ACIT, New Delhi V. M/s. Blue Scope Steel India (P) Ltd., Pune

ITA 5535/DEL/2012

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3179 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-03-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I1
• Next Hearing Date: 20-06-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 01-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RONAK DASHI
• Keywords: Transfer pricing; International transaction

Judgement Text

1ITA NO. 5535/DEL/2012 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEM BER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER I.T.A .NO. 5535/DEL/2 012 (A.Y 2007-08) I.T.A .NO. 5536/DEL/2 012 (A.Y 2008-09) I.T.A .NO. 5537/DEL/2 012 (A.Y 2009-10) ACIT CIRCLE-3(1) NEW DELHI (APPELLANT) VS BLUE SCOPE STEEL INDIA (P) LTD. THE METROPOLITAN, FINAL PLOT NO. 27, SURVEY NO. 21, WAKDEWADI, SHIVAJI NAGAR, PUNE AAACB2855R (RESPONDENT) APPELLANT BY SH. RONAK DASHI, CA RESPONDENT BY SH. KUMAR PARNAV, SR. DR ORDER PER SUCHITRA KAMBLE, JM THESE APPEALS ARE FILED BY THE REVENUE AGAINST THE ORDER DATE D31/08/2012 PASSED BY CIT (A)-XX, NEW DELHI FOR ASS ESSMENT YEAR 2007-08. 2. IN ALL THE APPEALS THE GROUNDS ARE COMMON THEREF ORE, THE GROUNDS OF ITA NO. 5535/DEL/2012 ARE TAKEN UP WHICH ARE AS UNDER:- 1. THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONCLUDING THAT TPO HAS ACCEPTED ALP AT COST PLUS 7.5% WHEN THE ACT UAL INTENTION OF THE TPO WAS TO DETERMINE THE ALP AT HIGHER MARGIN B Y EXCLUDING THE SALARY COST FROM THE COST BASE. 2. THE LD. CIT(A) ERRED ON FACTS IN LAW IN HOLDING THAT IF AO HAS ALLOWED THE SALARY TO EXPATS EXPENSES AGAINST LOCAL REVENUE, THE TPO DATE OF HEARING 06.12.2017 DATE OF PRONOUNCEMENT 01.03.2018 2ITA NO. 5535/DEL/2012 CANNOT DISALLOW IT IN THE INTERNAL TAXATION. 3. THE LD. CIT(A) ERRED ON FACTS IN LAW IN NOT EXAM INING THE TRANSACTION FROM AN INDEPENDENT PERSPECTIVE AND SUM MARILY REJECTING THE TPOS SECONDARY ANALYSIS. 4. THE LD. CIT(A) ERRED ON FACTS IN LAW IN DELETING THE ADJUSTMENT OF RS.2,32,67576/- AS PROPOSED BY THE TPO IGNORING THE DETAILED REASONING GIVEN BY THE TPO IN HIS ORDER U/S 92CA(3) . 3. BLUE SCOPE STEEL INDIA (P.) LTD. IS A SUBSIDIA RY OF BLUE SCOPE STEEL LIMITED, AUSTRALIA (AE OR HOLDING COMPANY). DURING THE AS SESSMENT YEAR, THE ASSESSEE COMPANY WAS ENGAGED IN PROVIDING BUSINESS SUPPORT SERVICES TO ITS AE AND FEASIBILITY/ TECHNICAL CONSULTANCY SERVICES AND PROJECT MANAGEMENT SERVICES TO THIRD PARTY. DURING THE YEAR UNDER CONS IDERATION, THE ASSESSEE COMPANY HAD UNDERTAKEN FOLLOWING INTERNATIONAL TRAN SACTIONS WITH ITS HOLDING COMPANY, WHICH WERE BENCHMARKED AND REPORTED IN FOR M 3CEB AS UNDER: SR. NO. DESCRIPTION OF TRANSACTION VALUE IN RS. (A) PROVISION OF BUSINESS SUPPORT SERVICES - INCOME VALUE IN RS. (B) REIMBURSEMENT OF SALARY COST - EXPENSE 2,21,06,858 2,32,67,567 THE TERMS BETWEEN THE ASSESSEE AND ITS HOLDING COMP ANY IN RELATION TO THE BUSINESS SUPPORT SERVICES [AS REPORTED AT (A) ABOVE ] ARE GOVERNED BY THE AGREEMENT DATED APRIL 1, 2004 AND THE ASSESSEE COMP ANY CHARGED COST PLUS MARKUP OF 7.5% TOWARDS SUCH SERVICES. THE SAID TRAN SACTION