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TMI Blog2023 (2) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee on account of determination of Arm's Length Price in respect of an international transaction of rendering of Software Development Services by the Assessee to its Associated Enerprise. Though the Assessee has raised several grounds of appeal, at the time of hearing of the Appeal, the learned counsel for the Assessee restricted his arguments to exclusion of 7 comparable companies viz., and exclusion of margins for R.S.Software (India) Ltd., for FY 2014-15 & 2015- 16) inclusion of one comparable company Akshay Software Technologies Ltd., besides grounds on working capital adjustment. 3. The Assessee in engaged in the business of provision of Software Development Services (SWD services), to its wholly owned holding company. In terms of the provisions of Sec.92-A of the Act, the Assessee and its wholly owned holding company were Associated Enterprises ("AEs"). In terms of Sec.92B(1) of the Act, the transaction of providing SWD Services was an "international transaction" i.e., a transaction between two or more associated enterprises, either or both of whom are nonresidents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.77% 16.94% 8.60% 2 E-Zest Solutions Limited 7.65% 11.80% 14.88% 10.87% 3 Rheal Software Pvt. Ltd. 3.20% 2.76% 36.64% 14.50% 4 Sybrant Technologies Private Limited 16.10% 13.88% 15.26% 14.74% 5 Harbinger Systems Pvt. Limited 12.69% 17.18% No Data in Public Domain 15.06% 6 C G-V A K Software & Exports Ltd. 19.60% 19.87% 13.81% 18.50% 7 R S Software (India) Ltd. -2.09% 32.75% 24.14% 20.87% 8 Larsen & Toubro Infotech Ltd. 26.29% 24.22% 23.54% 24.83°- 9 Orion India Systems Private Limited 26.08% 25.14% No Data in public domain ' 25 64% 10 Nihilent Ltd. 15.94% 29.19% 35.72% 26.36% 11 Integ Software Pvt. Ltd. 7.53% 32.14% 45.00% 28.20% 12 Persistent Systems Ltd. 26.92% 31.34% 35.64% 30.89% 13 Infobeans Technologies Ltd. 34.98% 20.78% 41.95% 32.42% 14 Thirdware Solution Ltd. 23.89% 44.39% 44.68% 36.90% 15 Infosys Ltd. 38.22% 41.30% 36.28% 38.61% 16 Aspire Systems (India) Pvt. Ltd. 34.26% 47.56% 38.04% 39.28% 17 Cybage Software Pvt. Ltd. 62.90% 68.68% 68.82% 66.45% 35th Percentile 18.50% Median 25.64% & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess than INR 1 crore, however, erred in not applying an appropriate upper limit to reject high turnover companies and thereby, erred in accepting companies without considering the turnover and size of the Assessee and comparables. It was the plea that should an upper limit be applied, the following companies would be rejected: Sl.No Company Turnover FY 2013-14 FY 2014-15 FY 2015-16 1 R S Software (India) Ltd. 351.88 345.51 - 2 Persistent Systems Ltd. 1,184.12 1,242.50 1,447.14 3 Thirdware Solution Ltd. 206.76 230.08 - 4 Larsen & Toubro Infotech Ltd. 4,643.94 4,744.40 5,569.52 5 Infosys Ltd. 44,341.00 47,300.00 53.983.00 6 Nihilent Ltd. 242.00 267.00 7 Aspire Systems (India) Pvt Ltd 156.53 - 8 Cybage Software Pvt. Ltd. 544.27 622.26 722.25 The further argument was that out of the 8 companies set out above, the Turnover of 7 companies except R.S.Software (India) Ltd., during AY 2016-17 was more than Rs.200 Crores and therefore those 7 companies have to be regarded not as comparable. As far as R.S.Software (India) Pvt.Ltd., is concerned, the turnover for FY 2015-16 (AY 2016-17 was less than Rs.200 Crores hence cannot be excl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; (f)...... (2) For the purposes of sub-rule (1), the comparability of an international transaction [or a specified domestic transaction] with an uncontrolled transaction shall be judged with reference to the following, namely:- (a) the specific characteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f comparable uncontrolled transactions. In this context, to be comparable means that: * None of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or * Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 11. As far as comparability of companies listed in Grd.No.4.3 raised by the Assessee is concerned, the admitted factual position is that the turnover of these companies is more than Rs.200 Crores and the Assessee's turnover is only Rs. 40,39,51,067/-. The TPO excluded from the list of comparable companies chosen by the Assessee in its TP study companies whose turnover was less than Rs.1 Crore. The contention of the Assessee before the DRP was that while the TPO excluded companies with low turnover, he failed to apply the same yardstick to exclude companies with high turnover compared to the Assessee. The reason for excluding companies with low turnover was that such companies do not reflect the industry trend as their low cost to sales ratio made their results less