That on the facts and in the circumstances of the case, the Ld. TPO and the Ld. AO have erred in application of entity level Transactional Net Margin Method ( TNMM ) considering the Assessee as the tested party (the Assessee having a turnover of 1,166.84 Crs. vis-a-vis 18.49 Crs. of related party sales transaction being tested). DRP Directions: The TPO has examined the factual position of the International Transaction involving both the AEs. The functionality in both the sets of transactions is similar. The profile has also been discussed in the para in objection no 4. The panel does not find any infirmity in applying TNMM. The application at entity level is also understandable in view of the nature of transactions vis a vis same tested party with same set of comparables. The panel has requested the assesse to furnish computations basis segregated data. The assessee has not furnished its set of alternate comparables. Accordingly, the panel is inclined to uphold the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on (iS10). The change in the identification and grouping of similar economic activities associated with the move to the new NACE implies a statistical break in the time series.) it is seen from the page 41 of the TP study that the following NACE codes have been selected 4651,5829,6201,6311,9511,6209-it is seen that all these codes relate to the IT and computer software sectors. The assessee has also not stated in very clear terms on the nature and scope of the so called consultancy services received/ rendered. The set of comparables per the TP study at page 43 is also functionally akin to the IT and software services renderer. The functional profile of such comparables is at page 48 to 50 of the TP study. The assessee claims to be in business of rendering management consultancy services. The examination of the TP study does not bring out the functions performed by the assessee very clearly. The assignments are listed in ambiguous terms. The panel called for and examined specific assignment details. The chart produced in this regard clearly indicates the nature of services rendered to be of IT and ITES type of services. The TPO has also categorized the International Transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy administration support services, tax advisory services and a very insignificant quantum of excel spreadsheet services. The details of such services do not demonstrate the contention of the assessee. Besides, it has also to be seen whether the assessee is rendering a template or providing customized solutions to the end users. The discussions in respect of functionality and selection of parameters per NACE in the preceding objections clearly shows that the asses se has itself profiled the assignment to be of the IT and IT enabled services type. The objection is therefore, dismissed as it is devoid of any factual basis. The Assessing Officer has accordingly framed his final assessment making the impugned transfer pricing adjustment of ₹345,51,562/-. 15. It emerges at the outset that the assessee has filed its application seeking admission of additional evidence in the form of segmental profits in relation to its AE in question. It quotes Rule 29 of the Income-tax Appellate Tribunal Rules, 1963 in support. It pleads that the lower authorities ought to have taken into consideration its segmental profit only than entity based results. It invites our attention towa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue has failed to express any doubt on relevance of corresponding documents filed thereof as well as the fact that same are very much required for proper adjudication of the issue of ALP determination raised before us. We thus admit assessee s additional evidence and leave it open for the TPO to carry out necessary factual verification. 17. Learned Authoritative Representative s next submits that lower authorities have also erred in law as well as on facts in treating the assessee to be providing information technology enabled services whereas the TPO s observations hold it to be an entity having provided consultancy including tax regulatory services and software (including resale) as well as related technical services. He refers to a detailed chart of all the relevant heads in both tax regulatory advisory and consultancy services on record. All this assessee s assertions appear to be prima facie correct. The fact however remains that we have already restored the entire issue of correctness of transfer pricing adjustment back to the TPO for afresh adjudication. We therefore leave it open for him to adjudicate all factual as well as legal issues; as the case may be in consequenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher side not liable to be sustained. We accordingly conclude that an estimated disallowance of 2% only instead of 40% would meet the ends of justice. We order accordingly. The assessee gets part relief in its instant grievance. 20. Next comes assessee s third substantive ground challenging the lower authorities action making ad hoc disallowance of ₹913,48,803/- @ 25% of the gross amount of ₹36,53,95,215/- incurred on account of travelling and conveyance charges. The assessee s case is that it has employed around 4,000 number of persons approximately at 17 office location in the country for rendering various services to its clients (both domestic and foreign). It is stated that the impugned travelling and conveyance charges have been incurred for visiting working places, government departments, project sites, meetings, seminars business development initiatives, recruiting derive and business events etc., Mr. Kaushal pleads that assessee s details totaling to 1919 pages as well as supporting documents comprising 2500 pages form part of records have gone unrebutted. He thereafter clarifies that assessee has already deducted TDS on payments of ₹14,65,80,718/-. