2013 (9) TMI 48 - AT - Income Tax

Non Deduction of TDS on Mark up of 21% over basic Salary - secondment of employees - Reimbursement salary and other expenses to company held in Singapore - disallowance u/s 40(a)(ia) - Held that - The concept of secondment employee is that an employee is temporarily transferred to another job to a different party, for a defined period of time or for specific purpose and may be to the mutual benefit of the parties. This concept is prevalent in most part of the world, where one company transfers its employees under the secondment agreement to the other company and in most of the cases under control and supervision of the other company. The salary can be paid either by the first company to whom the seconded employees belong or the other company which are availing the services of seconded employee. In the present case, the secondment agreement clearly provides that these two employees will work for the assessee company under their supervision and under the control of the Board of Directors of the Indian company. Their services can be terminated by the either party and the salary which is borne by the employer company i.e., Singapore company, the entire cost of salary would be reimbursed by the assessee company as per the advice raised from time to time - disallowance under section 40(a)(ia) on account of these expenses stands deleted - Decided in favour of assessee. Disallowance of professional fee - Held that - Expenditures have been incurred for the purpose of Indian company for its operation in India and these payments were made by the Singapore company which has been reimbursed by the Indian company. We have already held that the payment of professional fee does attract with holding of tax under the provisions of the Act and that this issue has not been properly dealt with either by the Assessing Officer or by the learned Commissioner (Appeals) because both these authorities were dealing mostly with the reimbursement of salary issue, therefore, issue of reimbursement of expenditure towards the payment of professional fee is set aside and the matter is restored back to the file of the Assessing Officer to examine it afresh and in accordance with the provisions of law - Decided in favour of assessee. Payment of salary by the Singapore company to the seconded employees who were employed and working for the assessee company and the cost of salary and expenditure that have been reimbursed by the Indian company to the Singapore company, do not fall within the realm of fees for technical services either under Article-12(4) of the DTAA or under section 9(1)(vii) of the Act. The Article-12(4)(b) of the Indo-Singapore DTAA provides for make available clause whereby any payment in consideration of services of a managerial technical consultancy in the nature makes available any technical knowledge, experience skill, knowhow, or process which enables the person acquiring the services to apply the technology contained therein. Here the services are being rendered by the Indian company to the Singapore company and the seconded employees are working for the Indian company for its Indian operation. For all practical purposes, the assessee company is the economic employer of the seconded employees who are rendering services purely for the assessee company. There is no make available of any kind of technical knowledge, experience, skill or process by the Singapore company to the assessee company through these seconded employees, which is purely a case of payment of salary and reimbursement of salary. Transfer pricing adjustment - Rejection of comparables - Held that - The assessee which is mainly engaged in rendering of investment advisory services to its parent company at Singapore has received mark-up of 21%. This margin of 21% has been benched marked by using TNMM as the most appropriate method with PLI as operating profit to operating cost. After detail process of selection in Prowess data and selection criteria, it had selected six comparables in its transfer pricing study report with average margin of 13.85%. Since this margin was lower than assessee's margin of 21% and, hence, it was declared that its margin on the transaction carried out with its parent company was at ALP. The TPO, however, out rightly rejected the assessee's comparables, firstly, on the ground that they are not in investment advisory services and secondly the assessee has not carried out search by using the key phrase investment advisory services . No proper reasoning has been given by the TPO as to why data from Prowess is not reliable and the capital line data should have been taken. He has also not established that by entering the key phrase investment advisory service , the selection of the functionally similar companies are available from the data - The companies selected as comparable by TPO are engaged in the asset management are basically responsible for mobilizing the funds from the investors by marketing the scheme. Their main functions are sales and marketing, investment and management of the funds mobilized under various schemes. They are responsible for providing management and administrative services mostly to the mutual funds and to deploy such funds. The risk is also assumed by such companies in the form of service liabilities, regulatory and reputational risk. Moreover, the asset management companies are also regulated entities which are required to be licensed by SEBI. Thus, these companies also fail the test of FAR analysis with the investment advisory companies - all the six companies shortlisted by the assessee are quite good comparables looking to the over all functions and also that the same have been found to be so by the Department in the preceding and succeeding years. Accordingly, the entire adjustment made by the TPO cannot be sustained as the margin of the assessee @ 21% is at arm's length looking to the average margin of the six comparables. Accordingly, the adjustments made by the TPO are deleted - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenditure under section 40(a)(ia) for sums aggregating to Rs. 3,93,03,905.
2. Disallowance under section 14A.
3. Transfer pricing adjustment on international transactions of investment advisory services.
4. Reimbursement of salary cost and other expenses treated as "fees for technical services" under Article 12 of Indo-Singapore DTAA.

Issue-wise Analysis:

1. Disallowance of Expenditure under Section 40(a)(ia):
The main issue relates to the disallowance of Rs. 3,93,03,905 claimed by the assessee as reimbursement of salary and other expenses to its holding company in Singapore. The assessee, Temasek Holdings Advisors India Pvt. Ltd. (THAIPL), argued that these payments were reimbursements and not income chargeable under the Act, hence not subject to TDS under section 195. The Assessing Officer (AO) rejected this, stating that the secondment agreements were unregistered and concluded these were colorable devices to avoid tax. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, citing discrepancies in financial statements and concluding that the reimbursement of expenses was not substantiated. The Tribunal found the AO's reasoning flawed, noting that the salary paid by the Singapore company had already been subjected to TDS under section 192. Hence, there was no need for double deduction of TDS. The Tribunal directed the AO to re-examine the professional fees component of the reimbursement.

2. Disallowance under Section 14A:
The assessee did not press this ground, and it was dismissed as "not pressed."

3. Transfer Pricing Adjustment:
For the assessment year 2008-09, the AO made a transfer pricing adjustment of Rs. 8,02,32,972, rejecting the comparables selected by the assessee and introducing new ones. The Tribunal found that the comparables chosen by the AO were not functionally similar to the assessee's operations. The Tribunal upheld the comparables selected by the assessee, which were consistent with those accepted in previous and subsequent years. The Tribunal concluded that the assessee's margin of 21% was at arm's length, and the adjustment made by the AO was deleted.

4. Reimbursement of Salary Cost and Other Expenses:
The DRP treated the reimbursement of salary and other expenses as "fees for technical services" under Article 12 of the Indo-Singapore DTAA. The Tribunal disagreed, stating that the seconded employees were working exclusively for the Indian company under its control and supervision. The payment was purely reimbursement of salary and expenses, not fees for technical services. The Tribunal held that since TDS had already been deducted under section 192, there was no requirement for further deduction under section 195.

Conclusion:
The Tribunal concluded that the disallowance under section 40(a)(ia) for reimbursement of salary and other expenses was incorrect, except for the professional fees component, which was remanded to the AO for re-examination. The disallowance under section 14A was dismissed as not pressed. The transfer pricing adjustment was deleted, and the reimbursement of salary and other expenses was not considered as "fees for technical services." The appeals for the assessment years 2007-08 and 2008-09 were partly allowed and allowed, respectively.