2020 (1) TMI 1620 - AT - Income Tax

TP Adjustment - comparable selection - action of the AO/TPO of cherry-picking TTK Healthcare Limited ( TTK Healthcare ) as a comparable company - HELD THAT - The comparability of each company needs to ascertained only after matching the functional profile and the relevant reasons for the other company. The principle of res judicata cannot be applied in the cases where the assessment of different year is involved. The concept of transfer pricing is directly linked to the computation of income on year to year basis and it cannot be an issue which is settled once for ever. Every year the transactions vary and the facts of the case also vary for calculating the taxable income. The selection of the PLI depends on the factual position of the case on comparable companies and FAR analysis which may vary on year to year basis. The issue raised by the Ld. counsel in respect of TTK Healthcare delineated at para 3 hereinbefore need to be re-examined by the AO/TPO. Therefore we set aside the order of the AO and restore the matter to him to pass an order afresh on the issues emanating from the above grounds of appeal after giving reasonable opportunity of being heard to the appellant. We direct the appellant to file the relevant documents/evidence before the AO. Thus the 1st 2nd grounds of appeal are allowed for statistical purposes. Non-deduction of tax at source u/s 195 - foreign remittances reflected in Annual Information Report (AIR) downloaded from Income Tax System for the financial year (FY) 2010- 11 wherein on certain payments tax was deducted and tax was not deducted on certain payments - HELD THAT - We agree with the contentions of the Ld. counsel that (i) no income can be said to be accrued or deemed to be accrued in India on account of remittance towards participation fees for a conference held outside India ; (ii) the payment can be characterized as FTS u/s 9(1)(vii) of the Act only when a person pays to another person a payment for rendering of services which is in the nature of consultancy technical or managerial in nature; further professional services is not covered by the definition of FTS u/s 9(1)(vii) of the Act. Thus the said payments in the instant case cannot be characterized as FTS u/s 9(1)(vii) as no services in the nature of consultancy technical or managerial have been provided to the appellant. Duo Contrusting is a tax resident of Germany and as such provisions of India-Germany DTAA shall be applicable; the remittance towards participation in a conference does not specifically fall under any Article of India-Germany DTAA as the said remittance is not in the nature of royalty or FTS. Also the said remittance should be construed in the nature of business income of the payee and in absence of PE of the payee in India the said sum should not be subject to tax in India. We find that as per Article 21 of the India-Germany DTAA dealing with Other Income any income not dealt with any of the Article of DTAA can be taxed only in Germany. Payment to Right Management Singapore Pte Ltd. - We agree with the contentions of the Ld. counsel that it is a tax resident of Singapore eligible to claim benefit under the provisions of India-Singapore DTAA ; as per Article 7 of the said DTAA business profits of Right Management can be taxed only in Singapore unless Right Management is carrying its business through a PE situated in India. As per Article 12(4)(b) of the said DTAA consideration towards technical knowledge skill etc. would be considered as FTS only if the technical knowhow skill etc. is made available to the recipient of the services. Further Right Management has not transferred or made available any technical knowledge or skills to the appellant and therefore payments made to Right Management are not in the nature of FTS and not liable to tax in India having regard to the provisions of the said DTAA. Since participation fees for attending seminar is not taxable in India the question of TDS on aforesaid payment does not arise. Payments to Global Data Ltd. for obtaining market analysis and forecast report we find that the said expenses were booked in the FY 2009-10 and only remittance was made during the FY under consideration i.e. FY 2010-11 and as such the question of disallowance of expenses which has not been claimed for the FY under consideration i.e. FY 2010-11 shall not arise. Payments to F. Hoffman La Roche AG Switzerland ( F. Hoffman Switzerland ) towards reimbursement of taxes of employee it is found that the appellant has not claimed the said payment of expat tax which was recovered from the employee as the same has not been passed through the profit and loss account. In this regard the question of disallowance of the said expenses shall not arise. Payment to Hoffman La Roche Inc USA towards reimbursement of salary - No tax is required to be deducted again at the time of reimbursing salary cost to Roche Group companies; otherwise the same will result in double taxation i.e. one at the time of payment of salary/social security to the employees in India and second at the time of reimbursement to group companies. Payment to Roche Germany towards other reimbursement viz. travel and stay conference participation fees and web access charges it is a mere reimbursement