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TMI Blog2022 (12) TMI 244X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant, is bad in law and facts and liable to be quashed. Transfer pricing ('TP') related 2. That, on the facts and in the circumstances of the case, the learned Transfer Pricing Officer ('TPO')/hon'ble Dispute Resolution Panel, erred in making a transfer pricing adjustment to the arm's length price of the appellant's international transaction of payment of royalty amounting to Rs. 75,274,460. 3. That, on the facts and in the circumstances of the case, the learned Transfer Pricing Officer/hon'ble Dispute Resolution Panel erred in rejecting the transfer pricing documentation maintained by the appellant under section 92D of the Act read with rule 10D of the Income-tax Rules, 1962 ('the Rules'). 4. That, on the facts and in the circumstances of the case, the learned Transfer Pricing Officer/hon'ble Dispute Resolution Panel erred in rejecting the aggregation approach followed by the appellant to benchmark the international transactions including payment of royalty. 5. That, on the facts and in the circumstances of the case, the learned Transfer Pricing Officer/hon'ble Dispute Resolution Panel has erred in questioning the commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar (India) Limited ; (d) selecting companies which have incurred research and development expenses whereas the selection criteria set by the Transfer Pricing Officer himself suggests that companies which have incurred research and development expenses should not be selected as comparables ; and (e) not selecting certain companies proposed by the appellant i. e., Rasandik Engineering Industries India Limited and Sandbar Technologies Limited which have not incurred any research and development expenses. 10. That, on the facts and in the circumstances of the case, the learned Transfer Pricing Officer/hon'ble Dispute Resolution Panel has erred in applying an inconsistent approach in the assessment year 2016-17 as the learned Transfer Pricing Officer had himself accepted similar approach of economic analysis, carried out by the appellant in the assessment year 2011-12 as well as assessment year 2012-13 and concluded that all the international transactions of the appellant, including the payment of royalty was at arm's length. 11. That, on the facts and in the circumstances of the case, the learned Assessing Officer has erred in passing the assessment order contrary to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowing the consequential additional depreciation under section 32(1)(iia) of the Act for the expenses treated as capital expenditure for the assessment year 2016-17. 19. Without prejudice to the above, the learned Assessing Officer/ hon'ble Dispute Resolution Panel erred in not allowing the consequential depreciation for the expenses treated as capital expenditure for the prior years. (Tax effect : Rs. 31,35,016)." 2. The brief facts of the case are that the assessee is company is engaged in the business of manufacture of automobile component such as seats, door strings, and interiors for the automobile industry. It filed its return of income on November 29, 2016 declaring the total income as Nil and current year carry forwarded loss amounting to Rs. 1,37,85,727. The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee furnished the details time to time in ITBL portal. During the course of scrutiny proceedings, it has been observed that the company had entered into several international transactions with its associated enterprises. The case was referred to the Transfer Pricing Officer as per section 92CA of the Act and the Transfer P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity is dependant on the technical know how from TBC, the trans actions are closely interlinked, royalty relates to turnover and forms an essential part of sales and due to the peculiar circumstance of operations involving various types of interdependent transactions, the taxpayer has aggregated the transactions and used transactional net marginal method as the most appropriate method which should be allowed. 5.4 Why transactional net marginal method cannot be used as an appropriate method here ? 5.4 1 There are numerous approximations in usage of transactional net marginal method. Aggregation of transactions and analysis can still be justified if there are numerous high-value international trans actions, and all the transactions are so inter-linked that they can be called a 'bundle of transactions'. For instance, if a company is in 'start-up stage' and all technologies have been transferred by associated enterprises ; so also, a major portion of purchases or sales are from the associated enterprises, then we can infer that intangibles received from associated enterprises under technology transfer agreement and regular sale-purchase transactions are part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia and can justify the profit shifting by saying that it is within tolerance limit of transactional net marginal method mean margin. In