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TMI Blog2019 (2) TMI 795X X X X Extracts X X X X X X X X Extracts X X X X ..... before us. Inclusion of selling/business promotion expenses in scope of AMP expenditure when DRP for Assessment Year 2011-12 excluded similar expenses - Held that:- Admittedly this Tribunal in orders for preceding Assessment Years directed Ld.TPO to exclude sales related expenditure/subsidies received by assessee. Insofar as business promotion expenses are concerned, Ld.TPO shall consider the same after perusal of relevant agreements entered into by assessee with its AE and to decide this issue as per law. TDS u/s 195 - payments in respect of reimbursement of salaries of seconded employees without deducting TDS - Held that:- In our considered opinion, inference that could be drawn from documents filed by assessee does not distinguish present case from Centrica offshore India (P.) Ltd. case (2014 (5) TMI 154 - DELHI HIGH COURT) and documents produced by assessee are no substitute for Secondment Agreement and fails assessee in discharge of its burden of proof. It would be relevant to go through secondment agreement before coming to a conclusion. Neither before DRP nor before us assessee filed Secondment Agreement. Assessee is therefore directed to file Secondment Agreement before Ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g and Promotion ("AMP") expenditure. 3. That on the facts and circumstances of the case and in law, the orders passed by the AO/TPO were bad in law as the prerequisite for applying Chapter-X, i.e., existence of an international transaction between two Associated Enterprises ("AE") under section 92B of the Act, was not satisfied or existed as there was no agreement, understanding or arrangement between the Appellant and the AE for incurrence of such expenditure by the Appellant. Further, the DRP erred in upholding the action of the lower authorities. 3.1. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred in holding that the unilateral arrangement between the Appellant and Indian third parties for advertisement and promotion would be a "transaction" much less an "international transaction" within the meaning of Chapter X of the Act. 4. Notwithstanding and without prejudice, the orders passed by the AO / TPO were bad in law as the unilateral AMP expenditure incurred by the Appellant was categorized as 'international transaction' under chapter X of the Act, contrary to law in as much the AO neither granted the Appellant a proper oppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d circumstances of the case and in law, the AO / TPO erred in law and on facts, in applying Profit Split Method ("PSM") to benchmark the alleged international transaction of incurring excessive AMP expenditure without establishing as to how PSM was the most appropriate method in terms of section 92C read with Rule 10B of the Rules and had applicability to the facts of the instant case. Further, DRP erred in summarily rejecting such action of AO / TPO without giving any cogent reasons. 10.1. That on the facts and circumstances of the case, AO / DRP / TPO erred in recharacterizing the functional analysis of the Appellant and further erred in alleging that in the instant case the overseas entities is an entrepreneur and AE has assigned vital function that otherwise should have been carried out by itself. 10.2. That on the facts and circumstances of the case and in law, the AO / DRP / TPO erred in holding that the Appellant is contributing to the intangible of the AE and thus, contributing to the global profit and therefore, the PSM is the most appropriate method for benchmarking the alleged international transaction pertaining to excessive AMP spent. 10.3. Without prejudice a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in this regard. 14. That on facts and circumstances of the case and in law, the AO / DRP / TPO have erred in not providing the Appellant the benefit of 5 percent range as provided by the proviso of section 92C(2) of the Act. Further, DRP erred in not adjudicating the objection of the Appellant in this regard. B. Corporate Tax Grounds 1. The Hon'ble DRP has grossly erred in law and on facts in directing the Ld. AO to enhance the income by disallowing ₹ 3,90,27,709/- being the reimbursement to Canon Inc., Japan of salaries of the seconded employees under section 40(a)(i) of the Act for non-deduction of tax at source under section 195 of the Act. 1.1. The Ld. AO / Hon'ble DRP have erred in holding reimbursement of salary cost of seconded employees as 'fees for technical services' ('FTS') under section 9(l)(vii) of the Act read with Article 12(4) of the India - Japan Double Taxation Avoidance Agreement ('DTAA') and liable to TDS under section 195 of the Act. 1.2. The Ld. AO / Hon'ble DRP have failed to appreciate that the above amount represent reimbursements of actual costs and does not have any element of income and is for services rendered by seconded employees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case and in law, the Ld. AO / Hon'ble DRP have erred in not appreciating that the taxes on salaries reimbursed had been duly deducted and deposited under section 192 of the Act and thus any reimbursement of such payments, cannot be taxed again under section 195 of the Act. 2. On the facts and in the circumstances of the case and in law, after having computed a taxable income in case of Appellant, the Ld. AO has erred in not allowing the credit of Tax Deducted at Source amounting to ₹ 5,36,848/-. 3. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in charging interest under section 234A and 234B of the Act. 4. On the facts and in the circumstances of the case and in law, the Ld. AO has erred in initiating penalty proceedings under section 271(1 )(c) of the Act. The above grounds are independent and without prejudice to each other. The Appellant craves leave to add, withdraw, amend or vary the above grounds of appeal before or at the time of hearing. 