ACIT 6(3), MUMBAI V. LEHMAN BROTHERS & ADVISORS P. LTD, MUMBAI

ITA 7688/MUM/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3886 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 1 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: L
• Next Hearing Date: 11-02-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 27-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: HARSH KAPADIYA; PARAS SAWALA
• Keywords: Transfer pricing; Double taxation relief; Retrospective amendment

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI L BENCH , , BEFORE S/SH. RAJENDRA,ACCOUNTANT MEMBER & RAM LAL NEGI,JUDICIAL MEMBER /.ITA NO.7688/MUM/2012, /ASSESSMENT YEAR-2007-08 ACIT, CIR.6(3) MUMBAI PAN: AABCL2172N VS. M/S LEHMAN BROTHERS & ADVISORS P LTD C/O KPMG INDIA PRIVATE LIMITED,LODHA EXCELUS, 1STFLOOR, APOLLO MILLS COMPOUND, N.M. JOSHI MARG, MAHALAXMI, MUMBAI- 400 011 ( / ASSESSEE) ( / RESPONDENT) /CO.41/MUM/2014 ARISING OUT OF ITA/7688/MUM/2012 , AY. -2007-08 M/S LEHMAN BROTHEWRS & ADVISORS P LTD. C/O KPMG INDIA PRIVATE LIMITED, MUMBAI-400 011 VS. ACIT, CIR.6(3) MUMBAI. ( / ASSESSEE) ( / RESPONDENT) /ASSESSEE BY : SHRI PARAS SAWALA AND HARSH KAPADIYA / REVENUE BY : SHRI AJAY MODI / DATE OF HEARING : 11 1111 11 .02.2016 / DATE OF PRONOUNCEMENT : 19.02.2016 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER BENCH ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF INVE STMENT ADVISORY.IT FILED ITS RETURN OF INCOME ON 31.10.2007,DECLARING INCOME OF RS.3.79 CRORES.TH E ASSESSING OFFICER(AO)COMPLETED THE ASSESSMENT,U/S.143(3)OF THE ACT,ON 31.10.2011,DETER MINING THE INCOME OF THE ASSESSEE AT RS. 5,05,23,090/-. 2. EFFECTIVE GROUND OF APPEAL FILED BY THE AO IS ABOU T DISALLOWANCE OF REIMBURSEMENT OF EXPENSES OF RS.97.95 CRORES.DURING THE ASSESSMENT P ROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD MADE CERTAIN PAYMENTS TO ITS OVERSEAS GROUP COM PANIES,THAT IT HAD NOT DEDUCTED TAX AT SOURCE WITH REGARD TO SUCH PAYMENTS.HE OBSERVED THAT PAYME NTS MADE BY THE ASSESSEE WERE IN NATURE OF THE TECHNICAL/MANAGERIAL SERVICES,THAT THE ASSESSEE WAS LIABLE TO DEDUCT TAX AS PER THE PROVISIONS OF SECTION 195(1)R.W.S.9(1)(VII)OF THE ACT.HE ISSUE D A NOTICE TO THE ASSESSEE ASKING IT AS TO WHY NOT SAME SHOULD BE DISALLOWED AS PER THE PROVISIONS OF SECTION 40(A)(IA)OF THE ACT AND BE ADDED BACK TO ITS TOTAL INCOME.AFTER CONSIDERING THE SUBM ISSIONS OF THE ASSESSEE,THE AO HELD THAT IT HAD NOT FILED ANY DETAILS TO PROVE THAT THE EXPENDITURE INCURRED WAS REIMBURSEMENT,THAT IT HAD PAID THE SAID SUM FOR SERVICES PROVIDED BY THE GROUP COMPANI ES,THAT IN THE AUDIT REPORT IT WAS NOT MENTIONED THAT THE EXPENDITURE REPRESENTED SIMPLE R EIMBURSEMENT,THAT THE GROUP COMPANIES WERE DOING RECRUITMENT FOR THE ASSESSEE,THAT GROUP COMPA NIES WERE LOCATED OUTSIDE INDIA,THAT THE ASSESSEE HAD HANDED OVER THE JOB OF RECRUITMENT IN FOREIGN TERRITORIES TO THEM,THAT THE PAYMENTS 