this situation, transactional net marginal method actually defeats the very purpose of transfer pricing as an anti-abuse provision. There is no justification for application of transactional net marginal method, because the so called tech supplied by the associated enterprises to this hypothetical company is not 'start-up tech'. It is technological update/upgradation. There is no benchmark of such technology intangible. As such, intangibles can be benchmarked only using analytical approaches. Transactional net marginal method is very crude, and it definitely does not give any indication of the arm's length nature of royalty transactions. The taxpayer's case 5.6 The taxpayer's case is not very different from that of the hypo thetical situation described above. The taxpayer started operations in 2003 and still pays a running royalty of 5 per cent. in the financial year 2012-13. The useful life of start-up tech is over. The technological upgradations and updates it gets from its associated enterprises are intangibles, and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble on public databases, and analysis of the facts of the case, the Transfer Pricing Officer concludes that residual profit split steps can be applied to get the profit split. The Transfer Pricing Officer refers to the judgment of the Income-tax Appellate Tribunal, Delhi Bench in the case of Global One India P. Ltd. v. Asst. CIT [2014] 31 ITR (Trib) 722 (Delhi) (I. T. A. No. 5571/ Delhi/2011 and I. T. A. No. 5896/Delhi/2012) for the steps involved. There is sufficient literature on the steps involved. However, in this case, the Income-tax Appellate Tribunal had also observed that (refer para 20.5 of Income-tax Appellate Tribunal order) residual profit split method involves : (a) determination of routine return, and (b) allocation of residuary profits. 6.3 The Transfer Pricing Officer did a search for comparables involved in 'manufacture of car seats, other interiors'. The Transfer Pricing Officer does analysis in two steps, transactional net marginal method step and profit split method step. In transactional net marginal method step, the profit level indicator is the EBITR, meaning earnings before interest, taxes, and royalty and research and development. This margin for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (its profit from usage of technology): Particulars Amount (INR) Operating revenue 4,61,23,47,934 Total cost 4,59,17,97,705 Less : Royalty 13,33,90,044 Operating cost 4,45,84,07,661 Operating profit-EBITR 15,39,40,273 EBIT R/OR 3.3% 6.7 The non-routine profitability of the taxpayer is 3.3 per cent.-0.15 per cent. which equals 3.15 per cent. on sales. A/OR is the enhancement of profits of the taxpayer by using the associated enter prises technologies transferred. This has to be split between the taxpayer and its associated enterprises. The Transfer Pricing Officer gives weightage to the licensor and licensee based on the FAR analysis of both. FAR analysis of licensor is as under : 6.7.1 Functions : 1. Conducts all research and development activities. Same is used primarily by the licensor ; licensor transfers the risks to non-competing licensees in other geographies. 2. Technical assistance : The taxpayer pays technical assistance fees to associated enterprises. So, the function is not covered in this analysis. 6.7.2 Assets : 1. Owns the asset. The licensor uses the asset primarily, but also transfers it to non-competing licensees in other geographies. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to line set up expense amounting to Rs. 1,06,57,228 and the similar was also discussed in the previous assessment order. The same was incurred for reimbursement or renovation of old premises so as to enhance the producing capacity accordingly he observed that the expenditure incurred was enduring in nature and not a revenue expenditure. Income-tax is a capital expenditure accordingly he allowed the depreciation at 15 per cent. on this amount to Rs. 15,98,584 and the balance amount of Rs. 90,58,644 was added back into the total income of the assessee. 2.3 The learned Assessing Officer further observed that the assessee had made payment of Rs. 5,38,09,953 as reimbursement of salary to expatirates in this regard the assessee made submissions vide letter dated November 18, 2019 provided the details of expat's. Salary reimbursement amounting to Rs. 5,38,09,953 paid during the assessment year 2016-17 and the asses see further submitted that the TDS has been deducted as per section 192 of the Act on the entire salary paid including the salary paid in Japan. The reimbursement of salary portion paid to Toytoto Boshku Corporation (TBJ) is pure reimbursement in nature, as the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.3 We have heard the rival submissions and carefully considered the same along with the order of the authorities below as well as the documents referred to and relied on before us during the course of the hearing. we adjudicate the issues as under. 4. Ground No. 1 is general in nature, hence no adjudication is required. 