TMI Blog2023 (8) TMI 440X X X X Extracts X X X X X X X X Extracts X X X X ..... erent and unconnected it was submitted before us, that in the instant case, it may be noted that order of ld. CIT(A) for assessment year 2010-11 [ 2019 (9) TMI 1702 - ITAT AHMEDABAD] on which reliance has been placed by CIT(A) while confirming the adjustment has been reversed by ITAT subsequently. However, in the instant facts, the matter needs to be set aside to see whether the comparables which have been taken are correct or not. In the instant facts, the TPO would need to examine the comparables in light of earlier years orders. Upward adjustment for giving comparables carrying out by assessee to the customers of associated enterprise - HELD THAT:- ITAT in assessee s own case on identical set of facts for assessment years 2008-09 [ 2018 (3) TMI 1881 - ITAT AHMEDABAD] and 2009-10 and 2010-11 [ 2019 (9) TMI 1702 - ITAT AHMEDABAD] has decided the issue in favour of the assessee. Upward adjustment of HRM services - assessee provides it s own employee on secondment basis to its associated enterprises - HELD THAT:- As decided in own case 2009-10 and 2010-11 [ 2019 (9) TMI 1702 - ITAT AHMEDABAD] the appellant's contentions find favour. Therefore, MUK's operations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 2. The assessee has taken the following grounds of appeal:- GROUND NO. 1 a) The learned CIT (A) has erred in law and on facts in upholding the adjustment of Rs. 6,508,491 made by Transfer Pricing Officer ( TPO ) in relation to the financial guarantee given by the Appellant to its Associated Enterprise ( AE ). In doing so, the learned CIT (A).-has erred in not appreciating the following:- 1. The financial guarantee-is in the nature of shareholder activity; as it was to enable the AE pay purchase consideration 'of acquisition, decision in relation to which was made by the Appellant; 2. The financial guarantee is quasi-equity in nature as the loan availed through financial guarantee, has been repaid from time to time by equity infusion; and 3. Provision of guarantee is not an international transaction as per section 92B of the Act. b) Without prejudice to the above, the1 learned CIT (A) has erred in the following:- 1. Not undertaking a credit rating analysis for the Appellant and the AE and not considering ratings for both Appellant and the AE and the spread between them on an adhoc basis; 2. Disregarding the comparable uncontr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following:- 1. The service liability risk is borne by the Appellant as the services are either provided by its delivery center in India (offshore) or branch in UK (onsite in case of Mastek (UK.) Ltd); and 2. The said performance guarantee is in the nature of shareholder activity. b) Without prejudice to the above, the learned CIT(A) has erred in not appreciating the following:- 1 No cost is incurred by the Appellant in provision of these performance guarantees; 2. The said performance guarantees cannot be equated with financial guarantee; Your Appellant craves leave to add to and/or to amend and/or to modify and/or to cancel any one or mere grounds of appeal at any time before or at the time of hearing. Ground No. 1 (Upward adjustment of Rs. 65 lakhs for financial guarantee given by assessee to AE) 3. The brief facts in relation to this ground of appeal are that the assessee is engaged in providing services in the life and annuity which is a vertical of the insurance sector. In order to expand its business in another vertical (property and casualty), the assessee decided to acquire STG (USA). Accordingly, it was decided to undertake the acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company into its subsidiary. It was further submitted that provision of guarantee is not covered under transfer pricing regulations. The counsel for the assessee submitted the case of the assessee is covered in its favour by decision of ITAT for assessment year 2008-09, 2009-10 and 2011-12. 7. We have heard the rival contentions and perused the material on record. We observe that the ITAT in assessee s own case for preceding assessment year have held that providing of corporate/financial guarantee does not tantamount to an international transaction, and hence there is no requirement for benchmarking the same. However, we observe that the Allahabad High Court in the case of Jubilant Pharmoba Ltd. 146 taxman.com 319 (Allahabad) held that transaction of furnishing corporate guarantee to overseas AEs constitute an international transaction. Further, the Hon ble Supreme Court in the case of Jubilant Pharmoba Ltd. vs. Additional CIT 146 taxman.com 318 (SC) also dismissed the SLP filed by the assessee against the order of High Court. Further, the Madras High Court in the case of PCIT vs. Radington India Ltd. 122 taxman.com 136 held that inherent risk cannot be ruled out in provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was submitted before us, that in the instant case, it may be noted that order of ld. CIT(A) for assessment year 2010-11, on which reliance has been placed by ld. CIT(A) while confirming the adjustment has been reversed by ITAT subsequently. However, in the instant facts, the matter needs to be set aside to see whether the comparables which have been taken are correct or not. In the instant facts, the TPO would need to examine the comparables in light of earlier years orders. 