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2021 (12) TMI 783 - AT - Income TaxTP Adjustment - Foreign/AE selected by the assessee having been rejected as a tested party - HELD THAT - It is seen that such issue also came up for consideration before the Tribunal in the assessee's appeals for the assessment years 2010-11 and 2011-12 2019 (12) TMI 374 - ITAT PUNE has directed that the transfer pricing addition should be restricted to the transactions with AEs and not unrelated or non-AEs. Respectfully following the precedent, we set-aside the impugned order on this score and remit the matter to the file of AO/TPO with a direction to confine the transfer pricing addition only qua the international transactions under the Manufacturing segment and not the entity level transactions of the segment. Disallowance of IT Support Service fee paid to N.V. Bekaert SA u/s. 40(a)(ia) - Sub-licensing/licensing of software having been treated as Royalty and Provision of support and maintenance services in relation to such sub-licensed/licensed software having been treated as Fees for technical services - one of the international transactions declared by the assessee was Reimbursement of SAP software cost to its Associated enterprise (AE), viz., N.V. Bekaert SA. - What for the payment was made? - HELD THAT - AR tried to make out a case that the assessee did not use any IT infrastructure equipment but availed only IT services for which the payment was made. This contention runs contrary to the stand taken by the assessee before the authorities below as has been discussed above threadbare, which ardently proves that the assessee paid for the use of the IT Infrastructure facility set up by its AE and not for availing any separate IT services. Still, in order to provide an opportunity to substantiate his stand that the assessee paid for the IT services, the Bench directed the ld. AR to file details of the total costs incurred by NV Bekaert SA during the year on the IT Infrastructure facility and then the basis of charge to the assessee. Since such details were not readily available with him, the matter was adjourned for a later date. On the next date of hearing, again, the ld. AR failed to file any such details. In fact, our attention has not been drawn towards any specific IT service provided to the assessee by NV Bekaert, SA. Going with what the assessee stated before the authorities below, including the price mechanism as reproduced above, there remains no doubt whatsoever that it is a clear-cut case of allocation of total costs on the basis of extent of user of the IT equipment and not of paying for availing any IT service from the AE. Self user of an equipment by a person for an output and, simultaneously, another person also providing that very output through his services to the first person, is practically not possible. Presence of one ousts the other. As the extant is a case of user of the IT equipment by the assessee, it cannot be a case of provision of service by the AE. Is the payment Reimbursement? - The reimbursement issue has rightly not been pressed because the Transfer pricing study report of the assessee, at internal page no. 79, categorically states that 'The cost sharing arrangement is pertaining to IT support services which are required for all Group companies and allocation of cost is in accordance with reasonable allocation keys that commensurate with the usage/benefit to the beneficiary group entities (including BIPL). Certain IT support services are charged to Group entities at cost plus 5% mark-up basis. However, while charging for the said services to BIPL, AE has merely recovered the proportionate costs from BIPL and has not charged any mark-up on the costs'. Albeit, it has been stated that the AE did not recover any mark-up from the assessee, but no evidence was placed on record to substantiate this argument before the TPO as well as the DRP. Position continues to remain the same before the Tribunal as well. Is the payment Royalty or Fees for technical services? - Tribunal observed that the software licenses were purchased for installation in the IT Infrastructure facility of the non-resident assessee and RIPL was given only access to that IT facility, similar to what has happened in the case under consideration. Vide its order dated 21.10.2021, which was duly confronted to both the sides during the course of hearing of the extant appeal, the Tribunal held ₹ 3.88 crore was not different from ₹ 20.04 crore and was hence chargeable to tax in India in the hands of the non-resident assessee. The facts of the instant case are on all fours with Rieter Machine Works Ltd. 2021 (11) TMI 37 - ITAT PUNE insofar as the taxability of the amount received by foreign entity from the Indian entity for allowing access to its IT Infrastructure facility, is concerned. DRP was not justified in compartmentalizing the payment made by the assessee into three broad categories and then allowing the assessee's claim in respect of the (c) category, being consideration for other support services, while rejecting for (a) and (b) categories of sub-licensing/licensing of software and its support and maintenance services. Legally speaking, the amount paid by the assessee on this count is chargeable to tax in entirety in the hands of the non-resident. Failure of the assessee to deduct tax at source should have met its logical consequences. Since the part of the direction of the DRP, providing relief under category (c) has not been challenged by the Revenue, the same will remain intact and the consequences of non-deduction of tax at source would visit only the payment for categories (a) and (b), for which the disallowance has been made - We accord our imprimatur to the impugned order to this extent. Scope of powers of Tribunal in appeal - Tribunal can disallow a claim on a ground different from that of the AO, if it is rightly disallowable under the latter. As the subject matter of claim in both the cases remains the same, no fetters can be imposed on the power of the Tribunal to examine the subject matter in appeal from another point of view by applying another provision to the same issue, that was not applied by the AO. This view also gets fortified on reading the exception clause contained in rule 11 of the Income-tax Appellate Tribunal Rules, 1963, It can be seen from the discussion supra that the Tribunal did not decide the issue of royalty from a different standpoint on any non-existing legal or factual position but took cognizance of the correct legal position and the material already available on record from the orders of the authorities below qua the transaction under consideration. It is only on consideration of such material that the subject matter in appeal has been approached from a different perspective and decided on a legally tenable angle. AO was justified in making disallowance u/s. 40(a)(ia) on failure of the assessee to deduct tax at source from the payment to NV Bekaert SA, which is chargeable to tax in the hands of the foreign entity. Appeal is partly allowed for statistical purposes.