7688/12+C.O.41/14-LEHMAN 2 WERE IN THE NATURE OF TECHNICAL SERVICES AS IT REQU IRED TECHNICAL EXPERTISE, THAT IT WAS FEES FOR TECHNICAL SERVICES(FTS),THAT AS PER THE AMENDED PRO VISIONS OF SECTION 9(1)(VII)INCOME WOULD DEEMED TO ARISE OR ACCRUE IN INDIA EVEN IF PAYMENT WAS MADE OUTSIDE INDIA/THE SERVICES WERE RENDERED OUTSIDE INDIA.FINALLY,HE MADE A DISALLOWAN CE OF RS.97,95,014/-INVOKING THE PROVISIONS OF SECTION 40(A)(IA)OF THE ACT. 3. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM,THE ASSESSEE ARGUED THAT IT HAD FURNISHED DETAILS OF REIMBURSEMENT OF EXPENSES TO OVERSEAS GROUP COMPANIES ALONG WITH SUP PORTING DOCUMENTS VIDE LETTERS 18.11.2009 AND 30.11.2010,THAT THE AO WITHOUT PROVIDING ANY OP PORTUNITY PASSED THE ASSESSMENT ORDER ON 31.1.2011, THAT THE PAYMENT MADE BY THE ASSESSEE TO THE OVERSEAS GROUP COMPANY WAS MAINLY IN RESPECT OF LEGAL AND PROFESSIONAL CHARGES, RECRUITM ENT CHARGES AND REPAIRS / MAINTENANCE COST, THAT THE OVERSEAS GROUP COMPANIES INITIALLY INCURRE D THE EXPENSES BY WAY OF PAYMENT TO THIRD PARTIES, THAT THE PAYMENT WERE MADE ON BEHALF OF TH E ASSESSEE, THAT THE EXPENSES WERE BOOKED AT COST AND THERE WAS NO MARK-UP, THAT NO INCOME HAD A CCRUED TO THE OVERSEAS GROUP COMPANIES FROM THE AMOUNTS REIMBURSED BY THE ASSESSEE.IT WAS FURTHER STATED THE COMPLETE DETAILS OF REIMBURSEMENT OF EXPENSES TO OVERSEAS GROUP COMPANI ES WERE SUBMITTED VIDE LETTER DATED 28.11.2009 AND 30.11.2010, THAT THE REIMBURSEMENT O F EXPENSES HAD ALSO BEEN REPORTED IN THE FORM 3CED, THAT THE TPO HAD EXAMINED THE NATURE OF REIMBURSEMENT OF EXPENSES WHILE PASSING THE TRANSFER PRICING ORDER ON 9.10.2010, THAT THE T PO HAD FOUND THAT THE TRANSACTIONS WERE NOT HIT BY THE ALP PROVISIONS. WITHOUT PREJUDICE TO THE ABO VE, THE ASSESSEE ARGUED THAT THE AMOUNT PAID / PAYABLE TO THE OVERSEAS GROUP COMPANIES WOULD NOT QUALIFY AS FDS, THAT THE AMOUNT PAID / PAYABLE WOULD NOT QUALIFY AS MAKE AVAILABLE SERVICE S UNDER THE DTAA, THAT WHILE DISALLOWING THE AMOUNT IN QUESTION, U/S 40(A)(IA) OF THE ACT, T HE AO HAD NOT CONSIDERED THE PROVISIONS OF SECTION 90(2) OF THE ACT, THAT AS PER THE ARTICLE 1 2(4) OF THE INDO-USA TAX TREATY SERVICES WILL QUALIFY AS FDS ONLY IF IT MADE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW TO THE PERSON RECEIVING THE SERVICES. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AN D THE ASSESSMENT ORDER,THE FAA HELD THAT THE MAJORITY AMOUNT (RS.96.43 LAKHS) PERTAINED TO RECRU ITMENT CHARGES PAID TO OVERSEAS ENTITIES, THAT VIDE ITS LETTER DATED 28.11.2009 THE ASSESSEE HAD S UBMITTED EMPLOYEE-WISE RECRUITMENT CHARGES INCURRED DURING THE YEAR ALONG WITH THE SUPPORTING DOCUMENTS,THAT THE COPIES OF INVOICE RAISED TOWARDS SEARCH FEES FOR RECRUITING EMPLOYEES FOR TH E SERVICES WERE ALSO SUBMITTED,THAT THE AO,IN HIS ASSESSMENT ORDER,HAD NOT REFERRED TO THE LETTER DATE 18.11.2009 OF THE ASSESSEE, THAT THE REMAINING EXPENSES (1.15 LACS ASSESSEE 