12. On going through the facts of the instant case, in the interest of justice, the issue is being set aside to the file of TPO for carrying out afresh analysis of the comparables, after taking the submissions of the assessee on record. Further, ld. Departmental Representative also not objected to the matter being set aside to the file of TPO for de-novo consideration, in the interest of justice. 13. In the result, ground no. 2 of assessee s appeal is allowed for statistical purposes. Ground No. 3 (Upward adjustment of Rs. 38 lakhs for giving comparables carrying out by assessee to the customers of associated enterprise) 14. The brief facts in relation to this ground of appeal are that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or any comparable data is available for deciding the issue. The appellant is giving a commission of 5.5% of the revenues generated through MUK. It is this commission which varies in absolute terms in accordance with the price fixed by MUK while selling a product, which is guaranteed by the appellant company. The appellant has furnished a copy of sample performance guarantee agreement entered by it with British Telecommunication and it is noted that it has guaranteed due and punctual performance by MUK of each and all of the obligations, warranties or representations due to it etc. It also had agreed to indemnify the British Telecom against all losses which may incur due to breach of contract by the MUK and also the losses which may incur due to certain guaranteed obligations being enforceable, invalid or illegal. It is an admitted fact that out of the total sale consideration received by the MUK, it is retaining only 5.5% of the sales value and balance is given to the appellant company. The performance guarantee component in this commission can be only certain Percentage of the 5.5% commission retained by MUK. It is also a fact that MUK is also undertaking other functions of sellin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law and on facts in deleting the adjustment while computation of arms length price of the international transactions of software services distributed by MUK(Associated Enterprise) by making upward adjustment of Rs 17,48,63,595/- 2. The Ld CIT(A) has erred in law and on facts in deleting the adjustment made by way of Human Resource Management Services amounting to Rs 80,70,360/- 3. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. Ground No. 1 (Ld. CIT(A) erred in deleting upward adjustment of software development of Rs. 17.48 crores) 20. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer/TPO made an upward assessment of Rs. 17.48 crores on account of benchmarking of transactions on sale of software to Mastek, USA primarily on the ground that while in the TP documentation, the assessee has categorized MUK, UK as a full-fledged distributor eligible for above normal margin of sales and the assessee tried to justify the margin allowed to MUK by submitting that significant functions are being performed by employees of MUK, and the same are not me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e perused the relevant materials available on records and judgment passed by the Co-ordinate Bench. It appears that while dismissing this ground of appeal preferred by the Revenue the Ld. Tribunal observed as follows: ...13. The next ground is with respect to the addition of Rs.26,02,07,754/- made by TPO u/s 92CA(3):- During the course of assessment proceedings, the A.O. noted that the assessee company had international transactions as defined in Section 92B of the Act with the associate enterprise. The associated transactions were made for software development and related services rendered for India to onsite software project execution etc. Reference was made to TPO who held that adjustment are required to be made with respect to international transactions by any amount paid towards software services, repair maintenance services and adjustment on account of excess credit provided to AEs. The total adjustment of income as proposed by TPO was Rs.26.02,07,754/-. Aggrieved by the aforesaid action of the A.O., the assessee carried the matter before Ld. CIT(A) who after considering detailed submissions of the assessee, deleted the addition by holding as under: 11:10 I have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n based on sales which incentives MUK to generate more revenue appears to be appropriate. Accordingly, this ground no. 10 is fully allowed. 14. Ld. D.R. supported the order of the A.O. whereas the Ld. A.R. submitted that the facts are identical to that of the earlier year and supported the order of the Ld. CIT(A). 