DCIT/ACIT Vs VA Tech Wabag Ltd. (ITAT Chennai)
ITAT Chennai held that the services rendered by non-resident agent for completion of export commitment would not fall under the definition for fee for technical services. Hence, disallowance alleging non-deduction of TDS unjustified.
Facts- The assessee acquired the shares in VA Tech Wabag GmBH, Austria (VA Tech, Austria) from Siemens Aktiengesellschaft Osterreich, Austria (Siemens). At the time of acquisition of shares, the assessee took over the contingent liability, which included a corporate performance guarantee given by Siemens to the Bank of Austria, which in turn provided performance guarantee to various customers of VA Tech Austria.
The assessee explained that when it has acquired the shares of VA Tech Austria from Siemens through its 100 percent subsidiary VA Tech Wabag (Singapore) Pte Limited, the assessee took over the corporate performance guarantee given by the Siemens to Bank of Austria. The A.O during the course of assessment proceedings noted that as a part of acquisition of VA Tech WABAG, Austria through its Singapore AE, the assessee had exposed itself to the Performance Corporate Guarantee to the extent of Euro 67.985 million of which 64.985 was through ICICI Singapore and Euro 3 million through Bank Austria. As the costs of counter guarantee issued through ICICI were found to be prohibitive and the terms and conditions not favourable, the guarantees given through ICICI Singapore were swapped by assessee with SBI Belgium. This clearly shows that the transaction involves elements of costs and risks. AO accordingly taken 1% of the average exposure and directed upward adjustment of Rs. 3,49,27,400/- and treated the same as international transaction.
Aggrieved, the assessee raised objections before DRP. The DRP deleted the corporate guarantee determined by the TPO as ALP and making upward adjustment accordingly. Aggrieved, the Revenue appealed before the tribunal.
Further, the assessee was executing a water treatment project in Sri Lanka and the assessee has availed certain support services from one Mr. Jaffer Jee, a non-resident. The services rendered by the agent were in the nature of marketing and consulting amounting to Rs. 1,73,77,686/-. These payments were without deduction of TDS and hence, the A.O invoking the provisions of Section 40(a)(i) of the Act disallowed the expenses.
Conclusion- We concur with the TPO’s order that this is an international transaction, but upward adjustment is now covered in favour of the assessee partly by the decision of Hon’ble Bombay High Court in the case of Everest Kanto Cylinder Ltd, wherein it is directed that the adjustment should be made @0.5%. Hence, we direct the A.O accordingly.
Hon’ble Madras High Court in the case of CIT vs. Faizan Shoes (P) Ltd. has considered that the services rendered by non-resident agent for completion of export commitment would not fall under the definition for fee for technical services. Accordingly, held that none of the authorities below have discussed the nature of marketing fee whether these are paid fee for technical services this needs to be examined. In case, these are not fee for technical services, the A.O cannot make disallowance. Hence, to examine this issue, the matter restore back to the file of A.O. This issue of assessee’s appeal is allowed for statistical purposes.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal by the revenue in ITA No 953/Chny/2015 and Cross objection No. 50/Chny/2016 by the assessee, for the assessment year 2010-11, are arising out of the final assessment order passed by DCIT, Central Circle 3(2), Chennai dated 25.02.2015 u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter the ‘Act’) pursuant to the directions of Dispute Resolution Panel, Chennai (DRP) u/s. 144C(5) of the Act dated 26.12.2014. The appeal by the assessee in ITA No.807/Chny/2016 for the assessment year 2011-12 is arising out of the final assessment order passed by the ACIT, Central Circle-3(2), Chennai dated 29.01.2016 u/s 143(3) r.w.s. 92CA(3) & 144C(13) of the Act pursuant to the directions DRP u/s. 144C(5) of the Act dated 23.12.2015.
2. The first common issue in this appeal of Revenue for A.Y 2010- 11 and the appeal of assessee for A.Y 2011-12 is as regards to the issue of adjustment made to Arms Length Price(ALP) on account of corporate guarantee commission whether to be made or not. For this, the Revenue for A.Y 2010-11 has raised following ground No.2:
“2.1 The Hon’ble DRP erred in allowing the claim of Corporation Guarantee amounting to Rs. 3,49,27,400/-.
2.2 It is submitted that the decision of the Hon’ble ITAT in the case of Redington India Limited has not reached finality and further appeal is pending before the Hon’ble High Court.”
3. For this, the assessee for A.Y 2011-12 has raised the following Ground No.3:
“3. Additions pursuant to the order of the Learned Transfer Pricing Officer (“Ld. TPO”)
3.1 Both the Ld. TPO and Hon’ble DRP have erred in law and on facts in making addition of INR 2.30,12,800 as commission income on the guarantee extended by the Appellant to its Associated Enterprise (AE”), when providing corporate guarantee is not an international transaction under section 92B of the Act.
3.2 Without prejudice to the above grounds, the Ld. TPO have erred in charging the guarantee commission on the opening balance of outstanding guarantee value.”
4. The Ld. counsel as well as Ld. CIT-DR agreed that the facts and circumstances are exactly identical in both the years and hence, we take the facts from A.Y 2010-11 in ITA No.953/Chny/2015 and will decide the issue.
5. The brief facts of the case are that the assessee acquired the shares in VA Tech Wabag GmBH, Austria (“VA Tech, Austria”) from Siemens Aktiengesellschaft Osterreich, Austria (“Siemens”). At the time of acquisition of shares, the assessee took over the contingent liability, which included a corporate performance guarantee given by Siemens to the Bank of Austria, which in turn provided performance guarantee to various customers of VA Tech Austria. The details of corporate guarantee are as under:
