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TMI Blog2023 (3) TMI 399X X X X Extracts X X X X X X X X Extracts X X X X ..... e entire business model of the assessee is dependent on foreign AE which has provided the concept, design, trademark, software, etc. for the assessee s day to day operation clearly establishes that services were rendered by the foreign AE to the assessee (independent of the legal point that the AE relationship itself has been established only due the existence of the services and in absence thereof, AE relationship would fail, and consequently, the jurisdiction of the TPO itself would also fail.) Therefore on the facts on record, it is beyond doubt that the assessee is wholly dependent on the use of know-how, patents, copyright, trademark, licences, franchise and other services of We Work Global, for its day to day operation in India. Thus TPO is not justified in treating the ALP of management fee paid by assessee to WeWork Global at NIL . It is ordered accordingly. Interest on CCDs issued by the assessee - assessee had issued 33,75,000 Compulsory Convertible Debentures (CCD) to WeWork Netherlands under the Debenture Subscription Agreement - HELD THAT:- The Bangalore coordinate bench of the Tribunal in the case Summit Development Pvt. Ltd.[ 2022 (11) TMI 1323 - ITAT BANGAL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mination of arm's length price (ALP) with reference to all the international transactions reported by the assessee. The TPO, vide order dated 31.07.2021 passed an order under Section 92CA of the Act proposing an aggregate adjustment of Rs.8,94,53,562/-. The TP adjustment proposed are detailed below: - S.No. TP Adjustment Amount (INR) 1 Payment of Management Fee (i.e., towards Operations and Management service/ license 7,09,23,425/- 2 Payment of Interest on CCD 1,85,30,137 Total 8,94,53,562 3. The Assessing Officer (AO) thereafter passed draft assessment order on 23.09.2021 incorporating the said TP adjustments. The AO did not propose any other adjustments. 4. Aggrieved by the draft assessment order the assessee filed objections before the Dispute Resolution Panel (DRP) on 22.10.2021. The DRP, vide its directions dated 29.06.2022, disposed off the objections of the assessee. The DRP rejected the objections raised by the assessee. Pursuant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der process technology , trademark and franchise were selected. The ALP was finally determined based on the rate prescribed for the 8 comparable agreements. The arm s length range of the management fee in comparable transactions was determined at 8% to 16%. Since the assessee s transaction was undertaken at 12.5% the assessee in its TP study concluded the said transaction to be at ALP. 9. The TPO, however, held that the ALP of the said transaction of payment of management fee was to be taken at NIL . The TPO ignored the benchmark analysis undertaken by the assessee. Following is the summary of the TPO s conclusions (refer pages 7 8 of the TP order): - - Alleged failure of the assessee to prove the actual receipt of the said services; and - Alleged non-satisfaction of need/benefit test Under controlled circumstances any independent enterprise having skilled sufficiently trained manpower would not have been willing to pay any third party to provide the above said services. 10. Aggrieved, assessee filed objections before the DRP. The assessee filed sample copies of emails between WeWork Global and the assessee to demonstrate that the assessee was in recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. It provides flexible leasing options to the tenants on short term basis. Its work space included dedicated desk in shared office spaces, standard office, office suites with private amenities and full floor offices. WeWork work spaces are used by businesses and organisations of various size, freelancers and small start-ups to fortune 500 companies. In India the assessee company has taken franchise from WeWork Global based on OMA entered into between the assessee and WeWork Netherlands. The nature of services and the related benefits, the test of determination of management fee along with relevant agreement are placed on record which depicts the entire business model of the assessee is dependent on foreign AE, which has provided the concept, support, the acquisition and design of property, trademark and trade name, proprietary and third party software for the day to day operations of the assessee in India. In other words, the assessee is dependent on AE to provide all the necessary support, to design and construct of the premises, sell the concept in the market and also operationalisation of business which will require similar look and feel, connected by common software for bookin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of AEs. h. Access to WeWork Brand / Trademarks i. AEs provide access to the intellectual property in the nature of patents, copyrights, business names, domain names (registered or unregistered) including the trademarks owned by them, essential to WeWork India for operating its business. 