5. Ground Nos. 2 to 11 is regarding transfer pricing adjustment in relation to payment of royalty of Rs. 7,52,74,460. 5.1 The facts in the present assessment year 2016-17 are identical with issue covered by the decision of co-ordinate Bench in the assessee's own case in I. T. (TP) A. No. 1646/Bang/2017 vide order dated April 13, 2022 for the assessment year 2013-14 and also for the assessment year 2015-16. The para Nos. 11.1 to 11.5 in para No. 12 in the assessment year 2013-14 is reproduced here under : "11.1. On the contrary, the learned Commissioner of Income-tax, Departmental representative placed reliance and orders passed by the authorities below. 11.2. We have perused submissions advanced by both sides in light of records placed before us. We note that the functions performed by the assessee before us, and that of Toyota Kirloskar (supra) cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o involvement of the global entities in order to execute the transaction. We have perused the decision case of the assessee's sister concern referred to hereinabove, wherein, in identical circumstances, the Tribunal observed and held as under : '15. We have considered the rival submissions. We are of the view that the issue with regard to most appropriate method in the case of assessee had already been settled by the Tribunal. The Transfer Pricing Officer as well as the Dispute Resolution Panel have not followed the aforesaid decision of the Tribunal on the ground that economic life of the technology had an impact on the most appropriate method and that technology in question was to be used by start-ups and since the assessee was using the technology for a fairly long period of more than 5 years, it would not be proper to adopt the transactional net marginal method as the most appropriate method, as the economic life of the technology would no longer exist. In our view, there is no basis for the Transfer Pricing Officer as well as the Dispute Resolution Panel to come to a conclusion that technology in question was to be used by a start-up. There is no basis for the Tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofits of the transaction in proportion to their respective contributions and a two-sided method might be more appropriate in these circumstances than a one-sided method. In addition, in the presence of unique and valuable contributions, reliable comparables information might be insufficient to apply another method. On the other hand, a transactional profit split method would ordinarily not be used in cases where one party to the transaction performs only simple functions and does not make any significant unique contribution (e. g. contract manufacturing or contract service activities in relevant circumstances), as in such cases a transactional profit split method typically would not be appropriate in view of the functional analysis of that party.' 16. The revised guidance (June 2018) on the application of trans actional profit split method, provided by the OECD state the importance of delineating the transactions in determining whether the profit split method is applicable or not. The relevant extract from the OECD Guidelines is provided below : '2.125. The accurate delineation of the actual transaction will be important in determining whether a transactional profit sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assumption of the economically significant risks by the parties, and Be capable of being measured in a reliable manner.' 17. It is clear from the above OECD guidelines that in order to determine the profits to be split, the crux is to understand the functional profile of the entities under consideration. Although the comparability analysis is at the 'heart of the application of the arm's length principle', likewise, a functional analysis has always been a cornerstone of the comparability analysis. In the present case the assessee leverages on the use of technology from the associated enterprises and does not contribute any unique intangibles to the transaction. It may be true that the assessee aggregated payment of royalty with the transaction of manufacturing as it was closely linked and adopted transactional net marginal method but that does not mean that the transactions are so interrelated that they cannot be evaluated separately for applying profit split method. Further, the assessee does not make any unique contribution to the transaction, hence profit split method in this case cannot be applied. 18. Therefore, we are of the view that transactional net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 to 16 raised their in." 5.2 Respectfully following the decision of the co-ordinate Bench of the Tribunal in the assessee's own case for the assessment year 2013-14 cited supra, we allow ground Nos. 2 to 11. 6. The ground Nos. 12 to 15 are with regard to disallowance of reimbursement of salary of seconded employees on account of non-deduction of tax at source of Rs. 5,38,09,953. 6. 