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2024 (6) TMI 147 - AT - Income TaxTP Adjustment - determination of MAM Most Appropriate Method to benchmark the international transaction in respect of IT enabled Services (ITeS) - HELD THAT - Neither the assessee nor the Revenue contend that there is any change in the functions performed, assets employed, and the risks assumed by the assessee from the same as in the assessment year 2009-10 2017 (12) TMI 1867 - ITAT HYDERABAD Since the facts of the year under consideration are identical to the facts involved in the years in which such issues stood covered, while respectfully it we restore this issue to the file of the learned AO/learned TPO with a direction to consider only the operating profit/operating cost of the transactions and also to consider internal TNMM where the services rendered by the assessee are similar to both AEs and non-AEs. Grounds No. 2 to 11 are answered accordingly. TP adjustment in respect of the interest on trade receivables - AR submitted that the assessee is a debt free entity, working capital adjustment is not given and also that the assessee has not been charging any interest to non-AEs - HELD THAT - In the case of CIT Vs. Cotton Naturals (I) (P.) Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid; that the interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. While referring to the Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 the Hon'ble High Court held that the PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate and the PLR rates are not applicable to loans to be re-paid in foreign currency. Hon'ble Court accordingly held that whatever the principle that is applicable to the case of outbound loans, would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs, that the parameters cannot be different for outbound and inbound loans, and a similar reasoning applies to both inbound and outbound loans. Respectfully following the judicial opinion stated supra, we are of the considered opinion that the ends of justice would be met by accepting the interest rate on similar foreign currency receivables/advances as LIBOR 200 points. We direct theAO/TPO to adopt the same. Grounds are partly allowed accordingly. TDS u/s 195 - Disallowances u/s 40(a)(ia) - payments made by the assessee to the Thailand entity are to be classified as FTS but there is no FTS clause in India-Thailand DTAA - HELD THAT - A Co-ordinate Bench of the Delhi Tribunal in the case of Solvay Asia Pacific (P.) Ltd. 2024 (1) TMI 1004 - ITAT DELHI considered the issue in the light of the decision of Bangkok Glass Industry Co. Ltd. 2015 (4) TMI 503 - MADRAS HIGH COURT and Bharti Airtel Ltd. 2024 (2) TMI 411 - SC ORDER and reached a conclusion that when a non-resident receives certain amounts fall in the category of FTS and there is no FTS clause in India-Thailand DTAA, such receipts have to be treated as business income in the hands of the Thailand entity, but not as miscellaneous income under any residual clause. Since the decision is applicable to the facts of the case on hand, we hold that in such situation the provisions of section 40(a)(ia) of the Act cannot be invoked. Learned Assessing Officer is directed to delete the addition by invoking the provisions under section 40(a)(i) of the Act. Payments made to the German entity , according to the assessee such payments represent reimbursement of salary of the seconded employees, with a Markup of 6% - DRP found that these payments were made in consideration for the software development services provided by the German entity to the assessee, and for provision of technical personnel, all of which clearly fall within the purview of FTS under article 13(4) of the India-Germany DTAA, requiring tax to be deducted on the said payments - As against these findings of the learned DRP, absolutely there is no material produced before us to return a different factual finding. Further even in respect of the assessee having any income through its branch in Germany, there is no evidence produced before us nor our attention is drawn to any such material. In these circumstances, we do not find any reason to interfere with the findings of the authorities and we uphold the addition made by AO invoking section 40(a)(i) of the Act. Ground of the appeal is accordingly dismissed. Appeal of the assessee is partly allowed and for statistical purpose.
Issues Involved:
1. Determination of the most appropriate method to benchmark the international transaction in respect of IT enabled Services (ITeS). 2. Transfer Pricing (TP) adjustment in respect of the interest on trade receivables. 3. Disallowances under section 40(a)(i) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Determination of the Most Appropriate Method to Benchmark the International Transaction in Respect of IT Enabled Services (ITeS): The assessee, engaged in providing computer-aided design and engineering solutions, reported international transactions for ITeS using the internal Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) disregarded the internal comparables used by the assessee and adopted external comparables for the TNMM, leading to an adjustment. The Dispute Resolution Panel (DRP) upheld the TPO's approach. The Tribunal referred to a prior decision in the assessee's case for the assessment year 2009-10, where it was held that the operating profit and operating cost relating to AE transactions should be considered for arriving at the Arm's Length Price (ALP) and that internal TNMM should be used when services rendered to AEs and non-AEs are similar. The Tribunal restored the issue to the AO/TPO with directions to consider only the operating profit/operating cost of AE transactions and to use internal TNMM where applicable. 2. Transfer Pricing Adjustment in Respect of the Interest on Trade Receivables: The TPO made an adjustment for interest on trade receivables using SBI short-term deposit rates. The assessee argued that it is a debt-free entity, does not charge interest to non-AEs, and that the receivables are closely linked to the principal transaction of service provision. The Tribunal noted that the question of whether interest on trade receivables is an international transaction was settled by the Bombay High Court in the case of Patni Computer Systems, which upheld the retrospective amendment to Section 92B. The Tribunal followed judicial precedents, including Tecnimont ICB House and Cotton Naturals, and directed the AO/TPO to adopt the interest rate on similar foreign currency receivables/advances as LIBOR+200 basis points. 3. Disallowances under Section 40(a)(i) of the Income Tax Act: - Payments to Techno Support Co. Ltd. (Japan): The AO disallowed payments made to Techno Support Co. Ltd., finding no evidence of secondment of employees. The assessee produced additional evidence before the Tribunal, which restored the issue to the AO for examination, allowing the assessee to prove the secondment of employees and reimbursement of their salaries. - Payments to Adecco Bangna Recruitment Ltd. (Thailand): The AO disallowed payments for non-deduction of TDS. The DRP classified the payments as Fee for Technical Services (FTS) under Article 22 of the India-Thailand DTAA. The Tribunal, following the Delhi Tribunal's decision in Solvay Asia Pacific, held that such receipts should be treated as business income and not miscellaneous income, directing the AO to delete the addition. - Payments to TechM, Gmbh (Germany): The AO disallowed payments made to the German entity, finding them to be for software development services and provision of technical personnel, falling under FTS as per Article 13(4) of the India-Germany DTAA. The Tribunal upheld the AO's addition due to the lack of evidence to the contrary. Conclusion: The appeal of the assessee was partly allowed for statistical purposes, with specific directions for re-examination and adjustments where applicable. The Tribunal's detailed analysis and directions ensure that the issues are addressed in accordance with legal precedents and the specifics of the case.
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