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TMI Blog2021 (8) TMI 1359X X X X Extracts X X X X X X X X Extracts X X X X ..... ture or contributed any money for establishment of its name in the geographical areas that benefited the associated enterprises. Based on the above, we cannot uphold 2% royalty computed on the turnover of the AE s by the Ld.AO/TPO. We remand this issue back to the Ld.TPO for fresh consideration - TPO shall carry out necessary verification based on the which it must first be determined whether there is any Royalty that could be attributed. In the event Royalty is to be attributed, proper benchmarking needs to carried out the accordance with section 92CA of the Act, by selecting an authorised method and comparables. We place reliance on BEPS action plan reproduced herein above. Needless to say that proper opportunity of being heard must be granted to assessee. Benchmarking of the international transaction between the assessee and Sasken Inc. - HELD THAT:- There is no document to show the risk assumed or that assessee had anything to do beyond mediating between Sasken Inc., and GE Ultrasound Ltd. We note that the observations of authorities below that the contract is coming because of numerous intangibles and that assessee has contributed to the intangibles along with Saske ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Grounds relating to Transfer Pricing - General:- 2 The lower authorities have erred in: a. Making transfer pricing adjustment of Rs. 2,04,22,991!-; b. Making a reference to Transfer Pricing Officer for determining arm's length price without demonstrating as to why it was necessary and expedient to do so; c. Not appreciating that there is no amendment to the definition of income and charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X' and therefore addition under Chapter X is bad in law; and 3. Passing the order without demonstrating that the Appellant had motive of tax evasion. Grounds relating to Transfer Pricing - Brand Royalty:- 4. The lower authorities have erred in: a. Determining adjustment of Rs.1,94,30,176!- under section 92CA in respect of the royalty on alleged usage of brand 'SASKEN' by the AEs. b. Not appreciating that the AEs have not received any financial benefit from use of trademark 'SASKEN', owned by the Appellant. c. Not performing any Functional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, not allowing the benefit of the +1-3% range prescribed in the proviso to section 92C(2). Grounds Relating To Computation Of Deduction Under Section 10AA:- 10. The lower authorities have erred in: a. Calculating deduction under section 1 OAA on combined basis for all the eligible units rather than computing deduction each undertaking wise. b. Excluding Rs.1,10,88,43,931 being communication expenses, travel, insurance, professional charged, software expenses, expenses at branch office and other expenses from export turnover without appreciating that the Appellant had already reduced Rs.1,59,19,069/- from export turnover in the computation of 1OAA deduction which were attributable to eligible units. c. Not reducing Rs.1,59,19,069/- from total turnover while computing deduction under section 10AA. d. Excluding insurance charges of Rs.1,24,44,000/- and communication charges of Rs.2,94,07,000/- from export turnover of SEZ units without appreciating the fact that the aforesaid expenditure were not incurred for the purpose of export / delivery of computer software outside India. e. Not appreciating that the insurance expenses of Rs. 1,24,44, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference was made to the Transfer Pricing officer. 2.2 On receipt of reference under 92CA, the Ld.TPO called upon the assessee to file economic details of international transaction entered into by assessee with its AE is in form 3 CEB. 2.3 The Ld.TPO observed that, following were the international transaction entered into by assessee: Particulars Amount Received Rendering of sales and marketing services 7,791,592 Rendering of Software development services 97,869,088 Receipt of Software development services 24,995,724 Receipt of Sales and marketing services 21,146,671 Receipt of hardware support services 2,160,495 Receipt of Software testing services 40,228,261 Invoicing and collection service 21,568 Total 194,213,399 2.4 During the course of hearing the Ld.TPO observed that assessee has multiple subsidiaries in USA, China, F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO concluded that Sasken Inc., owns the main assets being the patents and assessee owns some assets owing to which the contract name. The Ld.TPO gave weightage of 3:1 to Sasken Inc. to assessee, and held that 25% of Rs.40,52,308/- should be retained by assessee. Since the assessee retained only 0.5%, the balance 24.05% of Rs.40,52,308/- was held to be the adjustment proposed. The Ld.TPO thus proposed addition as under: Particulars Amount (Rs.) Royalty from AEs for using trademark 1,94,30,176 Incremental Collection fee to be received from AE's for acting as collection Agent 9,92,815 Total 2,04,22,991 2.8 On receipt of the transfer pricing order, the Ld.AO passed the draft assessment order on 21/12/2016, wherein following disallowances were also made on following corporate tax: Disallowance under section 14A amounting to Rs.15,93,573/- Disallowance under section 10AA amounting to Rs.11,05,19,452/- 2.9 Against the draft assessment order, assessee filed objections before DRP. The DRP upheld the addition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquired Botnia Hightee in Finland in August 2006. It is submitted that the purpose of acquisition was: with the reason to acquire competencies in the telecom space, Botnia had a niche set of competencies to cater to handset and enterprise technology to access the largest player in telecom domain, as Nokia had major market share in handset and enterprise segment and Botnia had good relations with Nokia. To establish opportunities being a development centre in Finland and to exploit the European markets. 