Issues Involved:
1. Transfer pricing adjustment in the 'Manufacturing segment'. 2. Disallowance of IT Support Service fee under Section 40(a)(ia) for failure to deduct tax at source. Detailed Analysis: 1. Transfer Pricing Adjustment in the 'Manufacturing Segment': The first issue pertains to the transfer pricing adjustment in the Manufacturing segment of the assessee, an Indian company engaged in manufacturing Steel Tyre Cord and Hose Reinforcement Wire. The assessee declared a total loss of ?46.15 crore and disclosed certain international transactions in Form No. 3CEB. The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO) to determine the Arm's Length Price (ALP) of these transactions. The TPO noted that the assessee used different methods for benchmarking various international transactions and treated Foreign/Associated Enterprise (AE) as the tested party, which was rejected by the TPO. The assessee then aggregated the transactions into four segments: Manufacturing, Trading, Commission, and Engineering, and treated itself as the tested party. The TPO made amendments and computed the mean PLI of comparables at 4.72%, resulting in a transfer pricing adjustment of ?31.07 crore. The AO included this adjustment in the draft order, and the Dispute Resolution Panel (DRP) revised it to ?15,82,40,997/- in the final assessment order. The Tribunal upheld the Revenue's standpoint of treating the assessee as the tested party and directed that the transfer pricing addition should be restricted to international transactions only, not entity-level transactions. 2. Disallowance of IT Support Service Fee under Section 40(a)(ia): The second issue involves the disallowance of ?1,71,53,803/- paid to N.V. Bekaert SA for IT Support Services under Section 40(a)(ia) due to non-deduction of tax at source. The assessee argued that the payment was a reimbursement and that N.V. Bekaert SA did not have a Permanent Establishment (PE) in India. The AO and TPO treated the payment as software Royalty and Fees for Technical Services under the Act and the Double Taxation Avoidance Agreement (DTAA) between India and Belgium. The DRP classified the IT Support service payment into three categories: sub-licensing/licensing of software, support and maintenance services, and other support services. The DRP held that payments for the first two categories were taxable as royalty and fees for technical services, while the third category was not chargeable to tax. The Tribunal examined the nature of the transaction and concluded that the payment was for using an IT infrastructure facility set up by N.V. Bekaert SA, not for availing IT services. Hence, it was considered Royalty under Section 9(1)(vi) of the Act and the DTAA. The Tribunal upheld the disallowance under Section 40(a)(ia) for non-deduction of tax at source. Tribunal's Scope of Powers: The Tribunal clarified its power under Section 254(1) of the Act to pass any order as it thinks fit, provided it remains within the subject matter of the appeal and after giving both parties an opportunity to be heard. The Tribunal can allow or disallow a claim on grounds different from those of the AO if the subject matter remains the same. Conclusion: The Tribunal partly allowed the appeal for statistical purposes, upholding the transfer pricing adjustment restricted to international transactions and the disallowance under Section 40(a)(ia) for non-deduction of tax at source on IT Support Service fees. The order was pronounced in the Open Court on 13 December 2021.
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