reliable. The content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with each other was held to be proper. The following relevant observations were brought to our notice:- "9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which .ire (sic) making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which arc loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, were in the nature of obiter dictum. Judicial discipline requires that the Tribunal should follow the decision of a non-jurisdiction High Court, even though the said decision is of a non-jurisdictional High Court. We however find that the Hon'ble Bombay High Court in the case of CIT Vs. Pentair Water India Pvt.Ltd. Tax Appeal No.18 of 2015 judgment dated 16.9.2015 has taken the view that turnover is a relevant criterion for choosing companies as comparable companies in determination of ALP in transfer pricing cases. There is no decision of the jurisdictional High Court on this issue. In the circumstances, following the principle that where two views are available on an issue, the view favourable to the Assessee has to be adopted, we respectfully follow the view of the Hon'ble Bombay High Court on the issue. Respectfully following the aforesaid decision, we uphold the order of the DRP excluding 5 companies from the list of comparable companies chosen by the TPO on the basis that the 5 companies turnover was much higher compared to that the Assessee. 17.8. In view of the above conclusion, there may not be any necessity to examine as to whether the decision rendered in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be excluded from the list of comparable companies. 15. As far as the company R.S. Software (India) Pvt.Ltd., listed at Sl.No.1 in Ground No.4.3 is concerned, the said company has admittedly a turnover of above Rs.200 crores in FY 2013-14 & 2014-15 and hence is not a comparable company in those two Financial Years and therefore while computing the average profit margin of three financial years, the profit margins of these two Financial years 2013-14 & 2014-15 should be excluded and only margins for FY 16-17 should be taken for working out the average profit margin of this company. In the case of M/S.BORQS Software Solutions Pvt.Ltd. Vs. ACIT IT(TP) A.No.310/Bang/2021 for AY 2016-17, the ITAT Bangalore Bench in it's order dated 25.10.2021 has taken the view as canvassed by the Assessee. The following are the relevant observations of the Tribunal in this regard: "A reading of Rule 10B(3) shows that comparison of an uncontrolled transaction to an international transaction can be done only if differences, if any, between the transactions that are compared or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was submitted that under the safe Harbour Rules under Rule 10TA of the Income Tax Rules, 1962 (Rules), software development services include support services like debugging of systems and services for maintenance of software products and hence the conclusion of the DRP is incorrect. It was submitted that SWD services forms 96.05% of the total ooperating revenue. Reliance was placed on decision of ITAT Bangalore in the case of Citrix R & D India Private Limited order dated 19.7.2022 in IT(TP) A.No.459/Bang/2017 wherein this company was held to be comparable company. 19. We have considered the submissions and are of the view that on identical facts and directions of the DRP, this tribunal in the case of M/s. Prism Network Pvt.Ltyd. Vs. ACIT IT(TP) A.No.349/Bang/2021 order dated 11.2.2022 for AY 2016-17 remanded the issue to the TPO/AO for fresh consideration with the following observations: "18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not to consider the claim of the Assessee for inclusion of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 22. The learned counsel for the Assessee submitted that the conclusions of the DRP are identical to the conclusions arrived at by the revenue authorities in the case of Huawei Technologies India Pvt. Ltd. v. JCIT [2019] 101 taxmann.com 313 (Bang. Trib.). In the aforesaid decision on an identical issue, the Tribunal held that working capital adjustment has to be given. The tribunal reasoned in the aforesaid decision that a reading of Rule 10B(l)(e)(iii) of the Rules read with Sec.92CA of the Act, would clearly show that the net profit margin arising in comparable uncontrolled transactions has to be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, which could materially affect the amount of net profit margin in the open market. The tribunal referred to Chapters I and III of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llects the investment (i.e. collects money from customers) ♦ This time gap is calculated as: the period needed to sell inventories to customers + (plus) the period needed to collect money from customers - (less) the period granted to pay debts to suppliers." 