3.4 It is submitted that Sasken Finland (formerly Botnia ) is an existing company operating in the market and that it had its own customer market share, relationships etc. Sasken Inc USA 4. It is submitted that, it is a wholly owned subsidiary of assessee and has been incorporated as an investment arm of the company to make strategic investment in USA and other overseas market. It has been submitted that in 2009, Sasken Inc, purchased the product portfolio, customer contracts and certain assets from Ingenient Inc, USA. By this acquisition, assessee acquired the niche competency (including IPR ) in the field of customer/automotive electronics and also p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f paper book is reproduced herein under: B.4.3. Payments for use of the company name 6.81 Questions often arise regarding the arm's length compensation for the use of group names, trade names and similar intangibles. Resolution of such questions should be based on the principles of this Section B and on the commercial and legal factors involved. As a general rule, no payment should be recognised for transfer pricing purposes for simple recognition of group membership or the use of the group name merely to reflect the fact of group membership. See paragraph 7.12 6.82 Where one member of the group is the owner of a trademark or other intangible for the group name, and where use of the name provides a financial benefit to members of the group other than the member legally owning such intangible, it is reasonable to conclude that a payment for use would have been made in arm's length transactions. Similarly, such payments may be appropriate where a group member owns goodwill in respect of the business represented by an unregistered trademark, use of that trademark by another party would constitute misrepresentation, and the use of the trademark provides a clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount of payment with respect to a group name, it is necessary to consider the amount of financial benefit to the user of the name that could be attributed to the use of that name, the cost and the benefits associated with other alternatives and relative contributions to the value of the name made by the legal owner and the entity using the name in the form of functions performed, assets used and risk assumed by the user in its jurisdiction. 4.10 It was thus submitted that when one successful business is acquired by another successful business, awnd the acquired business begins to use a name, trademark or other branding indicator of the acquiring business, there cannot be an automatic assumption that payment should be made in respect of such use. The Ld.AR thus submitted that: Sasken Inc., was wholly owned subsidiary of assessee incorporated as an investment arm of assessee to make strategic investment in USA and other overseas market. Sasken Network Solution Inc., was a subsidiary of Sasken Network Engineering Ltd. of assessee, engaged in the business of erection and installation of network equipment and provision of testing services. Sasken Japan was a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SI TOTAL Revenue from operations 56,85,76,504 20,51,64,919 13,40,12,285 6,16,82,884 9,06,03,366 1,06,000,39,958 Less: Intercompany Revenue 1,13,50,177 36,09,388 61,05,299 2,72,38,025 4,02,28,261 8,85,31,150 Revenue from external customers 55,72,26,327 20,15,55,531 12,79,06,986 3,44,44,859 5,03,75,105 97,15,08,808 Revenue in the year of acquisition 69,69,79,557 10,37,63,220 - - - 80,07,42,797 Revenue base for Royalty -13,97,53,230 9,77,92,311 12,79,06,986 3,44,44,859 5,03,75,105 31,05,19,261 Royalty at 2% on the - 19,55,846 25,58,140 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany independently without having any connection with that of assessee based on which, Hon ble Delhi High Court held that Sasken is an inalienable brand of assessee and cannot be used by Anupam Agarwal s company. The Ld. TPO went on a footing that assessee claimed damages and file suit on multiple issues from third-party for using the same brand name but allowed its own sister concern to use the brand name without paying a penny. He thus computed 2% of the turnover of AEs being royalty payable to the assessee. 4.19 We note that apart from the observations of Hon ble Delhi High Court in case of a third-party, Ld.TPO do not have any other evidence material on record to establish that assessee transferred any of the assets like technical knowhow and R D owned by it, to the subsidiaries, based on which royalty could be attributed. On one hand the Ld.TPO observes that the subsidiaries are full-fledged entrepreneurs whereas on the other hand he proposes an adjustment for use of trade name and holds that the subsidiaries cannot stand on its own legs without the use of brand name Sasken. In our view assessee cannot blow hot and cold at the same time. 4.20 We note that, in certain c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deemed to accrue or arise in India :- (vi) income by way of royalty payable by- (a) the Government ; or (b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of 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 royalty is payable in respect of any right, property or information used or services utilised for the purposes of 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 : .. Explanation 2.