TMI Blog2023 (2) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. We are therefore of the view that the issue with regard to the grant of working capital adjustment should be directed to be examined by the TPO/AO afresh in the light of the decision of the tribunal referred to above, after affording opportunity of being heard to the Assessee. Short term capital loss on transfer of investment - slump sale - Assessee incurred loss in the Sprinkler business and wanted to hive off the same, i.e., wanted to sell its Sprinkler business as a going concern, identifying it s assets and liabilities and Assessee sold its sprinkler business on a slump sale basis - HELD THAT:- The entire exercise of forming a subsidiary, selling the sprinkler business by way of slump sale, subscribing to the debentures and ultimately sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be nil, in the facts and circumstances of the present case. In the light of the above discussion, we reject the prayer of the Assessee to allow the short term capital loss on sale of shares as claimed by the Assessee and hold that the transaction of sale of shares deserves to be ignored and no loss can be determined nor can any short term gain be taxed. Thus the grounds relating to short term loss/gain on sale of shares are treated as partly allowed. TDS u/s 195 - Disallowance u/s 40(a)(ia) - non-deduction of TDS on payment of management fees - applicability of DTAA - HELD THAT:- TIMCO is the person with whom the Assessee entered into Agreement for providing managerial services. TIMCO nominated TIL Switzerland as billing and collecting agent and directed the payment to be made for management services to the agent. TIMCO is the beneficial owner of the payment and therefore taxability of the payment in India has to be considered in the hands of TIMCO and not TIL Switzerland. Therefore the applicable DTAA would only be India-USA DTAA and not India-Switzerland DTAA. The findings of the DRP on the MFN clause on India-Switzerland DTAA are therefore in our view superfluous. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tax treaty, not only the services should be technical in nature but should be such as to result in making the technology available to person receiving the technical services in question. The Tribunal also referred to with approval the extracts from protocol to the Indo-US tax treaty to the effect that 'generally speaking, technology will be considered made available, when the person acquiring the service is enabled to apply the technology. It is not even the allegation of the revenue that the non-residents had made available to the assessee, the knowledge generated in the course of rendering managerial services. In our view the services rendered were purely managerial services and by no stretch of imagination can be considered as making available any technical knowledge, experience, skill, know-how or processes, to the assessee. The services provided by non-residents, did not make available any technical knowledge, experience, skill, know-how or processes to the assessee, the same cannot be regarded as taxable in India. Consequently, there was no obligation on the part of the assessee to deduct tax at source at the time of making payment. Hence, the disallowance made u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. In terms of Sec.92(1) of the Act, the any income arising from an international transaction shall be computed having regard to the arm s length price. In this appeal by the Assessee, the dispute is with regard to determination of Arms Length Price (ALP) in respect of the international transaction of rendering SWD services to the AE. 4. As far as the provision of Software Development services are concerned, the Assessee filed a Transfer Pricing Study (TP Study) to justify the price paid in the international Transaction as at ALP by adopting the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) of determining ALP. The Assessee selected Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI) for the purpose of comparison of the Assessee s profit ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Infotech Ltd. 26.29% 24.22% 23.54% 24.83 - 9 Orion India Systems Private Limited 26.08% 25.14% No Data in public domain ' 25 64% 10 Nihilent Ltd. 15.94% 29.19% 35.72% 26.36% 11 Integ Software Pvt. Ltd. 7.53% 32.14% 45.00% 28.20% 12 Persistent Systems Ltd. 26.92% 31.34% 35.64% 30.89% 13 Infobeans Technologies Ltd. 34.98% 20.78% 41.95% 32.42% 14 Thirdware Solution Ltd. 23.89% 44.39% 44.68% 36.90% 15 Infosys Ltd. 38.22% 41.30% 36.28% 38.61% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 22.4.2 The above shortfall of Rs.4,63,62,735/-is treated as transfer pricing adjustment u/s 92CA in respect ,-of software development segment of the taxpayer's international transactions. Thus a sum of Rs.4,63,62,735/- was added to the total income of the Assessee on account of determination of ALP for provision of SWD services by the Assessee to its AE. 6. The Assessee filed objections before the Disputes Resolution Panel (DRP) against the draft assessment order passed by the AO wherein the addition suggested by the TPO as adjustment consequent to determination of ALP was added to the total income of the Assessee by the AO. The DRP gave certain directions. Based on the directions of the DRP, the AO passed the final order of assessment. To the extent the Assessee did not get relief from the DRP, the Assessee has preferred appeal before the Tribunal. 