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TMI Blog2018 (3) TMI 938X X X X Extracts X X X X X X X X Extracts X X X X ..... tertainment expenditure - Held that:- Only because the disallowance of similar nature was made in assessment year 2006–07 either for lack of evidence or some other reasons and the assessee accepted it, disallowance cannot be made in subsequent assessment years. If the assessee through proper documentary evidence is able to prove the genuineness of the expenses, there is no reason to disallow the same. In the facts of the present case, it appears that in the course of assessment proceedings, the assessee did produce sufficient documentary evidences to prove the genuineness of the expenses. Without properly examining the evidence brought on record, the Assessing Officer has disallowed part of expenditure that too on ad–hoc basis. DRP has also simply relying upon the fact that similar disallowance was made in assessment year 2006–07 has upheld the disallowance. There being no basis for disallowance of part of the expenses, we delete the disallowance made by the Assessing Officer. This ground is allowed. Disallowance u/s 40(a)(i) - fee for technical services - TDS u/s 195 - income accrued in India - Held that:- It has not been established on record that while rendering the services, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment to its overseas Associated Enterprise (A.E) ExxonMobil Chemical Co., USA. It also provides application research and technical services as well as back office support services to its A.E. Though, as per the transfer pricing order, the assessee has entered into various international transactions with its A.E., however, in the present appeal, we are concerned with the international transaction relating to provisions of technical services and back office support services. As far as the provision of technical services to A.E. is concerned, the assessee bench marked such transaction by applying Transaction Net Margin Method (TNMM) as the most appropriate method. In the search process conducted by the assessee, ten companies stated to be functionally similar to the assessee were selected as comparable. However, the Transfer Pricing Officer rejected three of the comparables selected by the assessee viz. Pfizer Ltd., ADS Digenetic Ltd., Neeman Medical International (Asia). As a result of which the arithmetic mean of the remaining seven comparables finally retained by the Transfer Pricing Officer worked out to 23.11% as against the margin declared by the assessee of 5.61%. Therefore, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as a comparable. He submitted, in assessee s own case for assessment year 2006 07, the DRP has accepted this company as comparable. He submitted, even the Transfer Pricing Officer in assessee s own case for assessment year 2009 10 and 2010 11, has accepted this company as a comparable. He submitted, there being no difference in fact there is no reason why it should be rejected as comparable in the impugned assessment year. In this context, he drew our attention to DRP s order for the assessment year 2006 07 as placed in the paper book. The learned Departmental Representative drawing our attention to the annual report of the company submitted that none of the segments can compare to the technical service segment of the assessee which is basically in the nature of ITES (Information Technology Enabled Services). Drawing our attention to the financial statement of the company, he submitted, it has huge unallocated expenditure for which reason the Transfer Pricing Officer has excluded the company. Further, he submitted, the company has a financial year different from the assessee, therefore, cannot be considered as comparable. 6. Findings : As could be seen, the Transfer Pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar to the assessee as it is basically a diagnostic service provider whereas the assessee is providing technical service. Therefore, he justified exclusion of this company. 9. We have heard rival contentions and perused material on record. No doubt, the Transfer Pricing Officer has rejected this company purely on the reasoning that it is a loss making company and the DRP has also approved it. It is also a fact that in assessment year 2006 07, the company did report a loss of ₹ 14.32 lakh, however, from the financial statements of the company submitted in the paper book it is evident that in the impugned assessment year the company has shown marginal profit of ₹ 23738=68. Therefore, to that extent, the finding of the Transfer Pricing Officer that it is a consistent loss making company is factually incorrect. Having said that, it is required to be examined whether this company can still be considered as a comparable to the assessee. As seen from the materials before us, the comparability of the aforesaid company with the assessee also arose in assessment year 2006 07. The Tribunal while examining the issue in ITA no.8311/ Mum./2010, dated 10th June 2011, has held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T) exceeding the threshold limit of more than 15%. Therefore, he submitted that these companies should be excluded. 15. Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP. 16. We have heard rival contentions and perused the material available on record. As per assessee s own submissions, the related party transaction in case of HCL Comnet Systems Services Ltd. is 22.37%. In many of the orders including the orders where the Judicial Member is a party, threshold limit of related party transaction has been accepted at more than 25%. That being the case, we are of the view that HCL Comnet Systems Services Ltd. cannot be excluded on account of high related party transaction. However, as far as Apex Knowledge Solutions Pvt. Ltd. is concerned, the learned Authorised Representative submitted that the related party transaction in case of this company is 104.38%. It is observed, in the search process adopted by the Transfer Pricing Officer to select comparables one of the criterion is to exclude companies who have more than 25% related party transaction. Therefore, if the related party transaction of Apex Knowledge Solutions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provider. In this context, we may refer to following decisions of the Tribunal, Hyderabad Bench: i) Capital IQ Information Systems India Pvt. Ltd. v/s DCIT, [2013] 32 taxmann.com 21; and ii) HSBC Electronic Data Processing India Pvt. Ltd. v/s ACIT, [2014] 52 taxmann.com 136. 20. In fact, in case of Rampgreen Solution Pvt. Ltd., 377 ITR 533, the Hon'ble Delhi High Court referring to the decision of the Tribunal, Hyderabad Bench, in case of Capital IQ Information Systems Pvt. Ltd. (supra), has held that e Clerx Services Ltd. being a KPO service provider cannot be compared to BPO service provider. In view of the aforesaid, we direct the Assessing Officer to exclude e Clerx Services Ltd. from the list of comparables. 21. As far as Mouldtek Technologies Ltd. (SEG) is concerned, it is observed in the course of transfer pricing proceedings, the assessee has objected to inclusion of this company by specifically stating that it is engaged in providing KPO services in the field of engineering services involving structural engineering drawing using 3D/2D software. Further, in the relevant previous year, it has issued initial publication offering. Further, as per the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the functionality of this company and exclude the same if it is found that the company is engaged in the software development. ASIT C. MEHTA FINANCIAL SERVICE LTD. 25. Learned Counsel for the assessee objected to selection of this company as a comparable on the ground that the company lacks segmental details. Further, he submitted that the company has a low employee cost of 24.78%, hence, cannot be comparable to the assessee. 