Case Law Details
Toyota Boshoku Automotive India Pvt. Ltd Vs ACIT (ITAT Bangalore)
Held that assessee leverages on the use of technology from the AE and does not contribute any unique intangibles to the transaction. PSM cannot be applied. TNM Method is Most Appropriate Method.
Facts- The appellant is engaged in the business of manufacturing automobile component such as seats, door strings, and interiors for the automobile industry. During the course of scrutiny proceedings, it has been observed that the company had entered into several international transactions with its associated enterprises. The case was referred to the transfer pricing officer as per sec. 92CA and made an adjustment of Rs.7,52,74,460/-.
Being aggrieved, the appellant preferred the present appeal.
Conclusion- The coordinate bench in assessee’s own case has held that the assessee leverages on the use of technology from the AE and does not contribute any unique intangibles to the transaction. It may be true that the Assessee aggregated payment of royalty with the transaction of manufacturing as it was closely linked and adopted TNMM but that does not mean that the transactions are so interrelated that they cannot be evaluated separately for applying PSM. Further, the Assessee does not make any unique contribution to the transaction, hence PSM in this case cannot be applied.
Held that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording an opportunity of being heard to the assessee.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal filed by the assessee is directed against the asst. order passed by the National e-Assessment Centre, Delhi dated 22/4/2021 for the asst. year 2016-17 with the following grounds of appeal:-
“General
1. That on facts and circumstances of the case and in law, the order passed by the Learned AO, pursuant to the directions of the Hon’ble Dispute Resolution Panel – 2, Bangalore (‘Panel’ or ‘DRP’), and the order of the Learned Deputy Commissioner of Income-tax, Transfer Pricing- Circle (2)(2)(2), Bengaluru (‘Learned TPO’) to the extent prejudicial to the Appellant, is bad in law and facts and liable to be quashed.
Transfer pricing (‘TP’) related
2. That, on the facts and in the circumstances of the case, the Learned Transfer Pricing Officer (‘TPO’)/ Hon’ble DRP, erred in making a TP adjustment to the arm’s length price of the Appellant’s international transaction of payment of royalty amounting to INR 75,274,460.
3. That, on the facts and circumstances of the case, the Learned TPO/ Hon’ble DRP erred in rejecting the TP documentation maintained by the Appellant under section 92D of the Act read with Rule ioD of the Income- tax Rules, 1962 (‘the Rules’).
4. That, on the facts and circumstances of the case, the Learned TPO/ Hon’ble DRP erred in rejecting the aggregation approach followed by the Appellant to benchmark the international transactions including payment of royalty.
5. That, on the facts and circumstances of the case, the Learned TPO/ Hon’ble DRP has erred in questioning the commercial rationale of payment of running royalty to Toyota Boshoku Corporation (‘TBC’) by alleging that the transaction is hypothetical.
6. That, on the facts and circumstances of the case, the Learned TPO / Hon’ble DRP has been inconsistent in the view to the extent of holding that on one hand there is no requirement for making any royalty payment whereas on the other hand, it was held that it is because of the technology transferred that the Appellant is being able to earn non-routine profits.
That, on the facts and circumstances of the case, the Learned TPO / Hon’ble DRP has erred in rejecting the Transactional Net Margin Method (‘TNMM’) used by the Appellant and applying the Profit Split method (‘PSM’) as the most appropriate method (‘MAM’) to benchmark the international transaction of payment of royalty.
Without prejudice, while applying PSM, the Learned TPO / Hon’ble DRP erred in:
a) comparing two totally different ratios/ profit level indicators for computation of TP adjustment wherein the ratio of royalty income by sales of comparable companies is compared with the ratio of operating profit earned by the Appellant before royalty to its operating revenue to determine additional profit earned by the Appellant;
b) considering royalty income of comparable companies instead of royalty expenses to compute the royalty / sales ratio;
c) applying arbitrary methodology of profit allocation between the AE and the Appellant in a 2:3 ratio.
9. Without prejudice , the Learned TPO/ Hon’hle DRP while undertaking the comparability analysis for applying PSM erred in,
a) considering loss incurred on account of foreign exchange fluctuations as operating in nature while computing the ratio of operating profit earned (before royalty) by the Appellant to its operating revenue;
b) rejecting functionally similar comparable companies selected by the Appellant, without providing any reason for rejection of such comparable companies;
c) randomly selecting certain companies which are functionally dissimilar i.e., Minda Industries Limited, JBM Auto Limited, ZF Steering Gear (India) Limited;
d) selecting companies which have incurred R&D expenses whereas the selection criteria set by the TPO himself suggests that companies which have incurred R&D expenses should not be selected as comparables; and
e) not selecting certain companies proposed by the Appellant i.e., Rasandik Engineering Industries India Limited and Sandbar Technologies Limited which have not incurred any R&D expenses.
10. That, on the facts and circumstances of the case, the Learned TPO / Hon’ble DRP has erred in applying an inconsistent approach in AY 2016-17 as the Learned TPO had himself accepted similar approach of economic analysis, carried out by the Appellant in AY 2011-12 as well as AY 2012-13 and concluded that all the international transactions of the Appellant, including the payment of royalty was at arm’s length.
ii. That, on the facts and circumstances of the case, the Learned AO has erred in passing the assessment order contrary to the directions issued by the Hon’ble DRP. (Tax effect: INR 26.050-985)
Corporate tax related
12. That, on the facts and circumstances of the case, the Learned AO/ Hon’ble DRP erred in considering the reimbursements of INR 53,809,953 made to TBC by the Appellant as Fees for Technical Services (‘FIS’) and consequently disallowing the same under section 40(a)(i) of the Act for alleged failure to withhold taxes under section 195 of the Act.
13. That, on the facts and in the circumstances of the case, the Learned AO/ Hon’ble DRP erred in not appreciating that amount paid to TBC was not towards rendition of any service but represented reimbursement of the salary cost incurred by the Appellant on which tax was deducted at source under section 192 of the Act.
14. That on the facts and the circumstances of the case, the Learned AO/ Hon’ble DRP erred in not appreciating the fact that the seconded employees are the employees of the Appellant and not TBC.
15. That on the facts and circumstances of the case, the Learned AO/ Hon’ble DRP erred in not appreciating that the remittances made are in the nature of cost-to-cost reimbursements, without any profit element and that such reimbursements cannot be considered as income chargeable to tax in the hands of the recipients for the purpose of the provisions of section 195 of the Act.
(Tax effect: INR 18,622,549)
16. That the Learned AO/ Hon’ble DRP erred in law and on facts in holding expenses (aggregating to INR 90,58,664) incurred on account of plant layout charges to facilitate material movement, re-arrangement of production lines and for optimum utilization of space to be of capital in nature in the hands of the Appellant, even in the absence of any enduring benefit or increase in production capacity.
17. That the Learned AO/ Hon’ble DRP have erred in stating that the expenses spent on plant layout charges are for setting up or re-aligning the production process and hence are considered as capital in nature.
18. Without prejudice to the above, the Learned AO/ Hon’ble DRP erred in not allowing the consequential additional depreciation under section 32(iia) of the Act for the expenses treated as capital expenditure for AY 2016-17.
