9911796707
TMI Blog2024 (7) TMI 1086X X X X Extracts X X X X X X X X Extracts X X X X ..... allowed. TDS u/s 194C - Disallowance made u/s 40(a)(ia) on account of failure to withhold tax payments - Payment made to M/s Team Lease for providing secretarial and clerical staff on contractual basis - HELD THAT:- We find merit in the contention advanced in behalf of the Revenue. In absence of a valid/proper Nil tax withholding certificate (containing the name of the Assessee) having been issued under Section 197(1) of the Act for the relevant previous year, the Assessee was under obligation to deduct tax at source from payments made to Team Lease as per provisions of Section 194C of the Act. We decline to interfere with the order passed by the CIT(A) confirming disallowance made u/s 40(a)(ia) - Decided against assesee. TDS u/s 195 - disallowance made u/s 40(a)(i)/(ia) - failure to withhold tax from the payments of Global Overhead Charges to Deutsche Securities Inc., New York, USA - HELD THAT:- DTAA between India and Germany did not contain the make available clause in the definition of Fees for Technical Services as contained in Article 12(4) of the said DTAA. Therefore, disallowance was reported/made under Section 40(a)(i) in the Tax Audit Report and the computation of total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vices . In view of the above, we do not find any infirmity in the conclusion drawn by the CIT(A) that VSAT/Leased Line Charges and Transaction Charges are not in the nature of fee for technical services. Accordingly, we decline to interfere with the order passed by the CIT(A) deleting the disallowance under Section 40(a)(ia) of the Act in respect of VSAT/Lease Line Charges and Transaction Charges. Claim of benefit of variation/reduction of 5 percent in terms of the provisions contained in proviso(s) to Section 92C(2) - HELD THAT:- Special Bench of the Tribunal in the case of M/s IHG IT Services (India) Private Limited [ 2013 (5) TMI 309 - ITAT DELHI] after taking into consideration the retrospective amendment to the second proviso to Section 92C(2) of the Act by the Finance Act, 2012, held that the benefit of tolerance margin of 5% would be available only if the variation is within the said tolerance margin. Once the variation exceeded the tolerance margin of 5%, then there would be no benefit even up to tolerance margin of 5%. Then, the ALP as worked out under Section 92C(1) would have to be taken as ALP without any benefit of tolerance margin. Accordingly, we overturn the decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 should be deleted. 3. The CIT(A) erred in upholding the action of the AO in disallowing Rs. 1,31,15,947 under section 40(a)(i), as tax was not withheld on global overhead charges paid / payable to M/s. Deutsche Securities Inc., New York having failed to appreciate that the services received from M/s. Deutsche Securities Inc., New York were not in the nature of 'fees for included services' as per clause 12(4)(b) of the Double Taxation Avoidance Agreement between India and USA. The appellants pray that the disallowance under section 40(a)(ia) on account of global overhead charges of Rs. 1,31,15,947 should be deleted. 4. The CIT(A) has erred in confirming the addition of Rs. 12,56,43,551 made by learned Assessing Officer (AO)/ Transfer Pricing Officer (IPO) and further erred in enhancing the addition by Rs. 4,19,89,484 based on the provisions of Chapter X of the Income-tax Act, 1961 ('the Act'). 5. The CIT(A) has erred in upholding/confirming the action of the AO/TPO in disregarding the benchmarking analysis made by the Assessee and comparable transactions (ie. rate charged by unrelated brokers to associated enterprise) selected by the Assessee in respect of equity b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment year 2005-06 2.2. The Assessee has also raised following Additional Grounds of appeal vide letter dated 22/08/2022 in ITA No. 8354/Mum/2011: 12. In the event a view is taken that it is not possible to quantify with complete accuracy the adjustment claimed by the Assessee in accordance with the provisions of Rule 10B of the Income Tax Rules, 1962 (on account of significant differences in the transactions entered by the Assessee with associated enterprises and top 10 FIIs), the most appropriate method ( MAM ) should be regarded as Transactional Net Margin Method ( TNMM ). 