7. The grievance of the Assessee projected in the grounds of appeal filed before the Tribunal which was pressed for adjudication and argued before us were: (i) choice of comparable companies by the TPO which was affirmed by the DRP. It was the plea of the Assessee that the Ld. ITO/ Ld. TPO/ Ld. DRPanel, while applying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e profit margin of three financial years, the profit margins of these two Financial years 2013-14 2014-15 should be excluded and only margins for FY 16-17 should be taken for working out the average profit margin of this company. (Grd.No.9 and Addl.Grd.No.24 25) (ii) The next prayer was for Inclusion of Akshay Software Technologies Ltd., on the ground that this company is functionally similar to the Assessee. (Grd.No.10) (iii) Allow working Capital Adjustment as prayed for by the Assessee. The grievance in this regard is projected by the Assessee in Grd.No.15 of the grounds of appeal raised by the Assessee. 8. As far as the plea of the Assessee for exclusion of companies whose turnover was more than Rs.200 Crores is concerned, the 7 companies listed in paragraph 7 of this order (excluding R.S.Software (India) Ltd.), the relevant provisions of the Act in so far as comparability of international transaction with a transaction of similar nature entered into between unrelated parties, provides as follows: Determination of arm's length price under section 92C . 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction [or a specified domestic transaction] if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the open market; or (ii) reasonably accurate adjustments can be made to eliminate the material effects of such differences. 9. A reading of Rule 10B(1)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly shows that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t.Ltd Vs. DCIT 82 Taxmann.com 167(Del), wherein it was held that high turnover ipso facto does not lead to the conclusion that a company which is otherwise comparable on FAR analysis can be excluded and that the effect of such high turnover on the margin should be seen. The DRP therefore held that a company which is otherwise functionally comparable cannot be excluded only on the basis of high turnover. The Assessee has raised Grd.No.4, 4.1 to 4.3 before the Tribunal challenging the aforesaid view of the DRP. 12. On the issue of application of turnover filter, we have heard the rival submissions. The parties relied on several decisions rendered on the above issue by the various decisions of the ITAT Bangalore Benches in favour of the Assessee and in favour of the Revenue, respectively. The ITAT Bangalore Bench in the case of Dell International Services India (P) Ltd. Vs. DCIT (2018) 89 Taxmann.com 44 (Bang-Trib) order dated 13.10.2017, took note of the decision of the ITAT Bangalore Bench in the case of Sysarris Software Pvt.Ltd. Vs. DCIT (2016) 67 Taxmann.com 243 (Bangalore-Trib) wherein the Tribunal after noticing the decision of the Hon ble Delhi High Court in the case of Chr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study. 42. The Assessee s turnover was around Rs.110 Crores. Therefore the action of the CIT(A) in directing TPO to exclude companies having turnover of more than Rs.200 crores as not comparable with the Assessee was justified. As rightly pointed out by the learned counsel for the Assessee, there are two views expressed by two Hon ble High Courts of Bombay and Delhi and both are non-jurisdictional High Courts. The view expressed by the Bombay High Court is in favour of the Assessee and therefore following the said view, the action of the CIT(A) excluding companies with turnover of above Rs.200 crores from the list of comparable companies is held to correct and such action does not call for any interference. 13. The Tribunal in the case of Autodesk India Pvt.Ltd. Vs. DCIT (2018) 96 Taxmann.com 263 (Banglore-Tribunal), to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also. On this issue, the first aspect which we notice is that the decision rendered in the case of Genisys Integrating (supra) was the earliest decision rendered on the issue of comparability of companies on the basis of turnover in Transfer Pricing cases. The decision was rendered as early as 5.8.2011. The decisions rendered by the ITAT Mumbai Benches cited by the learned DR before us in the case of Willis Processing Services (supra) and Capegemini India Pvt.Ltd. (supra) are to be regarded as per incurium as these decisions ignore a binding co-ordinate bench decision. In this regard the decisions referred to by the learned counsel for the Assessee supports the plea of the learned counsel for the Assessee. The decisions rendered in the case of M/S.NTT Data (supra), Societe Generale Global Solutions (supra) and LSI Technologies (supra) were rendered later in point of time. Those decisions follow the ratio laid down in Willis Processing Services (supra) and have to be regarded as per incurium. These three decisions also place reliance on the decision of the Hon ble Delhi High Court in the case of Chriscapital Investment (supra). We have already held that the decision rendered in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith a rider that if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared . If by application of any filter an enterprise undertaking uncontrolled transaction similar to an international transaction is regarded as not being comparable in the earlier two years immediately preceding the current year and thereby attracting the provisions of Rule 10B(2) or 10B(3) then the data for those years will not have any influence on the determination of transfer prices in relation to the transactions being compared for the current year and hence have to be ignored. On a harmonious reading of the provisions of Rule 10CA, 10B(3) (4) of the Rules, we agree with the stand taken by the learned counsel for the Assessee. Therefore, if at all R.S.Software Ltd., is to be regarded as a comparable company, then the margins for AY 2014-15 and 2015-16 of the company have to be ignored because in those years they are to be regarded as not comparable. We hold accordingly. 16. Following the same, we hold that R.S. Software (India) Pvt.Ltd., has admittedly a turnover of above Rs.200 crores in FY 2013-14 2014-15 and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the DRP to have adjudicated the question of inclusion of these companies as comparable companies. The fact that these companies do not figure in the search matrix of the TPO is not and cannot be a ground not to consider inclusion of these companies as comparable companies. Since the DRP has failed to do so, we are of the view that the issue regarding inclusion of the aforesaid companies as comparable companies should be set aside to AO/TPO for fresh consideration in the light of the information available in public domain. Thus ground No.7 is treated as allowed for statistical purposes. 20. We are of the view that a direction to consider the comparability of this company afresh in the light of the submission as made above and decisions cited would be just and sufficient in the present case. Hence the question regarding inclusion of this company as comparable company is hereby set aside to AO/TPO for fresh consideration. 21. The next ground that needs adjudication is the ground with regard to the grievance of the Assessee that no adjustment towards working capital has been allowed to the Assessee. In this regard though the ground of appeal raised by the Assessee is ground N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aragraphs 13 to 16 of the aforesaid OECD guidelines, wherein the need for working capital adjustment has been explained as follows: 13. In a competitive environment, money has a time value. If a company provided, say, 60 days trade terms for payment of accounts, the price of the goods should equate to the price for immediate payment plus 60 days of interest on the immediate payment price. By carrying high accounts receivable a company is allowing its customers a relatively long period to pay their accounts. It would need to borrow money to fund the credit terms and/or suffer a reduction in the amount of cash surplus which it would otherwise have available to invest. In a competitive environment, the price should therefore include an element to reflect these payment terms and compensate for the timing effect. 14. The opposite applies to higher levels of accounts payable. By carrying high accounts payable, a company is benefitting from a relatively long period to pay its suppliers. It would need to borrow less money to fund its purchases and/or benefit from an increase in the amount of cash surplus available to invest. In a competitive environment, the cost of goods sold s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. The Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. 24. We are therefore of the view that the issue with regard to the grant of working capital adjustment should be directed to be examined by the TPO/AO afresh in the light of the decision of the tribunal referred to above, after affording opportunity of being heard to the Assessee. 25. No other grounds with regard to determination of ALP in the SWD services segment was pressed for adjudication. The TPO/AO is directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration received. while computing capital gain/ loss arising to the Assessee from the said transaction, and treating it as a sham / nongenuine transaction. 19. The learned AO / DRP erred in concluding that sale of equity shares and debentures of Aigua Sprinkler is pre-planned / arranged transaction and rejecting the short term capital loss of INR 89,991 on sale of equity shares and short term capital loss of INR 54,99,99,990 on sale of debentures. 