19. Without prejudice to the above, the Learned AO/ Hon’ble DRP erred in not allowing the consequential depreciation for the expenses treated as capital expenditure for the prior years. (Tax effect: INR 3,135,016)”
2. The brief facts of the case are that the assessee is company is engaged in the business of manufacture of automobile component such as seats, door strings, and interiors for the automobile industry It filed its return of income on 29/11/2016 declaring the total income as Nil and current year carry forwarded loss amounting to Rs.1,37,85,727/- . The case was selected for scrutiny and statutory notices were issued to the assessee. The assessee furnished the details time to time in ITBL portal. During the course of scrutiny proceedings, it has been observed that the company had entered into several international transactions with its associated enterprises. The case was referred to the transfer pricing officer as per sec.92CA of the Act and the TPO after detailed study of the documents furnished by the assessee he observed that the company has entered into the following international transactions with its AEs as under:-
2.1 The TPO passed order on 30th Oct, 2019 by making adjustment u/s 92CA of the Act of Rs.7,52,74,460/-. By observing as under:-
2.1 The TPO passed order on 30th Oct, 2019 by making adjustment u/s 92CA of the Act of Rs.7,52,74,460/-. By observing as under:-
5. TP study of the taxpayer
1. In its TP Study, the taxpayer has aggregated all international transactions and has used TNMM as the most appropriate method to benchmark the international transactions. The TPO found that the sale and purchase transactions with AEs are minimal. Major transactions are payment of management fees and royalty. The taxpayer ha.’-‘ka turnover of Rs. 464 Crores and it has used an entity level margin as profit level indicator to benchmark international transaction of small value.
1. 1 Entity level margins of such a huge company cannot accurately predict the arm’s length price of stray and independent transactions of much smaller value. The TPO rejected the TP Study vide notice dated 27.09.2019 and concluded that Profit Split Method (PSM) is the most appropriate method. The TPO gave an opportunity to the taxpayer to make an analysis under PSM methods such as excess profit method, profit differential method (also called residual profit split method).
2. The taxpayer furnished a reply dated 14.10.2019 stating that as the taxpayer is a licensed manufacturer, the manufacturing activity is dependant on the technical know-how from TBC, the transactions are closely interlinked, royalty relates to turnover and forms an essential part of sales and due to the peculiar circumstance of operations involving various types of interdependent transactions, the taxpayer has aggregated the transactions and used TNMM as the MAM which should be allowed.
5.4 Why TNMM cannot be used as an appropriate method here?
5.4.1 There are numerous approximations in usage of TNMM. Aggregation of transactions and analysis can still be justified if there are numerous high-value international transactions, and all the transactions are so inter-linked that they can be called a ‘bundle of transactions’. For instance, if a company is in ‘start-up stage’ and all technologies have been transferred by AE; so also, a major portion of purchases or sales are from the AE, then we can infer that intangibles received from AE under technology transfer agreement and regular sale-purchase transactions are part of an entity-level interaction between the company and its AE. Start-up technologies provided by AE are a bundle of technologies that include both generic tech (those that are easily available from a university or technology consultant) and proprietary tech (those that have been indigenously developed by the licensor of tech). Entire bundle is part of the setting up of the business.
5.4.2 However, the useful economic life of start-up tech is 4-5 years, and the
present taxpayer has been in operation for much more than that. Then why is it paying a running royalty on sales? Because it consistently gets new technology from its licensor (the AE). We do not know whether these new technologies are generic or proprietary, whether these new technological updates are unique or easily available in the market. There is no evidence that such tech actually increases the profitability of the company beyond the profits it would routinely get. TNMM cannot give us that benchmark — of relative enhancement of profits from the ‘technological updates’. On the contrary, TNMM can become a method to justify profit shifting in such scenarios.
How TNMM can be misused to justify profit shifting?
5.5 Consider an automobile company that purchased technologies and machinery for a new vehicle gear system back in 2003. It has no international transaction. It makes better profits than market average. Market average (what we call mean OP/OR) is the average of companies performing better than average and worse than average. Now, this company performs better than market average. It gets healthy profits and pays healthy taxes to Indian treasury. One fine day, in 2012, it decides to reduce its tax burden in India. So, it starts an AE in Cayman Island and pays royalty to the AE. By doing this, it reduces its profits in India to the market average. As a cover, it prepares documentation on how the AE gave the taxpayer the knowhow of a new technique to weld gear machines. There is no way of benchmarking such unpatented knowhow (even for patents, a survey shows that 98% of patents cannot be commercially harnessed). The company pays less tax in India and can justify the profit shifting by saying that it is within tolerance limit of TNMM mean margin.
In this situation, TNMM actually defeats the very purpose of transfer pricing as an anti-abuse provision. There is no justification for application of TNMM, because the so-called tech supplied by the AE to this hypothetical company is not ‘start-up tech’. It is technological update/upgradation. There is no benchmark of such technology intangible. As such, intangibles can be benchmarked only using analytical approaches. TNMM is very crude, and it definitely does not give any indication of the arm’s length nature of royalty transactions.
The taxpayer’s case
5.6 The taxpayer’s case is.not very different from that of the hypothetical situation described above; The, taxpayer started operations in 2003 and still pays a running royalty of 5% in F.Y,,,2012-13, The useful fife of start-up-lech is over. The technological up gradations and, updates it gets from its AE are intangibles, and their value cannot be determinedirom an entity level analysis of taxpayer.
Why CUT cannot be used as an appropriate method here?
5.7 CUT stands for Comparable Uncontrolled Transactions. This method can be categorized under ‘other method’ in Rule 10AB of the IT Rules. Under this method, the TP analyst finds comparable transaction and finds mean of the royalty rate in those transactions. For finding comparable transactions, there are three basic factors to check:
1.Whether the technology in comparable transaction is similar to the technology of tested transaction?
2.Are the two technologies (tested transaction and comparable transaction) of similar uniqueness?
3.Do both technologies have similar utility for enhancing profits?
It is usually difficult to find similar transactions where above data is available. If technologies are in similar fields, then we can refer to a technical consultant to make a technology audit and find out if the technologies have similar uniqueness and similar degree of utility, leading to higher profitability. CUT fails severely if such analysis is not done. Technology transfer is transfer of intangibles. Without doing a valuation of intangibles involved in the transaction, how do you compare them? It is like comparing an apple to a black box. There may be an apple inside the black box, or a potato, or even a chicken leg piece. The taxpayer manufactures car seats and other car interiors. It receives technologies from AE for enhancement of such products.
6. Profit Split Method as MAM
1. 1. The TPO concludes that PSM is the most appropriate method for
benchmarking royalty transactions. Internationally, PSM has been considered the most appropriate method for benchmarking of royalty transactions. The logic for same is also very strong. A licensee will commit to pay a percentage of its sales as royalty in third party situation only if it knows that it can make much more profits. The profitability from the intangibles shared by licensor have to be split between the licensor and licensee. Profit Split is the logic on which all third-party negotiations of royalty rate take place internationally.