2.3. The Revenue has raised following grounds of appeal in ITA No. 8033/Mum/2011: 1. (i) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs. 96,66,784/- made u/s.40(a)(ia) in respect of Transaction charges paid to Stock Exchange, without appreciating the facts that these were composite charges for professional and technical services rendered by the Stock Exchange to its members and the assessee has failed to deduct TDS thereon. (ii) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in ignoring the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, a reference was made to the Transfer Pricing Officer for determination of Arm s Length Price (ALP) of the International Transactions undertaken by the Assessee with its AEs. Vide order dated, 31/10/2008, the Transfer Pricing Officer proposed Transfer Pricing Adjustment of INR 12,56,43,551/- in respect of Clearing House Trades (for short CH Trades ) undertaken by the Assessee with its AEs. No transfer pricing adjustment was proposed in relation to the International Transaction. The Assessing Officer frame assessment of the Assessee under Section 143(3) of the Act vide assessment order, dated 29/12/2008, after making the following addition/disallowance (a) Transfer Pricing Addition of INR 12,56,43,551/-, (b) Disallowance of INR 3,36,450/- under Section 14A of the Act, (c) Disallowance of INR. 98,30,093/- under Section 40(a)(ia) of the Act in respect of VSAT Expenses/Line Charges of INR. 1,63,309] and Transaction Charges of INR 96,65,784/-, (d) Disallowance of INR. 10,27,625/- under Section 40(a)(i) of the Act in respect of payments made to Term Lease for provisions of technical and clerical staff on contractual basis. (e) Disallowance of INR. 1,31,15,947/- under Section 40(a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer invoked provisions of Section 14A of the Act made a disallowance of INR 3,36,450/- by applying the provision contained in Rule 8D of the Income Tax Rules, 1962 (for short the IT Rules ). 5.2. The Assessee challenged the above disallowance before the CIT(A). The Assessee, inter alia, submitted that the provisions contained the Rule 8D of the IT Rules were not applicable to the Assessment Year 2005-06. The CIT(A) accepted the aforesaid contention of the Assessee. However, by applying a method of computation similar to the one contained in Rule 8D of the IT Rules quantified the amount of disallowance under Section 14A of the Act at INR. 5,02,967/-. Thus, the CIT(A) enhanced the disallowance of INR. 3,36,450/- made by the Assessing Officer by INR. 1,65,517/-. 5.3. Being aggrieved the Assessee has now preferred appeal before us in this issue. 5.4. Before us, the primary contention of the Assessee was that the CIT(A) had, indirectly, applied Rule 8D of the IT Rules and had enhanced the disallowance in clear violation of the judgment of the Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd (328 ITR 81). It was submitted that the disallowance be restric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eam Lease for providing secretarial and clerical staff on contractual basis. Accordingly the Assessing Officer the payments made to M/s Team Lease were subject to withholding of tax under Section 194C of the Act and since the Assessee had failed to deduct tax from the payment of INR. 10,27,625/- made to M/s Team Lease, the same was disallowed as per the provision of section 40(a)(ia) of the Act. The CIT(A) confirmed the action of the Assessing Officer. 6.2. In appeal before the Tribunal it was submitted that the M/s Team Lease had obtained a certificate under Section 197(1) of the Act for receiving income from various parties without deduction of tax at source for the relevant assessment year. On account of a procedural lapse the name of the Assessee was not included in the certificate obtained under Section 197 of the Act for the relevant assessment year. The aforesaid lapse was corrected subsequently and the name of the Assessee was included in the tax withholding certificate under Section 197 of the Act for the Assessment Year 2006-07. A copy of the certificate issued under Section 197 of the Act. It is not disputed by the Revenue that the aforesaid certificate covers payments o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Associated Enterprise (namely, M/s Deutsche Securities Inc. New York, USA) as global overhead costs mainly incurred for management leadership charges which included the cost incurred by the group on management personnel who are monitoring and overseeing the Global Market Equities and Global Banking business hosted in Deutsche Equities India Pvt. Ltd. In response to the show cause notice issued by the Assessing Officer during the assessment proceedings, it was submitted on behalf of the Assessee that the aforesaid payments were not covered by the expression Fee for Included Services as defined in Article 12 of the Double Taxation Avoidance Agreement between India and USA [for Short DTAA ] since the services under consideration did not 'make available' any technology, skill etc. It was further submitted that, the same were in the nature of business income and since the payee did not have a permanent establishment in India in terms of Article 5 of DTAA, such business income was not be taxable in India as per the Article 7 of the DTAA. However, the