20. Without prejudice to the above the learned AO / DRP erred in taxing the capital gain twice , once on transfer of Sprinkler business by way of slump sale (INR 12,00,00,000 - INR 9,99,82,170 = INR 2,00,17,830) and secondly by considering the cost of equity shares at INR 99,990 and deeming the sale consideration of the same at INR 14,69,00,010. 27. The facts with regard to ground No.17 and modified grounds No.18 to 20 are that the Assessee is engaged in the business of providing installation solutions for Tyco s fire and security products in India. The operations of the Assessee included a business unit primarily engaged in the installation of water-based fire suppression solutions ( Sprinkler business ). The Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same. Valuation of net worth of Sprinkler Business was carried on and it was found to be of value of INR 14,70,00,000 as per Valuation report dated 24 April 2015 ( pages 900 of paper book dated June 24, 2022). 9 June 2015 Assessee entered into Debenture Subscription agreement with its wholly owned subsidiary Aigua Sprinkler and subscribed 5,50,00,000 Compulsory Convertible Debentures at Face value of INR 10 (pages 809 to 826 of paperbook dated June 24, 2022). Thus, Assessee invested INR 55,00,00,000 into its subsidiary as Debentures. On the same day, Assessee entered into Business Transfer Agreement with Aigua Sprinkler (wholly owned subsidiary) for the sale of Sprinkler Business on slump sale basis. (pages 909 to 924 of paperbook dated June 24, 2022) The purchase consideration payable by Aigua Sprinkler to the Assessee was fixed at INR 12,00,00,000 based on Valuation report of Sprinkler Business on 24th April 2015. The net worth of undertaking transferred by the Assessee was INR 9,99,82,170 (Total Asset transferred was INR 30,99,77,697 minus Total liabilities transferred fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds of appeal is in relation to the aforesaid short term capital loss on sale of shares and assignment of debentures. 31. It can be seen from the above sequence of events that the valuation of the business for slump sale happened on 24.4.2015 and the slump sale took place on 9.6.2015 on the basis of the said valuation. By virtue of the Slump Sale, the Assessee hived off it s sprinkler business to Aigua Sprinkler. Prior to the slump sale it funded Aigua Sprinkler by subscribing to its Debentures worth Rs.55 crores on 9.6.2015. The full value of consideration received on slump sale was Rs.20 Crores. Thus the Assessee funded Aigua Sprinkler for payment of consideration for slump sale by subscribing to its debentures. On 12.6.2015 the Assessee sold Debentures worth Rs.55 Crores for a nominal sum of Rs.100 to Mr.Gitendra G.Bhanot. Likewise the shares held by the Assessee in Aigua Sprinkler of the face value of Rs.99,999/- were sold on 12.6.2015 to Mr.Gitendra G.Bhanot for a paltry sum of Rs.999/-. Between 9.6.2015 and 12.6.2015 how could there be such a huge difference in valuation and the rationale for incurring loss on sale of shares and assignment of debentures by the Assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also for carrying forward capital losses for future set off. 34. The tax treatment of the business transfer as per the Assessee and per the AO as upheld by DRP are summarized below: Particulars As per Assessee As per learned AO upheld by Hon ble DRP Slump Sale of Sprinkler Business to Aigua Sprinkler Sale Consideration 12,00,00,000 12,00,00,000 Less: Cost of Acquisition 9,99,82,170 9,99,82,170 Long Term Capital Gain 2,00,17,830 2,00,17,830 Sale of equity shares of Aigua Sprinkler to unrelated third party Particulars As per Assessee As per learned AO upheld by Hon ble DRP Sale Consideration 9,999 14,70,00,000 Less: Cost of Acquisition 99,990 99,990 Short Term Capital Gain/(Loss) (89,991) 14,69,00,010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision to sell sprinkler business. It was highlighted that the Assessee is engaged in the business of providing installation solutions for Tyco s fire and security products in India. The operations of the Assessee included a business unit primarily engaged in the installation of sprinklers ( Sprinkler business ). The sprinkler business was incurring huge losses and was not expected to make profits in the foreseeable future. In order to turnaround the business, the Assessee changed the business strategy in 2013. However, despite the same, the business was continuing to make losses. Therefore, the management envisaged shutting down this business unit to avoid future losses. However, this would have resulted in additional costs, efforts to close the open contracts and recover outstanding receivables, and could have possibly had legal repercussions on account of non-performance of obligations on contracts with customers, retrenchment of employees, etc. In order to mitigate future losses from the sprinkler business, the Assessee contemplated hiving off the same during FY 2015-16. This was executed by a sale of the sprinkler business to Assessee s subsidiary, Aigua Sprinkler, as a going ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat as provided in the aforementioned valuation report, the Sprinkler business registered losses at gross margin level during year ended September 30, 2013 and year ended