WAS BENCHMARKED BY THE ASSESSEE COMPANY USING TRANSACTIONAL NET MAR GIN METHOD. AS FAR AS REIMBURSEMENT OF SALARY COST IS CONCERNED, THE SAME WAS REIMBURSED TO THE AE FOR SALARY DISBURSED BY THE AE IN AUSTRALIA AND AIR TICKET, VISA CHARGES, ETC. INCURRED BY THE AE IN RESPECT OF EMPLOYEES SECONDED TO THE ASSESSEE COMPANY. SINCE THE ASSESSEE COMPANY REIMBURSED SUCH COST TO ITS HOLDING COMPANY ON ACTUAL BASIS WITHOUT ANY MARKUP AND CHARGING OF ANY MARKUP WOULD ONLY RESULT IN REDUCTION OF THE PROFITS OF THE ASSESSEE, THE SAME IS CONSIDERED TO BE 3ITA NO. 5535/DEL/2012 AT ARMS LENGTH IN VIEW OF SECTION 92(3) OF THE ACT . DURING A.Y. 2005-06, THE ASSESSEE COMPANY HAD UNDERTAKEN TO SET UP A PROJECT RELATING TO STEEL COATING FACILITY AND TO MANUFACTURE BUILDING PRODUCTS FOR I NDIAN BUILDING AND CONSTRUCTION INDUSTRY. HOWEVER, DUE TO COMMERCIAL C ONSTRAINTS, THE ASSESSEE COMPANY, IN A.Y. 2006-07, SOLD THE SAID PROJECT TO TATA BLUESCOPE STEEL LIMITED [TBSL (FORMERLY KNOWN AS BLUESCOPE STEEL BUILDING SOLUTIONS PRIVATE LIMITED)] WHICH IS A JOINT VENTURE COMPANY BETWEEN TATA STEEL LIMITED AND BLUESCOPE STEEL LIMITED, AUSTRALIA. THE SALE OF THE PROJECT ENABLED THE ASSESSEE COMPANY TO RECOVER THE COST OF THE PROJECT FROM TBS L IN THE FORM OF LUMP SUM CONSIDERATION OF RS. 7,50,00,000/-AT THE TIME OF SA LE AND RECURRENT PROJECT MANAGEMENT INCOME IN THE SUBSEQUENT YEARS, WHICH OT HERWISE WOULD HAVE BEEN SUNK COSTS RESULTING INTO HUGE LOSSES. THE S ALE CONSIDERATION AND THE PROJECT MANAGEMENT INCOME WAS RECOGNIZED AS REVENUE IN THE BOOKS OF THE ASSESSEE COMPANY AND HAS BEEN ACCEPTED AS SUCH BY T HE TAX DEPARTMENT. THE ABOVEMENTIONED AGREEMENT DATED DECEMBER 1, 2005 ALS O PROVIDED THAT THOUGH THE PROJECT IS SOLD, THE ASSESSEE COMPANY, UPON REC EIPT OF PROJECT MANAGEMENT FEES, SHALL CONTINUE TO PROVIDE THE ONGOING PROJECT SERVICES AND BUSINESS CONSULTANCY SERVICES TO TBSL. ACCORDINGLY, THE ASSE SSEE RECEIVED THE PROJECT MANAGEMENT FEES OF RS. 68,79,062/- AND RS. 3,10,57, 199/- DURING A.Y. 2006- 07 AND A.Y. 2007-08 RESPECTIVELY FROM TBSL, WHICH W AS DULY ACCOUNTED AND OFFERED FOR TAX BY THE ASSESSEE. THE ASSESSEE BENC HMARKED THE BUSINESS SUPPORT SERVICES PROVIDED TO ITS AE BY APPLYING TRA NSACTIONAL NET MARGIN METHOD AND ADOPTING OPERATING PROFIT/OPERATING COST AS THE PROFIT LEVEL INDICATOR. THE TPO ACCEPTED THE MARGIN EARNED BY TH E ASSESSEE COMPANY @ 7.5% ON THE PROVISION OF SUCH SERVICES AND NO ADVER SE INFERENCE IS DRAWN BY TPO IN RELATION TO THE SAME. THE ASSESSEE REIMBURSED THE SALARY COST TO THE AE AT COST WITHOUT ANY MARK-UP. THE TPO DETERMINED THE ARMS LENGTH PRICE (ALP) OF REIMBURSEMENT OF SALARY COST AS NIL BA SED ON THE FOLLOWING OBSERVATIONS: A. THERE IS NO AGREEMENT BETWEEN THE ASSESSEE COMPANY AND ITS AE RELATING TO SECONDMENT OF EMPLOYEES AND NOTHING WAS BEEN SUBMITTED 4ITA NO. 5535/DEL/2012 WITH REGARD TO ROLE OF EMPLOYEES FOR RENDERING BUSI NESS SUPPORT SERVICES TO THE AE. B. THE EXPATS ARE THE EMPLOYEES OF THE OVERSEAS AE AN D WERE DEPUTED FOR PROJECT RELATED WORK TO THE ASSESSEE COMPANY BU T AFTER THE SALE OF THE PROJECT, THEIR SERVICES WAS DEPUTED TO