15. We have considered the rival submissions and perused the material on record. We find that Ld. CIT(A) while deleting the addition has held that the facts of the case of the year under appeal are identical to that of earlier year and has followed the order of his predecessor. Further, he has also relied on the decision of Hon'ble ITAT in the assessee's own case for assessment year 2006-07 for deleting this addition. The finding of Ld. CIT(A) could not be controverted by the Ld. D.R. by bringing any contrary material on record. We, therefore, find no reason to interfere in the order of Ld. CIT(A). Thus this ground of the Revenue is also dismissed. Since the issue has already been decided by the Ld. Tribunal, we do not find any reason to deviate from the stand taken by the Co-ordinate Bench and we do not find any infirmity in the order passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made by the assessee. 22. We have heard the respective parties, we have perused the relevant materials available on records and judgment passed by the Co-ordinate Bench. It appears that while dismissing this ground of appeal preferred by the Revenue the Ld. Tribunal observed as follows: ...13. The next ground is with respect to the addition of Rs.26,02,07,754/- made by TPO u/s 92CA(3):- During the course of assessment proceedings, the A.O. noted that the assessee company had international transactions as defined in Section 92B of the Act with the associate enterprise. The associated transactions were made for software development and related services rendered for India to onsite software project execution etc. Reference was made to TPO who held that adjustment are required to be made with respect to international transactions by any amount paid towards software services, repair maintenance services and adjustment on account of excess credit provided to AEs. The income as proposed by TPO was Rs.26,02,07,754/-. Aggrieved by the aforesaid action of tire A.O., the assessee carried the matter before Ld. CIT(A) who after considering detailed submissions of the assessee, de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered to be correctly characterized as a distributor and a return based on sales which incentives MUK to generate more revenue appears to be appropriate. Accordingly, this ground no. 10 is fully allowed. 14. Ld. D.R. supported the order of the A.O. whereas the Ld. A.R. submitted that the facts are identical to that of the earlier year and supported the order of the Ld. CIT(A). 15. We have considered the rival submissions and perused the material on record. We find that Ld. CIT(A) while deleting the addition has held that the facts of the case of 'the year under appeal are identical to that of earlier year and has followed the order of his predecessor. Further, he has also relied on the decision of Hon 'hie ITAT in the assessee's own case far assessment year 2006-07 for deleting this addition. The finding of Ld. CIT(A) could not be controverted by the Ld. D.R. by-bringing any contrary material on record. We, therefore, find no reason to interfere in the order of Ld. CIT(A). Thus this ground of the Revenue is also dismissed. Since the issue has already been decided by the Ld. Tribunal, we do not find any reason to deviate from the stand taken by the Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to modify and/or to cancel any one or more grounds of appeal at any time before or at the time of hearing. Ground No. 1 (upward adjustment of financial guarantee given by assessee to AE) 29. We observe that ground no. 1 of assessee s appeal is same as ground no. 1 of assessee s appeal for assessment year 2011-12. Accordingly, our observations for assessment year 2011-12 shall apply to this year as well. 30. In the result, ground 1 of assessee s appeal is partly allowed. Ground No. 2 of assessee s appeal: (Enhancement by ld. CIT(A) by upward adjustment of Rs. 36.77 lakhs made in relation to performance guarantee given by the assessee to the customer of the AE) 31. We observe that ground no. 2 of assessee s appeal is same as ground no. 3 of assessee s appeal for assessment year 2011-12. Accordingly, our observations for assessment year 2011-12 shall apply to this year as well. 32. In the result, ground no. 2 of assessee s appeal is partly allowed. ITA No. 1215/Ahd/2012 filed by Revenue for A.Y. 2012-13 33. The Revenue has taken the following grounds of appeal:- 1. The Ld CIT(A) has erred in law and on facts in deleting the adjustment made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s entire staff. ii. All conditions laid down in section 37 of the Act are satisfied with respect to the recruitment and training expenses. iii. Without prejudice to the above, the Ld. TPO has already made an upward adjustment in respect of HRM function for the captioned assessment on the ground that the assessee is not justified in not charging any mark-up on account of services for provision of skilled manpower to group companies. The Ld. TPO has accordingly made an upward adjustment of Rs. 2.92 crores calculated at 9% of the total annual salary of the persons seconded. As such, recruitment and training expenses cannot be again disallowed. iv. The aforesaid issue has been decided in favour by the Hon'ble CIT (A) in appellant's own case in AY2005-06. 