23. The tribunal observed that examples of how to work out adjustment on account of working capital adjustment is also given in the said guidelines. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to be kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rate (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The tribunal observed that the guidelines conclude by observing that the purpose of working capital adjustments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in concluding that the sale of investment in Aigua Sprinkler at nominal value is a pre-planned and arranged transaction and rejecting the short-term capital loss of INR 550.089.891 arising on the sale of investment in Aigua Sprinkler on account of projection of growth of revenue in the valuation report of the Sprinkler business without considering the historic negative EBITDA of the Sprinkler business 20.without prejudice to the above. erred in offering the capital gains on the enterprise value of Sprinkler business twice. on both sale of Sprinkler business to Aigua Sprinkler amounting to INR 12 crores and on considering INR 14.7 crores as full value of consideration of 9.999 equity shares sold to third party. 21.without prejudice to the above. erred in considering enterprise value of Sprinkler business amounting to be INR 14.7 crores instead of book value of INR 12 crores as prescribed under Rule 11 UA. 22.erred in considering the face value of CODs to be the sale consideration and reworking the short-term capital gain/ loss on transfer of the same to be Nil. The learned counsel filed memo requested for withdrawing ground No.21 & 22 and for revising ground No.18 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in Explanation 1 to section 50B as the difference between 'the aggregate value of total assets of the undertaking or division' and 'the value of its liabilities as appearing in books of account'. The 'aggregate value of total assets of the undertaking or division' is the sum total of: WDV as determined u/s.43(6)(c)(i)(C) in case of depreciable assets, The book value in case of other assets. Net worth is deemed to be the cost of acquisition and cost of improvement for section 48 and section 49 of the Act. As per section 50B, no indexation benefit is available on cost of acquisition, i.e., net worth. 28. Before and after effecting slump sale, the Assessee entered into some ancillary transactions which had tax implications. The issue raised in Grd.No.18 to 20 of the modified grounds emanate from those ancillary transactions. 29. The sequence of events prior to slump sale of sprinkler business and ancillary transactions was as follows: Date Events 3 February 2015 * Assessee set up wholly owned subsidiary, M/s. Aigua Sprinkler and Hydrant India Pvt. Ltd. ("Aigua Sprinkler") with a paid up share capital of INR 99,990 (9,999 shares at Face Value INR 10 each) 24 April 2015 * ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant losses and added investment cost or; * To sell the CCDs at the price agreed by the Purchaser. * Hence, Assessee decided to dispose of its investment in Aigua Sprinkler for a nominal amount 30. There is no dispute with regard to the capital gain offered to tax by the Assessee on slump sale of its sprinkler business on 9.6.2015 to Aigua Sprinkler. The Full value of consideration received on slump sale was Rs.12 Crores. The networth of the sprinkler business was Rs.9,99,82,170/- The resultant capital gain of Rs.2,00,17,830/- declared by the Assessee was accepted by the AO. The Assessee sold its entire shareholding in Aigua Sprinkler to Gitendra G.Bahnot on 12.6.2015 worth Rs.99,999/- for a nominal sum of Rs.9,999/- and declared Short Term Capital Loss Rs.89,991/-. Likewise, the Debentures worth Rs.55 Crores were assigned to Gitendra G.Bhanot on 12.6.2015 for a nominal sum of Rs.100/- and the short term capital loss resulting from such transfer by way of assignment of the debentures of Rs.54,99,99,900. The aforesaid short term capital loss on sale of shares and assignment of debentures was sought to be carried forward for set off in future. Ground No.18 to 20 of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein the value of INR 14.7 crores was determined as the value of sprinkler business and substituted the full value of consideration received on transfer by the fair market value of the equity shares of Rs.14.7 crores as against a sum of Rs.999 actually received as consideration for transfer of shares. The AO accordingly, determined a short-term capital gain of INR 14,69,00,001 on sale of equity shares(Rs.14,70,00,000 - Rs.999= Rs.14,69,00,001/-); * On the short term capital loss on assignment of CCDs of Aigua