TBSL BUT THROUGH THE ASSESSEE COMPANY. C. THE ROLE OF THE ASSESSEE COMPANY AFTER THE SALE OF THE PROJECT ON DECEMBER 1, 2005 REMAINED TO WATCH THE INTEREST OF THE AE AND FOR THE SAME, ROLE OF THESE EMPLOYEES IS INCOMPREHENSIB LE. THE ASSESSEE COMPANY AND ITS AE MADE AN ARRANGEMENT TO DRAIN OUT THE MONEY FROM INDIA BY BURDENING THE ASSESSEE COMPANY WITH A LIABILITY WHICH IS ACTUALLY OF TBSL, WHERE THE AE IS A PARTNER. D. NO SERVICES RELATING TO PAYROLL MANAGEMENT SERVICE S RENDERED BY AE TO THE ASSESSEE COMPANY FOR WHICH CLAIM WAS MADE. T HE PAYMENT OF SALARY AND OTHER COSTS OF EXPATS DID NOT CONSTITUTE ANY SERVICE; RATHER CAN BE SAID AS AN ARRANGEMENT. DURING THE YEAR UNDE R CONSIDERATION, NOTHING WAS CHARGED BY THE AE TO THE ASSESSEE COMPA NY TOWARDS PAYROLL MANAGEMENT SERVICES. THE AO AFTER GIVING AN OPPORTUNITY TO THE ASSESSEE COMPANY, CONFIRMED THE ACTION OF THE TPO AND MADE THE ADDITION OF RS. 2,32 ,67,567/- TO THE TOTAL INCOME TOWARDS REIMBURSEMENT OF SALARY COST. 4. BEING AGGRIEVED BY THE ASSESSEE FILED APPEAL BEF ORE THE CIT(A). THE CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE. 5. THE LD. AR SUBMITTED THAT THE ASSESSEE COMPANY E MPLOYED EXPATS SECONDED BY THE AUSTRALIAN AE AND THE ASSESSEE COMP ANY IS ENGAGED IN PROVIDING BUSINESS SUPPORT SERVICES TO AE AND PROJE CT MANAGEMENT SERVICES TO TBSL THROUGH SUCH EXPATRIATE EMPLOYEES. THE LD. AR FURTHER SUBMITS THAT THE ROLE OF THE EXPATS IN PROVIDING SUCH SERVICES ALONG WITH THEIR PROFESSIONAL QUALIFICATION WAS DULY SUBMITTED BEFORE THE TPO AND THE SAID FACT WAS ALSO 5ITA NO. 5535/DEL/2012 ACKNOWLEDGED BY THE TPO IN HIS ORDER. THE LD. AR S UBMITTED THAT THE FOLLOWING FACTS CANNOT BE DISPUTED: (1) EMPLOYEES WERE SECONDED BY THE AE TO THE ASSESS EE COMPANY (2) ASSESSEE COMPANY WAS PAYING THEM SALARY. WHILE THE INDIAN COMPONENT OF EXPATS SALARY IS NOT DISPUTED ONLY THE FOREIGN COMPONENT DISBURSED BY THE AE IN AUSTRALIA FOR CONV ENIENCE PURPOSE OF SUCH EXPATS WAS DISALLOWED. THE ASSESSEE COMPANY DEDUCT ED TAX AT SOURCE ON ENTIRE SALARY PAID TO EMPLOYEE (INDIAN & AUSTRALIAN DISBUR SEMENT). THE SAID FACTS WAS TAKEN INTO ACCOUNT BY THE TPO IN HIS ORDER AND ACCEPTED THAT SUCH HIGHLY TECHNICAL FORCE IS NEEDED FOR THE PROJECT DEVELOPME NT WORK. SUCH SECONDED EMPLOYEES ALSO FILED RETURN OF INCOME IN INDIA. TH E LD. AR FURTHER SUBMITS THAT THE SECONDED EMPLOYEES WITH HIGH QUALIFICATION AND EXPERIENCE ENABLED THE ASSESSEE COMPANY TO RENDER BUSINESS SUPPORT SERVICE S TO AE AND PROJECT MANAGEMENT SERVICES TO TBSL AND THEREBY EARN INCOME FROM SUCH SERVICES. IT IS A SETTLE LAW THAT AN AGREEMENT BETWEEN TWO PARTI ES NEED TO BE RETURNED AND SHOULD BE INFERRED FROM THE CONDUCT BY THE PARTIES. THE LD. AR FURTHER SUBMITS THAT THE ASSESSEE COMPANY EMPLOYED SUCH EXP ATS ON SECONDMENT BASIS IN THE PAST AND THERE WAS NO DISPUTE ON SUCH SECONDMENT AND RENDERING OF BUSINESS SUPPORT SERVICES IN ASSESSMENT YEAR 200 5-06 AND 2006-07. THUS, THE LD. AR SUBMITTED THAT THE REVENUE IS FIRST TIME CHANGING ITS STAND ONLY POST SALE OF PROJECT. 