37.1. It was noticed that the assessee had incurred an amount of Rs.2,36,00,496/- for recruitment and training expenses. In compliance of show-cause, it was informed that the nature of business of the assessee is to provide services to customers which constitute composite deliverables as well as onsite - offshore services. Therefore, to provide onsite software development services to customers, the tec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e attrition and hence retention of employees is of utmost importance. The HR department of the company, therefore, on a continuous basis is required to indulge in activities such as recruitment programs, trainings required to obtain and retain the said world-class talent, etc., which enables the company to render world class solutions. It needs to be noted that the company's expertise in domain knowledge helps in attracting good talent from other competitors, which helps in delivering software solutions. In this regard, it is pertinent to note that the inflow of the employees for the company need not be only from the fresh recruits but also from the onsite employees returning during the concerned year. 37.3. On the other hand, from the side of the Revenue, the ld. DR supported the order of the AO. 38. On hearing the submissions of both the sides, we are of the conscientious view that in a situation where the requisite detail in respect of training of employees and the genuineness of the expenditure was very much before the AO and in respect of these two reasons, no disallowance was suggested, then it was unjustifiable on the part of the AO to say that a 20% recruitmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct tax at source. In addition, the fee for technical services clause under Article 13 of the India-U.K. Tax Treaty contains the make available clause for a service to qualify as FTS under the India-U.K. Tax Treaty. In the instant facts, the non-resident treaties have rendered services to the U.K. branch by providing consultants having requisite technical knowledge. The U.K. branch utilizes services provided by these consultants for assistance in executing software development projects. The services provided by them do not make available any technical knowledge, skill, know-how etc. in the nature of transfer of technical plan or design. Accordingly, there is no requirement to deduct tax at source on such payments. However, the Assessing Officer made disallowance of Rs. 70,01,53,135/- u/s. 40(a)(ia) of the Act by making the following observations:- 2.12 In this connection it is to be noted that the alleged payments through the branch are not accounted as transfer to branch or lump sum expenditure in the books under the head 'branch' but accounted as such with in the name of the payee under the same title under relevant head in the books of the company. This shows tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAA with UK, FTS means consideration for the rendering of any technical or consultancy services (including the provision of services of technical or other personnel) which make available technical knowledge, experience skill know-how or processes, or consist of the development and transfer of a technical plan or technical design. 2.15 The issue of 'make available' in the DTAA and concept laid down in Raymond Ltd (86 ITD 791) has to be understood and interpreted to the working of 'computer software1 industry. In a software business, consultancy involves study of the issues and chalking out a plan. Some times this involves, teaching the software personnel the new software or new techniques. In both these instances of consultancy, the trained persons of company will be able to handle the issues after the consultant leaves and will be in a position to do it themselves without the presence of the trainer. Therefore the issue of make available discussed in the case relied by the assessee is of no avail as in the software industry FTS involves invariably the making available the technical knowledge, experience, skill. In the present case, the knowledge is passed after the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dabad has decided this issue in favour of the appellant while deciding the appeal for A. Y. 2006-07. Since the facts and the nature of payment in the present year are similar, the findings given in that order would be applicable to the present year also. Following the same, the disallowance made by Assessing Officer u/s. 40(a)(ia) of the 1. T. Act is directed to be deleted. The ground of appeal is allowed. 4.5. Considering the above facts of the case and the fact that the identical issue on similar facts has been decided by the ITAT, Ahmedabad in appellant's own case for A. Y. 2006-07, the disallowance made by the AO on account of non deduction of tax u/s. 40(a)(i) amounting to Rs.20,69,17,536/- is directed to be deleted. The ground of appeal is allowed. 