India held by the Assessee of the face value of Rs.55 Crores to Jitendra G.Bhanot, at nominal value of Rs.100, the AO held that the assignment/sale of CCDs at a nominal value of INR 100 was irrational and not acceptable as per the Act and accordingly, determined the sale consideration to be at face value of INR 55 Crores and the short-term capital gain / loss was reworked to be Nil. 33. The Assessee filed objections before the Dispute Resolution Panel (DRP) against the draft order of Assessment incorporating the above findings of the AO. The DRP upheld the AO's findings and held that the series of transactions has been planned to avoid payment of capital gains and also for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed as withdrawn. 36. In so far as the issue with regard to short term capital loss on sale of shares by the Assessee, is concerned, the learned counsel for the Assessee explained the circumstances under which the sprinkler business was sold as a going concern and as to how losses were incurred by the sprinkler business resulting in a decision to sell sprinkler business. It was highlighted that the Assessee is engaged in the business of providing installation solutions for Tyco's fire and security products in India. The operations of the Assessee included a business unit primarily engaged in the installation of sprinklers ('Sprinkler business'). The sprinkler business was incurring huge losses and was not expected to make profits in the foreseeable future. In order to turnaround the business, the Assessee changed the business strategy in 2013. However, despite the same, the business was continuing to make losses. Therefore, the management envisaged shutting down this business unit to avoid future losses. However, this would have resulted in additional costs, efforts to close the open contracts and recover outstanding receivables, and could have possibly had legal repercussi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2014 since the direct cost of product installations ("Cost of product revenues") have exceeded corresponding revenues during the said historical period. These losses were primarily attributable to six projects which had significant cost overruns due to one or more of project delays, redesigns, estimation issues, labor issues etc. Moreover, significant proportion of the losses were attributable to one project (MEAT airport) where the cost overruns have been significant as a combination of redesigns, re-installations (the costs of which could not be passed through to the customer) and labor issues. As the projects are fixed-price in nature, the Sprinkler business has not been able to secure pro-rata increases in the event of re-designs / re-installations and have also been impacted by adverse exchange rate movements, considering that a significant proportion of the materials are imported. Further, it is to be noted that the Sprinkler Business registered positive gross margins for the year to date April 24, 2015 only due to completion of certain projects for which the costs were already booked. 39. The reason given by the Assessee why the business for which the Aigua Sprinkler, subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessee's EBITDA over the years. Financial Year EBITDA (in INR) FY 2012-13 -25,34,11,126 FY 2013-14 -73,04,71,185 FY 2014-15 -34,83,31,363 FY 2015-16 -56,81,11,225 FY 2016-17 -10,28,37,197 FY 2017-18 26,77,23,571 FY 2018-19 38,02,13,725 FY 2019-20 26,39,48,654 41. The learned counsel for the Assessee submitted that having regard to the future losses circumvented and the assurance, warranties and undertakings of the purchaser, it was agreed that the equity shares and CCDs of Aigua Sprinkler be transferred at a nominal value of INR 9,900 and INR 100 respectively. Since, the sale of equity shares / CCDs is to an unrelated third party, the sale consideration is driven by the market forces. Further, having regard to the underlying liabilities and obligations, it can be concluded that the current sale consideration is what a third party buyer would be willing to pay. Therefore the same cannot be questioned by the learned AO / Hon'ble DRP. 42. Our attention was drawn to the relevant extracts of the stock purchase agreement, debenture subscription agreement and business transfer agreement indicating the underlying liabilities and obligations: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... run the operations of the Sprinkler Business and discharge the operational and corporate obligations of Aigua. (Emphasis supplied) The same is also substantiated in Para B of business transfer agreement The Seller and the Purchaser have also entered into a debenture subscription agreement dated 9 June 2015, a copy whereof is attached as Annex 6 (DSA) pursuant to which