6. THE LD. AR FURTHER SUBMITS THAT THE EXPATS ARE O N THE PAY ROLE OF THE ASSESSEE COMPANY SINCE MANY YEARS AND THE ASSESSEE COMPANY PROVIDED BUSINESS SUPPORT SERVICES TO ITS AE AND PROJECT MAN AGEMENT SERVICES TO TBSL THROUGH SUCH EXPATS AND THE CORRESPONDING BUSINESS SUPPORT SERVICE INCOME AND PROJECT MANAGEMENT INCOME WAS DULY OFFERED FOR TAXATION AND ACCEPTED BY THE REVENUE DEPARTMENT. THE LD. AR FURTHER SUBMITT ED THAT THE TPO ON MERE SURMISES AND CONJECTURES HELD THAT POST SALE OF PRO JECT SUCH PREVIOUS WERE 6ITA NO. 5535/DEL/2012 DEBITED TO TBSL WITHOUT ANY DOCUMENTARY EVIDENCE AN D WITHOUT CROSS CONFIRMATION FROM TBSL. THE TRANSFER PRICING OFFIC ER DID NOT BRING ON RECORD ANY EVIDENCE WITH SUBSTANTIALS THE ALLEGATION THAT POST SALE OF PROJECT EMPLOYEES WERE DEPUTED TO TBSL. 7. THE LD. AR FURTHER SUBMITS THAT THE ROLE OF THE ASSESSEE COMPANY AFTER SALE OF THE PROJECT TO TBSL AS DEFINED IN THE AGREE MENT DATED DECEMBER 1 ST , 2005, WAS TO PROVIDE ONGOING PROJECT SERVICES AND B USINESS CONSULTANCY SERVICES TO TBSL IN ORDER TO AVOID INCREASED COST A ND TO ENSURE SMOOTH FUNCTIONING OF THE PROJECT THE LUMP SUM CONSIDERATI ON AMOUNTING TO RS.7,50,00,000/- RECEIVED ON THE SALE OF THE PROJEC T AND THE RECURRING PROJECT MANAGEMENT INCOME WAS DULY OFFERED FOR TAX BY THE ASSESSEE COMPANY WHICH WAS NOT DISPUTED BY THE REVENUE DEPARTMENT. THE LD . AR FURTHER SUBMITS THAT THE EMPLOYEE COST OF THESE EXPATS COMPRISES OF THE LOCAL EXPENDITURE AND THE FOREIGN COMPONENT WHICH WAS DISBURSED BY THE AE IN AUSTRALIA FOR CONVENIENCE PURPOSES AND SUBSEQUENTLY, REIMBURSED B Y THE ASSESSEE COMPANY TO ITS AE. THE TPO ALLOWED THE LOCAL EXPENDITURE. HOWEVER, HE DETERMINED THE ALP OF THE FOREIGN COMPONENT AS NIL. THE ASSESSEE COMPANY DID NOT MAKE ANY ARRANGEMENT TO DRAIN OUT THE MONEY FROM INDIA AND I T CANNOT BE SAID THAT THE LIABILITY OF SUCH EXPATS WAS OF TBSL AS THE COMPANY HAD DEVELOPED THE PROJECT AND THE INCOME ON SALE AND CORRESPONDING PROJECT AN D MANAGEMENT INCOME WAS ACCOUNTED FOR THE IN THE BOOKS OF THE ASSESSEE COMPANY. THE ASSESSEE COMPANY WAS UNDER CONTRACTUAL OBLIGATION TO PROVIDE SUCH SERVICES AS PER THE AGREEMENT DATED DECEMBER 1 ST 2005. THE TPO CANNOT REWRITE THE TERMS OF ANY COMMERCIAL AGREEMENT AND CANNOT STEP INTO THE SHOES OF THE ASSESSEE TO DETERMINE THE EXIGENCIES OF THE EXPENDITURE TO THE INCURRED BY THE ASSESSE AS PER THE SUBMISSIONS OF THE LD. AR. 8. THE LD. AR SUBMITS THAT NO PAY ROLL MANAGEMENT S ERVICES WERE RENDERED BY THE AE TO THE ASSESSEE COMPANY IN THE YEAR UNDER CONSIDERATION AND ACCORDINGLY NOTHING WAS CHARGED BY THE AE TO THE AS SESSEE ON THIS ACCOUNT. 7ITA NO. 5535/DEL/2012 THE FACT THAT THE REIMBURSEMENT OF SALARY COST IS U NDER PAY ROLL MANAGEMENT SERVICES AGREEMENT WAS BEFORE THE CIT(A). THE CORR ECT FACT IS THAT THE ASSESSEE COMPANY HAD EMPLOYED SECONDED EMPLOYEES FROM AUSTRA LIA AND THE SAME SET OF EMPLOYEES WERE RENDERING BUSINESS SUPPORT SERVICES AND PROJECT MANAGEMENT SERVICES TO THE AE AND TBSL RESPECTIVELY. THE LD. AR FURTHER SUBMITS THAT RENDERING OF PAY ROLL SERVICES BY THE AE AND THE SE CONDMENT OF EMPLOYEES FROM AE ARE INDEPENDENT AND THE SAME CANNOT BE SAID THAT SINCE NO PAY ROLL MANAGEMENT SERVICES WERE RENDERED BY THE AE, THE S ALARY COST OF THE SECONDED EMPLOYEES THROUGH WHICH THE ASSESSEE COMPANY EARNS INCOME CAN BE DISALLOWED. 