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the lower authorities to prove the actual payment. It pleads during the course of hearing that the payee herein is a renowned non profit orginzation promoting bilateral trade environment between the two countries. The same is projected as wider platform created for successfully contributing its efforts to global economy. Learned counsel terms assessee s annual member-ship payment to be involving commercial consideration for obtaining commercial advantage liability to be treated as revenue expenditure. Case law CIT vs. Chemicals Plastics India Ltd. 292 ITR 155 (Mad), CIT vs. Co-operative Sugars Ltd. 304 ITR 259 (Ker) and ACIT vs. Rajasthan Spg. Wvg. Mills Ltd. 274 ITR 465 (Raj) is quoted in support. We find no merit in assessee s above submissions. We make it clear that although it has placed on record its only membership detailed followed by actual payment. it is very much imperative to prove the scheme of above counal or its bye-laws vis- -vis the assessee s relevant business activity. We are of the opinion that mere payment of an amount does not prove the same to be having direct link with business activities. The relevant case law hereinabove (supra) involves instances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s part in not deducting TDS thereupon. We have heard rival contentions reiterating both parties respective facts. There is no dispute in principle about the assessee s firm service agreement with the payee M/s PWCD s services as well as its role played as providing central services to the entire PWC group based on cost allocation method keeping in mind the nature of services rendered benefits derived as per pages 117 to 261 of the paper book. The assessee has also prepared a list of services availed via the payee concerned in respect of all member firms of the group involving sample cases of e-learning and education, mandatory foundation programmes, training programmes alloys specific / technical programmes etc. All this has gone unrebutted from the Revenue side whose case is that there is no business link forthcoming from the impugned expenditure. We find no substance in Revenue s instant stand. We make it clear that the assesseecompany is engaged in multi functional consultancy services as a group entity of PWCDA organization based in Netherlands. Learned counsel has also filed before us relevant assessment records with regard to the payee entity pertaining to the impugned asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,01,972/-. 27. Next para is the assessee s payments of ₹ 14,08,115/-. There is no dispute that these sums have been paid to regarding Tax Administration Capacity in taxpayer services project and Bangladesh Railways. Relevant reference is invited to page no. 262 in the paper book. Learned Counsel quotes section 91(vii)(b) of the Act and more particularly the latter portion involving exception clause to the main provision that where fees are payable in respect of services utilized in a business or profession carried on by a non-resident outside India or for the purposes of making or earning income from any source outside India. The assessee s case therefore is that the main payment instances are squarely covered by the above exception provision itself since it has been paid in respect of services utilized in a business or profession carried on by Bangladesh based payees in the said country only. There is no dispute on this clinching facts as highlighted during the course of hearing at the Revenue s behest. We thus quote hon ble Delhi high court s decision in DIT vs. Lufthansa Cargo Limited [375 ITR 85 (Del)] to delete the impugned disallowance. 28. Next disallowance am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant conditions incorporated in the corresponding DTAAs and take fresh a fresh callas per the necessary Articles therein regarding taxation of fee for technical services payments. We thus accept assessee s contention in principle and leave it open for the Assessing Officer to conduct necessary factual verification more particularly in view of the fact that we have already restored the main issue (supra) back to the Assessing Officer for afresh proceedings in preceding paragraphs. 30. The assessee s next substantive ground challenges lower authorities action disallowing rent claim of ₹7,13,000/- pertaining to provision made amounting to ₹2,73,000/- and guest house rent of ₹440,000/- paid without deducting TDS. It emerges at the outset from page 44 that the above payee has already obtained nil withholding tax certificate dated 21.02.2011 of the Act. It is also stated to be exempt u/s. 10(26) of the Act. We therefore delete the impugned disallowance to the extent of ₹44,000/-. Coming to the balance provision amount for rent of ₹2,73,000/- learned counsel fails to offer any explanation regarding the basis thereof as per the case records. We ac ..... 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