14. The above benefit derived from the foreign AE have a direct link in increasing the trade and number of desk sold in each of the financial year which is evident from the tabulation below: - FY 2017-18 FY 2018-19 Difference % of increase FY 2019-20 Difference (on comparison with FY 2017- 18) % of increase with FY 2017-18 as base No. of Desks Sold 8,341 26,300 17,959 215% 36,500 28,159 338% Revenue from operations 56,73,31,681 3,01,60,95,458 2,44,87,63,777 432% 6,91,08,82,854 6,34,35,51,173 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf has been established only due the existence of the services and in absence thereof, AE relationship would fail, and consequently, the jurisdiction of the TPO itself would also fail.) Therefore on the facts on record, it is beyond doubt that the assessee is wholly dependent on the use of know-how, patents, copyright, trademark, licences, franchise and other services of We Work Global, for its day to day operation in India. Therefore once the above fact is established, the ALP of management fee paid by the assessee company to WeWork Global cannot be determined at NIL by the TPO. In this context we rely on the following judicial pronouncements: - i) Toyota Kirloskar Motors Pvt. Ltd. (2018) 7 TMI 477 (Kar.) ii) EKL Appliance Ltd. 345 ITR 241 (Del.) iii) Cushman and Wakefield India Pvt. Ltd. 367 ITR 730 (Del) iv) Inteva Products India Automotive Pvt. Ltd. TS-565-ITAT-2016 Bang-TP (Bangalore Trib.) v) Royal Canin India Pvt. Ltd. TS-687-ITAT-2022 Mum-TP (Mumbai Trib) vi) US Technology Resources Pvt. Ltd. TS-1229-ITAT-2018 COCH-TP (Cochin Trib) 16. In view of the above said reasoning and the judicial pronouncements cited supra we hold that the TPO is not justified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 94B of the Act w.e.f. 01.04.2018 to address the issue of base erosion posed by thin capitalisation, the same shall take precedence and no adjustment in this regard can be made under the TP provisions which is limited to the determination of ALP. The learned A.R. submitted that the proposition of CCDS are in the nature of debt and cannot be recharactrised as equity by the TPO and the same is within the scope of Section 94B of the Act was also upheld by the coordinate bench order of the Tribunal in Summit Development Pvt. Ltd. in IT(TP)A No. 794/Bang/2022 (order dated 10.11.2022). 21. The learned D.R., on the other hand, supported the orders of the AO and TPO. 22. We have heard the rival contentions and perused the material on record. The Bangalore coordinate bench of the Tribunal in the case Summit Development Pvt. Ltd. (supra) had held that CCD are in the nature of debt and cannot be recharacterised as equity till the time the same is converted into equity. The relevant extract of the said order is reproduced below: - 7.3 It is well settled by judicial proposition that CCDs constitute debt and interest payable thereon is a deductible expenditure till the time the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made under Section 94B of the Act but only is contending that thin capitalisation cannot be the basis for such TP disallowance and the same may be tested for arm s length compliance and held to be excessive based on benchmarking exercises. In such an event, the excessive interest of ALP will account for permanent disallowance, while balance interest would be subject to Section 94B of the Act which would be in the nature of a temporary disallowance permitted to be carry forward. However, in the instant case this is not what has been done by the TPO. The above preposition finds support from various judicial pronouncements as detailed below: - i) Besix Kier Dabhol SA 26 taxmann.com 169 (Bom) ii) Summit Developments Pvt. Ltd. IT(TP)A No. 794/Bang/2022 iii) CAE Flight Training India Pvt. Ltd. (2019) (8) TMI 554 Bangalore Trib. iv) Embassy One Developers Pvt. Ltd. (2-020) (12) TMI 110 Bangalore Trib. v) IMS Health Analytics Services Pvt. Ltd. (2020) (6) TMI 505 Bangalore Trib. vi) TE Connectivity Services Pvt. Ld. IT(TP)A No. 191/Bang.2022 vii) Enzen Global Solutions Pvt. Ltd. 14 taxmann.com 2 (Bang. Tirb.) viii) Amanora Future Pvt. Ltd. ITA 772/Pun/2018 24. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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