9. THE LD. DR SUBMITTED THAT AS PER GROUND NO. 1 TO 4, THE CIT(A) HAS ERRED IN DELETING THE TP ADJUSTMENT OF RS.2,32,67,5 76/- AND IGNORED THE DETAILED REASONS GIVEN BY THE TPO AT PG NO. 19 AND 20 OF THE TPOS ORDER FOR DETERMINING ALP AT NIL. THE LD. DR FURTHER SUBMITTE D THAT NO BENCHMARKING WAS DONE BY THE ASSESSEE FOR THE SAID INTERNATIONAL TRANSACTION. THE ASSESSEE IS EARNING SERVICE INCOME FROM ONLY TWO SERVICES - BU SINESS SUPPORT SERVICES AND TECHNICAL SERVICES. THE ASSESSEE WAS NOT ABLE TO SUBSTANTIATE THE FACT EITHER BEFORE THE AO/TPO OR BEFORE THE CIT(A) THAT THESE SIX EXPATS WORKED FOR THE ASSESSEE IN PROVIDING BUSINESS SUPPORT SERVICE S TO THE AE OR TO TECHNICAL SERVICES TO THE JV (WHERE AE IS 50% PARTNER). THUS , THE ALP WAS CORRECTLY DETERMINED AT NIL UNDER CUP AS NO INDEPENDENT PARTY WOULD HAVE PAID SUCH AMOUNTS TO THE AE ON ACCOUNT OF SALARIES WITHOUT DE RIVING ANY BENEFIT. THE LD. DR FURTHER SUBMITTED THAT THERE IS NO AGREEMENT BET WEEN THE ASSESSEE AND AE IN RESPECT OF PROVIDING THE SERVICES OF THE ABOVE S IX EXPAT EMPLOYEES. THERE ARE NO INDIVIDUAL AGREEMENTS BETWEEN THE ASSESSEE AND T HE ABOVE SIX EXPAT EMPLOYEES REGARDING THE AMOUNT OF SALARY TO BE PAID AND NATURE OF SERVICES REQUIRED. THE AE PAID MERELY ON THE BASIS OF THE DE BIT NOTES RAISED BY THE AE. THE LD. DR SUBMITS THAT THE TPO CORRECTLY HELD THAT THE ABOVE SIX PERSONS ARE NOT THE EMPLOYEES OF THE ASSESSEE AS THERE IS NO AG REEMENT OR APPOINTMENT 8ITA NO. 5535/DEL/2012 LETTER OF ANY SORT BETWEEN THE ASSESSEE AND THE EXP ATS. IN FACT, THERE IS NO SUCH AGREEMENT OF THE ASSESSEE WITH THE AE AS WELL. IT I S EVIDENT THAT THESE SIX EXPATRIATE EMPLOYEES ARE EMPLOYEES OF AE AND NOT OF ASSESSEE WHO MIGHT BE WORKING ON THE PROJECT (SOLD BY THE ASSESSEE TO THE JV IN THE EARLIER FINANCIAL YEAR) ON BEHALF OF THE AE. SINCE THEY ARE NOT EMPLO YEES OF THE ASSESSEE HENCE THERE IS NO QUESTION OF PAYING ANY SALARY TO THEM. THIS FACT HAS NOT BEEN APPRECIATED BY THE CIT(A). 10. THE LD. DR FURTHER SUBMITS THAT THE CIT(A) ERR ONEOUSLY HELD THAT COST BASE IN THE CALCULATION OF MARK-UP OF 7.5% PERTAINI NG TO THE BUSINESS SUPPORT SERVICES COMPRISED OF THE SALARIES PAID TO THE EXP ATRIATE EMPLOYEES AND SINCE NO ADVERSE VIEW WAS TAKEN BY THE TPO IN CASE OF BU SINESS SUPPORT SERVICES HENCE NO SUCH TP ADJUSTMENT CAN BE MADE IN CASE OF REIMBURSEMENT OF SALARIES. THE ASSESSEE ITSELF HAS SUBMITTED THAT OU T OF TOTAL PAYMENT OF SALARIES OF RS.2,32,67,567/- MADE TO THE SIX EXPATRIATE EMPL OYEES PAYMENT OF ONLY RS.47,86,261/- (REFER PG NO. 6 OF THE TPOS ORDER) PERTAINED TO THE PROVISION OF BUSINESS SUPPORT SERVICES AND BALANCE, I.E. RS. 1, 84,81,306/-, PERTAINED TO PROVISION OF TECHNICAL SERVICES TO THE JV. THE LD . DR FURTHER SUBMITTED THAT THE TPO HAS EXCLUDED SALARY TO EXPATS WHILE BENCHMA RKING THE PROVISION FOR BUSINESS SUPPORT SERVICES USING INTERNAL TNMM. THE AGREEMENT OF THE ASSESSEE WITH THE JV IS W.E.F. DECEMBER 2006 I.E. FOR THE PA RT OF THE FY 2006-07 WHEREAS THE PAYMENTS WERE MADE