CA Tarunkumar Singhal & Sunil Moti Lala, Advocate INTERNATIONAL TAXATION A. SUPREME COURT RULINGS 1. Where the transfer pricing addition made in the final assessment order pursuant to original assessment proceedings was set aside to the Assessing Officer to consider fresh evidence filed by the assessee, the Assessing Officer was obligated to first pass a draft assessment order under Section 144C of the Act prior to passing a final assessment order, failing which the final assessment order under Sections 143(3)/254 read with Section 144C(13) of the Act and consequential demand notice issued under Section 156 of the Act are liable to be set aside / quashed DCIT vs. Control Risks India Pvt. Ltd. TS-170- SC-2018-TP Special Leave Petition 7090 / 2018 1. The assessee was engaged in the business of providing consultancy services. For the year under review i.e. AY 2011-12, the Assessing Officer passed a draft assessment order proposing a transfer adjustment as well as an adjustment on account of disallowance of interest paid on late deposit of TDS, which was 130 confirmed by the DRP, pursuant to which the Assessing Officer passed a final assessment order under Section 143(3) read with Section 144C of the Act. 2. Aggrieved, the assessee filed an appeal before the Hon ble Tribunal and filed certain fresh evidences, pursuant to which the Tribunal remitted the matter to the TPO to consider the additional details filed by the assessee and to pass a speaking order upon such consideration. 3. The TPO undertook a fresh benchmarking analysis and proposed an adjustment to the arm's length price determined by the assessee. 4. Thereafter, instead of passing a draft assessment order, the Assessing Officer passed a final assessment order under Sections 143(3) / 254 read with Section 144C and also issued a consequential notice of demand under Section 156 of the Act. 5. Aggrieved, the assessee filed a Writ Petition before the Hon ble Delhi High Court. The Hon ble High Court observed that it was incumbent on the Assessing Officer to pass a draft assessment order under Section 144C of the Act prior to passing a final assessment order. Noting that by directly passing a final assessment order, the Assessing Officer had denied the assessee of an opportunity of approaching the DRP and relying on the decision of the Co-ordinate Bench in Turner International ML-504
India Pvt. Ltd. vs. DCIT (2017) 82 taxmann.com 125 (Del.) set aside the assessment order and quashed the notice of demand. 6. Aggrieved, the Revenue filed an SLP before the Hon ble Apex Court. The Hon ble Apex Court dismissed the Revenue s SLP. B. AUTHORITY FOR ADVANCE RULINGS 2. Non-resident availing the benefit of the first proviso to Section 48 was entitled to the benefit of lower tax rate of 10 per cent under the first proviso to Section 112 of the Act Finnish Fund for Industrial Cooperation Ltd. TS- 110-AAR-2018 AAR No. 1375 of 2012 1. The Applicant, a company registered in Finland was a non-resident under the provisions of the Act. It was a development finance company and provided long-term risk capital for private projects. It did not actively trade in stocks of Indian companies but pursued a longterm growth oriented strategy. It had acquired 21,25,005 shares of Andhra Pradesh Power Paper Mills Ltd. ( APPML ), a listed company and subsequently sold the shares either on the stock exchange or pursuant to an open offer from a company named IP Holdings as a result of which it earned long term capital gains of ` 32.64 crore. The Applicant filed an application under Section 197 of the Act for determining the rate of tax to be withheld on the impugned capital gains and pursuant to the order of the Assessing Officer, IP Holdings withheld tax at 21.02 per cent on such long term capital gains. 2. The Applicant raised the following question before the AAR: Whether the tax on the long term capital gains earned by the Applicant on sale of shares of ML-505 Andhra Pradesh Paper Mills Ltd. an Indian listed company, pursuant to an open offer, is required to be computed at 10.506% as per the proviso to Section 112(1)? 1. The AAR dismissed the contention of the Revenue that since the assessee was a nonresident, the first proviso to Section 48 of the Act would apply and consequently the second proviso to Section 48 (providing for the benefit of indexation) would not apply and therefore the non-resident was liable to tax at 21.02 per cent and the benefit of the first proviso to Section 112(1) would not apply. 2. The AAR accepted the contention of the Applicant that the entire issue was squarely covered by the decision of the High Court in Cairn UK Holdings vs. DIT [359 ITR 268] wherein it was held that as per a literal interpretation, the proviso to Section 112(1) of the Act does not state that a person availing the benefit of the first proviso (as so in the Applicant s case) was not entitled to avail the benefit of lower tax @ 10 per cent under Section 112 of the Act. Accordingly, it held that the long term capital gains on sale of shares to APPML under the open offer would be taxable at the rate 10.506% (inclusive of surcharge and cess) under the proviso to Section 112(1) of the Act. C. HIGH COURT 3. The Court upheld Tribunal s order excluding 6 companies from the list of comparables on account of high brand value, functional difference and inadequate segmental results Pr CIT vs. Evalueserve SEZ Pvt. Ltd. TS-125-HC- 2018(DEL)-TP ITA No. 241 / 2018 Delhi High Court 1. The assessee was engaged in the business of providing IT enabled services i.e. provision 131