6.1 The facts in the present assessment year 2016-17 are identical with issue covered by the decision of the co-ordinate Bench in the assessee's own case in Toyoto Boshoku Automotive India Pvt. Ltd. v. Dy. CIT (I. T. (TP) A. No. 1646/Bang/2017 vide order dated April 13, 2022) for the assessment year 2013-14 and also for the assessment year 2015-16. The para Nos. 14.1 to 14.26 and para No. 15 in the assessment year 2013-14 is reproduced here under : "14.1. At the outset it would be useful to understand the concept of assignment or secondment. Multi-national companies with a view to utilize skill within the group companies has global mobility policy of assignment or secondment. Secondment is, deputing or sending one employee in one entity of the multi-national company in one country, to ano ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shment which the employer has in the other State. 3. Notwithstanding the preceding provisions of this article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic, or aboard a boat engaged in inland waterways transport, may be taxed in the Contracting State in which the place of effective management of the enterprise is situated.' 14.3. Article 15(1) of OECD Model Convention lays down the rule of taxation of income earned by the seconded employee by giving the right to tax by the State where employment is exercised. The term 'Employment is exercised' means, the place where the employee is physically present, when performing the activities, for which the employment income is paid. Article 15(2) of OECD Model Convention carves out exception to the rule in Article 15(1) by facilitating short term secondment without the burden of having to pay tax in the country, where the employment is exercised subject to the following three conditions : (a) If the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of being regarded as non-resident employee of a non-resident employer rendering services on a temporary basis, individuals may, if certain objective criteria are met, be deemed to be the employees of the service recipient in the other country (i.e. source country), and therefore, taxable in the source country where they are performing their services. 14.8. In the above background let us analyse the 'Agreement of employees on loan', dated August 1, 2008 between the assessee and Toyota Corporation Japan, the independent employment contract between the assessee and the seconded employees and the correspondence between the employee and the assessee regarding bifurcation of salary payable to them. As a sample we have reproduced the contract of the assessee with Mr. Minoru Asahi hereinabove. 14.9. A reading of article 2, of the 'Agreement of employees on loan', dated August 1, 2008 between the assessee and Toyota Corporation, Japan, the request for employees on loan shall be made by a assessee in Part A of Form-1, wherein number of employees with details of the profile would be mentioned. We know that the said form one is annexed at page 507 as an annexure to the agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the control and supervision of the asses see in India. 3. That, his specialized knowledge in PED, quality and new projects was vital for the assignment with the assessee in India. From the letter dated June 11, 2014, upon completion of the assignment, it is clear that, Mr. Minoru Asahi was called upon to continue at the post of specialist PED quality and new projects with assessee in India. 4. That, during the assignment period, part of the salary after deducting grossed up Income-tax, under the Act, on the total salary, will be paid in India and the balance salary payable in Japan, by Toyota Corporation, Japan on behalf of the assessee, which shall be reimbursed by the assessee to Toyota Corporation, Japan against a debit note. 5. That, during the period of assignment with the assessee in India, all other terms and conditions as per polices of the assessee company would be applicable. Similar is the situation with all the seconded employees.' 14.15. Admittedly, the assessee deducted tax at source under section 192 of the Act, on the 100 per cent. salary paid to all the seconded employees, and paid the same to the credit of the Central Government. The assessee only r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... technical services payable by- (a) the Government ; or (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or (c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India : Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government. Explanation 1.-For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date. Explanation 2.-For the purposes of this clause, 'fees for technical services' means any consideration (including any lum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -up over and above costs of maintaining secondee could not negate nature of transaction. 