6.2 After going through the data available on public databases, and analysis of the facts of the case, the TPO concludes that residual profit split steps can be applied to get the profit split. The TPO refers to the judgement of ITAT, Delhi bench in the case of Global One India P Ltd. (ITA No. 5571/De1/2011 and ITA No. 5896/De1/2012) for the steps involved. There is sufficient literature on the steps involved. However, in this case, the ITAT had also observed that (refer Para 20.5 of ITAT order) residual PSM involves: a) determination of routine return, and b) allocation of residuary profits.
6.3 The TPO did a search for comparables involved in ‘manufacture of car seats, other interiors’. The TPO does analysis in two steps, TNMM step and PSM step. In TNMM step, the PLI is the EBITR, meaning earnings before interest, taxes, and royalty and R&D. This margin for the comparables is found and the average is found. This is the market profitability of companies with basic technologies. The technologies transferred by the AE to taxpayer have helped the taxpayer get better profitability. Same is calculated by the difference between EBITR/Revenue ratio of taxpayer and market (ALP margin of companies with basic technologies). This is to be split between taxpayer and AE in an appropriate ratio based on FAR analysis of both.
6.4 Determination of routine return: The entire exercise of finding comparables is to find the routine return of the taxpayer. This is the first step. The method of finding routine returns is very similar to TNMM: just that the mean OP/OR of comparables is taken as routine profitability. For this, the TPO has to select companies that do not have R&D expenses in P&L. Every manufacturing company generates intangibles/technologies on a daily basis. Such technology is part of the basic and generic technology. But some companies have a separate R & D unit and allocate expenses to the R & D unit. The developments in the R & D unit are significant intangibles, .and lead to additional profitability. Owing to this, companies having R & D expenses in P & L Account cannot be taken as comparable. For ‘routine returns’ we need to take companies that do not have a separate R & D centre and that do not allocate separate expenses to R & D.
6.5 The final companies used to get routine returns (profitability from routine functions without application of intangibles supplied by AE) are as under:
| Company | Royalty | OR | Rate |
| Minda Industries Ltd. | 4.35 | 1613.17 | 0.27% |
| J B M Auto Ltd. | 1.12 | 654.34 | 0.17% |
| Z F Steering Gear (India) Ltd. | 0.04 | 427.83 | 0.01% |
| Average | 0.15% |
6.6 The taxpayer’s EBIT-R (earnings before interest, taxes and royalty) margin is calculate as under (royalty is removed from the operating expenses, so that profit before royalty is computed. Routine return is removed from it and then residual profit is split between licensor (its royalty) and licensee (its profit from usage of technology):
| Particulars | Amount (INR) |
| Operating Revenue | 461,23,47,934 |
| Total Cost | 459,17,97,705 |
| Less: Royalty | 13,33,90,044 |
| Operating Cost | 445,84,07,661 |
| Operating Profit- EBIT — R | 15.39,40,273 |
| EBIT — R / OR | 3.3% |
6.7 The non-routine profitability of the taxpayer is 3.3% – 0.15% which equals 3.15% on sales. A/OR is the enhancement of profits of the taxpayer by using the AE’s technologies transferred. This has to be split between the taxpayer and its AE. The TPO gives weightage to the licensor and licensee based on the FAR analysis of both. FAR analysis of licensor is as under:
6.7.1 Functions:
1. Conducts all R & D activities. Same is used primarily by the licensor; licensor transfers the risks to non-competing licensees in other geographies.
2. Technical assistance: The taxpayer pays technical assistance fees to AE. So, the function is not covered in this analysis.
6.7.2 Assets:
1. Owns the asset. The licensor uses the asset primarily, but also transfers it to non-competing licensees in other geographies.
6.7.3 Risks:
1. Takes all research risk.
6.8 The FAR analysis of the taxpayer is as under:
6.8.1 Functions:
1. Manufacturing and Sales (these functions and returns from same are covered in routine market profits, and hence do not carry weight here).
6.9 Concluding from the above analysis, a weightage of 1 is given to functions and assets, and 1 to risks of licensor, and a weightage of 3 is given to the risks of the licensee. Thereby the profit split has to be in the ratio of 2:3 where licensor gets 2/5 of the residual profits as royalty.
6.10 The calculation of adjustment is as under:
| Description | Amount (INR) | |
| Residual Profits on revenue | 3.15% | |
| Arm’s length royalty rate | A | 1.26 |
| Operating Revenue | B | 461,23,47,934 |
| Arm’s length royalty payout | C=A% of B | 5,81,15,584 |
2.2 After receipt of the TPO order the AO passed draft assessment order u/s 144C of the IT Act, on 6/12/2019. The AO further observed from the profit and loss account that he ahs claimed expenditure relating to line set up expense amounting to Rs.10,65,7228/- and the similar was also discussed in the previous assessment order. The same was incurred for reimbursement or renovation of old premises so as to enhance the producing capacity accordingly he observed that the expenditure incurred was enduring in nature and not a revenue expenditure. IT is a capital expenditure accordingly he allowed the depreciation @15% on this amount to Rs.15,98,584/- and the balance amount of Rs.90,58,644//- was added back into the total income of the assessee.
2.3 The AO further observed that the assessee had made payment of Rs.5,38,09,953/- as reimbursement of salary to expatirates in this regard the assessee made submissions vide letter dated 18/11/2019 provided the details of expat’s. Salary reimbursement amounting to Rs.5,38,09,953/- paid during the assessment year 2016-17 and the assessee further submitted that the TDS has been deducted as per sec.192 of the Act on the entire salary paid including the salary paid in Japan. The reimbursement of salary portion paid to Toytoto Boshku Corporation (TBJ) is pure reimbursement in nature, as the amount is exactly equal to amount paid by TBJ to expat’s at Japan, without any value addition by TBJ and the assessee also submitted that the amount paid is not covered u/s 9(1)(ii) , hence sec.195 is not applicable. After examining the details submitted by the assessee and agreements made in this regard he observed that the TDS is to be deducted on the source based. He also relied on some judgments quoted in his order observed that the assessee has failed to deduct TDS as per sec.195 of the Act. Accordingly, he disallowed u/s 40(a)(i) of the Act on the entire sum paid and added into the total income of the assessee. Accordingly, the AO assessed the income @Rs.12,59,55,914/- and completed the draft assessment order.
2.4 Against the draft assessment order passed by the AO, the assessee failed objections before the DRP, Panel-II on 2/1/2020. The assessee failed detailed written submissions contesting against the addition made by the AO. The ld.DRP passed his order on 15/3/2021 confirming the proposed addition of Rs.7,52,74,460/-and Rs.5,38,09,953/- and regard to the addition of Rs.10,65,7228/-they directed to treat the expenditure as a capital in nature and directed to allow the depreciation on the above expenditure as per law after discussing in detail. After receipt of the DRP order, the AO passed assessment order u/s 143(3) r.w.s 144C(13) r.w.s 144B of the Act on 22/4/2021.
3. Feeling aggrieved from the above order, the assessee filed appeal before the Income-tax Appellate Tribunal.
3.1 The ld.AR submitted that the similar issue has been decided by the coordinate bench of the Tribunal in assessee’s own case covering all the issues in IT(TP)A No.1646/Bang/2017 vide order dated 13/04/2022 for the assessment year 2013-14 and the facts are similar and no any changes has been taken place during the impugned assessment year.
