Steria (India) Ltd. Vs. ACIT (ITAT Delhi)
Ground number 11 is with respect to the disallowance of management services fees for non-deduction of tax u/s 40 (a) (i) of the act amounting to ₹ 206,044,024 incurred on account of management services fees, held to be fees for technical services on which tax deduction at source u/s 195 of the act should have been done by the assessee and therefore disallowance was made. The learned dispute resolution panel also upheld the order of the learned assessing officer holding that payment made to groupe Steria SCA France is also in the nature of fees for technical services in terms of article 13 of the India France double taxation avoidance agreement read with protocol thereto. The above finding of the learned dispute resolution panel was based on the order of the authority of the advance ruling. The above issue was challenged before the honourable High Court against the order of authority for advance ruling and honourable High Court decided this issue in favour of the assessee. The identical issue arose in the case of the assessee for certain other years wherein the coordinate bench, following the order of the honourable High Court, decided the issue in favour of the assessee holding that assessee is not required to deduct any tax at source u/s 195 of the act on management fees paid to the France entity and therefore disallowance for non-deduction of tax invoking the provisions of Section 40(a)(i) is not sustainable. This issue is also decided by in case of the assessee for assessment year 2012 – 13 and 2013 – 14 by this order wherein the disallowance is deleted. For similar reasons given therein, we also direct the learned assessing officer to delete the above disallowance for non-deduction of tax. In view of this ground number 11 is allowed.
FULL TEXT OF THE ITAT JUDGEMENT
1. ITA No. 741 (Del) of 2017 is filed for assessment year 2012-13, ITA. No. 3992 (Del) of 2017 is filed for assessment year 2013-14 and ITA. No. 5745 (Del) of 2018 is filed for Assessment year 2014-15 by M/s. Steria (India) Limited, (The Assessee/ Appellant). As some common issues are involved, for the sake of convenience, these were heard together, and are being disposed of by this consolidated order. Stay petitions were also heard on 17 July 2020, which are also disposed of by this order for all these years.
2. ITA No. 741/Del/2017 for AY 2012-13 is filed by the assessee against the assessment order passed u/s 143 (3) read with Section 144C of The Income Tax Act, 1961[ The Act] dated 5/12/2016 passed by The Additional Commissioner Of Income Tax, Special Range – 8, New Delhi (The Learned Assessing Officer/ AO ) wherein the returned income of ₹ 1,132,764,007 370 filed by the assessee on 29/11/2012 is assessed at ₹ 1,515,053,700/–. The assessee has raised following grounds of appeal.-
“1. That the assessing officer erred on facts and in law in completing assessment under section 144C read with section 143(3) of the Income-tax Act (“the Act”) at an income of Rs. 151,50,53,700 as against the returned income of Rs. 113,27,64,370 under normal provisions of the Act.
Transfer Pricing issue:
2. That the assessing officer/DRP erred on facts and in law in making an adjustment of Rs. 11,70,02,000 to the arm‘s length price of the „international transaction‘ of provision of IT enabled services on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer („TPO‘).
2.1 That the DRP/TPO erred on facts and in law in not appreciating that the appellant being a routine back office support service provider cannot be compared with companies engaged in provision of Knowledge Process Outsourcing („KPO‘) Services for the purpose of benchmarking analysis.
2.2 That the DRP/TPO erred on facts and in law in considering Acropetal Technologies Ltd. (Seg.) as comparable for the purpose of bench marking without appreciating that the company is not functionally comparable to the appellant.
2.3 That the DRP/TPO erred on facts and in law in considering following companies in the final set of comparable for the purpose of bench marking analysis not appreciating that these companies are not functionally comparable to the appellant in terms of Rule 10B(2):
a. Eclerx Services Ltd.
b. Infosys BPO Ltd.
c. TCS E-Serve Ltd.
d. Informed Technologies Limited
e. BNR Udyog Ltd. (Seg.)