-For the purposes of this clause, royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for- (i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such process is secret; 4.24 Therefore, as per the aforesaid provisions, consideration for transfer of rights (including granting of a licence) in respect of a trade mark or similar property or for use of a trademark or transfer of rights (including granting of a licence) in respect of any copyright, literary, artistic or scientific work, falls under the definition of Royalty under the IT Act. 4.25 The revenue has not been able to produce any agreement to establish the payment of royalty by the associated enterprises to assessee. It is also not been established that by the use of brand Sasken the subsidiary associated enterprises were able to get premium price which could be ultimately translate into profits to pay royalty. 4.26 Admittedly, in the present facts of the case, assessee has registered the trademark at all the jurisdiction where the subsidiaries are located. It is also not brought on record that assessee has incurred any expenditure or contributed any money for establishment of its name in the geographical areas that benefited the associated enterprises. Based on the above, we cannot uhold 2% royalty computed on the turnover of the AE s by the Ld.AO/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to carried out the accordance with section 92CA of the Act, by selecting an authorised method and comparables. We place reliance on para 6.83-6.85 of BEPS action plan reproduced herein above. Needless to say that proper opportunity of being heard must be granted to assessee. Accordingly these grounds raised by assessee stands allowed for statistical purposes. 5. Ground No. 7 It has been submitted that, Sasken Inc. (subsidiary of assessee in USA) acquired the business contacts from Ingenient Technologies Inc in 2009. Sasken Inc. Thus holds 4 different kinds of technical patents which was required by a customer based in Korea being GE Ultrasound Ltd. In this respect, Sasken Inc., and GE Ultrasound Ltd., entered into an agreement dated 30/03/2010, wherein GE Ultrasound was allowed to use the patents acquired by Sasken Inc., for its R D activities. The said agreement is placed at page 417-432 of paper book. This agreement was valid for a period of 3 years as per clause 13. However the time of renewal, GE Ultrasound denied to enter into agreement with Sasken Inc., as per the global vendor guidelines followed by GE Ultrasound, since Sasken Inc. was a company having negative res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vanced by both sides in light of records placed before us 5.7 During the financial year 2009-10, Sasken Inc. And GE Ultrasound Ltd. had entered into agreement wherein, GE Ultrasound was allowed to use the 4 different technical patents held by Sasken Inc.. However at the time of renewal in the year 2012, GE Ultrasound Ltd. could not continue the agreement with Sasken Inc., as it was having negative results due to the global vendor guidelines followed by GE Ultrasound. 5.8 On a careful perusal of the agreement placed in the paper book refer to herein above by the Ld.AR, we note that there is no document to show the risk assumed or that assessee had anything to do beyond mediating between Sasken Inc., and GE Ultrasound Ltd. We note that the observations of authorities below that the contract is coming because of numerous intangibles and that assessee has contributed to the intangibles along with Sasken Inc., is all assumptions in thin air without any basis. We further note that on these facts, the Ld.TPO used PSM without there being any discussion about the comparables chosen and whether they were acceptable or not to the assessee. Such action by Ld.TPO cannot be approved as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise to be undertaken under Chapter VI for arriving at the total income of the assessee from the gross total income. The somewhat discordant use of the expression 'total income of the assessee' in section 10A has already been dealt with earlier and in the overall scenario unfolded by the provisions of section 10A the aforesaid discord can be reconciled by understanding the expression total income of the assessee in section 10A as 'total income of the undertaking'. For the aforesaid reasons it is held that though section 10A, as amended, is a provision for deduction, the stage of deduction would be while computing the gross total income of the eligible undertaking under Chapter IV and' not at the stage of computation of the total income under Chapter VI. 6.3 Accordingly, we direct the Ld. AO to compute deduction under section 10 AA of the act in accordance with the ratio laid down by Hon ble Supreme Court in case of Yokogawa India Ltd. (supra). Accordingly this ground raised by assessee stands allowed. 7. Ground No. 11-12 relates to disallowances made under section 14A and MAT credit not granted in respect of taxes paid outside India under se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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