97.95 LAKHS 96.43 LAKHS) WERE TOWARDS COMMUNICATION EXPENSE (RS.3,252/-LEGAL & PROFESSIONAL CHARGES (47 ,800), PRINTING & STATIONERY EXPENSES (RS. 12,226) AND REPAIRS / MAINTENANCE COST (RS.88,065), THAT ALL THESE EXPENSES WERE REIMBURSEMENT ONLY AND WERE NOT IN THE NATURE OF FTS, THAT THERE WAS NO ELEMENT OF INCOME/ PROFIT EMBEDDED IN SUCH PAYMENTS,THAT THE PROVISIONS OF SECTION 195(1) WERE NOT ATTRACTED. FINALLY,HE HELD THAT THE DISALLOWANCE MADE BY THE AO BY INVOKING PROVISIONS OF SECTION 40 (A) (IA) OF THE ACT WAS NOT SUSTAINABLE. 4. DURING THE COURSE OF HEARING BEFORE US,THE DEPARTME NTAL REPRESENTATION (DR) SUPPORTED THE ORDER OF THE AO AND RELIED ON THE CASE OF VIROLO IN TERNATIONAL(42 TAXMAN.COM 286).THE AUTHORISED REPRESENTATIVE(AR)RELIED UPON CASES OF S EIMENS AKTIONGESELLSCHAFT (310 ITR 320, WNS GLOBAL SERVICES LTD (214TAXMAN317)AND MADE THE SAME SUBMISSIONS THAT WERE MADE BEFORE THE FAA. 7688/12+C.O.41/14-LEHMAN 3 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD INCURRED AN EXPENDITURE OF RS.97.95 LA KHS TOWARDS REIMBURSEMENT,THAT OUT OF THE ABOVE AMOUNT RS.96.95 LAKHS WERE PAID FOR RECRUITME NT CHARGES,THAT IT HAD REIMBURSED THE FOREIGN ENTITIES WHO HAD UNDERTAKEN SEARCH PROCESS FOR RECRUITING EMPLOYEES ON ITS BEHALF,THAT EXPENSE WAS PAID AT COST PRICE AND THERE WAS NO MAR K UP,THAT THE TPO IN HIS ORDER HAD NOT DISTURBED THE CLAIM MADE BY THE ASSESSEE,THAT VIDE ITS LETTER DATED 28.11.2009 THE ASSESSEE FURNISHED ALL THE NECESSARY DETAILS ABOUT THE EXPEN DITURE INCURRED,THAT THE AO DID NOT CONSIDER THE DETAILS WHILE FINALISING THE ASSESSMENT,THAT TH E AO HAD MADE THE DISALLOWANCE U/S.40(A)(I)BY TREATING THE EXPENDITURE IN QUESTION AS FTS AS PER THE PROVISIONS OF SECTION 9(1)(VII)OF THE ACT,THAT THE AUDITOR HAD NOT QUALIFIED THE DISPUTED AMOUNT AS DISALLOWANCE U/S.40(A)(I)OF THE ACT,THAT AO HAD NOT PROVED THAT PROFIT ELEMENT WAS EMBEDDED IN THE PAYMENTS MADE TO THE OVERSEAS ENTITIES,THAT PAYMENT WAS PURE AND SIMPLE REIMBURSEMENT,THAT PROVISIONS OF SECTION 195 WERE NOT ATTRACTED FOR REIMBURSEMENTS.HERE,WE WOULD LIKE TO REFER TO THE RELEVANT PORTION OF THE JUDGMENT OF SEIMENS AKTIONGESELLSCHAFT (SUPRA) DELI VERED BY THE HONBLE BOMBAY HIGH COURT AND SAM E READS AS UNDER: 33. THAT LEAVES US WITH THE LAST CONTENTION AS TO WHET HER THE AMOUNTS BY WAY OF REIMBURSEMENT ARE LIABLE TO TAX. TO ANSWER THAT ISSUE, WE MAY GAI NFULLY REFER TO THE JUDGMENT OF A DIVISION BENCH OF THE DELHI HIGH COURT IN CIT VS. INDUSTRIAL ENGINEERING PRODUCTS (P) LTD. (SUPRA). THE LEARNED DIVISION BENCH OF THE DELHI HIGH COURT WAS PLEASED TO HOLD THAT REIMBURSEMENT OF EXPENSES CAN, UNDER NO CIRCUMSTANCES, BE REGARDED A S A REVENUE RECEIPT AND IN THE PRESENT CASE THE TRIBUNAL HAD FOUND THAT THE ASSESSEE RECEIVED N O SUMS IN EXCESS OF EXPENSES INCURRED. A SIMILAR ISSUE HAD ALSO COME UP FOR CONSIDERATION BE FORE THE DIVISION BENCH OF THE CALCUTTA HIGH COURT IN CIT