TO THE EXPATS FOR THE ENTIRE FINANCIAL YEAR 2006-07. FROM THE PERUSAL OF THE AGREEMENT OF THE ASSESSEE W ITH THE JV IT HAS BEEN OBSERVED THAT THE RATES FOR MARKETING AND BUSINESS DEVELOPMENT MANAGER (EFFECTIVE DATE DECEMBER 2006), OPERATIONS MANAGER( EFFECTIVE DATE DECEMBER 2006), ENGINEERING MANAGER(EFFECTIVE DATE OCTOBER 2 007) AND PRESIDENT SOLUTIONS BUSINESS (EFFECTIVE DATE OCTOBER 2007). N ONE OF THE EXPAT EMPLOYEES FALL INTO THE ABOVE CATEGORIES. THE ASSESSEE HAS NO T FURNISHED THE DETAILS AT WHICH IT HAS CHARGED THE JV FOR THE SERVICES OF THE SIX EXPAT EMPLOYEES. 11. THE LD. DR FURTHER SUBMITS THAT FROM THE ANALYS IS OF THE AUDITED 9ITA NO. 5535/DEL/2012 ACCOUNTS OF THE ASSESSEE ALSO IT IS EVIDENT THAT TH E ASSESSEE HAS NOT UTILIZED THE SERVICES OF THE SIX EXPATRIATE EMPLOYEES FOR GENERA TING SERVICE INCOMES IN RESPECT OF BUSINESS SUPPORT SERVICES OR IN RESPEC T OF TECHNICAL SERVICES, I) THE ASSESSEE HAS ONLY TWO SOURCES OF REVENUE - PRO VISION OF BUSINESS SUPPORT SERVICES TO THE AE AND PROVISION OF TECHNICAL SER VICES TO THE JV. AS PER THE AGREEMENT WITH THE AE THE PROVISION OF BUSINESS SU PPORT SERVICES IS AT COST PLUS MARK-UP OF 7.5%. THUS, TOTAL COST INCURRED IN RESPECT OF THE PROVISION OF THESE SERVICES CAN BE IDENTIFIED. THE ASSESSEE HAS INCURRED TOTAL EMPLOYEE COST OF RS.5,92,59,906/- (PAYMENT OF RS.2,32,67,567/- TO THE EXPATRIATE EMPLOYEES AND PAYMENT OF RS.3,59,92,339/- TO INDIAN EMPLOYEES ) AND TOTAL ESTABLISHMENT EXPENSES OF RS.3,04,38,634/-. THE ASSESSEE HAS EARN ED TOTAL SERVICE INCOME OF RS.5,31,94,119/- AS MENTIONED IN THE AUDITED ACCOUN TS WHICH INCLUDES RS.2,21,06,858/-, IN RESPECT OF BUSINESS SUPPORT S ERVICES (AT MARK-UP OF 7.5% OF THE COST) , AND RS.2,99,26,552/- IN RESPECT OF TECHNICAL SERVICES. SINCE TOTAL COST AFTER MARK-UP OF 7.5% IN RESPECT O F BUSINESS SUPPORT SERVICES IS RS.2,21,06,858/- HENCE THE ACTUAL COST (WITHOUT MARK-UP) IS RS.2,06,60,615/-. NOW THE ASSESSEE ITSELF HAS CLAIM ED THAT COST OF SALARIES TO THE EXPATRIATE EMPLOYEES FOR PROVIDING BUSINESS SU PPORT SERVICES IS RS.47,86,261/- THUS IT MEANS THAT THE BALANCE SALAR Y COST TO EXPATS FOR PROVIDING THE ABOVE SERVICES IS RS.1,58,74,354/- (R S.2,06,60,615 - RS.47,86,261). 12. THE LD. DR FURTHER SUBMITS THAT ASSUMING THAT THE ENTIRE COST OF THE ASSESSEE IS ONLY ON ACCOUNT OF EMPLOYEE COST (IGNOR ING THE HUGE ESTABLISHMENT EXPENSES WHICH IS MORE THAN 50% OF THE SALARY EXPEN SES), THE PAYMENT ON ACCOUNT OF SALARIES MADE TO THE INDIAN EMPLOYEES FO R PROVIDING BUSINESS SUPPORT SERVICES IS RS. 1,58,74,354/-. SINCE TOTAL PAYMENT TO INDIAN EMPLOYEES IS RS.3,59,92,339/- HENCE PAYMENT MADE TO INDIAN EMPLOYEES FOR PROVIDING TECHNICAL SERVICES TO THE JV IS RS.2,01 ,17,985/-. THE ASSESSEE HAS RECEIVED SERVICE INCOME FROM JV AMOUNTING TO RS.2,9 9,26,552/-. THUS, IF IT IS ACCEPTED THAT THE EXPATRIATE EMPLOYEES ARE PROVIDIN G SERVICES TO THE JV AS WELL 10 ITA NO. 5535/DEL/2012 THEN THE ASSESSEE HAS PAID SALARIES OF RS.3,85,99,2 91/- (RS.2,01,17,985/- PAID TO INDIAN EMPLOYEES + RS. 1,84,81,306/- PAID TO EXP ATRIATE EMPLOYEES) TO EARN SERVICE INCOME OF RS.2,99,26,552/- IN SPITE OF