September 30, 2014 since the direct cost of product installations ( Cost of product revenues ) have exceeded corresponding revenues during the said historical period. These losses were primarily attributable to six projects which had significant cost overruns due to one or more of project delays, redesigns, estimation issues, labor issues etc. Moreover, significant proportion of the losses were attributable to one project (MEAT airport) where the cost overruns have been significant as a combination of redesigns, re-installations (the costs of which could not be passed through to the customer) and labor issues. As the projects are fixed-price in nature, the Sprinkler business has not been able to secure pro-rata increases in the event of re-designs / re-installations and have also been impacted by adverse exchange rate movements, considering that a significant proportion of the materials are imported. Further, it is to be noted that the Sprinkler Business registered positive gross margins for the year to date April ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business to divest its sprinkler business has minimized any further losses on account of the performance of that business unit. The learned counsel drew our attention to the compilation of the Assessee s EBITDA over the years. Financial Year EBITDA (in INR) FY 2012-13 -25,34,11,126 FY 2013-14 -73,04,71,185 FY 2014-15 -34,83,31,363 FY 2015-16 -56,81,11,225 FY 2016-17 -10,28,37,197 FY 2017-18 26,77,23,571 FY 2018-19 38,02,13,725 FY 2019-20 26,39,48,654 41. The learned counsel for the Assessee submitted that having regard to the future losses circumvented and the assurance, warranties and undertakings of the purchaser, it was agreed that the equity shares and CCDs of Aigua Sprinkler be transferred at a nominal value of INR 9,900 and INR 100 respectively. Since, the sale of equity shares / CCDs is to an unrelated third party, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause 4, an amount up to 13,000,000 shall be used to pay the retention amounts to the Employees as set out in Schedules 1 and 2 (Employee Retention Amounts) pursuant to the respective retention agreements listed in Schedule 3 (Retention Agreements) in the following manner: Within 7 days of the Transfer Date INR 6,500,000 (First Installment) Within 90 days of the Transfer Date (Second Installment Date) INR 6,500,000 (Second Installment) (c) the balance Subscription Consideration shall be used only to meet the working capital expenses and run the operations of the Sprinkler Business and discharge the operational and corporate obligations of Aigua. (Emphasis supplied) The same is also substantiated in Para B of business transfer agreement The Seller and the Purchaser have also entered into a debenture subscription agreement dated 9 June 2015, a copy whereof is attached as Annex 6 (DSA) pursuant to which the Seller has invested an amount of INR 550,000,000 in the Purchaser with the understanding that INR 120,000,000 out of such amount shall be paid by the Purchaser to the Seller as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset is different from its fair market value and that the former does not have any reference to the latter. Attention was drawn to the following observations of the Judgment: It follows that the expression full consideration in the main part of s. 12B(2) cannot be construed as having a reference to the market value of the asset transferred but the expression only means the full value of the thing received by the transferor in exchange for the capital asset transferred by him. If it is therefore held in the present case that the actual price received by the respondent was at the rate of Rs. 136 per share the full value of the consideration must be taken at the rate of Rs. 136 per share. This interpretation of the main part of s. 12B(2) is borne out by the fact that in the first proviso to s. 12B(2) the expression full value of the consideration is used in contradistinction with fair market value of the capital asset and there is an express power granted to the ITO to take the fair market value of the capital asset transferred as the full value of the consideration in specified circumstances. (Emphasis supplied) Reliance was placed on the decision of H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.55 Crores for a nominal sum of Rs.100 to Mr.Gitendra G.Bhanot. Likewise the shares held by the Assessee in Aigua Sprinkler of the face value of Rs.99,999/- were sold on 12.6.2015 to Mr.Gitendra G.Bhanot for a paltry sum of Rs.999/-. Between 9.6.2015 and 12.6.2015 how could there be such a huge difference in valuation and the rationale for incurring loss on sale of shares and assignment of debentures by the Assessee. He questioned when was Aigua Sprinkler incorporated and what was the purpose. The Assessee could have directly sold the business to Mr.Gitendra G.Bhanot without the intervening medium of Aigua Sprinkler. In that event, even going by the logic of the Assessee, it would not have fetched price of Rs.12 crores from a third party, why did the Assessee invest Rs.55 Crores of his money in Aigua Sprinkler and then give Mr.Gitendra G.Bhanot the entire business of Aigua Sprinkler, which as per valuation of the valuers was worth Rs.14.7 Crores for a paltry sum of Rs.999/-. It was highlighted that effectively Mr.Gitendra G.Bhanot has been the beneficiary of a business worth Rs.14.7 Crores and debenture subscription money of Rs.55 Crores less Rs.12 Crores paid to the Assessee as c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on slum sale of the sprinkler business as declared by the Assessee was accepted by the AO and there is no dispute on this aspect. 