2016 (8) TMI 1001 - AT - Income Tax

Treatment to project work as separate profit centre - segmental approach - Held that - The inferences drawn by the TPO are incorrect and quite clearly the assessee was not doing a simple support service per se for the project work undertaken by its AEs. The assessee did act as an entrepreneur and developed this field quite substantially, and the segmental approach of the assessee has been accepting in preceding and succeeding assessment year as well. On these peculiar facts, the approach of the assessee, in treating project work as separate profit centre, is justified. The plea of the assessee was, therefore, indeed well taken and we approve the same. With these observations, the matter goes back to the TPO for reexamination of the matter. As the matter is going back to the file of the TPO, and as it is uncontroverted stand of the assessee that in the event of this basic plea being accepted, all other issues, with respect to ALP determination, will be rendered infructuous and academic, we see no need to deal with other issues, on ALP determination, raised by the assessee. TDS U/S 195 - Disallowance under section 40(a)(i) - Held that - The requirements of tax deduction at source under section 195 do not come into play simply because an amount is being remitted abroad. The income embedded in such a payment must also be taxable in nature, and unless that is established, the tax deduction at source requirements do not come into play. Here is a case in which the payment is in the nature of reimbursement to a US resident, but even if we go by nature of expenses, recruitment fees, by the virtue of Article 12(4)(b) of India US tax treaty, is not taxable in the source country since it does make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design . Since the income embedded in the payment was not taxable in India under the treaty provisions, and since treaty provisions override the provisions of the Income Tax Act- unless the latter was beneficial to the assessee, the tax withholding requirements of Section 195 were not triggered on the facts of this case. Since the assessee did not have any tax withholding obligations, non-deduction of tax at source by the assessee cannot lead to any disallowance under section 40(a)(i). We, therefore, delete the impugned disallowance.

Summary

Issues Involved:
1. Challenge to correctness of the order dated 30th April 2012 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2007-08.
2. Arm’s length price adjustment of ?2,96,58,519 and disallowance of reimbursement of recruitment expenses amounting to ?6,53,850.

Analysis:

Issue 1: Arm’s Length Price Adjustment
- The appellant challenged the arm’s length price adjustment of ?2,96,58,519 and the rejection of segmental results by the TPO.
- The appellant argued that the business model, functional responsibilities, and risk profile of the appellant and its AE were not considered by the CIT(A) while rejecting the segmental approach followed by the appellant in benchmarking its international transactions.
- The Tribunal noted that in the preceding and succeeding assessment years, the TPO had accepted the segmental results without adjustments, indicating inconsistency in approach.
- It was established that the appellant, in addition to project work, was developing business independently, incurring non-project expenses for long-term business development.
- The Tribunal found the TPO's rejection of the segmental results unsustainable, as the appellant acted as an entrepreneur, developing substantial business with non AEs in subsequent years.
- The Tribunal approved the appellant's approach of treating project work as a separate profit center, directing the matter back to the TPO for reexamination.

Issue 2: Disallowance of Reimbursement of Recruitment Expenses
- The Assessing Officer disallowed reimbursement of recruitment charges to a US resident under section 40(a)(i) due to non-deduction of tax at source.
- The Tribunal held that tax deduction at source requirements do not apply unless the income embedded in the payment is taxable in India.
- The payment, considered as reimbursement under the India-US tax treaty, was not taxable in India, thus not triggering tax withholding obligations under Section 195.
- As the reimbursement did not involve taxable income in India, the non-deduction of tax at source by the assessee did not warrant disallowance under section 40(a)(i).
- The Tribunal ruled in favor of the appellant, deleting the disallowance of recruitment expenses reimbursement.

In conclusion, the Tribunal allowed the appeal concerning both issues, directing the reexamination of arm’s length price adjustment and overturning the disallowance of recruitment expenses reimbursement.