of business information, market research and intellectual property research to its AEs and benchmarked its international transactions under TNMM. 2. The TPO conducted the exercise of determination of ALP afresh and arrived at 10 comparables. 3. Aggrieved with the inclusion of 6 of the comparables viz. TCS E-Serve Ltd., TCS-E Service International Ltd., Infosys BPO Ltd., Accentia Technologies Ltd., ICRA Techno Analysis Ltd. and Eclerx Services, the assessee filed objections before the Hon ble DRP. The DRP rejected the assessee s contentions and confirmed the draft assessment order. 4. The Tribunal accepted the assessee s plea and directed the exclusion of the six comparables. 5. Aggrieved, the Revenue filed an appeal before the Hon ble Court. 1. Vis-à-vis the Tribunal s exclusion of TCS E-Serve Ltd., TCS E-Serve International Ltd. and Infosys BPO Ltd., the Court following the decision of the Co-ordinate Bench in Pr CIT vs. BC Management Services Pvt. Ltd. 89 taxmann. com 68 (Del.) held that the Tribunal had correctly excluded the said companies as these entities had a high brand value as compared to the assessee and were therefore able to command greater profits and also since they operated on economic upscale. 2. As regards Accentia Technologies Ltd. it held that the Tribunal had rightly excluded the said company as comparable as it was engaged in providing various activities and did not have adequate segmental results. 3. Further, it upheld the exclusion of ICRA Techno Analysis observing that the company was functionally dissimilar to the assessee it was engaged in providing business intelligence, software development, consultancy services, engineering services, web development and 132 hosting services and did not have adequate segmental results. 4. It held that Eclerx was also rightly excluded by the Tribunal as it performed KPO services whereas the assessee was a BPO. 5. Observing that no substantial question of law arose, it dismissed the Revenue s appeal. 4. Infosys BPO Ltd. could not be considered as comparable owing to its huge brand value. R Systems Ltd. could not be excluded merely because it followed a different financial year ending where the results of the relevant financial year could be reasonably extrapolated from the data available on record Pr CIT vs. MMTC Ltd. TS-135-HC-2018(DEL)-TP - ITA No. 260 / 2018 Delhi High Court 1. The assessee was engaged in the business of providing ITES and benchmarked its transactions under TNMM. The TPO carried out his own search and included various comparables out which the assessee was aggrieved with the inclusion of three comparables i.e. TCS E Serve Ltd., Infosys BPO Ltd. and Excel Infoways Ltd. The TPO also excluded R Systems as comparable 2. On appeal, the Tribunal accepted the plea of the assessee and directed exclusion of the three companies and the inclusion of R Systems. 3. Aggrieved, the Revenue filed an appeal before the Hon ble Court 1. Vis-à-vis the exclusion of Infosys BPO and the inclusion of R Systems, the High Court held that no substantial question of law arose. Relying on the decision of the Co-ordinate Bench ML-506
in Baxter India Pvt. Ltd. ITA 408/2017, it held that Infosys BPO was rightly excluded as it had huge brand value. As regards R System, the Court relying on its decision in CIT vs. McKinsey Knowledge Centre Pvt. Ltd. ITA 217 / 2014 held that the company could not be excluded merely on account of different financial year ending where the financial data for the year could be reasonably extrapolated from the data available on record. Accordingly, it dismissed the appeal of the Revenue. 2. It admitted the Revenue s appeal vis-à-vis the Tribunal s exclusion of TCS E Serve Ltd. and Excel Infoways. D. TRIBUNAL DECISIONS 5. As per Article 5(5) for determining the independence of an agent one should only look at the whether the agent has only one principal for whom it works for exclusively and the fact that the principal has only agent in India would not be relevant ADIT (IT) vs. Bay Lines (Mauritius) (2018) 91 taxmann.com 110 (Mum.-Trib.) ITA No. 1181 / Mum. / 2002 1. The assessee, a shipping company incorporated in Mauritius claimed 100 per cent relief under Article 8 of the India-Mauritius DTAA, in support of which it furnished a Tax Residency Certificate issued by the authorities of Mauritius. 2. The Assessing Officer denied the assessee relief under Article 8 observing that the place of effective management was in the UAE and not in either India or Mauritius and therefore the provisions of the India-Mauritius DTAA would not be available to the assessee. The AO noted that i) two of the assessee s directors who took majority of the decisions were situated in UAE, ii) the main agent of the assessee in India was appointed on the letter head of the assessee at UAE and iii) the letter to the AO by the assessee also originated from UAE, Dubai. Accordingly, it held that the place of effective management of the assessee was in the UAE and therefore was not eligible to the India-Mauritius DTAA. Further, the AO noted that the assessee had an agent in India viz. FCIPL which was doing all the work in all the Indian ports and habitually concluded contracts on behalf of the assessee and therefore held that the assessee had a Dependent Agent Permanent establishment in India. 