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TMI Blog2023 (8) TMI 440X X X X Extracts X X X X X X X X Extracts X X X X ..... ssociated 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 uncontrolled price details submitted by the Appellant 3. Not appreciating the fact that, no cost is incurred by the Appellant in relation to the financial guarantee, and . 4. Mot appreciating that the jurisdiction Tribunal in various rulings has levied a charge of approx. 0.3 to 0.5%. GROUND NO. 2 a) The learned CIT(A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppreciating 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 acquisition through Majesco Mastek, US (MMUS), a wholly owned US subsidiary of the assessee and acting as a distributor of software services capabilities of the assessee. The assessee issued a guarantee to ICICI bank, Canada, which in turn gave a loan to MMUS, which enabled the latter to pay the purchase consideration for the acquisition of STG (USA). Further, the assessee also decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee'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 providing guarantees and hence adjustments are required for carrying commissions. Further, in the case of Rubani Ltd. 131 taxman.com 344, Ahmedabad ITAT held that corporate guarantee extended by assessee to its AE is an international transaction and corporate adjustment guarantee addition has to be made to an extent of 0.5% only. Similarly, the Bombay High Court in the case of Siro Clinpharm 131 taxman.com 73 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amine 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 assessee had given performance guarantee to customers of MUK, its associated enterprise based in U.K. As per the assessee, the performance guarantees are made to ensure that the services are provided towards customers as per the contract entered into by MUK with the customers. The services for which the performance guarantee is given are performed by the assessee either through its off shore facilities or on-site through its branch in U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 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 selling and distribution. It is making efforts in marketing the product and undertaking activities so as to achieve the maximum possible sales. However, the contracts are signed by MUK and manage. the customer relationships until the point of final delivers of the product to the buyer. Therefore, the majority of the commission given by the appellant to UK is attributable to the activities as a distributor or the marketing agent of the appellant c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 merely distribution functions, however, on a perusal of FAR analysis revealed that UK entity is merely performing pure distribution functions without carrying any financial, functional or inventory risks. Hence, this function is different from normal independent distributor which bears financial and inventory risk. Further, the Assessing Officer observed that though MUK has been presented as a risk bearing entity, it is seen that its profits have remained at 4.5% without any refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 considered the facts and submissions of the Ld. AR and the IT AT order for AY 2006-07 carefully. I agree with the appellant that the facts for .AY 07-08 are no different from the facts brought forth in the JTAT order for AY 06-07. Accordingly, my views are as under. The appellant has submitted the following to evidence the activities performed by MUK vis-a-vis the customers: * Master Agreement between MUK and Mustek; * detailed FAR analysis of MUK and India; * details of employees of MUK, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the "Ld.CIT (A)" so as to warrant interference, hence, this ground of appeal preferred by the Revenue is dismissed." 22. Respectfully following the decision rendered by ITAT in assessee's own case for earlier assessment years, ground no. 1 of the Department's appeal is hereby dismissed. Ground No. 2 (ld. CIT(A) erred in deleting upward adjustment of HRM services amounting to Rs. 80,70,360/-) 23. The brief facts in relation to this ground are that the assessee provides it's own employee on secondment basis to its associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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, deleted the addition by holding as under: "11:10 I have considered the facts and submissions of the Ld. AR and the 1TAT order for AY 2006-07 carefully. I agree with the appellant that the facts for .AY 07-08 are no different from the facts brought forth in the IT AT order for AY 06-07. Accordingly, my views are as under. The appellant has submitted the following to evidence the activities performed by MLJK vis-a-vis the customers: * Master Agreement between MUK and Mastek; * detailed FAR analysis of MUK and India; * details of employees of MUK ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal 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-ordinate Bench and we do not find any infirmity in the order passed by the "Ld.CIT (A)" so as to warrant interference, hence, this ground of appeal preferred by the Revenue is dismissed." 26. In light of the above observations made by ITAT in assessee's own case for assessment year 2009-10 and 2010-11, the appeal of the Department is accordingly dismissed. 27. In the result, ground no. 2 of Department's appeal is dismissed. ITA No. 1074/Ahd/2018 filed by Assessee for A.Y. 2012-13 28. The assessee has taken the following grounds of appeal:- "The following grounds of appeal are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by way of Human Resource Management Services amounting to Rs 2,75,03,807 /- 2. The Ld CIT(A) has erred in law and on facts in deleting the disallowance of recruitment expense of Rs 43,26,027/- being 20% of the recruitment and training expense of Rs 2,16,30,133/- treating the same as no incurred for the purpose of business. 3. The Ld CIT(A) has erred in law and on facts in deleting the disallowance of Rs 70,01,53,135/- u/s 40(a)(ia) of the IT Act incurred as professional and consultancy expense paid outside India. 4. 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 adjustm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;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 technical support and the technical services of technical staff is required. It was categorically stated before the AO that none of the recruitment and training expenses have been specifically incurred to train the employees only for the purpose of deputation to its subsidiaries. The expenditure has been incurred at organizational level. The HR Department of the Company on a continuous basis is indulged in recruitment programmes, training programmes, so as to retain the talent of technical persons. The assessee has explained the business rationale behind such expenditure that the Company derives double benefits, one. increase in offshore revenue, second, employees with upgraded skill has enhanced solution delivery skills. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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% recruitment and training expenses would be disallowed on mere presumption that it was not wholly beneficial to the assessee. There is no evidence in the possession of the AO to hold that a particular expenditure on training was not business related. In fact, the argument of the assessee appears to be logical that considering the nature of the services provided a training of the technical staff is always a business necessity and because of the trained staff the assessee's revenue has substantially gone up. In the absence of any adverse material, we are not inclined to approve such an adhocism. This disallowance is hereby deleted and Ground is allowed." 37. Accordingly, respectfully following the decision of ITAT rendered in case of assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the expenditure is incurred by the company and paid by the company as against what is argued by the assessee. Under the circumstances it cannot be said that the payments are made by the branch, but are actually made by the company through the account in UK for convenience. In this regard attention of provisions of section 195 with regard to mode of payment is invited. The section provides that "at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier". The payment through transfer through the branch is covered by the phrase 'by any other mode.' Therefore it is held that the company was under obligation to deduct tax from the payments made to non-residents mentioned by the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny 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 consultant leaves the company may do it the same with its manpower. Further it is also to be noted that, foreign parties from which services are regularly availed on year on year basis. Therefore the consultancy services for which the company paid the charges on regular basis are covered by the definition of FTS in IT Act and also by the definition given in the DTAA with UK. 2.16 From the above discussions and disallowance has been made consistently in earlier years on the same facts of the case. Thus, it can be said that the assessee was under obligation to deduct tax from the certain payments made by the UK Branch to non-resident companies for professional and consultancy. Therefore, amount of Rs. 70,01,53,135 are disallowable u/s 40(a)(i) on account of non-deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 parties, listed in the assessment order, for software consultation and recruitment services. The payment to the extent of Rs.12,26,18,416/- was made without deduction of tax. A show cause was issued as to why the disallowance under the provisions of section 40(a)(i) should not be made in respect of the said payment. The explanation of the assessee was that the MIL is executing software development project in UK through its branch set up in UK. During the course of execution of software development project, the UK branch has incurred various expenses. The payments to those parties for the said expenditure have been directly made by the UK branch from its bank account in UK. The submission of the assessee was as follows:- "2.1. Assessee's branch in UK is a separate and distinct entity: a. It is submitted that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is to bring certain income of non-residents to tax in India if the source is in India. According to AO, the source is MIL, an Indian Company. From the side of the Assessee, CBDT Circular 740 was cited for the argument that the branch of a foreign company in India being treated as a separate entity, likewise branch of the assessee in UK should be considered as a separate non-resident entity. However, the AO was not convinced and stated that the branch in UK is only a branch as well as part and parcel of Indian Company. The AO has also mentioned that the alleged payment which was made through the branch was not accounted as transferred to branch but accounted as such in the name of the payees. According to him, the expenditure was incurred by the assessee-company. The AO has finally concluded as under:- "7.20. In view of the above facts and leg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deduction of tax. It is also not in dispute that the payment was made to 19 (Nineteen) parties and all of them are not Indian Residents. It is also not in dispute that the nature of expenses were, namely, "Recruitment Services", "Training Services" and "Software Consulting". Before DRP, the assessee has described the party-wise nature of services. Relevant pages of DRP are page Nos. 141 to 147, referred so as to understand the description of said services rendered. Section 40(a)(i) of the Act was invoked. This section starts with an obstante clause that notwithstanding of anything to the contrary in sections 30 to 38, certain amounts shall not be deducted in computing the income chargeable under the head "profits & gains of business" in the case of an assessee any interest, royalty, fees for technical services or other some chargeable under this Act which is payable outside India or in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness 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 before me, it was observed that these entities are based in the United Kingdom with no business presence in India. The A.O. while drawing adverse conclusion has not brought any fact on record to controvert the claim of the app in this regard. I am of the view that the professional fees payable to should be considered as business income of the said entities and in the absence of PE in India, the same would n9ot be liable to tax in India. Since such income of non-residents is not liable to tax in India, the provision of section 195 of the IT Act are not attracted on such payments and consequently no disallowance can be made under section 40(a)(i) of the IT. Act." 36.2. This is the one aspect which has been argued and the other aspect was that on such income the deeming provisions of section 9 do not apply because the impugned income do not accrue or arise in India. In this regard, section 9(l)(vii)(b) has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 point of time, i.e. during the relevant Financial Year, it was not possible on the part of the assessee to comply with the said Statute. We therefore hold since the services in question were neither "availed" nor "rendered" and even not "utilized" in India, therefore no tax was required to be deducted at source. Rest of the issues about the nature of the FTS and whether it was made available to the assessee are alternate plea of the assessee and need not to be addressed because on the preliminary question of "chargeability", the issue stands decided in favour of the assessee. This ground of the assessee is therefore allowed." 41. Respectfully following the decision rendered by ITAT for assessment year 2006-07 in assessee's own case, ground no. 3 of department's appeal is dismissed. 42. In the result, the appeal of the Department is dismissed. 43. In the combined result, the appeal for A.Y. 2011-12 of the assessee is partly allowed for ..... 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