of expenses and cannot be construed as a fee for services rendered since what is achieved by a reimbursement is mere repayment of what has been already spent and is not a reward or compensation for services rendered. Further the transactions relating to reimbursement of expenses to AE have been subject matter of TP assessment and the fact that the reimbursement of various expenses are at actual cost with no profit element has been accepted by the TPO. Further the DRP has granted relief in case of reimbursement of expenses of similar nature paid to other Roche group companies against which the Department has not filed appeal before the Tribunal. Payments to Genentech Inc towards reimbursement of relocation expenses to Mrs. Rita Kale we observe that reimbursement of expenses does not constitute income and accordingly should not be subject to TDS. Reimbursement of expenses to Sanofi Aventis Bangladesh Ltd. we observe that the appellant had submitted copies of debit notes third party invoices salary statement of the employee TRC of Sanofi No PE certificate Form No. 15CA and 15CB and these documents establish that payments pertain to pure cost reimbursement. Reimbursement of special discounts and additional support the actual amount of special discount i.e. the difference of local sales price of Sanofi and the discounted price at which Sanofi had sold the products as directed by the appellant is reimbursed by the appellant to Sanofi. Also the appellant has not adjusted the said special discount against sales to Sanofi and instead recorded it as a separate transaction. Reimbursement of promotional expenses we find that the appellant has reimbursed promotional cost incurred by Sanofi (on behalf of the appellant) on actual basis without any element of mark up or profit thereon. Reimbursement of cost of manager we find that as per the arrangement between the appellant and Sanofi the appellant will provide the technical scientific and marketing support including training of engineers salesmen to Sanofi for sale of its products. It is observed that Mr. Mostafa Jamal Anwar ( Mr. Mostafa ) has been appointed in Bangladesh exclusively for advertisement and promotion of the appellant s products and for providing various services to the new customers (end user) like providing guidance on usage of the products its benefits etc. and Sanofi has recovered the actual salary cost of Mr. Mostafa and other related costs incurred by Sanofi from the appellant. Further even if the aforesaid payments are considered as FTS the same should not be subject to tax in India in the absence of specific Article of FTS in India-Bangladesh DTAA. Reimbursement of expenses to JL Morison Sons Jones (Ceylon) Ltd it is observed that as per the arrangement between JL Morison and the appellant the former buys products and re-sells them on its own account and the business between the them is on a principal-to-principal basis and the role of JL Morison is to promote sales of products of the appellant and not to manage the appellant s business -appellant had submitted copies of debit notes third party invoices salary agreement of the employee and TRC of JL Morison and these documents establish that the payments pertain to pure cost reimbursements. Reimbursement of special discounts - actual amount of such special discount i.e. the difference of local sales price of JL Morison and the discounted price at which JL Morison has sold the products as directed by the appellant is recovered from the appellant. Also the appellant has not adjusted the said special discount against sales to JL Morison and instead recorded it as a separate transaction. Reimbursement of cost of manager - It is found that as per the agreement the appellant will provide the technical scientific and marketing support including training of engineers salesmen to JL Morison for the sale of its product and Mr. Sujeewa Kruppu has been appointed in Sri Lanka exclusively for advertisement and promotion of the appellant s products and for providing various services to the new customers (end user) like providing guidance on usages of the products its benefits etc. Further JL Morison has recovered the actual salary cost of the said personnel and other related costs incurred by JL Morison from the appellant. There is merit in the contentions of the Ld. counsel that (i) even if the aforesaid payments are considered as FTS the same should not be subject to tax in India in the absence of specific Article of FTS in India-Sri Lanka DTAA; (ii) even if the appellant would have directly paid third party vendors in Sri Lanka (instead of JL Morison incurring such expenses and claiming recovery from the appellant) still no TDS obligation would have arisen considering the nature of payment such as special discounts etc. Thus we delete the disallowance of expenses. 3rd ground of appeal is allowed. Disallowance of payments towards expenses - non-deduction of tax at source u/s 195 - said expenses were booked in earlier Financial Year ( FY ) 2009-10 and only - HELD THAT - The said expenses were booked in FY 2009-10 and only remittance was made during the FY under consideration i.e. FY 2010-11. Therefore we have no hesitation in deleting the disallowance made by the AO. Thus the 4th ground of appeal is allowed.

Summary

Issues Involved:
1. Inclusion of TTK Healthcare Limited as a comparable company for Transfer Pricing.
2. Disallowance of expenses due to non-deduction of tax at source under Section 195 of the Income Tax Act.
3. Disallowance of expenses booked in an earlier financial year but remitted in the current year.

Detailed Analysis:

Issue 1: Inclusion of TTK Healthcare Limited as a Comparable Company for Transfer Pricing

Grounds of Appeal:
- The appellant contended that TTK Healthcare should not be considered a comparable company due to differences in business activities (manufacturing vs. trading) and high related party transactions.

Appellant's Argument:
- TTK Healthcare is engaged in manufacturing medical devices, whereas the appellant is involved in trading.
- TTK Healthcare's related party transactions exceed 15% of its revenue, making it unreliable for comparability.

DRP's Decision:
- The DRP upheld the TPO's inclusion of TTK Healthcare, considering it engaged in trading activity.

Tribunal's Findings:
- The Tribunal noted that the TPO did not select TTK Healthcare as a comparable in preceding and subsequent years.
- The principle of consistency should be applied, but each year's facts must be independently examined.
- The Tribunal directed the AO/TPO to re-examine the inclusion of TTK Healthcare as a comparable, considering the appellant's submissions and providing a reasonable opportunity for the appellant to present relevant documents.

Conclusion:
- The Tribunal allowed the grounds of appeal for statistical purposes, requiring a fresh examination by the AO/TPO.

Issue 2: Disallowance of Expenses Due to Non-Deduction of Tax at Source under Section 195 of the Income Tax Act

Grounds of Appeal:
- The appellant challenged the disallowance of expenses aggregating to Rs.2,64,09,027/- on the ground of non-deduction of tax at source.

Appellant's Argument:
- Payments for participation fees in conferences held outside India do not accrue income in India and should not be considered Fees for Technical Services (FTS).
- Reimbursements to foreign entities for employee salaries and other expenses should not attract TDS as they do not constitute income.

Tribunal's Findings:
- Payments for participation fees in conferences held outside India are not taxable in India and do not qualify as FTS under Section 9(1)(vii) of the Act.
- Reimbursements to foreign entities for employee salaries, travel, and other expenses are not subject to TDS as they are mere repayments and not income.
- The Tribunal referred to relevant case laws and DTAA provisions to support its findings.

Conclusion:
- The Tribunal deleted the disallowance of expenses aggregating to Rs.2,64,09,027/- and allowed the ground of appeal.

Issue 3: Disallowance of Expenses Booked in an Earlier Financial Year but Remitted in the Current Year

Grounds of Appeal:
- The appellant contested the disallowance of payments towards expenses aggregating to Rs.14,45,583/- on the ground of non-deduction of tax at source, arguing that these expenses were booked in FY 2009-10 and only remitted in FY 2010-11.

Tribunal's Findings:
- The Tribunal examined the details of the expenses and confirmed that they were booked in FY 2009-10.
- Since the expenses were not claimed in the current financial year, the disallowance for the current year does not arise.

Conclusion:
- The Tribunal deleted the disallowance of Rs.14,45,583/- and allowed the ground of appeal.

Final Order:
- The appeal was partly allowed, with directions for re-examination of the inclusion of TTK Healthcare as a comparable and deletion of disallowances related to non-deduction of tax at source for specific expenses.