3. On appeal to the CIT(A), the CIT(A) upheld the AO s findings vis-à-vis the nonavailability of deduction under Article 8 of the DTAA. However, it held that the AO erred in holding that the assessee had a DAPE in India and observed that FCIPL only earned 57.95 per cent of its total commission from the assessee whereas 42.05 per cent of the commission earned by it was from other parties which proved that FCIPL was not the exclusive agent of the assessee. Accordingly, it held that the assessee was not liable to tax in India. 4. Aggrieved, both the assessee and the Revenue filed appeals before the Hon ble Tribunal 1. Vis-à-vis the existence of DAPE, the Tribunal, relying on the decision of the Bombay High Court in DIT vs. B4U International Holdings Ltd. 374 ITR 453 (Bom.), dismissed the contention of the Revenue that since the assessee had only one agent in India viz. FCIPL, FCIPL constituted a DAPE of the assessee and held that as per Article 5(5) for determining the independence of an agent one should only look at the whether the agent has only one principal for whom it works for exclusively and the fact that the principal has only agent in India would not be relevant. 2. Vis-à-vis the applicability of Article 8 of the DTAA, the Tribunal dismissed the contention of the assessee that the effective place of management could only be in one of the two contracting States and relying on the ML-507 133
commentary of Dr. Klaus Vogel held that where the effective place of management was not in either of the contracting States, the benefit of Article 8 of the DTAA could not be extended to the assessee. 6. Opportunity of hearing before referring the matter to TPO was to be read into Sec. 92CA(1) where the very jurisdiction to tax under Chapter X was challenged by the assessee Omni Active Health Technologies Ltd. vs. DCIT TS 146- ITAT-2018 (Mum.) TP - ITA No. 638 / 2017 1. The assessee, Omni Active Health Technologies Ltd. was engaged in the manufacture and supply of natural ingredient products to its AE. Occasionally, it also sourced raw material from third parties based in USA. Since its AE was situated in the USA, such sourcing was done via AE and who charged the assessee on cost-to-cost basis. During the year the assessee imported raw material via its AE amounting to only ` 1.03 crore and finished goods of ` 7.56 lakh which was miniscule as compared to overall volume of assessee s business. Thus, both its international transactions i.e. export of goods to AE as well as import of materials from AE were clubbed together and benchmarked under Transitional Net Margin Method (TNMM). 2. The TPO inferred that the assessee sold the goods at a much lower rate to the AE visa-vis non-ae entities. Accordingly, rejecting the application of TNMM (even though it was followed and accepted by the Revenue in the prior years), the TPO applied CUP method as MAM and proposed an adjustment of ` 13.42 crore, which was confirmed by the DRP. 3. Aggrieved, the assessee filed an appeal before the Hon ble Tribunal. Further, it raised an additional ground that that AO s action of 134 making reference to TPO without giving any opportunity of being heard to the assessee, was in violation of the provisions of Sec. 92CA of the Act and thus the reference and order ought to have been quashed. 1. The Tribunal observed that in the decision of the Bombay High Court in Vodafone India Services P. Ltd. [TS-320-HC-2013(BOM)-TP], the Court had held that the grant of opportunity of hearing before referring the matter to TPO was to be read into Sec. 92CA(1) where the very jurisdiction to tax under Chapter X was challenged by the assessee and that where no objection was raised by the assessee to the applicability under Chapter X, then the prima facie view of the AO would be sufficient before referring the matter to the TPO for ALP determination. Further, it also referred to CBDT Instruction No. 15 of 2015 which enumerated 3 situations, where the AO must, as a jurisdictional requirement, record his satisfaction that there was an income or potential of an income arising and/or being affected on determination of the ALP of an international transaction before he proceeded to determine the ALP. Noting that the assessee neither challenged the applicability of Chapter X nor contended that the AO had not recorded requisite satisfaction, the Tribunal dismissed the assessee s additional ground of appeal. 2. Vis-à-vis the merits of the case, the Tribunal held that the TPO had rejected the consistently applied TNMM method without bringing on record any cogent reason. It held that Section 92C did not provide for an order of preference of method for determining arm s length price and therefore considering that the TNMM method was accepted to be the MAM in the past, there was no justification in applying CUP for the year under review. Noting that the PLI of the assessee came to 15.21% which was higher than the PLI of the 2 comparable companies, the Tribunal deleted the TP adjustment. 2 ML-508