Assessing Officer was not convinced. The Assessing Officer noted that the Assessee had also made payments to other AE's like ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship and co-ordination functions which were provided centrally. The same constituted managerial services which were excluded from the definition of expression fees for included services used in Article 12(4)(b) of the DTAA. Further, the same and did not make available any technical knowledge, skill, know-how etc. Hence the global overhead charges paid/payable did not constitute fees for included services in terms of Article 12 of the DTAA. 7.7. In support of the above contentions, reliance was placed on behalf of the Assessee on the Memorandum of Understanding concerning Fees for Included Services executed between India and USA. On perusal of the same we find that it was agreed position that the consultancy services which are not technical in nature do not fall within the ambit of Clause 4(b) of Article 12 of the DTAA. The relevant extract of the aforesaid memorandum of understanding reads as under: Paragraph 4(b) Paragraph 4(b) of Article 12 refers to technical or consultancy services that make available to the person acquiring the services, technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer. 7.10. Further, we note that the Assessing Officer and the CIT(A) had observed that the Assessee had made similar payments towards global overhead charges to other AE's like Deutsche Bank AG, APHO Singapore and Deutsche Bank AG, London after deducting tax from the same. However, no tax was deducted from payment of global overhead charges to Deutsche Securities Inc., New York, USA. In this regard, it was explained by the Assessee that Deutsche Bank AG, APHO Singapore and Deutsche Bank A.G, London were branches of Deutsche Bank A.G., a tax resident of Germany. The DTAA between India and Germany did not contain the make available clause in the definition of Fees for Technical Services as contained in Article 12(4) of the said DTAA. Therefore, disallowance was reported/made under Section 40(a)(i) in the Tax Audit Report and the computation of total income. Thus, the aforesaid payments of global overhead charges stood on a different footing as compared to the payments for global overhead charges to Deutsche Securities Inc. New York, USA, a tax resident of USA entitled to claim benefit of Article 12(4)(b) of the DTAA containing make available clause. 7.11. In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AEs with the Assessee and AEs with unrelated Indian brokers for equity broking services. Therefore, the TPO selected the brokerage rates charged by the Assessee to its top 10 Foreign Institutional Investors (FIIs) as comparable uncontrolled transactions for benchmarking the brokerage rates charged by the Assessee to the AEs in respect of CH Trades. A show cause notice was issued to the Assessee, and in response to the same, the Assessee filed objections to comparable uncontrolled transactions selected by the TPO and in alternative, sought adjustments for the differences of volume, marketing cost and research cost. The TPO only accepted Assessee s contention relating to the adjustment for marketing cost and allowed Marketing Cost Adjustment to the extent of 5 basis points. Thus, TPO proposed upwards transfer pricing adjustment of INR. 12,56,43,551/- and the same was incorporated in the assessment order. 8.2. In appeal, the CIT(A) declined to grant any relief and withdrew that marketing adjustment granted by the TPO. 8.3. The Assessee is now in appeal before the Tribunal challenging the transfer pricing adjustment. 8.4. We have head both the sides and perused the material on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing cost adjustment are allowed as well as a brief description of the adjustments: Particulars Basis Point Reference Average Brokerage Rate Charged to Top 10 FII Clients 26bps Page 8 of TP Order Less: Volume Adjustment 12 bps Page 173 174 of paper book Less: Marketing Cost Adjustment 5bps Page 8 of TP order In view thereof, it is respectfully submitted that if the aforesaid adjustments are granted, the rate at which the brokerage is charged by the Assessee to Deutsche Securities Mauritius Limited ('DSML') (i.e., 10 bps) would be at arm's length and no transfer pricing adjustment will be required thereto. Judicial Precedents to justify the Comparability Adjustments It is respectfully submitted that the Hon'ble ITAT in various decisions has in principle upheld the grant of the aforesaid adjustments claimed by the Appellant. The quantum and quantification of the adjustment may vary from case to case depending on the facts, issues raised by lower authorities and claims made by the assessees, etc. In the case of Morgan Stanley India Company Private Limited (Formerly known as J.M. Morgan Stanley