3. Brief facts of the case are as under: Assessee is 100% subsidiary of Cannon Singapore Pte.Ltd., and started its Indian operation way back in 1996. During years under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, it requires verification as there is no mention of the specific agreements to the effect of the AMP whether is a international transaction or not. Therefore, we direct the TPO/AO to verify this issue in light of the agreements signed by the assessee with its AEs as well as the main company. Needless to say the assessee be given the opportunity of hearing by following principles of natural justice. Ground no.2, 2.2 and 4 of the assessee's appeal are partly allowed for statistical purpose." 6. Ld.CIT,DR though supported order passed by authorities below could not controvert aforestated observations by this Tribunal in assessee's own case for the preceding Assessment Years. 7. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254. 7.1. It is further observed that, from Assessment Year 2006-07, 2007-08, 2008-09 and 2009-10 this Tribunal consistently restored these issues back to Ld.AO/TPO for determination of ALP of AMP expenses afresh, in light of agreements entered into by assessee with its AE for purchase and resale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this Tribunal in assessee's own case for Assessment Year 2006-07 to 2008-09 and 2010-11 as under: "53. As regards to ground no.8 and 8.1 relating to exclusion of certain selling and distribution expenditure and subsidy, the same are identical with ground no.8 of the appeal filed by the assessee for A.Y. 2010-11. Therefore, the observations made in that respect are applicable in the present appeal as well. Thus, following the order of the Tribunal for A.Y. 2006-07 to 2008-09 read with the subsequent directions of the Hon'ble Delhi High Court in assessee's own case, it will be appropriate to direct the TPO to exclude Trade discount, commission, selling and administrative expenses and special purpose subsidy from the ambit of the AMP expenditure, as given in the tabulated form by the Ld.AR alongwith the synopsis at the time of hearing after verifying the same in accordance with the records available with the TPO/AO. Thus, this issue is remanded back to the file of the TPO/AO. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Ground no.8 of the assessee's appeal is partly allowed for statistical purpose.' 13.2. Ld.CIT,DR th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 9 (1) (vii) of the Act, as well as Article 12 (4) of India Japan DTAA. Ld.AR submitted that DRP while opining so, relied upon observations of Hon'ble Delhi High Court in case of Centrica India offshore Pvt.Ltd., reported in (2014) 364 ITR 336. He submitted that DRP further held assessee to be in default for non-deduction of TDS under section 195 of the Act on such reimbursements, and consequently made disallowance under section 40 (a) (i) of the Act. 19. Ld.AR thereafter, took us through paper book and submitted that employees from Cannon Inc., (being Overseas entity) were seconded at request of assessee for a specified tenure of 3 years or more during which they worked wholly and exclusively for assessee only. He submitted that during assessment year under consideration following expatriates were seconded to assessee: S. No. Name of seconded employee Designation of seconded employee given by CIPL(Appellant) Period (3 or more years starting from) Part of salary paid by CINC on behalf of appellant in Japan which is reimbursed by appellant 1. Shimogawa Yoshitaka Director, ICP 1 Sept.2010 7,272,240 2. Hirata Takashi Director, ISDC 20 Nov.2008 7,620,983 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by to assessee, and such payment is made on behalf of assessee. Ld.AR also referred to Clause 6 and 7 wherein it has been agreed by assessee that it shall reimburse and repay to Cannon Inc actual cost of remuneration paid to such employees without any markup/profit. 24. Referring to Form 16 issued by assessee to these employees, Ld.AR submitted that assessee treats entire payments made to seconded employees (both in Indian Rupees as well as Japanese Yen) as salary and deducts TDS under section 192. He thus submitted that TDS on total payments made to such seconded employees have been duly deposited with revenue authorities and has been accepted. 25. Ld.AR referred to Explanation 2 of Section 9 (1) (vii) of the Act, and submitted that "Fees for Technical Services" means, any consideration (including any lump sum consideration) for rendering of any managerial, technical or consultancy services (including provision of services of technical or other personnel) but does not include consideration for any construction, assembling, mining or like project undertaken by the recipient or consideration, which would be income of the recipient, chargeable under the head salaries. 26. Empha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in case of Morgan Stanley, and opined that where employees continues to be on payroll of overseas entity or they continued to have their lien on their jobs with multinational enterprises a service PE can emerge and on completion of their tenure they are repatriated to their parent job. Under such circumstances they retain their lien on their employment with overseas entity. 29. Ld.AR, while distinguishing facts with that of Morgan Stanley (supra) submitted that, in case of present assessee, seconded employees are working wholly and exclusively for assessee, and Canon Inc., is not responsible for work of seconded employees. He further submitted that relationship between assessee and seconded employee is that of employee employer, irrespective of whether such seconded employees continue to have lien with Canon Inc., or not. He submitted that this is duly substantiated from terms of agreement which clearly provides that seconded employee will work wholly and exclusively for assessee and are under an obligation to perform such duties as assessee directs them to perform from time to time. Relying upon Cost Reimbursement Agreement entered into between Canon Inc., and assessee, Ld.AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs the employee for a period of 3 years, for the purpose of its business operations in India, the subsisting relationship with Canon Inc. whose regular employees they are is clearly specified and the temporary nature of the assignment is highlighted as also the fact that it is for the purpose of the business operations of Canon Inc in India. 