3.2 The ld.DR relied on the order of the lower authorities and could not controvert the findings of the decision of the Tribunal in assessee’s own case cited supra.
3.3 We have heard the rival submissions and carefully considered the same along with the order of the authorities below as well as the documents referred to and relied on before us during the course of the hearing. we adjudicate the issues as under:
4. The ground No.1 is general in nature, hence no adjudication is required.
5. Ground No. 2 to 11 is regarding transfer pricing adjustment in relation to payment of royalty of Rs.7,52,74,460/-.
5.1 The facts in the present asst. year 2016-17 are identical with issue covered by the decision of coordinate bench in the assessee’s own case in IT(TP)A No.1646/Bang/2017 vide order dated 13/04/2022 for the assessment year 2013-14 and also for the asst. year 2015-16. The para nos. 11.1 to 11.5 in para no.12 in the asst. year 2013-14 is reproduced here under:-
“11.1. On the contrary, the Ld.CIT.DR placed reliance and orders passed by authorities below.
11.2. We have perused submissions advanced by both sides in light of records placed before us.
We note that the functions performed by the assessee before us, and that of Toyota Kirloskar (supra) considered by Coordinate Bench of this Tribunal, being the sister concern, are identical in nature. Both these assessee are engaged in manufacture of automotive components, peculiar to automobile industry. The assessee before us aggregated all the international transaction by using TNNM as the most appropriate method to benchmark the international transactions. The Ld.TPO segregated management fees and royalty payment, which constituted major part of the transaction.
The entire dispute before us, is in respect of the method used for benchmarking the royalty transaction by separately benchmarking it under PSM.
11.3. The overall margin computed by the assessee was at 5.26%. From the transfer pricing study, we note that the assessee paid Rs.105,317,196/- as royalty to the AE, for use of technical know-how relating to manufacture and sale of automotive components. The net sales earned by the assessee for the year under consideration is Rs.4,61,06,57,812/-. Thus, the effective rate of royalty paid by the assessee to the AE is at 2.28% over net sales. We note that, the Ld.TPO computed the royalty rate by using profit split method at 3.19%. The Ld.TPO considered the profit split ratio of 2:3 wherein 40% split was considered to be the share of the AE. There is in the overall margin of 5.26% 2.28% over the net sales are paid as royalty to the AE by assessee.
11.4. We note that, Ld.TPO referred to the decision of Hon’ble Delhi bench in case of Global One India (P.)Ltd. vs. ACIT (supra). On perusal of this decision, we learn that, that was a case where, Global One India, out of highly integrated operations and deployment of assets and functions of different entities located in different geographical locations, for execution of one transaction, to be ultimately delivered by way of combined effort. It was under such circumstances that profit split method was necessary to be considered as the most appropriate method.
11.5. In the present facts of the case that technology is obtained from the evil witches used by assessee in its manufacturing activity as there is no involvement of the global entities in order to execute the transaction.
We have perused the decision case of assessee’s sister concern referred to herein above, wherein, in identical circumstances, the Tribunal observed and held as under:
“15. We have considered the rival submissions. We are of the view that the issue with regard to Most Appropriate Method in the case of assessee had already been settled by the Tribunal. The TPO as well as the DRP have not followed the aforesaid decision of the Tribunal on the ground that economic life of the technology had an impact on the MAM and that technology in question was to be used by start-ups and since the assessee was using the technology for a fairly long period of more than 5 years, it would not be proper to adopt the TNMM as the MAM, as the economic life of the technology would no longer exist. In our view, there is no basis for the TPO as well as the DRP to come to a conclusion that technology in question was to be used by a start-up. There is no basis for the TPO and DRP to come to a conclusion that the Assessee is a start up in manufacture of various parts for automobiles. The technology in question was that of TMC Japan. The technology is being used by the Assessee even today. There is no basis for the TPO/DRP’s conclusion that the useful economic life of the technology would be only 5 years. In any event passage of time cannot be the basis to discard TNMM which is already held by the Tribunal and upheld by the Hon’ble High Court as no longer the MAM because the conditions necessary for PSM as MAM are not met in the case of the Assessee. Even going by Rule 10B(1)(d), there should be contribution by each of the parties to a transaction for earning profits from sale of goods or provision of services. Then the contribution of each of the parties is identified and the profit is split between those parties. In the case of the Assessee the technology is given by TMC, Japan for which royalty is paid. The use of the technology in manufacturing and the sale of the product so manufactured contribute to the profit of the Assessee and TMC, Japan has nothing to do with that. There is therefore absence the first condition for application of PSM as MAM. As submitted by the Assessee PSM is used as MAM only in a case involving transfer of unique intangible or in multiple interrelated international transactions which cannot be valued separately for determining the ALP. The OECD guidelines cited on behalf of the assessee clearly supports the aforesaid approach and the OECD guidelines in this regard reads as follows:—
“Further reliance is also placed on OECD Guidelines, which clearly lay down the situations in which the PSM is selected as an appropriate method for benchmarking. The relevant extract from the OECD Guidelines (para 2.109) is as below:
“A transactional profit split method may also be found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions (e.g. contribute unique intangibles) to the transaction, because in such a case independent parties might wish to share the profits of the transaction in proportion to their respective contributions and a two-sided method might be more appropriate in these circumstances than a one-sided method. In addition, in the presence of unique and valuable contributions, reliable comparables information might be insufficient to apply another method. On the other hand, a transactional profit split method would ordinarily not be used in cases where one party to the transaction performs only simple functions and does not make any significant unique contribution (e.g. contract manufacturing or contract service activities in relevant circumstances), as in such cases a transactional profit split method typically would not be appropriate in view of the functional analysis of that party”.
16. The revised guidance (June 2018) on the application of transactional PSM, provided by the OECD state the importance of delineating the transactions in determining whether the PSM is applicable or not. The relevant extract from the OECD Guidelines is provided below:
“2.125. The accurate delineation of the actual transaction will be important in determining whether a transactional profit split is potentially applicable. This process should have regard to the commercial and financial relations between the associated enterprises, including an analysis of what each party to the transaction does, and the context in which the controlled transactions take place. That is, the accurate delineation of a transaction requires a two-sided analysis (or a multi-sided analysis of the contributions of more than two associated enterprises, where necessary) irrespective of which transfer pricing method is ultimately found to be the most appropriate.
2.126. The existence of unique and valuable contributions by each party to the controlled transaction is perhaps the clearest indicator that a transactional profit split may be appropriate. The context of the transaction, including the industry in which it occurs and the factors affecting business performance in that sector can be particularly relevant to evaluating the contributions of the parties and whether such contributions ale unique and valuable. Depending on the facts of the case, other indicators that the transactional profit split may be the most appropriate method could include a high level of integration in the business operations to which the transactions relate and /or the shared assumption of economically significant risks (or the separate assumption of closely related economically significant risks) by the parties to the transactions. It is important to note that the indicators are not mutually exclusive and on the contrary may often be found together in a single case.