Securities Private Limited) Vs A.CL.T. - 4(3), Mumbai CO No. 215/Mum/2008 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee for rendering services to Associated Enterprises vis-a-vis unrelated entities. The Hon'ble ITAT relied on Ld. CIT(A)'s order for granting relief of 0.29% as adjustment towards additional cost incurred by the Assessee (in relation to credit risk, marketing and research cost). The relevant findings of Hon'ble ITAT (refer Para 3, Page 8 of the Order, Page 164 of the caselaw paper book) are stated below: .....Assessee should have been allowed the relief as per difference in the activities in the services rendered by it to related and unrelated parties. .....Assessee had to incur additional cost to the tune of 0.29% in relation to services rendered by it to unrelated parties when the same is compared to the similar services rendered to the related parties ....In view of these facts, we are of the opinion that Ld. CIT(A) was right in granting relief to the assessee and we decline to interfere in his findings on this issue. Additionally, in the case of J. P. Morgan India Private Limited vs. The ACIT, Range 4(3), Mumbai ITA No. 1502/MUM/2014 ( 2009-10), the Hon'ble ITAT has granted various adjustments, relying on Hon'ble ITAT's Order dated 12th February 20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n VSAT/Lease Line Charges and INR. 96,66,784/- Transaction Charges which were disallowed by the Assessing Officer invoking provisions of Section 40(a)(ia) of the Act. 11.1. In appeal the CIT(A) deleted the both the above disallowances holding that the Assessee was not under obligation to deduct tax from the payments towards VSAT/Leased Line Charges and Transaction Charges paid to stock exchanges since the same were not in the nature of fee for technical services as defined in Explanation 2 to Section 9(1)(vii) of the Act. Therefore, disallowance under Section 40(a)(ia) of the Act was not warranted. 11.2. The Revenue in now in appeal before the Tribunal. 11.3. We have heard the rival submission and perused the material on record. 11.4. The provisions contained in Section 40(a)(ia) of the Act are triggered in case of failure to deduct tax at source. The primary contention of the Revenue before us was that the payment for VSAT/Leased Line Charges as well as the Transaction Charges are not for standard facility as has been concluded by the CIT(A). According to the Revenue, the payments represent fee for services provides by the stock exchanges to its members which are technical in natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclusive to the seeker of the service, the latter, even if termed as a service, is available to all and would therefore stand out in distinction to the former. The service provided by the Stock Exchange for which transaction charges are paid fails to satisfy the aforesaid test of specialized, exclusive and individual requirement of the user or consumer who may approach the service provider for such assistance/service. It is only service of the above kind that, according to us, should come within the ambit of the expression technical services appearing in Explanation 2 of Section 9(1)(vii) of the Act. In the absence of the above distinguishing feature, service, though rendered, would be mere in the nature of a facility offered or available which would not be covered by the aforesaid provision of the Act. 9. There is yet another aspect of the matter which, in our considered view, would require a specific notice. The service made available by the Bombay Stock Exch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e correctness of the view taken by the Bombay High Court with regard to the issue of the disallowance under Section 40(a)(ia) of the Act. All the appeals, therefore, shall stand disposed in the light of our views and observations as indicated above. (Emphasis Supplied) 11.7. As regards VSAT/Leased line charges are concerned, the same are recovered by the stock exchanges from members for providing connectivity by way of VSAT/Leased Lines. In our view, as per the above judgment of the Hon'ble Supreme Court in the case of Kotak Securities Limited (supra), the VSAT/Leased Line Charges would also be regarded as payment for a facility provided by the stock exchanges and not fee for technical services . 11.8. In view of the above, we do not find any infirmity in the conclusion drawn by the CIT(A) that VSAT/Leased Line Charges and Transaction Charges are not in the nature of fee for technical services. Accordingly, we decline to interfere with the order passed by the CIT(A) deleting the disallowance under Section 40(a)(ia) of the Act in respect of VSAT/Lease Line Charges and Transaction Charges. Ground No. 1(i) to 1(v) raised by the Revenue are, therefore, dismissed. Ground No. 2 Cross ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
