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2023 (2) TMI 247 - AT - Income TaxTP Adjustment - comparable selection - turnover filter - HELD THAT - Companies whose turnover in the current year is more than Rs.200 Crores should be excluded from the list of comparable companies. Working capital Adjustment - As in case Huawei Technologies India Pvt. Ltd. 2018 (10) TMI 1796 - ITAT BANGALORE observed that the guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. The Tribunal further observed that the data available with the Assessee and the Department would be the starting point and depending on the facts and circumstances of a case further details can be called for. As far as the Assessee is concerned, the facts and figures with regard to his business has to be furnished. Regarding comparable companies, one has to fall back upon only on the information available in the public domain. If that information is insufficient, it is beyond the power of the Assessee to produce the correct information about the comparable companies. Revenue has on the other hand powers to compel production of the required details from the comparable companies. If that power is not exercised to find out the truth then it is no defence to say that the Assessee has not furnished the required details and on that score deny adjustment on account of working capital differences. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. We are therefore of the view that the issue with regard to the grant of working capital adjustment should be directed to be examined by the TPO/AO afresh in the light of the decision of the tribunal referred to above, after affording opportunity of being heard to the Assessee. Short term capital loss on transfer of investment - slump sale - Assessee incurred loss in the Sprinkler business and wanted to hive off the same, i.e., wanted to sell its Sprinkler business as a going concern, identifying it s assets and liabilities and Assessee sold its sprinkler business on a slump sale basis - HELD THAT - The entire exercise of forming a subsidiary, selling the sprinkler business by way of slump sale, subscribing to the debentures and ultimately selling shares held in the subsidiary at a loss (much less than its value) and assigning debentures at virtually nil value, is well thought out and has been carried out with a view to gain tax advantage and to ultimately confer benefit to a third party. Interjecting Aigua Sprinkler in the transaction was only with a view to gain tax advantage and for no other purpose. It is a colorable device adopted by the Assessee. A method put in place to avoid a legal liability, involving an unacceptable form of avoidance that is not within the framework of the law. Whether the device should be accepted or not is a changing perception and Courts have been conservative in the present times than in the past in accepting such avoidance. The facts and circumstances of the present case shows that it would be a fit case to lift the corporate veil and by doing so, we will find the Assessee is the transferor and Mr.Gitendra Bhanot the transferee of the sprinkler business worth as per valuation a sum of Rs.14.7 Crores together with Rs.55 Crores of debenture money less Rs.12 Crores paid to Assessee by way of slump sale. Law is settled that if the Revenue finds that in an transaction an entity which has no commercial/business substance has been interposed only to avoid tax , then in such cases the Revenue would be entitled to ignore the separate legal identity or interposition of that entity, to look at the holding company as having directly done the transaction. In so far as the Assessee is concerned, the statutory provisions do not provide for any tax implications. The affairs have been arranged in such a way that there is tax advantage to the Assessee. The transaction of sale of shares of Aigua Sprinkler to Mr.Gitendra Bhanot will be ignored, by lifting the corporate veil and by construing the sale of sprinkler business by the Assessee to Mr.Gitendra Bhanot. Loss on sale of shares to exploit a loophole in the law, has been plugged by way of amendment from AY 18-19 by introduction of Sec.50CA - We do not wish to go into the tax implications in the hands of Mr.Gitendra Bhanot and whatever is the observations in this appeal is restricted to the tax implications in the hands of the Assessee. Therefore the better course of action would be to ignore the transaction of sale of shares as superfluous and entered into with a view to gain tax advantage. Short term capital loss would be nil, in the facts and circumstances of the present case. In the light of the above discussion, we reject the prayer of the Assessee to allow the short term capital loss on sale of shares as claimed by the Assessee and hold that the transaction of sale of shares deserves to be ignored and no loss can be determined nor can any short term gain be taxed. Thus the grounds relating to short term loss/gain on sale of shares are treated as partly allowed. TDS u/s 195 - Disallowance u/s 40(a)(ia) - non-deduction of TDS on payment of management fees - applicability of DTAA - HELD THAT - TIMCO is the person with whom the Assessee entered into Agreement for providing managerial services. TIMCO nominated TIL Switzerland as billing and collecting agent and directed the payment to be made for management services to the agent. TIMCO is the beneficial owner of the payment and therefore taxability of the payment in India has to be considered in the hands of TIMCO and not TIL Switzerland. Therefore the applicable DTAA would only be India-USA DTAA and not India-Switzerland DTAA. The findings of the DRP on the MFN clause on India-Switzerland DTAA are therefore in our view superfluous. In so far as the payment made to Tyco International Asia, Inc. Singapore is concerned, it was not the case of the AO that the services rendered were not in the nature of managerial services. The DRP has given findings on its own without confronting to the Assessee as to the alleged discrepancy which it had noticed. The findings of the DRP in this regard is therefore held to be unsustainable. We have to therefore proceed to analyse the taxability of the payments towards management fees in the hands of the payee under the India-USA DTAA and India-Singapore DTAA. The relevant articles in the treaty between India and USA are is Article 12 which deals with taxability of Royalties and fees for included services. In terms of Article 12(1) - The same are the wordings in India-Singapore DTAA also. The discussion with regard to India-USA DTAA would therefore be applicable for payment made to Tyco International Asis Inc. Singapore. Royalties and fees for included services arising in a Contracting State (USA in this case) and paid to a resident of the other contracting State (India/Assessee in this case) may be taxed in that other state (i.e., USA). The relevant clause on