40. Before us, the assessee submitted that the case of the assessee is directly covered by order of ITAT passed in assessee s own case for assessment year 2006-07, wherein on identical set of facts, the addition was deleted. It would be useful to reproduce the relevant facts of the assessee s case for ready reference: A) FACTS: 35.1. It was noted by the AO that the assessee has made payment to 19 part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nch from non-residence. Those services were rendered as well as utilized outside India. According to assessee, there was no application of section 195 on the said payment. It was also contested that as per DTAA with UK the assessee was not under obligation to deduct TDS. The AO was not convinced and after analyzing section 195 of IT Act and the provisions of section 9(1)(i) and section 9(l)(vii) held that the payment was in the nature of Fees for Technical Services ('FTS'). He has mentioned that in section 9(T)(vii) the word used is the services utilized in India as against services rendered in India . He has explained that the effect of the word utilized in place of rendered is that the non-resident need not to come physically to India or the transaction need not to take place in India. According to AO, it is enough if the services or the end result of the services are utilized in India. He was of the view that irrespective of the source and place of delivery, the FTS deemed to accrue or arise in India, if the services are utilized in India for which FTS is paid. The AO has also referred Explanation to section- 9(1) of IT Act. The intention of this Explanation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of services utilized in a business earned on by such person outside India or for the purpose of making income from any source outside India. According to Id.CIT(A), UK branch was considered as a permanent establishment in UK . He has referred Article 1 of UK DTAA to hold that the profit is charged to tax attributable to branch operations in UK. In his view, the UK branch is a separate legal entity formed under UK regulations. In his opinion, after the combined reading of exception laid down in section 9(l)(vii)(b) along with India-UK DTAA the consultancy charges paid by the UK branch not to be held as income accrue or arising in India. A decision of Hon'ble Supreme Court in the case of Ishikawajma-Harima Heavy Industries Ltd. v. Director of Income Tax, Mumbai 288 ITR 408 was cited. Further, a decision of Hon'ble Madras High Court in the case of Skycell Communications Ltd. v. DCIT [2001] 251 ITR 53 was also cited. 35.4. From the side of the Revenue, Id.DR has placed reliance on the order of the AO and the order of the DRP. C) CONCLUSION; 36. We have heard both the sides and noticed the basic facts that the impugned payment was made without deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me from any business connection in India or an income from any property in India. Vide Explanation-l(b), an exception is that in the case of a non-resident, no income shall be deemed to accrue or arise in India to him from operations which are confined to the purchase of goods in India for the purpose of export. An issue has therefore been raised that the professional charges paid by the UK Branch of the assessee to various entities which are non-resident, then whether it can be held that an income has deemingly accrued in India. As far as the assessee's vehement contention is that the AO should not have decided against the order of C1T(A) pronounced in A.Y. 2005- 06. wherein vide an order dated 30/09/2009. the CIT(A)-VIII Ahmedabad has considered this aspect at length and thereupon held as under- 8.12. It may be further pointed out that Article 7 of the DTAA between India and UK states that business income of the UK enterprise shall not be taxable in India unless the UK enterprise has a Permanent Establishment ('PE') in India. The Ld. A.R. pointed out that the entities from whom UK branch availed services does not have PE in India. From the invoices submitted bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax. If any service has been rendered outside India, then the other condition for taxability is that it must be utilize in India. The Hon'ble Apex Court has therefore said that two conditions for taxability are that firstly, rendered in India and secondly, utilized in India. As far as the instant case is concerned, it is not in dispute that services from the foreign consultants were neither rendered in India nor utilized in India. Our attention has been drawn on an insertion of an Explanation below Section 9(2) of IT Act and for ready reference, reproduce below:- Explanation - For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not- (i) The non-resident has a residence or place of business or business connection in India; or (ii) The non-resident has rendered services in India. This Explanation has been inserted by Finance Act, 2007 and later on substituted by Finance Act, 2010. Due to this reason, at the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X
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