the Seller has invested an amount of INR 550,000,000 in the Purchaser with the understanding that INR 120,000,000 out of such amount shall be paid by the Purchaser to the Seller as consideration for the Sprinkler Business under this Agreement (Emphasis supplied) 43. It was submitted that the short-term capital loss of INR 55,00,89,891 arising on transfer of investment in Aigua Sprinkler has not been claimed as business loss. It was submitted that the short-term capital loss has been set off with the long-term capital gain of INR 2,00,17,830 arising on the slump sale of the sprinkler business. The resultant loss amounting to INR 53,00,72,061 was carried forward by the Assessee in the return of income filed by it for AY 2016-17 and has not been set off any eligible income till date. By way of the same, the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on must be taken at the rate of Rs. 136 per share. This interpretation of the main part of s. 12B(2) is borne out by the fact that in the first proviso to s. 12B(2) the expression "full value of the consideration" is used in contradistinction with "fair market value of the capital asset" and there is an express power granted to the ITO to "take the fair market value of the capital asset transferred" as "the full value of the consideration" in specified circumstances. (Emphasis supplied) Reliance was placed on the decision of Hon'ble Bombay High Court in the case of Morarjee Textiles Ltd. (ITA No. 738 / 2014) dated January 24, 2017 wherein the Hon'ble High Court did not admit the Department's appeal and upheld Hon'ble Mumbai Tribunal's decision in relation to rejection of fair market value of the unlisted shares for working out long term capital gain. Our attention was drawn to the following extracts of the judgement: As held by the Tribunal at the relevant time there was no power vested in the authorities under the Act to substitute a full value of consideration received for sale of shares by fair market value in respect of stocks a nd shares. The power to substitute full con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see, it would not have fetched price of Rs.12 crores from a third party, why did the Assessee invest Rs.55 Crores of his money in Aigua Sprinkler and then give Mr.Gitendra G.Bhanot the entire business of Aigua Sprinkler, which as per valuation of the valuers was worth Rs.14.7 Crores for a paltry sum of Rs.999/-. It was highlighted that effectively Mr.Gitendra G.Bhanot has been the beneficiary of a business worth Rs.14.7 Crores and debenture subscription money of Rs.55 Crores less Rs.12 Crores paid to the Assessee as consideration for slump sale. What is the business rationale for conferring such a benefit on Mr.Gitendra G.Bhanot at the cost of incurring loss. The purpose creating Aigua Sprinkler and transferring by way of slump sale the sprinkler business and immediately transferring to Mr.Gitendra G.Bhanot was nothing but a colorable device. The purpose was to set off the gain on slump sale against loss on sale of shares and debentures. The fact that the Assessee claimed set off loss which was denied and the fact that in future years he did not claim the loss cannot be the basis to say that there was no colorable device. He reiterated the fact that the transaction of slump sale an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n sale of shares and assignment of debentures was sought to be set off against the capital gain on slump sale and the remaining sum was sought to be carried forward for set off in future. 48. The short term capital loss on sale of shares and debentures was not accepted by the AO and the CIT(A). On short term capital loss on sale of equity shares of Aigua India by Assessee to Jitendra G.Bhanot, at nominal value, the AO relied on the valuation report of sprinkler business at the time of Slump Sale wherein the value of INR 14.7 crores was determined as the value of sprinkler business and substituted the full value of consideration received on transfer by the fair market value of the equity shares of Rs.14.7 crores as against a sum of Rs.999 actually received as consideration for transfer of shares. The AO accordingly, determined a short-term capital gain of INR 14,69,00,001 on sale of equity shares(Rs.14,70,00,000 - Rs.999= Rs.14,69,00,001/-). On the short term capital loss on assignment of CCDs of Aigua India held by the Assessee of the face value of Rs.55 Crores to Jitendra G.Bhanot, at nominal value of Rs.100, the AO held that the assignment/sale of CCDs at a nominal value of INR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket value of the asset transferred, but it shall mean the price bargained for by the parties to the transaction. It has been further held that the consideration for the transfer of a capital