THE FACT THAT THE ASSESSEE IS BILLING THE JV ON THE BASIS OF PROVISION OF MANPOWE R. THE ABOVE ANALYSIS HAS BEEN DONE WITHOUT ACCOUNTING FOR THE HUGE ESTABLIS HMENT EXPENSES OF RS.3,04,38,634/-. IF THESE COSTS ARE ALSO PROPORTIO NED THEN THE DIFFERENCE BETWEEN THE COST AND REVENUE FOR THE PROVISION OF T ECHNICAL SERVICES TO THE JV WILL BE APPROXIMATELY EQUAL TO THE SALARY PAID TO E XPATS. THUS, IT IS QUITE EVIDENT THAT THE EXPATRIATE EMPLOYEES ARE NOT PROVI DING TECHNICAL SERVICES TO THE JV AND THUS THE PAYMENT OF SALARIES TO THE EXPA TRIATE EMPLOYEES IS NOT AT ARMS LENGTH AS HELD BY THE TPO. 13. THE LD. AR AS REJOINDER SUBMITTED THAT THE ENTI RE ALLEGATION THAT THE SIX EXPATS WERE NOT ASSESSEES EMPLOYEES IS BASELESS WI THOUT ANY EVIDENCE. THE ASSESSEE HAS CLEARLY STATED THAT THE EMPLOYEES WERE SECONDED. ALSO THE ENTIRE TAX DEDUCTED AT SOURCE (TDS) ON SALARY WAS DEDUCT ED BY THE ASSESSEE AND FORM 16 WAS DULY ISSUED. EVEN THE EXPAT EMPLOYEES H AVE FILED THEIR RETURN OF INCOME IN INDIA. EVEN THE TRANSFER PRICING AUDITORS IN THE FORM 3CEB AND TRANSFER PRICING REPORT HAVE ACCEPTED THE REIMBURSE MENT OF SALARY ETC. OF THE SECONDED EMPLOYEES. LETTERS FILED BEFORE THE TPO CL EARLY PROVIDED THAT THE TDS HAS BEEN DEDUCTED BY THE ASSESSEE. THE DR WRONGLY C ONCLUDED THAT AS PER TPO, THE SIX EXPAT EMPLOYEES WERE OF AE AND NOT OF THE ASSESSEE. THE AO OR THE TPO HAVE NOT DISPUTED THAT THE SIX EXPATS WERE EMPLOYED BY THE ASSESSEE BUT THEIR ENTIRE CASE IS THAT POST SALE OF PROJECT SUCH EXPATS OUGHT TO HAVE BEEN SHIFTED ON PAYROLL OF THE JOINT VENTURE (JV). THI S IS ALSO SUBSTANTIATED AT PG. 16, WHEREIN THE TPO HAS ACCEPTED THAT FOR RENDERING TECHNICAL PROJECT DEVELOPMENT WORK, SUCH TECHNICAL WORK FORCE IS REQU IRED. THE AO OR THE TPO HAVE NOT DISPUTED THAT THE SIX EXPATS WERE EMPLOYED BY THE ASSESSEE BUT THEIR ENTIRE CASE IS THAT POST SALE OF PROJECT SUCH EXPAT S OUGHT TO HAVE BEEN SHIFTED ON PAYROLL OF THE JOINT VENTURE (JV). THIS IS ALS O SUBSTANTIATED AT PG. 16, WHEREIN THE TPO HAS ACCEPTED THAT FOR RENDERING TEC HNICAL PROJECT DEVELOPMENT 11 ITA NO. 5535/DEL/2012 WORK, SUCH TECHNICAL WORK FORCE IS REQUIRED. IN SO FAR AS THE ALLEGATION THAT RS. 3.59 CRORE IS SALARY PAID TO INDIAN EMPLOYEES IS CO NCERNED, THE ASSESSEE SUBMITS THAT THE SAID ALLEGATION IS ALSO MISUNDERST ANDING OF FACTS. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD EMPLOYED SIX EXPATS AND BESIDES THEM THERE WAS ONLY ONE COMPANY SECRETARY (MR. T. S . SUNDARESWARAN UPTO JUNE 30, 2006 AND MR. SATYAJIT JOSHI THEREAFTER). T HE SAME WAS ALSO STATED BEFORE TPO. THE INDIAN COMPONENT IS SALARY EXPENDIT URE OF SIX EXPATS AND COMPANY SECRETARY, WHICH HAS BEEN ALLOWED BY THE AO . 