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2014 (4) TMI 787 - AT - Income TaxCorporate tax Deduction of TDS u/s 194I of the Act - Whether tax should be deducted at source u/s 194I from payments made for use of such standard facilities Held that - The decision in Asia Satellite v. CIT 2011 (1) TMI 47 - DELHI HIGH COURT followed - payments made towards use of standard facility, when the lessee is not having any domain or control or possessory rights over such facility, cannot be categorized as use of assets for the purpose of the Act Decided in favour of Assessee. Transfer pricing adjustment - Determination of ALP - Profit Split Method or Transactional Net Margin Method Applicability of Rule 10AB - Held that - The revenues in the case of the assessee are generated in a transaction where there is contribution from multiple entities - the assessee runs its business independently in India - the assessee is an independent entrepreneur - But when a transaction is integrated and interrelated and when costs are incurred by multiple entities and the revenues are to be apportioned to multiple entities, then the factual conclusions of the T.P.O have to be vacated - the Profit Split Method (PSM) is the M.A.M for the reason that the assessee generates revenue out of operations that are highly integrated - When one transaction, (example transmitting data from a destination in one country, to a destination in a different country in a secured manner) requires deployment of assets and functions of different entities, located in different Geographical locations, to ultimately deliver services and when such combined efforts generate revenues, the MAM for determining arm's length price is Profit Split Method (PSM). The Transfer Pricing Officer is wrong in rejecting PSM on the ground that it is not possible to determine the cost incurred by the Indian entity separately - The cost incurred by the assessee is available on record - The entity maintains books and the same are subject to audit - use of unique intangibles is not a must for adopting PSM - the assessee does possess unique intangibles in the field of data transfer and communications, and comparing the operations with a simple E Mail and as a plug in operator is not factually correct - If the assessee is held to be a simple Email operator, then it is to be explained as to why reputed global enteprises would pay them for data transmission, when E Mail is free - The assessee does offer unique services as compared to an ordinary Email service and it is these unique services which are its intangibles. The factum of the assessee having a loss is no ground to reject PSM as the MAM - the arrangement with the AE under the agreement demonstrates that the administrator does not have absolute discretionary power to determine inter group payment - though the Rules do suggest that benchmarking should be done with external uncontrolled transactions, this is an impossibility, as it is not possible to get a comparable - allocation can be done, based on how much each independent enterprise might have contributed - Relative contribution has to be determined, based on key value drivers - there is a general consensus on the principles of allocation of residual surplus - as per rule 10B(l)(d) of the IT Rules, a contribution or residual PSM would need to be supplemented by a comparable PSM - the TPO, should determine the ALP by adopting residual PSM as the MAM and by allocating residual profits based on the relative value of each enterprise's contribution - Relying upon Allied Motors Private Limited Versus Commissioner of Income-Tax 1997 (3) TMI 9 - SUPREME Court - Rule 10AB can be applied for the AYs also, for determining the ALP thus, the matter is remitted back to the AO for fresh adjudication Decided in favour of Assessee.
Issues Involved:
1. Determination of the Most Appropriate Method (MAM) for Transfer Pricing. 2. Disallowance under Section 40A(ia). 3. Levy of interest under Section 234B. 4. Additional grounds related to deduction under Section 80-IA(4) and interest under Section 234C. 5. Initiation of penalty under Section 271(1)(c). Detailed Analysis: 1. Determination of the Most Appropriate Method (MAM) for Transfer Pricing: The primary issue was whether the Profit Split Method (PSM) or the Transactional Net Margin Method (TNMM) was the MAM for determining the Arm's Length Price (ALP) of the international transactions undertaken by the assessee for the Assessment Years 2007-08 and 2008-09. - Assessee's Position: The assessee adopted the PSM, arguing that the operations were highly integrated, interconnected, and involved unique intangibles. They used a residual profit analysis to allocate profits based on the relative contributions of each entity within the Equant Group. - TPO's Position: The TPO rejected PSM, favoring TNMM, arguing that PSM was not correctly applied and that the assessee did not benchmark against external comparables. The TPO also cited the lack of significant sales/marketing activities and the routine nature of the field operations as reasons to reject PSM. - Tribunal's Findings: The Tribunal concluded that the assessee's operations were indeed integrated and interrelated, making PSM the MAM. It noted that TNMM was not suitable due to the complex and unique contributions of each entity. The Tribunal also highlighted that the TPO should correct the application of PSM rather than reject it outright. The Tribunal directed the AO to determine the ALP using residual PSM, considering the relative value of each entity's contribution. 2. Disallowance under Section 40A(ia): The AO disallowed payments made for lease lines, holding that these were covered under Section 194-I, requiring tax deduction at source. - Assessee's Argument: The assessee argued that the payments were for standard facilities and not for the use of equipment, relying on judicial precedents like the Delhi High Court's decision in Asia Satellite Tele Communication Co. - Tribunal's Decision: The Tribunal allowed the assessee's claim, following the jurisdictional High Court's decision, and held that payments for standard facilities did not fall under Section 194-I. 3. Levy of Interest under Section 234B: The assessee contested the levy of interest under Section 234B. - Tribunal's Decision: The Tribunal dismissed the grounds related to the levy of interest under Section 234B, stating that it is mandatory and consequential. 4. Additional Grounds Related to Deduction under Section 80-IA(4) and Interest under Section 234C: The assessee raised additional grounds for deduction under Section 80-IA(4) and contested the levy of interest under Section 234C. - Tribunal's Decision: The Tribunal admitted the additional grounds, following the Supreme Court's decision in National Thermal Power Co. Ltd. v. CIT. It remitted the matter to the AO for fresh adjudication in accordance with the law. 5. Initiation of Penalty under Section 271(1)(c): The assessee contested the initiation of penalty under Section 271(1)(c). - Tribunal's Decision: The Tribunal dismissed the grounds related to the initiation of penalty as premature. Conclusion: The appeals were allowed in part, with the Tribunal directing the AO to re-evaluate the transfer pricing adjustments using the residual PSM, and to adjudicate the additional grounds related to Section 80-IA(4) and interest under Section 234C. The disallowance under Section 40A(ia) was reversed, and the levy of interest under Section 234B was upheld. The initiation of penalty under Section 271(1)(c) was dismissed as premature.
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