which reliance was placed by the assessee for non taxability of the sum in question in India in the hands of iRunway Inc. USA was Article 12(4). In order to attract the taxability of an income under Article 12(4)(b), not only the payment should be in consideration for rendering of technical or consultancy services, but in addition to the payment being consideration for rendering of technical services., the services so rendered should also be such that 'make available' technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design. These worlds are 'which make available'. The meaning of the expression make available were considered by the Tribunal in the case of Raymond Ltd. Vs. DCIT 2002 (4) TMI 891 - ITAT MUMBAI rendering of technical services cannot be equated with making available the technical services. Tribunal was dealing with the scope of Article 13(4)(c) of the Indo-UK tax treaty which is admittedly in pari materia with Article 12(4) of the India-USA tax treaty with which we are presently concerned. The majority view was that in order to attract the provisions of the said article of the tax treaty, not only the services should be technical in nature but should be such as to result in making the technology available to person receiving the technical services in question. The Tribunal also referred to with approval the extracts from protocol to the Indo-US tax treaty to the effect that 'generally speaking, technology will be considered made available, when the person acquiring the service is enabled to apply the technology. It is not even the allegation of the revenue that the non-residents had made available to the assessee, the knowledge generated in the course of rendering managerial services. In our view the services rendered were purely managerial services and by no stretch of imagination can be considered as making available any technical knowledge, experience, skill, know-how or processes, to the assessee. The services provided by non-residents, did not make available any technical knowledge, experience, skill, know-how or processes to the assessee, the same cannot be regarded as taxable in India. Consequently, there was no obligation on the part of the assessee to deduct tax at source at the time of making payment. Hence, the disallowance made u/s 40(a)(ai) of the Act cannot be sustained and is directed to be deleted. Appeal of the Assessee is partly allowed.
Issues Involved:
1. Determination of Arm's Length Price (ALP) for Software Development Services. 2. Exclusion of companies with high turnover from the list of comparables. 3. Inclusion of Akshay Software Technologies Ltd. as a comparable company. 4. Working capital adjustment. 5. Determination of short-term capital loss on the transfer of investments. 6. Disallowance under Section 40(a)(ia) for non-deduction of TDS on management fees. Issue-Wise Detailed Analysis: 1. Determination of Arm's Length Price (ALP) for Software Development Services: The Assessee challenged the AO's addition of Rs.4,63,62,735/- to its total income due to the determination of ALP for international transactions involving Software Development Services (SWD) rendered to its Associated Enterprise (AE). The Assessee adopted the Transaction Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). The Assessee's OP/OC was 12.70%, while the Transfer Pricing Officer (TPO) identified 17 comparable companies with an average profit margin range of 18.50% to 30.89%. The TPO did not grant a working capital adjustment. 2. Exclusion of Companies with High Turnover from the List of Comparables: The Assessee argued that the TPO failed to apply an appropriate upper limit for turnover while rejecting companies with turnovers less than INR 1 crore. The Tribunal noted that high turnover can affect profitability and should be considered for exclusion. The Tribunal upheld the exclusion of companies with turnovers exceeding Rs.200 Crores, following precedents like Dell International Services India (P) Ltd. and Autodesk India Pvt. Ltd. The Tribunal directed the exclusion of seven companies with turnovers above Rs.200 Crores from the list of comparables. 3. Inclusion of Akshay Software Technologies Ltd. as a Comparable Company: The Assessee sought the inclusion of Akshay Software Technologies Ltd., arguing its functional similarity. The DRP had rejected this company due to a mix of software and professional services and lack of segmental details. The Tribunal remanded the issue to the TPO/AO for fresh consideration, citing the need for a detailed examination of the company's functional profile and segmental information. 4. Working Capital Adjustment: The Assessee's plea for a working capital adjustment was initially rejected by the TPO and DRP, citing insufficient data and the complexity of factors affecting working capital. The Tribunal, referencing the decision in Huawei Technologies India Pvt. Ltd., directed the TPO/AO to re-examine the issue, emphasizing the need for adjustments to account for differences in working capital between the Assessee and comparables. 5. Determination of Short-Term Capital Loss on the Transfer of Investments: The Assessee incurred a short-term capital loss of INR 55,00,89,891 on the transfer of investments, which was disallowed by the AO. The Tribunal noted that the Assessee's transactions involving the transfer of shares and debentures of Aigua Sprinkler to a third party at nominal value lacked commercial substance and appeared to be a colorable device to avoid tax. The Tribunal upheld the AO's decision to disregard the short-term capital loss, emphasizing the need to look beyond the form of transactions to their substance. 6. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Management Fees: The Assessee's payments for management services to Tyco International Limited, Switzerland, and Tyco International Asia, Inc., Singapore, were disallowed for non-deduction of TDS. The Tribunal held that the payments did not qualify as Fees for Technical Services (FTS) under the India-USA and India-Singapore DTAAs, as the services rendered did not "make available" technical knowledge, skill, or know-how. Consequently, the Tribunal directed the deletion of the disallowance made under Section 40(a)(ia). Conclusion: The Tribunal provided a detailed analysis of each issue, directing the exclusion of high-turnover companies from the comparables, remanding the inclusion of Akshay Software Technologies Ltd. for fresh consideration, and instructing a re-examination of the working capital adjustment. The Tribunal upheld the disallowance of the short-term capital loss on the transfer of investments and directed the deletion of disallowance under Section 40(a)(ia) for non-deduction of TDS on management fees, emphasizing the need for a thorough examination of the functional profile of services and adherence to DTAA provisions.
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