2.4 That the DRP/TPO erred on facts and in law in considering following companies in the final set of comparable companies without appreciating that companies with such high turnover does not satisfy the test of comparability laid down under Rule 10B(2) Of the Income T&X Rules, 1962, for being operating in different market conditions and level of competition:
a. Infosys BPO Ltd
b. TCS E-Serve Ltd.
2.5 That the DRP/TPO erred on facts and in law in considering following companies which are earning exceptionally high margin when it should be appreciated that a company engaged in provision of routine BPO services cannot be expected to earn such high operating margins:
a. B N R Udyog Ltd. (Seg.)
b. Eclerx Services Ltd.
c. Infosys BPO Ltd.
d. TCS E-Serve Ltd.
2.6 That on the facts and circumstances of the case and in law, the DRP erred in accepting Infosys BPO Ltd., TCS E Serve Ltd and eCLerx Services Ltd as comparable companies not appreciating that such companies were rejected as comparable by the DRP in the earlier assessment years holding them to be functionally dissimilar to the assessee
2.7 That the DRP/TPO erred on facts and in law in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent software service provider.
2.8 That on the facts and in the circumstances of the case and in law, the DRP/TPO erred in rejecting the contention of the assessee regarding risk adjustment, allegedly holding that the computation of risk adjustment provided by the assessee is vague and without any basis.
Corporate Tax Issues:
Disallowance of Management Services Fees
3. That on the facts and in the circumstances of the case and in law, the DRP/ assessing officer erred in disallowing under section 40(a)(i) of the Act, expenditure of Rs.20,03,73,067 incurred on account of management services fees, allegedly on the ground that the appellant failed to deduct tax at source therefrom under section 195 of the Act.
3.1 That the DRP/assessing officer erred on facts and in law in holding payment made to Groupe Steria SCA („Steria France‘) towards management services fees to be in nature of fees for Technical services („FTS‘) in terms of Article 13 of India-France Double Tax Avoidance Agreement („the DTAA‘).
3.2 That the DRP/ assessing officer erred on facts and in law in erroneously relying upon the order of the Authority of the Advance Ruling („AAR‘) without appreciating that the findings of AAR are perverse in light of the favorable order passed by the jurisdictional Delhi High Court in appellant‘s own case, thereby resulting in gross violation of the principles of natural justice.
3.3 Without prejudice, the DRP/assessing officer erred on facts and in law in not appreciating that the payment for managerial services to Groupe Steria is not covered under the term “technical” or “consultancy” services, prescribed in Article 13 of the DTAA.
3.4 That the DRP / assessing officer erred on facts and in law in not appreciating that the said services provided by Steria France does not „make available‘ technical knowledge’, experience, or skill to the appellant, in order to be taxed as FTS in terms of Paragraph 7 of the Protocol read with Article 13 of the India-UK DTAA.
3.5 Without prejudice, the DRP / assessing officer erred on facts and in law in not appreciating that the said transaction could not be held as FTS in terms of performance rule prescribed in Article 13(5) of India – Israel DTAA and Article 12(5) of the India – Finland DTAA.
3.6 That the DRP / assessing officer erred on facts and in law in not appreciating that there was no involvement of use of technology / technical services and the said services were provided through telephone, fax, email, etc., without any visit to India by the personnel of Steria France.
3.7 That the DRP / assessing officer erred on facts and in law in not appreciating that since the payments made to Steria France were not in the nature of FTS and accordingly, not chargeable to tax in India, therefore, the appellant was not liable to obtain certificate under section 195 of the Act for lower or no deduction of tax at source.
Disallowance of deduction under section 10AA
4. That the DRP / assessing officer erred on facts and in law in determining deduction allowable to the appellant under section 10AA of the Act at Rs.11,40,34,006 only as against deduction of Rs.12,30,93,420 claimed by the appellant.
4.1 That the DRP / assessing officer erred on facts and in law in not excluding the following expenditure from the „total turnover‟, for the purpose of computing deduction under section 10AA of the Act:
