2017 (4) TMI 917 - AT - Income Tax

TDS u/s 195 - Addition of reimbursement of expenses to the head office(HO)for expenses incurred on behalf of the assessee by the HO - Held that - We find that the assessee had made payment its sister concern located in Singapore for the services rendered by that entity, that it had claimed the payments were reimbursements only without any mark up. The assessee had produced the debit note raised by the foreign entity.The invoices issued by the SGS talk about reimbursement,software maintenance charges,data communication charges, EDP consumables and others.If the DRP had some doubt about maintenance of software,it should have called for explanation from the assessee. But,doubt cannot take place of evidence to confirm any addition. Page 24 of the paper book contains detail of various charges paid by the assessee to the foreign entity.The Panel has not brought anything on record to controvert the entries appearing in it. Besides,Protocol 7 to the DTAA also supports the stand taken by the assessee. As relying on Steria case 2016 (8) TMI 166 - DELHI HIGH COURT we are of the opinion payment made by the assessee was neither royalty nor FFTS. It was case of pure and simple reimbursement. Secondly, the assessee had not made any payment to Singapore Telecommunication - Decided in favour of assessee. Not allowing the TDS credit on interest income paid to HO - Held that - During the course of hearing before us, the AR stated the assessee had paid interest to the HO for which TDS was paid, that the departmental authorities had denied to give credit for the taxes paid,that AO should be directed to give the credit for the tax paid by it, the DR left the issue to the discretion of the Bench. Thus we are of the opinion that matter should be sent back to the file of AO.He is directed to give credit for the taxes paid after verification. Second Ground is allowed in favour of the assessee,in part. Adjustment to the sales credit commission earned on sale of treasury products on behalf of the AE - Held that - Identical issue stands decided in favour of the assessee by the order of the Tribunal for the AY.2008-09 wherein as considered it fair and proper and in the interest of justice to set aside this matter to the A.O./TPO with a direction to consider the said objections of the assessee and recompute the average margin of the comparables after taking into consideration the said objections. We also direct the A.O./TPO to apply the average margin of comparables so recomputed to the operating cost of the assessee relating to its relevant transactions with its AEs in order to determine the ALP of the said transaction as well as the TP adjustment to be made in respect of such transactions.Needless to observe that the A.O. shall offer proper and sufficient opportunity to the assessee of being heard on this matter.

Summary

Issues Involved:

1. Addition of ?26.56 lakhs as reimbursement of expenses to the head office.
2. Non-allowance of TDS credit of ?1.58 lakhs on interest income paid to the head office.
3. Adjustment of ?67.28 lakhs to the sales credit commission earned on the sale of treasury products on behalf of the associated enterprise.

Issue-wise Detailed Analysis:

1. Addition of ?26.56 lakhs as reimbursement of expenses to the head office:

The first ground of appeal concerns the addition of ?26.56 lakhs, which the assessee claimed as reimbursement of expenses to the head office (HO) for expenses incurred on behalf of the assessee. The AO categorized these payments as Royalty/fees for technical services (FFTS) under the provisions of Article 13(3) and 13(4) of the India-France DTAA and proposed to tax the amount at 10%. The Dispute Resolution Panel (DRP) upheld the AO’s decision, stating that the payments fell under the definition of Royalty/FFTS and that non-deduction of TDS made the expenses disallowable under Section 40(a)(i) of the Act.

During the hearing, the assessee argued that the payments were reimbursements without any markup and referred to the case of Steria (India Ltd.) and WNS Global Services Ltd. The Tribunal found that the payments were indeed reimbursements and not Royalty/FFTS. The DRP's doubts about software maintenance were not substantiated with evidence. The Tribunal cited Protocol 7 of the DTAA and the judgment in Steria, concluding that the payments were not subject to withholding tax under section 195 of the Act. Thus, the Tribunal decided this ground in favor of the assessee.

2. Non-allowance of TDS credit of ?1.58 lakhs on interest income paid to the head office:

The second ground deals with the non-allowance of TDS credit of ?1.58 lakhs on interest income paid to the HO. The AO found that the assessee paid ?15.86 lakhs as interest to the HO and deducted tax at source under Section 195 of the Act. The assessee argued that under the Indo-France Tax Treaty, interest to the HO was allowable expenditure and TDS credit should be granted. However, the AO rejected this contention.

The DRP upheld the AO’s decision, referring to the CBDT Circular No.740 and stating that interest received by the HO from the PE was taxable under Article 12 of the treaty at a lower rate. During the hearing, the Tribunal directed the AO to verify and grant the TDS credit, thus allowing this ground in favor of the assessee, in part.

3. Adjustment of ?67.28 lakhs to the sales credit commission earned on the sale of treasury products on behalf of the associated enterprise:

The third ground involves an adjustment of ?67.28 lakhs to the sales credit commission earned on the sale of treasury products for the associated enterprise (AE). The Tribunal noted that a similar issue was decided in favor of the assessee for the AY 2008-09. The TPO had applied the Transactional Net Margin Method (TNMM) and used OP/TC as the price level indicator, selecting 25 comparables with an average OP/TC of 59.95%, leading to a proposed adjustment of ?66.80 crores.

The assessee disputed the comparables selected by the TPO and argued that the average margin should be applied only to the total cost related to the AE transactions. The Tribunal found merit in the assessee’s objections, noting that the DRP and TPO had not considered these objections. Consequently, the Tribunal remanded the matter to the AO/TPO to reconsider the objections and recompute the average margin of the comparables, applying it to the relevant costs. This ground was thus allowed for statistical purposes.

Conclusion:

The appeal filed by the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on the first and third grounds, and directing the AO to verify and grant TDS credit on the second ground. The order was pronounced in the open court on 19th April 2017.