2.127. At the other end of the, spectrum, where the accurate delineation of the transaction determines that one party to the transaction performs only simple functions, does not assume economically significant risks in relation to the transaction and does not otherwise make any contribution which is unique and valuable
“2.147. Under the transactional profit split method, the relevant profits are to be split between the associated enterprises on an economically valid basis that approximates the divisi6n of profits that would have been anticipated and reflected in an agreement made at arm’s length. In general, the determination of the relevant profits to be split and of the profit splitting factors should:
Be consistent with the functional analysis of the controlled transaction under review, and in particular reflect the assumption of the economically significant risks by the parties, and
Be capable of being measured in a reliable manner.”
17. It is clear from the above OECD guidelines that in ‘order to determine the profits to be split, the crux is to understand the functional profile of the entities under consideration. Although the comparability analysis is at the “heart of the application of the arm’s length principle”, likewise, a functional analysis has always been a cornerstone of the comparability analysis. In the present case the Assessee leverages on the use of technology from the AE and does not contribute any unique intangibles to the transaction. It may be true that the Assessee aggregated
payment of royalty with the transaction of manufacturing as it was closely linked and adopted TNMM but that does not mean that the transactions are so interrelated that they cannot be evaluated separately for applying PSM. Further, the Assessee does not make any unique contribution to the transaction, hence PSM in this case cannot be applied.
18. Therefore, we are of the view that TNMM is the Most Appropriate Method in the case of assessee. The decision of the Tribunal in the earlier AY 2008-09 has also been upheld by the Hon’ble High Court of Karnataka in CIT v. Toyota Kirloskar Auto Parts (P.) Ltd. [IT Appeal No.104 of 2015, dated 16-72018], which was an appeal of the revenue against the order of Tribunal for AY 2008-09. The Tribunal has upheld TNMM as MAM from AY 2007-08 to 2011-12. In those AYs the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. The grounds of appeal of the assessee are treated as allowed.
11.5. We note that, the Ld.TPO in present facts of the assessee before us, used identical comparables in order to ascertain the transaction to be at arms length as it was used in case of the sister concerns case referred to herein above. There is no dispute that, factual metrics and background our identical and the nature of payment having considered identically by the revenue authorities in both these cases. We are therefore respectfully following the view taken by coordinate bench of this tribunal in case of Toyota Kirloskar (supra), we are of the view that TNM Method is the Most Appropriate Method and the Ld.AO/TPO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee.
Accordingly, Ground No.2-10 raised by assessee for the assessment year 2013-14 stands allowed.
12. The facts for the assessment year 2015-16 are identical with assessment year 2013-14. Therefore the view taken for assessment year 2013-14 will apply mutatis mutandis to assessment year 2015-16 in respect of Grounds 2 to 16 raised their in.
5.2 Respectfully following the decision of the coordinate bench of the Tribunal in assessee’s own case for the assessment year 2013-14 cited supra, we allow ground nos.2 to 11.
6. The ground No.12 to 15 are with regard to disallowance of reimbursement of salary of seconded employees on account of non-deduction of tax at source of Rs.5,38,09,953/-.
6.1 The facts in the present asst. year 2016-17 are identical with issue covered by the decision of coordinate bench in the assessee’s own case in IT(TP)A No.1646/Bang/2017 vide order dated 13/04/2022 for the assessment year 2013-14 and also for the asst. year 2015-16. The para nos. 14.1 to 14.26 and para no.15 in the asst. year 2013-14 is reproduced here under:-
“14.1. At the outset it would be useful to understand the concept of assignment or secondment. Multi-national companies with a view to utilize skill within the group companies has global mobility policy of assignment or secondment. Secondment is, deputing or sending one employee in one entity of the multi-national company in one country, to another entity of the same multi-national company in another country. For reasons like continued pensionary benefits and other similar reasons the employee would want to retain his contract of employment with the original employer, rather than with the seconded employer. In such agreement there are usually three parties, the employer deputing or seconding his employee, the employee and the employer to whom the employee is seconded or deputed. Such arrangements are also referred to as “International hiring out of labor”. Sec.9(1)(ii) of the Act, lays down that, Income in the form of salaries is deemed to accrue or arise in India, and is deemed to have been earned in India, if is received for services rendered in India. Under the Act, irrespective of the residential status of the employee, salary would be taxable in India, if it is for services rendered in India, which is deemed to have been earned in India. In the case of seconded employee, if they are tax residents of a country with whom India has Double Taxation Avoidance Agreement (DTAA), Indian tax authorities right to tax salary income would depend on the terms of such treaty.
14.2. In OECD Model Commentary, Article 15 provides for right of taxation, in so far as salaries are concerned, between the source state and the residence state. Article 15 of the Model Commentary reads thus:
Article 15: INCOME FROM EMPLOYMENT
1. Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived there from may be taxed in that other State.
2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if:
a) the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the fiscal year concerned, and
(b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and
(c ) the remuneration is not borne by a permanent establishment which the employer has in the other State.
3. Notwithstanding the preceding provisions of this Article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic, or aboard a boat engaged in inland waterways transport, may be taxed in the Contracting State in which the place of effective management of the enterprise is situated.”
14.3. Article 15(1) of OECD Model Convention lays down the rule of taxation of income earned by the seconded employee by giving the right to tax by the State where employment is exercised. The term “Employment is exercised” means, the place where the employee is physically present, when performing the activities, for which the employment income is paid. Article 15(2) of OECD Model Convention carves out exception to the rule in Article 15(1) by facilitating short term secondment without the burden of having to pay tax in the country, where the employment is exercised subject to the following three conditions:
(a) If the recipient is present in the other State for a period or periods not exceeding in the aggregate 183 days in any 12 month period commencing or ending in the fiscal year concerned. and;
(b) if the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State; and,
(c) if the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other State.
14.4.1 The first condition – is not relevant as the seconded employees have been employed in India for more than 183 days.
14.4.2 The Second Condition –the remuneration is paid by, or on behalf of, an employer, who is not a resident of the other State. The meaning of the term ‘employer’ is critical, as there are occasions when seconded employees are on the rolls of a non-resident employer, but in essence, work as per the directions and under the supervision of an enterprise to whom he has been seconded and yet claims short stay exemption.
14.5. Since the right of the state of the temporary employment to tax employment income was limited by the provisions and conditions of Article 15, the tax administrations were not happy to notice that non-resident labor was easily entering their boundaries and easily avoiding source country taxation.
14.6. As a possible contribution to solving problems of abuse, recent OECD guidelines lay down guidelines to resolve interpretation issues concerning the concept of “employer” for purposes of paragraph 2 of Article 15. In determining the employer, the guidelines attaches importance to the nature of the services rendered, in order to determine, whether the services rendered by the individual constitute an integral part of the business of the enterprise to which these services are provided. In cases where the nature of the services rendered point to an employment relationship different than the one of the formal employer, the guidelines suggests objective criteria to determine the employer, namely:-
− who has the authority to instruct the individual regarding the manner in which the work has to be performed;
− who controls and has responsibility for the place at which the work is performed;
− the remuneration of the individual is directly charged by the formal employer to the enterprise to which the services are provided;
− who puts the tools and materials necessary for the work at the individual’s disposal;
− who determines the number and qualifications of the individuals performing the work.