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE COMPANY HAS RENDERED BUSINESS SUPPORT SERVICES TO ITS AE AND PROJECT MANAGEMENT SERVICES TO TBSL THROUGH ITS EMPLOYEES AND ALSO DERIVED INCOME BY RENDERING SUCH SERVICES, WHICH HA S BEEN OFFERED FOR TAX. THE ROLE OF THE ASSESSEE COMPANY POST-SALE OF THE PROJE CT WAS TO PROVIDE ONGOING PROJECT AND BUSINESS CONSULTANCY SERVICES TO TBSL T O ENSURE THAT THE DEVELOPMENT OF THE PROJECT IS NOT STALLED RESULTING INTO INCREASED COSTS. THE BUSINESS SUPPORT SERVICES AGREEMENT, PAYROLL MANAGE MENT SERVICES AGREEMENT, AGREEMENT BETWEEN THE ASSESSEE COMPANY A ND TBSL, TDS RETURNS, FORM 16 ISSUED BY THE ASSESSEE TO EXPATS, ETC. WAS BEFORE REVENUE AUTHORITIES. FROM THE RECORDS IT CAN BE SEEN THAT THE EXPATS WER E THE SECONDED EMPLOYEES OF THE ASSESSEE COMPANY AND NOT OF ITS OVERSEAS AE. THESE EXPATS WERE RESPONSIBLE FOR PROVIDING BUSINESS SUPPORT SERVICES TO THE AE AS WELL AS PROJECT MANAGEMENT SERVICES TO TBSL. THUS, THERE IS NO NEE D TO ALLOW LOCAL EXPENDITURE OF THESE EXPATS AND DENYING THE FOREIGN COMPONENT OF SALARY DISBURSED BY THE AE IN AUSTRALIA BY THE TPO/AO. THE ASSESSEE COMPANY HAD EARNED INCOME ON THE SALE OF THE PROJECT AND ALSO P ROJECT MANAGEMENT INCOME IN THE SUBSEQUENT YEARS. THE ASSESSEE COMPANY WAS U NDER CONTRACTUAL OBLIGATION TO PROVIDE PROJECT MANAGEMENT SERVICES A ND BUSINESS CONSULTANCY SERVICES TO TBSL POST-SALE, AND ALSO THE INCOME EAR NED FROM SUCH SERVICES HAS BEEN OFFERED FOR TAX. IN FACT, THE TPO HAS ALLOWED THE INDIAN COMPONENT OF SALARY PAID TO SUCH EMPLOYEES, HOWEVER, DENIED THE DEDUCTION OF FOREIGN 12 ITA NO. 5535/DEL/2012 COMPONENT BY DETERMINING THE ALP OF SUCH COST AS N IL. THE TPO HAS ACCEPTED THE BUSINESS SUPPORT INCOME AND PROJECT MANAGEMENT INCOME EARNED BY THE ASSESSEE THROUGH EMPLOYMENT OF SUCH EXPATS. THIS AC TION OF THE TPO IS NOT JUST AND PROPER WHEN IT IS ACCEPTING THE SALARY PAI D TO SUCH EMPLOYEES IN INDIA SHOULD NOT DENY THE DEDUCTION ON FOREIGN COMPONENT OF THE SAME. THE SAME SET OF EXPATS WERE ALSO ENGAGED IN PROVIDING BUSINESS S UPPORT SERVICES AND THE INCOME FROM SUCH SERVICES HAS BEEN OFFERED FOR TAX AND ACCEPTED BY THE TPO. ALSO, POST-SALE OF THE PROJECT, THE ASSESSEE COMPAN Y HAS CHARGED TO TBSL TOWARDS PROVISION OF PROJECT MANAGEMENT SERVICES WH ICH HAS ALSO BEEN OFFERED FOR TAX AND ACCEPTED BY THE DEPARTMENT. SINCE THE I NCOME EARNED THROUGH THESE EXPATS HAS BEEN ACCEPTED BY THE TPO AND THE L OCAL EXPENDITURE ALSO AGAINST THE SAID INCOME HAS BEEN ALLOWED, ONLY THE FOREIGN COMPONENT WHICH WAS DISBURSED IN AUSTRALIA FOR CONVENIENCE OF SUCH EXPATS CANNOT BE DISALLOWED. THESE FACTUAL ASPECTS WHERE NEVER REBUT TED BY THE TPO/AO. THE CIT(A) HAS TAKEN COGNIZANCE OF ALL THESE FACTORS AN D GIVEN A DETAILED FINDINGS IN RESPECT THEREOF. THERE IS NO NEED TO INTERFERE WITH THE FINDING OF THE CIT(A). ALL THE THREE APPEALS FILED BY THE REVENUE ARE IDENTICA L. THEREFORE, ALL THE APPEALS ARE DISMISSED. 15. IN RESULT, ALL THE THREE APPEALS OF THE REVENU E ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 01 ST MARCH, 2018 . SD/- SD/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 01/03/2018 R. NAHEED * 13 ITA NO. 5535/DEL/2012 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 07/12/2017 PS 2. DRAFT PLACED BEFORE AUTHOR 07/12/2017 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2018 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 05.03.2018 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 0 6 .03.2018 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. 14 ITA NO. 5535/DEL/2012