47. On 13.6.2015, just one week after the slump sale of sprinkler business, the Assessee transferred his share holding of 9,990 of Rs.10 each in Aigua Sprinkler, for a consideration of Rs.9,999. It incurred Short Term Capital Loss Rs.89,991/- on sale of shares. Likewise, the Debentures worth Rs.55 Crores were assigned to Gitendra G.Bhanot on 13.6.2015 for a nominal sum of Rs.100/- and claimed short term capital loss resulting from such transfer by way of assignment of the debentures of Rs.54,99,99,900. The aforesaid short term capital loss on sale of shares and assignment of debentures was sought to be set off against the capital gain on slump sale and the remaining sum was sought to be carried forward for set off in future. 48. The short term capital loss on sale of shares and debentures was not accepted by the AO and the CIT(A). On short term capital loss on sale of equity shares of Aigua India by Assessee to Jitendra G.Bhanot, at nominal value, the AO relied on the valuation report of sprinkler business at the time of Slump Sale wherein the val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :- (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto: The expression full value of consideration received on transfer , has been explained in two judgments of the Supreme Court in the case ofCIT v. George Henderson and Co. Ltd [1967] 66 ITR 622 and in the case of CTT v.Gillanders Arbuthnot and Co. [1973] 87 ITR 407 in which it has been held that the expression full value of the consideration does not mean the market value of the asset transferred, but it shall mean the price bargained for by the parties to the transaction. It has been further held that the consideration for the transfer of a capital asset is what the transferor receives in lieu of the assets he parts with, viz., money or money's worth, and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer and, therefore, the expression full value of the consideration cannot be construed as having a reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult of such transfer: Provided that the provisions of this section shall not apply to any consideration received or accruing as a result of transfer by such class of persons and subject to such conditions as may be prescribed. Explanation.-For the purposes of this section, quoted share means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business. 52. It is thus clear from the judicial pronouncements and the statutory provisions referred to above that prior to insertion of Sec.50CA of the Act, the AO could not substitute the full value of consideration received on transfer by the fair market value of unquoted shares. The provisions of Sec.50CA of the Act are applicable only from AY 2018-19 and not applicable for AY 2016-17 in which the transfer of shares took place during the previous year and the capital gain from transfer with which we are concerned in the present appeal. 53. We are of the view that the entire exercise of forming a subsidiary, selling the sprinkler business by way of slump sale, subscribing to the debentures ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t view of the matter, the short term capital loss would be nil, in the facts and circumstances of the present case. In the light of the above discussion, we reject the prayer of the Assessee to allow the short term capital loss on sale of shares as claimed by the Assessee and hold that the transaction of sale of shares deserves to be ignored and no loss can be determined nor can any short term gain be taxed. Thus the grounds relating to short term loss/gain on sale of shares are treated as partly allowed. 54. Ground No.23 and 24 relate to disallowance under Section 40(a)(ia) of the Act of INR 18,723,021 on account of non-deduction of TDS on payment of management fees. These grounds read as follows: 23. erred in disallowing payment of management fees amounting to INR 17,691,705 to Tyco International Limited under section 40(a)(i) of the Act without appreciating the fact that the Applicant is not required to withhold taxes on these payments as per the provisions of the Act read with India- Switzerland Treaty read with India-US Treaty . 