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TMI Blog2018 (5) TMI 1686X X X X Extracts X X X X X X X X Extracts X X X X ..... wance under section 40(a)(i) can be made - Decided in favor of assessee. Additions made on account of non-reconciliation of AIS payment of sales tax/professional tax - Held that:- AO has not brought on record sufficient evidence to prove that claim made by the assessee was factually incorrect - thus further investigation is required - matter is restored back to the file of AO for fresh adjudication. Transfer pricing adjustments - method of determination of Arm's Length Price - selection of comparables - Held that:- To determine the ALP of the IT's entered into by the assessee with its AE's, under the head BOSS, further verification is required - thus in the interest of justice, the issue is restored back to the file of the AO /TPO - also reasonable opportunity of hearing shall be given to the assessee - Decided partly in favor of assessee. - I.T.A./3601/Mum/2014 - - - Dated:- 23-5-2018 - Shri Rajendra, Accountant Member and Sandeep Gosain, Judicial Member For The Revenue : Dr. Saurabh Deshpande-DR For The Assessee : Shri Girish Dave Ms. Kadambari Dave Order u / s . 254 ( 1 ) of the Income - tax Act, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 disallowance of part of the expenses, we delete the disallowance made by the Assessing Officer . This ground is allowed . Following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red to withhold the tax while making such payments . As far as the contention of the assessee that the payment made is not subject to TDS in view of specific provision of the tax treaty between India and Singapore, the Assessing Officer observed 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 Rs . 6, 72, 753 . In view of the aforesaid direction, of the DRP, the addition was made final by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted, firstly, the support service provided by EMCAP cannot be regarded as technical services and secondly; if they are considered as managerial or consultancy services they do not make available technical knowledge, expertise, knowhow, skill or process so as to enable the person acquiring the services to apply the technology contained therein . Learned counsel for the assessee submitted that, since, the treaty 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 kno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce as defined under Explanation 2 to section 9 ( 1 )( vii ) of the Act . It is also relevant to note, under Article 12 of India Singapore tax treaty, fees for technical services, though, is taxable in the hands of the recipient in Singapore, however, it can also be taxed in India under certain circumstances . Applying the said provision, it is necessary to determine whether the payment made can at all be termed as fee for technical services as defined under Article 12 of India Singapore Tax Treaty . In our considered opinion, we have to address this issue at the very outset . Article 12 ( 4 ) of India Singapore tax treaty defines fee for technical services as under : 12. 4 the term fees for technical services as 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 techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, skill, knowhow or process, would not amount to fees for technical service unless it enables the person acquiring the service to apply the technology therein . A perusal of the agreement between the assessee and EMCAP makes it clear that as per the terms of the agreement EMCAP would provide management consulting, functional advice, administrative, technical, professional and other support services to the assessee either itself or through any affiliate or through third parties . However, there is nothing in the agreement to conclude that in the course of such provision of service, EMCAP has made available any technical knowledge experience, skill, knowhow, or process which enables the assessee to apply the technology contained therein on its own without the aid of EMCAP . The Hon'ble Karnataka High Court while explaining the true import of expression make available in case of De Beers India Mineral Pvt . Ltd . ( supra ) has observed as under : What is the meaning of make available . The technical or consultancy service rendered should be of such a nature that it makes available to the recipient technical knowledge, know-how and the like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid tests laid down by the Hon'ble Karnataka High Court to the facts of the present case it becomes clear that it has not been established on record that while rendering the services, EMCAP has made available technical knowledge, knowhow, skill, etc . , to the assessee in a manner to enable him to apply them independently or on its own . Therefore, the payment made by the assessee cannot be considered as fees for technical services as defined under Article 12 ( 4 )( b ) of the India Singapore tax treaty and for this reason also we do not have to examine taxability of the same under section 9 ( 1 )( vii ) of the Act . Moreover, it is a fact on record that the payment of global support service fee was made under the agreement which has continued from the year 2003 . It is a matter of record that in the preceding assessment years though the assessee has paid global support service fees to EMCAP without deducting tax at source, no disallowance under section 40 ( a )( i ) was ever made . Therefore, there being no difference in facts in the impugned assessment year, considering that the payment was made under the same contract, even, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned department / agency before making addition, that the AO did not make any enquiry in that regard, that there was no mixing up of details between assessee and its group entities, that the assessee was engaged in the business of market development, research etc. , that additions should not have been made merely on the basis of AIR without bringing any evidence on record, that the AO had not provided necessary details to the assessee though a specific request was made, that assessee had not made any sales during the year, that question of making payment under the head sales tax would not arise. He referred to page no. 216-218 of the paper book. The DR supported the order of the FAA. 4 . 3 . We have heard the rival submissions and perused the material before us. We find that AO had made an addition of ₹ 3. 32 crores to the income of the assessee because of the failure of assessee to reconcile the sales tax/professional tax payment, that the assessee had specifically stated that during the year under consideration no sales were made, that it had requested the AO to furnish further information in that regard. In our opinion AIR is a good starting point to make further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company OP/TC 1. Alphageo (India) Ltd. 41. 05% 2. Choksi Laboratories Ltd. 29. 