14.20.2. The hon'ble Pune Tribunal in the case of Faurecia Automative Holding v. Dy. CIT (I. T. A. No. 784/Pune/2015) has observed as under : '4.10. We have gone through the facts of the case obtaining in Centrica India (supra). The assessee therein contended that payment to foreign party towards seconded employees was only reimbursement and hence, no income was chargeable to tax in its hands. The Authority for Advance Rulings (AAR) held that payment made by the petitioner to the overseas entity was in the nature of income in view of the existence of service permanent establishment (PE) in India and hence liable for tax withholding. Overturning the view of the Authority for Advance Rulings that service permanent establishment was constituted, the hon'ble High Court held that the payment to associated enterprises was in the nature of 'fees for technical services' and not reimbursement of expenses and further laid down that the nomenclature of reimbursement was not decisive. It noted that : 'Money paid by the assessee to overseas entity accrues to overseas entity, whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me Court in the case of Morgan Stanley (supra) were in the context of existence of service permanent establishment. This is clear from a reading of the relevant portion of the judgment of the hon'ble Supreme Court, which is as follows (page 428 of 292 ITR) : '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 the MSCo the said company retains control over the deputationist's terms and employment. The concept of a service PE finds place in the UN Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entail it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applicant to A. T. & S in Euro. While working with the applicant, the seconded personnel are required to comply with the regulations of the applicant, but they would go back to the A. T. and S on the expiry of assignment. Afore said terms and conditions show that the seconded personnel in effect continue to be employees of A. T. and S. Recipient of the compensation is A. T. and S and not the seconded employees. Further contention was that A. T. and S is not engaged in the business of providing technical services in the ordinary course of its business is also not tenable. Therefore, payments made to A. T. and S by the applicant are for rendering 'services of technical or other personnel' and are in the nature of fees for technical services within the meaning of Explanation 2 to clause (vii) of section 9(1) and article 12(4) of the relevant Double Taxation Avoidance Agreement and are subject to deduction of tax at source under section 195. 14.23.1. The ruling of hon'ble Authority for Advance Rulings is on the factual finding that payments were not only reimbursement of actual salary, bonus etc., but was also included other sums. 14.23.2. Per contra in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 9(1)(vii).' 14.26. The hon'ble Bombay High Court in case of Addl. DIT v. Mark and Spencer Reliance India P. Ltd. [2013] 27 ITR (Trib) 448 (Mum) ; [2013] 38 taxmann.com 190 (Mum), upheld the view of the hon'ble Mumbai Tribunal which held that, payment towards reimbursement of salary expenditure without any element of profit, would not be taxable under the provisions of the Act. The hon'ble court also held that, when the entire salary has been subjected to tax in India at the highest average tax rate, the assessee could not held to be in default for not without tax under the provisions of the Act . . . 15. Respectfully following the above views expressed by the hon'ble Karnataka High Court in DIT (International Taxation) v. Abbey Business Services India Pvt. Ltd. [2021] 17 ITR-OL 150 (Karn), the hon'ble Authority for Advance Rulings in Cholamandalam MS General Insurance Co. Ltd. (supra), the hon'ble Bombay High Court in case of Addl. DIT v. Marks and Spencer Reliance India P. Ltd. (supra), the hon'ble Delhi High Court in the case of DIT v. HCL Info systems Ltd. [2005] 274 ITR 261 (Delhi), co-ordinate bench of this Tribunal in case of IDS Software ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re carefully considered. Broadly the line of argument put forth by the assessee is that these expenses are incurred to rearrange the production lines and reposition the process lines which also involved purchases of few mechanical and electrical items. Further the assessee contended that these expenses have not added to the production capacity of the assessee and hence there is no enduring benefit. The assessee also relied on various court decisions in it's favour. However, based on the facts it can be seen that the expenditure is incurred on the capital assets for rearranging, shifting or realigning etc., especially when there is new production line for producing new model of car etc., the production line is essentially re-setup for new production. This issue is covered by Supreme Court decision in the case of Ballimal Naval Kishore v. CIT [1997] 224 ITR 414 (SC) where in the court applied the test propounded by Bombay High Court in the case of New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT [1956] 30 ITR 338 (Bom). The test is proposed in the case by the hon'ble Bombay High Court whether a particular expenditure towards repairs to machinery or building etc., is ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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