24. erred in disallowing payment of management fees amounting to INR 1,031,316 to Tyco International Asia, Inc. under section 40(a)(i) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services; fire and security global account sales support services; information technology support services; financial support services; human resource services; six sigma services and supply chain real-estate services. It was contended under the Act, tax withholding provisions are attracted in relation to payments to non-residents only if the income is chargeable to tax in India. Since the payees were tax residents of countries with which India has Treaty for Avoidance of Double Taxation (DTAA), the taxability of the payment in the hands of the non-residents in India has to be determined having regard to the provisions of section 90(2) of the Act, which lays down that tax incidence on a non-resident would be governed by the provisions of the Act or the relevant DTAA, whichever is more beneficial. 57. It was contended that having regard to the nature of services, these could at best be managerial or consultancy services and hence could be characterised as Fees for technical services ( FTS ) / Fees for included services ( FIS ) as per the provisions of the Act but cannot be taxed in India as per the applicable DTAA. In this regard, the Assessee pointed out that the sum of Rs.1,7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sign. (Emphasis supplied) Definition of fees for technical services as provided under Article 12(4) of India Singapore DTAA 4. The term fees for technical services as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services : (a) . ; or (b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein ; or (Emphasis supplied) It was submitted that for the management services rendered by the AEs to be construed as FIS / FTS under India-US DTAA and of India-Singapore DTAA, respectively, the services should among others make available technical knowledge, experience, skill, know-how or processes, which enable the personnel of the Assessee acquiring the services to apply the technology contained therein. Hence, as the management services rendered by the AEs and do not transfer / make available any technical knowledge, skills, know-how, etc., to the Assessee, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the service provider...payment of consideration would be regarded as FIS only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. (Emphasis supplied) Relying on the above judgment, the Hon ble Karnataka High Court in the case of Director of Income-tax (International taxation) vs Sun Micro Systems India Private Limited (ITA no. 35/2010) held that it is clear that Sun Singapore has not made available to the assessee the technology or the technological services which is required to provide the distribution, management and logistic services. When once factually it is held that the technical services has not been made available, then in view of the law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... N clause. Thus, the payment made by the Assessee to TIL, Switzerland for management services rendered by TIMCO is not taxable as FTS in India as nothing was made available to the Assessee by virtue of those services. 65. The arguments advanced before the DRP did not find acceptance by the DRP. The DRP, in so far as payment to TIMCO is concerned, observed that the Assessee deducted TDS on similar payments from 17.11.2014 and therefore all arguments raised by the Assessee were rejected. It was the argument of the Assessee before DRP that the sum of Rs.1,76,91,705/- paid to TIMCO had to be judged in the light of the provisions of the India-USA DTAA because TIMCO was a tax resident of USA, though the payments were made for managerial services to TIL, Switzerland as they were appointed as a billing and collection agent by TIMCO for management services rendered to the Assessee. It was the contention of the Assessee that TIL, Switzerland was only a flow through entity and it was only TIMCO which was the beneficial owner of the income from managerial fees received from the Assessee and therefore would be deemed to be acting on behalf of TIMCO and accordingly the effect would be as if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd. Therefore the applicable DTAA would only be India-USA DTAA and not India-Switzerland DTAA. The findings of the DRP on the MFN clause on India-Switzerland DTAA are therefore in our view superfluous. In so far as the payment made to Tyco International Asia, Inc. Singapore is concerned, it was not the case of the AO that the services rendered were not in the nature of managerial services. The DRP has given findings on its own without confronting to the Assessee as to the alleged discrepancy which it had noticed. The findings of the DRP in this regard is therefore held to be unsustainable. We have to therefore proceed to analyse the taxability of the payments towards management fees in the hands of the payee under the India-USA DTAA and India-Singapore DTAA. 69. We shall first take up for consideration argument of the assessee that the sum paid by the assessee to TIMCO and TIL Switzerland cannot be brought to tax in India even assuming that the nature of the payment was FTS within the meaning of the Act because under the Indo US Treaty and India-Singapore DTAA, FTS is taxable in India only when the recipient of the payment 'makes available' technical knowledge, experienc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Inc. In other words, in order to attract the taxability of an income under Article 12(4)(b), not only the payment should be in consideration for rendering of technical or consultancy services, but in addition to the payment being consideration for rendering of technical services., the services so rendered should also be such that 'make available' technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. 