95% 3. Dolphin Medical Services Ltd. 2. 24% 4. Medinova Diagnostic Services Ltd. 4. 47% 5. N. G. Industries Ltd. 21. 56% 6. Vimta Labs Ltd. 15. 84% 7. TCG Lifesciences Ltd. 29. 97% 8. Transgene Biotech Ltd. -Diagnostic Services 38. 21% Arithmetic Mean 23. 79% Accordingly, he proposed an adjustment of ₹ 81. 51 lakhs under head TS as under :- Particulars Year ended 31/03/2008 Total cost 5, 92, 43, 957 OP/TC as per comparable @ 23. 79% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26. 96 Introduced by the TPO 9. Datamatics Financial services Ltd. (Seg. ) 34. 87 Introduced by the TPO 10 E4e Healthcare Solutions Ltd. 16. 72 Introduced by the TPO 11. Eclerx Services Ltd. 65. 88 Introduced by the TPO 12. Genesys International Corporation Ltd. 47. 4 Introduced by the TPO 13. HCL Comnet System Services Ltd. Seg. 32. 9 Introduced by the TPO 14. Infosys BPO Ltd. 20. 01 Introduced by the TPO 15. Iservices India Pvt. Ltd. 9. 58 Introduced by the TPO 16. Jindal Intellcom Pvt. Ltd. -8. 66 Introduced by the TPO 17. Maple eSolutions Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 . 2 . We find that while deciding appeal for the earlier year the Tribunal had deliberated upon inclusion of Pfizer in the final list of comparables. Relevant portion of the order of the Tribunal reads as under :- 5 . Learned Authorised Representative submitted, this company is functionally similar to assessee, hence, should not have been rejected 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 ( In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any and has not looked into any other aspects . He submitted, only because a company has suffered loss would not make it un comparable to the assessee . However, he fairly submitted that the Tribunal in assessee s own case for assessment year 2006 07, upheld the rejection of this company . 11 . Learned Departmental Representative supported the findings of the Transfer Pricing Officer and the DRP . 12 . We have heard rival contentions and perused the material available on record . The facts on record reveal that this company has incurred loss year after year including the impugned assessment year . Therefore, there is no doubt that it is a consistent loss making company . In fact, for this very reason, the Tribunal in assessee s own case for assessment year 2006 07 in ITA no . 8311 / Mum . / 2010 dated 10th June 2011, has upheld rejection of this company . That being the case, we do not find any reason to interfere with the decision of the Departmental Authorities on this issue . Therefore, we hold that Pfizer should be included in the list of the comparables and NIMA has to be excluded from the list. AO/TPO is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... X SERVICES LTD . MOULDTEK TECHNOLOGIES LTD . ( SEG ) 17 . Learned Authorised Representative submitted, Informed Technologies India Ltd . is not comparable to the assessee as it is providing knowledge process outsourcing ( KPO ) services whereas the assessee is providing Business Process Outsourcing ( BPO ). To buttress his aforesaid argument, the learned Authorised Representative drew our attention to the annual report of Informed Technologies India Ltd . at Page 452 of the paper book . Referring to the directors report, he submitted that this company is providing knowledge based services, therefore, it cannot be treated with the back office support service provided by the assessee . 18 . As far as this company is concerned, as per the order of the Transfer Pricing Officer it appears that the assessee objected to the inclusion of the aforesaid company on the ground that its related party transaction is higher than the threshold limit of 15 %. It is not forthcoming from the order of the Transfer Pricing Officer whether at the stage of transfer pricing proceedings, the assessee has objected to selection of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company, the I . T . Division has been specifically mentioned as KPO division . Further, in the relevant previous year, the company has acquired an overseas KPO company which is evident from the annual report of the company . The aforesaid factors have been totally ignored by the Transfer Pricing Officer and the DRP while selecting / retaining the aforesaid company which, in our view, is not correct . In fact, while considering the comparability of the aforesaid company in case of Capital IQ Information Systems India Pvt . ltd . and HSBC Electronic Data Processing India Pvt . Ltd . ( supra ) for the very same assessment year, the Tribunal has held that this company cannot be considered as comparable to a BPO service provider as it is a KPO company . In view of the aforesaid, we direct the Assessing Officer to exclude this company from the list of comparables . BODHTREE CONSULTING LTD . ( SEG ) 22 . Learned Authorised Representative objecting to the inclusion of the aforesaid information submitted that the company is involved in software development, hence, not comparable to the assessee . Drawing our attention to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the Assessing Officer / Transfer Pricing Officer for fresh adjudication . ICRA TECHNICAL ANALYSIS 28 . Objecting to the selection of this company, learned Counsel for the assessee submitted that the company is also in the field of software development and the segmental details relating to software development segment and service segment are not available . Therefore, due to lack of relevant information / data, it cannot be considered as a comparable . 29 . Learned Departmental Representative relied upon the observations of the Transfer Pricing Officer and the DRP . 30 . We have heard rival contentions and perused the material available on record . As per the annual report of this company, a copy of which is at Page 446 of the paper book it appears that the company has two reportable segments viz . , software development segment and sales and service segment . However, the financial statement of the company are in consolidated form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pricing study assessee has provided for working capital adjustment and risk adjustment on a reasonable and scientific basis which was not properly considered either by the Transfer Pricing Officer or by the DRP . After considering the submissions of the parties, we direct the Assessing Officer to consider assessee s claim with regard to working capital adjustment risk adjustment and decide the same after providing due opportunity of being heard . These grounds are partly allowed . 5 . 4 . If we consider the comparables for assessment year 2007-08 and 2008-09, the following picture will emerge:- Considering the above, we are of the opinion that to determine the ALP of the IT. s entered into by the assessee with its AE. s, under the head BOSS, further verification is required. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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