asset is what the transferor receives in lieu of the assets he parts with, viz., money or money's worth, and, therefore, the very asset transferred or parted with cannot be the consideration for the transfer and, therefore, the expression "full value of the consideration" cannot be construed as having a reference to the market value of the asset transferred and that the said expression only means the full value of the things received by the transferor in exchange for the capital asset transferred by him. Section 50C was introduced in the Act, by the Finance Act, 2002 with effect from 1st April 2003 for substituting the valuation done for the Stamp Valuation purposes as full value of the consideration in place of the apparent consideration shown by the transferor of the capital asset, being land or building and, accordingly, calculating the capital gains under Section 48. The said provision reads thus: 50C Provision for full value of consideration in certain cases (1) Where the considera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration received on transfer by the fair market value of unquoted shares. The provisions of Sec.50CA of the Act are applicable only from AY 2018-19 and not applicable for AY 2016-17 in which the transfer of shares took place during the previous year and the capital gain from transfer with which we are concerned in the present appeal. 53. We are of the view that the entire exercise of forming a subsidiary, selling the sprinkler business by way of slump sale, subscribing to the debentures and ultimately selling shares held in the subsidiary at a loss (much less than its value) and assigning debentures at virtually nil value, is well thought out and has been carried out with a view to gain tax advantage and to ultimately confer benefit to a third party. Interjecting Aigua Sprinkler in the transaction was only with a view to gain tax advantage and for no other purpose. It is a colorable device adopted by the Assessee. A method put in place to avoid a legal liability, involving an unacceptable form of avoidance that is not within the framework of the law. Whether the device should be accepted or not is a changing perception and Courts have been conservative in the present times than in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 23. erred in disallowing payment of management fees amounting to INR 17,691,705 to Tyco International Limited under section 40(a)(i) of the Act without appreciating the fact that the Applicant is not required to withhold taxes on these payments as per the provisions of the Act read with India- Switzerland Treaty read with India-US Treaty . 24. erred in disallowing payment of management fees amounting to INR 1,031,316 to Tyco International Asia, Inc. under section 40(a)(i) of the Act without appreciating the fact that the Applicant is not required to withhold taxes on these payments as per the provisions of the Act read with India- Singapore Treaty. 55. The Assessee entered into inter-company services agreement with Tyco International Management Company LLC, USA ("TIMCO") ( pages 2870 to 2889 of supplementary paperbook dated July 18, 2022) and Tyco International Asia, Inc., Singapore to receive certain management services. In relation to the services rendered by TIMCO, the Assessee remunerates Tyco International Limited, Switzerland ("TIL, Switzerland") which is appointed as a billing & collection agent by TIMCO, wherein TIMCO is beneficial owner of the income received from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overned by the provisions of the Act or the relevant DTAA, whichever is more beneficial. 57. It was contended that having regard to the nature of services, these could at best be managerial or consultancy services and hence could be characterised as Fees for technical services ("FTS") / Fees for included services ("FIS") as per the provisions of the Act but cannot be taxed in India as per the applicable DTAA. In this regard, the Assessee pointed out that the sum of Rs.1,76,91,705/- paid to TIMCO had to be judged in the light of the provisions of the India-USA DTAA because TIMCO was a tax resident of USA. The payments were made for managerial services to TIL, Switzerland as they were appointed as a billing and collection agent by TIMCO for management services rendered to the Assessee. Accordingly, TIL, Switzerland was only a 'flow through' entity and would be deemed to be acting on behalf of TIMCO and accordingly the effect would be as if the Assessee has directly engaged with TIMCO. 