2. However crucially they retained their Apropos remuneration it is stated that entitlement to participate in the overseas entities retirement and social security plans and other benefits in terms of its applicable policies, and their salary was properly payable by the overseas entities, which claimed the money from CIOP (page 40 para 34) Canon India P Ltd. Shall reimburse and repay to Canon Inc the actual cost of remuneration paid to the seconded employee-thus the terms of agreement simply mention salary in JPY and INR. (Refer Annexure 3) Thus clearly the employees retained their entitlement to participate in the overseas entities retirement and social security plans and other benefits in terms of its applicable policies, and their salary was properly payable by the overseas entities, which claimed the money from taxpayer, 3. There wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clearly states that: 1. Canon Inc transfers _________ to Canon India Private Limited as __________ for a period of 3 years, for the purpose of its business operations in India. Hence the employee clearly works exclusively for the Enterprise in the state of Residence. 32.1. Placing reliance upon page 79, a sample of Cost Reimbursement Agreement, entered into by Cannon Inc., with an employee, Ld.CIT DR referred to Clause 1 of terms of agreement wherein, the seconded employee has been held to be employee of Canon Inc. By placing reliance upon Employment Contract between expatriates with assessee, he submitted that work to be performed by these employees and post held by them with assessee has not been mentioned. Referring to submissions of Ld.AR from synopsis, Ld.CIT DR submitted that, admittedly seconded employees are involved in core business functions of assessee. From functions performed by assessee, under Provision of Software Development Services, he submitted that quality assurance are being evaluated and observed by personnel sent by these Associated Enterprises to facilitate assessee. He submitted that assessee nowhere explains what exactly it means by 'core business functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrol of assessee. All rules, regulations, policies and other practices established by assessee for its employees was to apply. It has been submitted that seconded employees were bound by instructions and directions of assessee throughout specified period, and was to strictly perform duties assigned by assessee with due diligence in a competent and professional manner in accordance with applicable laws and regulations, standard and practices and under supervision and control of assessee. The overseas entity is not to be responsible for errors/omissions or for work performed by seconded employees. Assessee was to bear all risk in respect of work performed by seconded employees and also had benefit from output. The seconded employees were to retain their entitlement in overseas entities. Either party to agreement could terminate agreement by giving written notice to other party three months before termination date. What is relevant to note is that assessee is given right to terminate secondment agreement with seconded employees and not services of seconded employees sent over by oversees entity. 34.3. It is observed from agreements relied upon by Ld.AR that none of agreements specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o perform managerial/technical functions envisaged for it. What is paid by assessee to overseas entity in view of this lending of service of certain employees, would spell in the realm of compensation paid for managerial/technical services. 34.7. Obligation to pay salary to an employee is different from obligation undertaken to compensate their employer by tendering amount equal to what is paid by former employer to seconded employees. In absence of any obligation on assessee to pay salary of seconded employees, such contention cannot be accepted. It is under this context that DRP placed reliance upon following paragraph from decision of Hon'ble supreme Court in case DDIT vs Morgan Stanley, reported in (2007) 162 Taxmann 165: "As regards the question of deputation, we are of the view that an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the U.N. Convention. It is constituted if the multinational enterprise renders services throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statistical purpose. 38. Ground No. 3 is consequential in nature. Ground No. 4 is premature at this stage and accordingly do not require any adjudication. 40. In the result appeal for A.Y. 2012-13 stands allowed for statistical purposes. 41. Assessment Year 2013-14 Ground No. 1 and 2 are general in nature, therefore, do not require adjudication. 42. Ground nos. 3 to 6: These grounds relate to whether AMP is an International transaction or not and whether TPO had jurisdiction to re-characterise it as international transaction. 43. Both parties submit that this issue is covered by ground nos. 3 to 8 for A.Y. 2012-13 and needs to be set aside to ld.AO. 44. Both parties refers to and rely upon submissions advanced while arguing ground nos. 3-8 of Appeal for A.Y. 2012-13. 45. We have perused submissions advanced by both sides in light of records placed before us and orders relied upon by Ld.Counsel, for preceding Assessment Years, which are placed in paper book from pages 191-254. 45.1. It is further observed that, from Assessment Year 2006-07, 2007-08, 2008-09 and 2009-10 this Tribunal consistently restored these issues back to Ld.AO/TPO for determination of ALP of AMP exp ..... 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