VS. DUNLOP RUBBER CO. LTD. (SUPRA). TH E LEARNED DIVISION BENCH WAS ANSWERING THE FOLLOWING QUESTION : 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE AMOUNTS RECEIVED BY THE ASSESSEE (ENGLISH COMPANY) FROM M/S DUNLOP RUBBER CO. (INDIA ) LTD. (INDIAN COMPANY) AS PER AGREEMENT DT. 29TH JAN.,1957 CONSTITUTED INCOME ASSESSABLE TO TAX ?' ON CONSIDERING THE ISSUE THE LEARNED BENCH NOTED TH AT THE TRIBUNAL WAS OF THE VIEW THAT WHAT WAS RECOUPED BY THE ENGLISH COMPANY WAS PART OF THE EXP ENSES INCURRED BY IT. THE LEARNED COURT UPHELD THE SAID FINDING. THE LEARNED BENCH WAS PLEA SED TO HOLD THAT SHARING OF EXPENSES OF THE RESEARCH UTILISED BY THE SUBSIDIARIES AS WELL AS TH E HEAD OFFICE ORGANISATION WOULD NOT BE INCOME WHICH WOULD BE ASSESSABLE TO TAX. A SIMILAR VIEW WA S TAKEN IN CIT VS. STEWARTS & LLOYDS OF INDIA LTD. (SUPRA). WE ARE IN RESPECTFUL AGREEMENT WITH THE VIEW EXPRES SED BY THE DELHI AND CALCUTTA HIGH COURTS. IN OUR OPINION,THE FAA HAD RIGHTLY HELD THAT SECTIO N 40(A)(I)HAD NO ROLE TO PLAY REGARDING THE PAYMENTS MADE BY THE ASSESSEE TO OVERSEAS COMPANIES .SECONDLY,SERVICES IN THE NATURE OF RECRUITMENT OR PLACEMENT AGENCY DO NOT COME UNDER T HE PURVIEW OF FEES FOR INCLUDED SERVICES WITHIN THE MEANING OF ART.12(4)(B)OF THE DTAA.RELIA NCE IS PLACED ON THE MATTERS OF REAL RESOURCING LTD. (190 TAXMAN 151-AAR)AND IIC SYSTEM( P.)LTD.(127TTJ435).WE WOULD ALSO LIKE TO MENTION THAT THE RETROSPECTIVE AMENDMENT TO SECTION 9 CANNOT CHANGE THE TAX WITHHOLDING LIABILITY WITH RETROSPECTIVE EFFECT.IN THE CASES OF VIROLA INTERNATIONAL(SUPRA)AND CHANNEL GUIDE INDIA LTD.(25TAXMANN.25)IT HAD BEEN CLEARLY HELD TH AT LIABILITY TO DEDUCT TAX CANNOT BE IMPLEMENTED RETROSPECTIVELY.THE ASSESSEE HAD ACTED AS PER THE PROVISIONS OF ACT THAT WERE APPLICABLE AT THE TIME OF MAKING THE PAYMENT AND IN THE CASE UNDER CONSIDERATION THERE WAS NO LIABILITY ON PART OF THE ASSESSEE TO DEDUCT TAX FOR THE PAYMENT MADE.CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT THE ORDER OF THE FAA DOES NOT S UFFER FROM ANY LEGAL OR FACTUAL INFIRMITY.SO, CONFIRMING HIS ORDER,WE DECIDE EFFECTIVE GROUND OF APPEAL AGAINST THE AO. 7688/12+C.O.41/14-LEHMAN 4 CO.41/MUM/2014,AY.-2007-08: IN THE GROUND RAISED IN THE CO,THE ASSESSEE HAD STA TED THAT FAA HAD NOT HELD THAT REIMBURSEMENT WAS NOT FTS AS PER THE PROVISIONS OF SECTION 9(1)(V II).WHILE DECIDING THE APPEAL FILED BY THE AO WE HAVE DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE AO.SO,THE CO IS ALLOWED FOR STATISTICAL PURPOSES. AS A RESULT,APPEAL FILED BY THE AO IS DISMISSED AND THE CO FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. . ORDER PRONOUNCED IN THE O PEN COURT ON 19 TH FEBRUARY, 2016. 19 , 2016 SD/- SD/- ( /RAM LAL NEGI) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /MUMBAI, /DATE: 19.02. 2016 . . . JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR L BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.