58. In so far as the payment of management fee amounting to Rs.10,31,316/- to Tyco International Asia Inc., Singapore is concerned, the Assessee submitted that the said payee was tax resident of Singa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w-how or processes, which enable the personnel of the Assessee acquiring the services to apply the technology contained therein. Hence, as the management services rendered by the AEs and do not "transfer" / "make available" any technical knowledge, skills, know-how, etc., to the Assessee, which could be independently applied by the Assessee, and such services would not qualify as "Fees for included services / Fees for technical services" as defined under Article 12(4) of India-US DTAA and Article 12(4) of India-Singapore DTAA, respectively. 61. Attention was drawn to the Memorandum of Understanding entered into between India and US explaining the term "make available" as follows: * Technology will be considered as "made available" when the person acquiring the services is enabled to apply the technology. * The fact that the provision of services may require technical input by the person does not per se mean that technical knowledge skill, etc. are "made available" to the person utilizing the service. Similarly, the use of a product that embodies technology shall not per se be considered to make the technology available. 62. It was submitted that in the assessment order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not made available to the assessee the technology or the technological services which is required to provide the distribution, management and logistic services. When once factually it is held that the technical services has not been made available, then in view of the law declared in the Judgment of De Beers India Minerals Pvt Ltd (supra), there is no liability to deduct tax at source. * The AAR ruling of Intertek Testing Services India Private Ltd (307 ITR 418) in relation to 'make available' concept states that service should be aimed at and result in transmitting the technical knowledge, etc., so that the payer of service could derive an enduring benefit and utilize the knowledge or know-how in future on his own without the aid of the service provider. * The Hon'ble Mumbai ITAT in case of Raymond Limited vs. DCIT (86 ITD 791) held that the requirement of "make available" in the tax treaty is met if the technology, knowledge or expertise can be applied independently by the person who obtained the services, without recourse to the service provider. * The Hon'ble Bangalore ITAT in the case of IRunway India (P.) Ltd. (IT(TP) A NO. 229 / BANG / 2019) for AY 2015-16 dated April ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IL, Switzerland was only a 'flow through' entity and it was only TIMCO which was the beneficial owner of the income from managerial fees received from the Assessee and therefore would be deemed to be acting on behalf of TIMCO and accordingly the effect would be as if the Assessee has directly engaged with TIMCO. On the above argument, the DRP held that the argument cannot be accepted but no reasons whatsoever was given by the DRP. The DRP thereafter held that the applicable DTAA would be India-Switzerland DTAA. The alternative argument of the Assessee was that if India-Switzerland DTAA is to be considered as applicable, then in terms of the Most Favoured National Clause (MFN Clause) in the said DTAA, the restricted scope of taxation under more than one DTAA for definition of FTS is available to be adopted. Accordingly the restricted scope of FTS as provided in India-UK DTAA can be applied in India Switzerland DTAA by virtue of MFN clause. On this alternate argument, the DRP held that by way of protocol dated 27.12.2011 MFN clause was introduced in the India-Switzerland DTAA and that protocol says that any convention entered into by India after 27.12.2011 containing a more restricte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven assuming that the nature of the payment was FTS within the meaning of the Act because under the Indo US Treaty and India-Singapore DTAA, FTS is taxable in India only when the recipient of the payment 'makes available' technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. The details of the services rendered by the non-residents are given in the annexure to this order. The services so provided were (a) legal & tax compliance services (b) Communication Support Services; (c) Information Technology support services; (d) internal audit services; (e) Marketing strategy and business development advisory services; (f) Human resource services; (g) Mergers and acquisition services; (h) Operation excellence servies and (i) Facility management services; In short it was in the nature of services of managerial in nature. 