14.7. As a consequence, instead of being regarded as non-resident employee of a non-resident employer rendering services on a temporary basis, individuals may, if certain objective criteria are met, be deemed to be the employees of the service recipient in the other country (i.e. source country), and therefore, taxable in the source country where they are performing their services.
14.8. In the above background let us analyse the ‘Agreement of employees on loan’, dated 01/08/2008, between the assessee and Toyota Corporation Japan, the independent employment contract between the assessee and the seconded employees and the correspondence between the employee and the assessee regarding bifurcation of salary payable to them. As a sample we have reproduced the contract of assessee with Mr.Minoru Asahi herein above.
14.9. A reading of Article 2, of the ‘Agreement of employees on loan’, dated 01/08/2008, between the assessee and Toyota Corporation, Japan, the request for employees on loan shall be made by a assessee in Part A of Form-1, wherein number of employees with details of the profile would be mentioned. We know that the said form one is annexed at page 507 as an annexure to the agreement of employees on loan dated 01/08/2008.
14.10. A reading of Article 6, of the ‘Agreement of employees on loan’, dated 01/08/2008, between the assessee and Toyota Corporation, Japan, shows that the control and supervision of the seconded employee is with the assessee in India. As per Article 7 of the ‘Agreement of employees on loan’, dated 01/08/2008 between the assessee and Toyota Corporation Japan, the salary of expatriate employee will be paid by the Toyota Corporation, Japan, that sends the employee on deputation, and that, Toyota Corporation Japan, continues to be the de jure employer. The assessee in India, to which the employee is sent on deputation is the de facto employer. The salary paid by the de jure employer is reimbursed by the assessee in India, to the Toyota Corporation, Japan.
14.11. Article 7 of the ‘Agreement of employees on loan’, dated 01/08/2008 between the assessee and Toyota Corporation Japan imposes obligation of compliance with tax deduction at source as per the Act, on salaries paid to the seconded employees on the assessee in India.
14.12. As per Article 8 of the ‘Agreement of employees on loan’, dated 01/08/2008, between the assessee and Toyota Corporation Japan, the assessee in India as well as the seconded employee shall not disclose confidential information of the other party.
14.13. From the recitals to the the ‘Agreement of employees on loan’, dated 01/08/2008 between the assessee and Toyota Corporation Japan, it is clear that, the process of secondment of employees by Toyota Corporation, Japan to the assessee in India is initiated, when the assessee in India, makes a request requiring the services of seconded employees of the Toyota Corporation, Japan, for its business projects by the assessee in India. The assessee in India gives offer letter to the seconded employee. By way of illustration, we may take the case of one Mr.Minoru Asahi who is a Japanese national and who is on the rolls of Toyota Corporation, Japan.
14.14. The offer letter dated 11.06.2014 of the assessee in India addressed to Mr.Minoru Asahi contains the following features:-
1. He is employee of Toyota Corporation Japan and during his assignment to assessee India, his employment responsibilities with Toyota Corporation Japan will remains suspended.
2. That, he will be under the control and supervision of the assessee in India.
3. That, his specialized knowledge in PED, Quality & New Projects was vital for the assignment with the assessee in India. From the letter dated 11/06/2014, upon completion of the assignment, it is clear that, Mr.Minoru Asahi was called upon to continue at the post of specialist PED Quality & New Projects with assessee in India.
4. That, during the assignment period, part of the salary after deducting grossed up income tax, under the Act, on the total salary, will be paid in India and the balance salary payable in Japan, by Toyota Corporation, Japan on behalf of assessee, which shall be reimbursed by the assessee to Toyota Corporation, Japan against a debit note.
5. That, during the period of assignment with the assessee in India, all other terms and conditions as per polices of the assessee company would be applicable.
Similar is the situation with all the seconded employees.
14.15. Admittedly, the assessee deducted tax at source u/s.192 of the Act, on the 100% salary paid to all the seconded employees, and paid the same to the credit of the Central Government. The assessee only reimbursed part of the salary cost of the seconded employee to Toyota Corporation, Japan that was already subjected to TDS under section 192 of the Act. And therefore, at the time of making such reimbursement, to Toyota Corporation Japan, no taxes were deducted at source by the assessee in respect of reimbursements made as, according to the assessee, it was in the nature of cost-to-cost reimbursement, and, no element of income was involved.
14.16. From a conjoint reading of Article 15 of the OECD Model Convention and the articled referred to herein above, there is no doubt in our minds that the assessee in India is the economic and de facto employer of the seconded employees. It is an admitted fact that all the seconded employees are in India for more that 183 days in a 12 month period. Further all the seconded employees have PAN card as well as file their returns in India in respect of the 100 % salary, though the assessee pays only part of the salary in India. We are therefore of the view that there exists an employer-employee relation between the assessee and the seconded employees.
14.17. Article 12(4) of India Japan DTA,A that deals with “Fees for technical services’, as under:
“4. The term “fees for technical services” as used in this Article means payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in Article 14, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.”
Reading Article 12(4) of India Japan DTAA,it is clear that payments made to individuals or firm of individuals for services rendered by them in independent capacity are specifically excluded as they are covered by Article 14 being “ Independent Personal Services. Article 12(4) also excludes payments made towards services rendered by an ‘employee’ of an enterprise.
14.18. The definition of FTS under the Act is given in Explanation 2 to Sec.9(1)(vii) of the Act that reads as follows:-
“Income deemed to accrue or arise in India.
9. (1) The following incomes shall be deemed to accrue or arise in India :-
(i) to (vi)
(vii) income by way of fees for technical services payable by—
(a) the Government ; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India :
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and approved by the Central Government.
Explanation 1.—For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
Explanation 2.—For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.
14.19. The definition of FTS under the Act excludes “consideration which would be income of the recipient chargeable under the head salaries.” If the seconded employee is regarded as employee of the assessee in India, then the reimbursement to Toyota Corporation, Japan, by the assessee in India would not be in the nature of FTS, but would be in the nature of ‘salary’, and therefore, the reimbursements cannot be chargeable to tax in the hands of Toyota Corporation, Japan, and therefore there would be no obligation to deduct tax at source at the time of making payment u/s.195 of the Act.
14.20. The Ld.DCIT placed reliance on the decision of the Hon’ble Delhi High Court in the case of Centrica India Offshore Pvt.Ltd. reported (2014) 44 taxmann.com 300 concluded that the reimbursement was FTS and that services provided make available technical skill or knowledge for use by the assessee.
14.20.1. In case of the decision of Hon’ble Delhi High Court in the case of Centrica India Offshore Pvt.Ltd vs. CIT(supra) dealt with identical case of reimbursement of salaries paid to expatriate employees. The Hon’ble Court held that, overseas entities had, through seconded employees, undoubtedly provided ‘technical’ services to Centrica India and that, the expression rendering technical services expressly includes provision of services of personnel. The Court held that the Seconded employees, were provided by overseas entities and work conducted by them thus, i.e. assistance in conducting business of assessee of quality control and management was through overseas entities. The Court also held that, mere fact that secondment agreement, phrases payment made by Centrica India to overseas entity as ‘reimbursement’ could not be determinative. It was also held that, the fact that overseas entity did not charge mark-up over and above costs of maintaining secondee could not negate nature of transaction.