26. Learned Departmental Representative relied upon the findings of the Transfer Pricing Officer and the DRP. 27. We have heard rival contentions and perused the material available on record. As could be seen in the course of transfer pricing proceedings, in response to the show cause notice issued by the Transfer Pricing Officer the assessee has accepted this company as a comparable. Further, it appears before the DRP also, the assessee has not specifically objected to the exclusion of this company. Thus, it is evident, the Departmental Authorities never had any occasion to examine the contention now raised before us by the assessee. That being the case, we are inclined to restore the issue relating to the comparability of this company to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arable. In this context, we may refer to the decision of the Tribunal, Hyderabad Bench, in Capital IQ Information System Pvt. Ltd. and HSBC Electronic Data Processing Pvt. Ltd. (supra). In fact, taking note of the aforesaid factual position, the Hon'ble Delhi High Court in Ramp Green Solutions Pvt. Ltd. (supra), has held that this company cannot be considered as a comparable. In view of the aforesaid, we direct the Assessing Officer to exclude this company as a comparable. 34. It is relevant to note in the course of hearing, learned Authorised Representative contended before us that the Transfer Pricing Officer has wrongly computed the margin of the comparable companies under both the segments. In this context, he drew our attention to the working of the correct margin as submitted in two separate charts. We direct the Assessing Officer to examine the aforesaid aspect and compute the arm's length price under both the segments by correctly computing the margin of the comparables. 35. One more contention of the assessee before us relates to working capital adjustment and risk adjustment. 36. Learned Authorised Representative submitted before us that in its transfer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer disallowed 25% of the expenditure claimed on ad hoc basis alleging that the assessee failed to explain the purpose for which such expenditure was incurred. It is also evident that the disallowance was made taking note of the fact that similar disallowance was also made in the assessment year 2006 07. In our view, only because the disallowance of similar nature was made in assessment year 2006 07 either for lack of evidence or some other reasons and the assessee accepted it, disallowance cannot be made in subsequent assessment years. If the assessee through proper documentary evidence is able to prove the genuineness of the expenses, there is no reason to disallow the same. In the facts of the present case, it appears that in the course of assessment proceedings, the assessee did produce sufficient documentary evidences to prove the genuineness of the expenses. However, without properly examining the evidence brought on record, the Assessing Officer has disallowed part of expenditure that too on ad hoc basis. DRP has also simply relying upon the fact that similar disallowance was made in assessment year 2006 07 has upheld the disallowance. There being no basis for disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the service rendered by EMCAP are crucial in carrying out the business activity and while rendering such service EMCAP had made available the technical skill and expertise to the assessee. Further, the Assessing Officer observed that the assessee under the provision of section 195 of the Act was duty bound to deduct tax at source while making the payment. It was not for the assessee to decide the taxability of income at the hands of EMCAP in India. Thus, the Assessing Officer disallowed the amount of ₹ 1,25,60,485. Being aggrieved of such disallowance, assessee raised objections before the DRP. 45. However, the DRP, did not find merit in the submissions of the assessee and confirmed the disallowance made by the Assessing Officer except the reimbursement of expenditure amounting to ₹ 6,72,753. In view of the aforesaid direction, of the DRP, the addition was made final by the Assessing Officer in the impugned assessment order. 46. Learned counsel for the assessee submitted that by virtue of an agreement entered with EMCAP on 1st January 2003, the assessee received certain services from the said company. Drawing our attention to the details of services rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reaty provisions override the domestic law, as per the provisions of treaty payment made cannot be regarded as fees for technical service. He submitted that the Assessing Officer has failed to establish that the services availed by the assessee has enabled it to apply the technology contained therein. Learned counsel for the assessee submitted, once the payment made is not treated as fees for technical service under Article 12(4)(b) of the tax treaty it cannot be taxed at the hands of EMCAP in view of Article 7 of the tax treaty as it has no P.E. in India. Learned counsel for the assessee submitted, the expression make available would mean recipient of such service would derive an enduring benefit and utilise knowledge or knowhow on his own in future without the aid of the service provider. He submitted, if the terms of the agreement were carefully analysed it does not authorise the assessee to utilise any technology, knowledge or knowhow on his own in future without the aid of service provider. In support of his contention, learned counsel for the assessee relied upon the decision of the Hon'ble Karnataka High Court in CIT v/s De Beers India Mineral Pvt. Ltd., [2012] 21 taxm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s used in this Article means payments of any kind to any person in consideration of services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services: (a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or (b) make available technical knowledge, experience, skill, know how or processes, which enables the person acquiring the services to apply the technology contained therein; or (c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein. 49. The Assessing Officer has treated the payment made as fees for technical services on the reasoning that under the agreement EMCAP has made available managerial and technical services to the assessee. The expression make available which also appears in Article 12(4)(b) of the India US tax treaty would mean the recipient of such service is able to apply or make use of the technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should he imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered made available' when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing inc service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available, in other words, payment of consideration would be regarded as fees for technical/included services only if the twin test of rendering services and making technical knowledge available at the same time is satisfied. 50. A careful analysis of the observations of the High Court, makes it clear that make available no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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