70. The relevant articles in the treaty between India and USA are is Article 12 which deals with taxability of Royalties and fees for included services. In terms of Article 12(1) . The same are the wordings in India-Singapore DTAA also. The discussion with regard to India-US ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this relative pronoun as a conjunction is to denote some additional function the 'rendering the services' must fulfil. And that is that it should also 'make available' technical knowledge, experience, skill etc. The word which occurring in the article after the word 'services' and before the words 'make available' not only ITA No.229/Bang/2019 described or defines more clearly the antecedent noun '(services') but also gives additional information about the same in the sense that it requires that the services should result in making available to the user technical knowledge, experience, skill, etc. Thus, the normal, plain and grammatical meaning of the language employed is that a mere rendering of services is not roped in unless the person utilizing the services is able to make use of the technical knowledge, etc. by himself in his business or for his own benefit and without recourse to the performer of the services in future. The technical knowledge, experience, skill etc. must remain with the person utilizing the services even after the rendering of the services has come to an end. A transmission of the technical knowledge, experience, sk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the service provider...payment of consideration would be regarded as FIS only if the twin test of rendering services and making technical knowledge available at the same time is satisfied." 75. It is not even the allegation of the revenue that the non-residents had made available to the assessee, the knowledge generated in the course of rendering managerial services. In our view the services rendered were purely managerial services and by no stretch of imagination can be considered as making available any technical knowledge, experience, skill, know-how or processes, to the assessee. In view of the fact that the services provided by non-residents, did not make available any technical knowledge, experience, skill, know-how or processes to the assessee, the same cannot be regarded as taxable in India. Consequently, there was no obligation on the part of the assessee to deduct tax at source at the time of making payment. Hence, the disallowance made u/s 40(a)(a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and markets; * Assistance in the design and implementation of advertisement and promotion materials which are in line with the Tyco trademark's positioning; * Organisation and participation in seminars, conferences and exhibitions for the benefit of TFSIPL, printing of catalogues; * Advice, assistance & training on marketing techniques such as market surveys, market analysis & evaluation, marketing communications, identifications of new market trends, definition of sales policy, collection and dissemination of marketing information; and * Methods for identification of potential new markets and prospects. Teleconferen ces & meetings TFSIPL has obtained guidance in relation to better servicing of existing clients, better understanding of market trends. TFSIPL was also provided a platform for exchange of information with various industrial and trade associations. Apart from various meetings and discussions held throughout the year, TFSIPL was provided with useful insights on the market trends in India. * TFSIPL has received marketing strategy and business development advisory services either through in-person meetings, periodic calls. 3. Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iances, accounts reconciliation. 6. Human resource services * Coordination of TFSIPL's resources policies; * Advice on recruitment strategies, wages, salaries; * Establishment of appraisal policies; * Coordination and assistance on training activities; training of management staff and technicians; * Coordination of secondments; * Recruitment of top level managers, advice on selection of and assistance in recruiting top level employees; * Assistance in individual career planning for group executives; and * Advice and coordination of insurance and incentive benefits programs. Emails, presentations, meetings & phone conferences TFSIPL obtained assistance with formulating standard policies and processes in relation to compensation & benefits; minimum criteria for recruiting personnel; performance evaluation; training & development etc. * TFSIPL generally receives advice, training, assistance from HR team via inperson meetings / teleconferences. 7. Mergers and acquisition services * Provides guidance to Tyco entities regarding its acquisitions and divestitures; * Provide inputs on large and complex transactions that require specialized expertise. * &n ..... X X X X Extracts X X X X X X X X Extracts X X X X
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