2018 (10) TMI 353 - AT - Income Tax

Activities in the nature of technical services - DTAA provision - nature of the business of the assessee - Held that - During the course of scrutiny assessment proceedings, the A.O observed that in the preceding assessment year i.e. 2001-02, the nature of the business of the assessee was the same and the contracts entered into by the assessee during the preceding years continued during this year as well. Following the findings of his predecessor for assessment year 2001-02 and for the same arguments and facts and also following the order of the AAR, New Delhi in the case of the assessee itself, remuneration received by the assessee was taken as fees for technical services within the meaning of DTAA with Sweden. As decided in assessee's own case it is seen that the authorities below have decided the issue of taxability of the amount of fees received by the assessee from technical services earned from Indian concerns simply on the basis of the Ruling given by the AAR. In such circumstances, the prescription of section 245S(2) gets attracted, which requires consideration of the arguments of the assessee in the light of the substituted DTAA along with its Protocol to the facts of the instant case. Such new DTAA and the Protocol have not been considered by the Assessing Officer, who has simply gone by the Ruling rendered by the AAR. As such, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is remitted to the file of Assessing Officer. TPA - comparable selection criteria - benchmarking - margin calculation of the appellant company - Held that - There is no dispute that the assessee sold its major business activity in the middle of FY. It is equally true that the assessee was incurring unutilised capacity in the form of fixed costs which were no longer recoverable through normal business activity. Meaning thereby, that there was no level playing field with the 51 comparables, in as much as, the comparables were not on the same platform with that of the assessee. In our considered opinion, the first appellate authority has given a very reasonable and justifiable finding in coming to the conclusion that the appellant has earned OP/TC of 14%. The allegation of the ld. DR that the findings of the ld. CIT(A) is not based on any sound reason in, is ill founded as the same is justified - decided against revenue

Summary

Issues Involved:
1. Whether the activities carried out by the assessee constitute technical services.
2. Whether the profit on sale of fixed assets should be included in the operational income for Transfer Pricing purposes.
3. Whether the additions made by the Assessing Officer were justified.

Issue-wise Detailed Analysis:

1. Whether the activities carried out by the assessee constitute technical services:
The primary grievance of the assessee was that the CIT(A) erred in concluding that the activities carried out by the assessee are in the nature of technical services. The appellant company, a branch of a Swedish entity, was engaged in telecommunication and mobile telephony. The contracts for installing GSM mobile telephone networks were initially awarded to the assessee but later assigned to an Indian subsidiary. The Assessing Officer (A.O) followed the previous year’s findings and the order of the AAR, concluding that the remuneration received by the assessee was ‘fees for technical services’ under the DTAA with Sweden. The Tribunal, referencing ITA No. 893/DEL/2006, noted that the DTAA and its Protocol should be considered together. The Tribunal directed the Assessing Officer to reconsider the issue in light of the new DTAA and Protocol, ensuring a fresh decision on merits.

2. Whether the profit on sale of fixed assets should be included in the operational income for Transfer Pricing purposes:
The Revenue’s appeal contested the deletion of additions made by the Assessing Officer. The assessee had restructured its business, transferring the installation/assembly business to an Indian entity and showing a profit on the sale of assets. The TPO excluded the profit on the sale of fixed assets from the operating profit, recalculating the margin at minus 1.57%, leading to an addition of ?1,27,93,154/-. The CIT(A), however, accepted the assessee’s argument that six months of operational results should be benchmarked and excluded the profit on the sale of fixed assets from operational income. The CIT(A) found that the appellant earned an OP/TC of 14%, which was consistent with the policy of the group company and higher than the 8% mean OP/TC of comparables. The Tribunal upheld the CIT(A)’s findings, noting the peculiar facts and the reasonable assumptions made.

3. Whether the additions made by the Assessing Officer were justified:
The Tribunal found no error in the CIT(A)’s decision to exclude the profit on the sale of fixed assets from operational income and to benchmark the six-month operational results. The Tribunal emphasized that the assessee’s unutilized capacity costs should be considered, as the business restructuring led to fixed costs that were no longer recoverable. The Tribunal dismissed the Revenue’s appeal, supporting the CIT(A)’s reasoning and conclusions.

Conclusion:
The appeal filed by the assessee was allowed, while the appeal filed by the Revenue and the cross objection filed by the assessee were dismissed. The Tribunal directed the Assessing Officer to reconsider the issue of technical services in light of the new DTAA and Protocol, and upheld the CIT(A)’s decision on Transfer Pricing adjustments.