14.20.2. Hon’ble Pune Tribunal in case of M/s.Faurecia Automative Holding (supra) has observed as under:
“4.10. We have gone through the facts of the case obtaining in Centrica India (supra). The assessee therein contended that payment to foreign party towards seconded employees was only reimbursement and hence, no income was chargeable to tax in its hands. The Authority for Advance Ruling (AAR) held that payment made by the petitioner to the overseas entity was in the nature of income in view of the existence of Service Permanent establishment (PE) in India and hence liable for tax withholding. Overturning the view of the AAR that Service PE was constituted, the Hon’ble High Court held that the payment to AE was in the nature of `fees for technical services’ and not reimbursement of expenses and further laid down that the nomenclature of reimbursement was not decisive. It noted that: ‘Money paid by assessee to overseas entity accrues to overseas entity, which may or may not apply it for payment to secondees, based on its contractual relationship with them.’ It is perceptible that in that case money paid by the Indian entity accrued to overseas entities only, which could or could not have been paid to the secondees depending upon the terms of contract. Per contra, we are confronted with a situation wherein the money never accrued to the assessee. It initially paid money to Mr. Franck in advance and then M/s.Faurecia Automotive Holding recovered the same from the Indian entity without any mark-up. There can be no question of the assessee receiving money in its own independent right. Rather, it is a case of discharge by the Indian entity of its own liability towards salary payable to Mr. Franck. It is thus manifest that this decision has no application to the facts of the instant case.”
14.21. We also note that, reliance is placed on the decision of Hon’ble Madras High Court in case of Verizon Data Services India (P) Ltd. v. AAR and Ors(supra), wherein it is held that, the reimbursement of salary of expatriates to foreign co by Indian company results in taxable income in the hands of the foreign company. Hon’ble High Court also upheld the observations of AAR, wherein it characterized the secondment of personnel as provision of managerial services. However, the Honble Court set aside the ruling of Hon’ble AAR, wherein it held that, the reimbursement of salary of expatriates constitutes fees for included services in terms of Article 12(4) of India USA DTAA. Therefore, reliance placed on this decision is of no assistance to revenue.
14.22. There is another decision of Hon’ble Supreme Court in case of DIT v. Morgan Stanley reported in (2007) 162 Taxman 165, wherein, it is held that, in case of deputation, the entity to whom the employees have been deputed cannot be regarded as employer of such employees as the employees continue to have lien on his employment with the entity which deputes him. Entity seconding the employee is the employer as it retained the right over seconded employee is also held by Hon’ble AAR in case of AT & S India Pvt Ltd., reported in 287 ITR 421.
14.22.1. The observations of the Hon’ble Supreme Court in the case of Morgan Stanley (supra) were in the context of existence of service PE. This is clear from a reading of the relevant portion of the judgment of the Hon’ble Supreme Court, which is as follows:-
“As regards the question of deputation, an employee of MSCo when deputed to MSAS does not become an employee of MSAS. A deputationist has a lien on his employment with MSCo. As long as the lien remains with the MSCo the said company retains control over the deputationist’s terms and employment. The concept of a service PE finds place in the UN Convention. It is constituted if the multinational enterprise renders services through its employees in India provided the services are rendered for a specified period. In this case, it extends to two years on the request of MSAS. It is important to note that where the activities of the multinational enterprise entail it being responsible for the work of deputationists and the employees continue to be on the payroll of the multinational enterprise or they continue to have their lien on their jobs with the multinational enterprise, a service PE can emerge. Applying the above tests to the facts of this case, it is found that on request/requisition from MSAS the applicant deputes its staff. The request comes from MSAS depending upon its requirement. Generally, occasions do arise when MSAS needs the expertise of the staff of MSCo. In such circumstances, generally, MSAS makes a request to MSCo. A deputationist under such circumstances is expected to be experienced in banking and finance. On completion of his tenure he is repatriated to his parent job. He retains his lien when he comes to India. He lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under art 5(2)(l). There is no infirmity in the ruling of the AAR on this aspect. In the above situation, MSCo is rendering services through its employees to MSAS. Therefore, the Department is right in its contention that under the above situation there exists a service PE in India (MSAS).”
14.22.2. Per contra, in the present facts of the case there is no finding, of their existing PE, in any form by the revenue and therefore is of no assistance to the revenue.
14.23. As far as the decision of Hon’ble AAR in the case of AT & S (supra) is concerned, the facts of the said case were that AT&S, a company incorporated in Austria, offered services of technical experts to applicant, a resident company, pursuant to a foreign collaboration agreement on the terms and conditions contained in secondment agreement. Under the secondment agreement the applicant is required to compensate AT&S for all costs directly or indirectly arising from the secondment of the personnel, and the compensation is not limited to salary, bonus, benefits, personal travel, etc. but also includes other items. On the above facts, Hon’ble AAR ruled that the Contention that the payments are only in the nature of reimbursement of actual expenditure is not supported by any evidence and there is no material to show what actual expenditure was incurred by AT&S and what was claimed as reimbursement. A part of the salary of seconded personnel is paid by the applicant in Indian rupees and the remaining part is paid by the applicant to AT&S in Euro. While working with the applicant, the seconded personnel are required to comply with the regulations of the applicant, but they would go back to the AT&S on the expiry of assignment. Aforesaid terms and conditions show that the seconded personnel in effect continue to be employees of AT&S. Recipient of the compensation is AT&S and not the seconded employees. Further contention was that AT&S is not engaged in the business of providing technical services in the ordinary course of its business is also not tenable. Therefore, payments made to AT&S by the applicant are for rendering “services of technical or other personnel” and are in the nature of fees for technical services within the meaning of Explanation 2 to sub clause (vii) of section 9(1) and Article 12(4) of the relevant DTAA and are subject to deduction of tax at source under section195.
14.23.1. The ruling of Hon’ble AAR is on the factual finding that payments were not only reimbursement of actual salary, bonus etc., but was also included other sums.
14.23.2. Per contra in the present facts of the case, it is not at all the contention of the revenue that, something over and above what was paid as salary, bonus etc.
14.24. Liability under section 195 to deduct tax at source when making payment to a non-resident arises only if sum paid is chargeable to tax in India. Payment of salaries is not covered under section 195. Thus, it is necessary to take into consideration following aspect to determine Payments to enterprise seconding employees, the Indian entity has an obligation to deduct tax source u/s 195:
(i) Payment of fees by an enterprise (Indian entity) to foreign entity for seconding employees;
(ii) Reimbursement of salaries to the entity seconding the employees (foreign entity) from the entity to whom employees have been seconded (Indian entity).