72. These worlds are 'which make available'. The meaning of the expression make available were considered by the Tribunal in the case of Raymond Ltd. Vs. DCIT (2003) 80 TTJ (Mum) 120. The Tribunal after elaborate analysis of all the related aspects observed that :- The words 'making available' in Article 13.4 refers to the stage subsequent to the 'making use of' stage. The qualifying words is 'which' the use of this relative pronoun as a conjunction is to denote some additional function the 'rendering the services' must fulfil. And that is that it should also 'make available' technical knowledge, experience, skill etc. The word whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly speaking, technology will be considered made available, when the person acquiring the service is enabled to apply the technology. 74. Honorable jurisdictional Karnataka High Court in the case of CIT vs De Beers India Minerals Private Limited (ITA 549 of 2007) has also interpreted the meaning of the term make available and observed that: The service should be aimed at and result in transmitting technical knowledge etc. so that the payer of the service could derive an enduring benefit and utilize the knowledge or know how on his own in future without the aid of the service provider. In other words, to fit into the terminology making available , the technical knowledge, skills etc. must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Emails phone conference TFSIPL obtained guidance on overall legal and tax framework and policy as formulated at a group level. TFSIPL also obtained assistance and inputs to enable it to adhere to the global approach to be followed by Tyco group in negotiating contracts with agents / distributors. Email evidencing webinar conducted in relation to Tax provisioning and process guidance provided by Central Tax team (Refer Annexure 5.1.1) Email evidencing teleconference set-up to provide inputs in India Tax issues under Litigation and compliance (Refer Annexure 5.1.2) Email evidencing exchange of updates regarding India Indirect Tax and setting up meetings and teleconferences for tackling issues under Indirect Tax Litigation (Refer Annexure 5.1.3). Email evidencing invitation for webinars and meetings conducted in relation to guidance provided for legal matters including environment safety, public affairs, billing management etc. 2. Marketing strategy and business development advisory services Assistance in the design and development of marketing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Information technology support services Defining the global strategy for the information systems; Coordinating assisting in implementation of well-adapted, standardised and secured IT and telecommunication solutions; Definition coordination of the office automation policy; Management and supervision of common IT applications; and Optimising the information flows in implementing a standard ERP and providing IT and information systems tools. Emails phone conferences TFSIPL obtained assistance with formulating standard policies and processes in relation to IT information systems. TFSIPL also obtained assistance in the implementation and supervision of common IT applications. In this regard, wish to highlight that TFSIPL s employees generally log a IT ticket in the system to resolve any IT issue and the ticket is assigned to the central IT team which looks into the issue and resolves the same. 5. Internal audit services Develops and executes internal audit practice to be adopted by Tyco Group entities; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... velops operating excellence program which has enables TFSIPL to improve working capital including inventory improvements and increasing customer satisfaction; Provides training and examination materials to help improve the various operational process Obtains government registrations and certifications relating to import and export control, putting in place the tools, processes and people to ensure Tyco s trade compliance, conducting audits/assessments of compliance performance at businesses, determining risk profiles for businesses and developing actions to address any identified gap areas, and developing and deploying specific trade compliance training materials. Emails, meetings phone conferences TFSIPL was assisted in developing its strategies and growth plan in line with group strategies, master plans. For example: The group senior management provided various directions and advice on the running and general management of the business through emails and periodic calls. Email evidencing policy intimations received from the . TFSIPL also receives inputs and training from the team via in-person meetings / ..... X X X X Extracts X X X X X X X X Extracts X X X X
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