14.25. Payment for supplying skilled manpower cannot be regarded as payment towards managerial, technical and consultancy services as per dictionary meanings of these terms. Hon’ble AAR in Cholamandalam MS General Insurance Co. Ltd., reported in 309 ITR 356, took the view that, merely supplying technical, managerial or personnel with managerial skills cannot be regarded as rendering technical services by the person supply such personnel. The following were the relevant observations of Hon’ble AAR:-
“It is debatable whether the bracketted words – “including provision of services of technical or other personnel” is independent of preceding terminology – “managerial, technical or consultancy services” or whether the bracketted words are to be regarded as integral part of managerial, technical or consultancy services undertaken by the payee of fee. In other words, is the bracketted clause a stand alone provision or is it inextricably connected with the said services? HMFICL itself does not render any service of the nature of managerial, technical or consultancy to the applicant and it has not deputed its employee to carry out such services on its behalf. There is no agreement for rendering such services. In this factual situation, it is possible to contend that merely providing the service of a technical person for a specified period in mutual business interest not as a part of technical or consultancy service package but independent of it, does not fall within the ambit of S.9(1)(vii).”
14.26. Hon’ble Bombay High Court in case of Marks & Spencer Reliance India Pvt.Ltd. VS. DIT reported in (2013) 38 taxmann.cm 190, upheld the view of Hon’ble Mumbai Tribunal which held that, payment towards reimbursement of salary expenditure without any element of profit, would not be taxable under the provisions of the Act. Hon’ble Court also held that, when the entire salary has been subjected to tax in India at the highest average tax rate, the assessee could not held to be in default for not without tax under the provisions of the Act.
15. Respectfully following the above views expressed by Hon’ble Karnataka High Court in DIT vs. Abbey Business Services India (P.)Ltd.(supra), Hon’ble AAR in Cholamandalam MS General Insurance Co. Ltd. (supra), Hon’ble Bombay High Court in case of Marks & Spencer Reliance India Pvt.Ltd. vs. DIT(supra), Hon’ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. (supra), Coordinate bench of this Tribunal in case of IDS Software Solutions vs. ITO(supra), Hon’ble Pune Tribunal in case of M/s.Faurecia Automative Holding(supra), Hon’ble Ahmedabad Tribunal in the case of Burt Hill Designs (P) Ltd. vs. DDIT(IT) (supra), we are of the view that the reimbursement made by the assessee in India to Toyota Corporation, Japan, towards the seconded employees cannot be regarded as “Fee For technical Services” and therefore not taxable u/s. 195 of the Act. We therefore direct the Ld.AO to delete the disallowance made u/s. 40(a)(i) of the Act.
Accordingly, Ground nos. 12-15 raised by assessee for the assessment year 2016-17 stands allowed.
6.2 In view of the decision of the coordinate bench in assessee’s own case for the asst. year 2013-14, we allow ground no.12 to 15.
7. Ground Nos.16 to 19 is with regard to treatment of payment towards plant layout charges as capital in nature of Rs.90,58,664/-.
7.1 The facts in the present asst. year 2016-17 are identical with issue covered by the decision of coordinate bench in the assessee’s own case in IT(TP)A No.1646/Bang/2017 vide order dated 13/04/2022 for the assessment year 2013-14 and also for the asst. year 2015-16. The para nos. 16 to 17 in the asst. year 2013-14 is reproduced here under:-
“16. Ground No.15-17 are raised by assessee challenging the treatment of payment towards plant layout charges as capital in nature. The assessee has incurred expenses towards plant layout charges to facilitate material movement for optimum utilization of space. Due to space constraints, amounts have been spent for re-arranging the production lines on a regular basis. These are minor modifications of small value, which do not result in benefits accruing for a long period. Such expenses have been incurred year-on-year basis to improve utilization of the resources, besides improvement in quality and safety. Such expenditure neither increases the earning capacity of the business, nor does it result in additional production capabilities for the company.
The Ld.AO held the expenditure to be capital in nature and disallowed the claim of the assessee.
On raising objections, the DRP held as under:
“7.4 The contentions of the assessee are carefully considered. Broadly the line of argument putforth by the assessee is that these expenses are incurred to rearrange the production lines and reposition the process lines which also involved purchases of few mechanical and electrical items. Further the assessee contended that these expenses have not added to the production capacity of the assessee and hence there is no enduring benefit. The assessee also relied on various court decisions in it’s favor. However, based on the facts it can be seen that the expenditure is incurred on the capital assets for rearranging, shifting or realigning etc. especially when there is new production line for producing new model of car etc. the production line is essentially re-setup for new production. This issue is covered by Supreme Court decision in the case of Ballimal Naval Kishore & Anr Vs. CIT [1997] 224 ITR 414 (SC) where in the court applied the test propounded by Bombay High Court in the case of New Sharrock Spinning and Manufacturing _Company Ltd (30 ITR 338). The test is proposed in the case by Hon’ble Bombay High Court whether a particular expenditure towards repairs to machinery or building etc. is capital or revenue. As per this decision one need to see, based on facts whether such expenditure is incurred to preserve or maintain already existing assets or it is incurred for renewal, restoration, bringing new asset into existence or bringing new (or) different advantage to the assessee. As observed based on existing facts that the factory production line was fully refurbished and made fit to manufacture new Toyota Corolla Model. Such expenditure brings new (or) different advantage and falls within the definition of capital expenditure as per above test. Accordingly, we confirm the AO’s treatment that the expenditure is capital in nature. Ground rejected.”
On an appeal before this Tribunal, the Ld.AR reiterated the submissions before the authorities below. The Ld.CIT.DR relied on orders passed by authorities below and submitted that there is nothing placed on record in support of the claim by assessee.
We have perused the submissions advanced by both sides in the light of records placed before us.
We note that the alleged expenditure has been claimed as plant layout charges to improve utilisation of resources, besides improvement in quality and safety. The Ld.AR however alternatively prayed that, in the event the said expenditure is upheld to be capitalised, depreciation may be granted.
We note that the assessee has not provided any details in respect of the expenditure incurred towards layout of plant, and why was it necessary to be incurred. In our view this issue needs to be revisited based on the evidences filed by the assessee having regard to the principles laid down by Hon’ble Supreme Court in case of Ballimal Naval Kishore & Anr vs. CIT (supra) of DRP order.
Accordingly, we direct the assessee to file all relevant details in support of the claim which would be verified by the AO in accordance with law.
Accordingly, Ground nos.15-17 raised by assessee for the assessment year 2013-14 stands allowed for statistical purposes. The facts for the assessment year 2015-16 are identical with assessment year 2013-14. Therefore the view taken for assessment year 2013-14 will apply mutatis mutandis to assessment year 2015-16 in respect of Grounds raised therein. Accordingly, Ground nos.20-23 raised by assessee for the assessment year 2015-16 stands allowed for statistical purposes. 17. Ground No.18 is raised by the assessee for non granting of credit for advance tax paid.
The assessee is directed to furnish requisite evidences in respect of the advance tax paid. The Ld.AO is directed verify the same and to grant credit for the advance tax paid by assessee.
Accordingly, Ground no.18 raised by assessee for the assessment year 2013-14 stands allowed for statistical purposes.
7.2 In view of the decision of the coordinate bench in assessee’s own case for the asst. year 2013-14, we allow ground nos.16 to 19.
8. In the result, the appeal of the assessee is allowed.
Order pronounced in court on 18th day of July, 2022.
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