Novo Nordisk India Pvt Ltd. v DCIT
The assessee is an Indian company (Subsidiary of a Foreign Co.) engaged in the business of pharmaceutical products, dealing mainly in the area of diabetes treatment drugs. The assessee was purchasing finished pharmaceutical products from its AE in Denmark and distributing the same in India (Business Category – 1). The assessee was also purchasing finished goods from an unrelated Indian private limited company and distributing these products in India (Business Category – 2).
In case of Business Category – 2 (Bus Cat – 2), the unrelated third party Indian private limited company was purchasing raw material from an AE of the assessee from Denmark, manufacturing as per the required standards, where the quality of the manufactured goods was tested by the AE supplier itself and finally the assessee was purchasing the goods from the unrelated Indian private limited company for distribution activity in India.
The assessee under its TP Study had classified itself as a distributor for the purpose of benchmarking. The TPO during assessment proceedings rejected the TP study of the assessee and proceeded to identify new comparables, classifying the function of the assessee as a manufacturer rather than as a distributor and making substantial addition.
The TPO, while making the assessment for the purpose of benchmarking considered both the purchases directly from the AE and the purchases from the unrelated Indian company classified the function of the assessee as a manufacturer.
The assessee before the ITAT argued among other things that the transactions between the unrelated Indian company and the assessee do not fall within the ambit of an international transaction as both the parties are residents in India, therefore the transfer pricing adjustment on transactions between the assessee and the unrelated Indian company are unwarranted and in its support the assessee supplied the decisions in Swarnadhara IJMII Integrated Township Development Co. Pvt Ltd., Hyd ITAT – 2012, and Kodak India Pvt Ltd., Mum ITAT – 2012.
The Departmental Representative argued that the transactions between the assessee and the unrelated Indian company fall within the ambit of deemed International transaction by virtue of Sec. 92B(2) of the Income – tax Act, 1961 (the Act) and in its support evidenced the agreements between the AE situated in Denmark and the unrelated Indian company, agreements between the assessee and the unrelated Indian company, the agreements between the assessee and the AE in Denmark.
The Bangalore tribunal after a detailed analysis of the facts of the case and the agreements,held that since all the agreements (mentioned supra) between parties refer to each other and specifically incorporate the terms of one agreement into the other, the parties to the arrangement are the assessee, the AE situated in Denmark and the unrelated Indian company. Since one of the parties to the transaction is a non – resident, the conditions specified in Sec. 92B(1) of the Act are satisfied and the deeming provision of Sec. 92B(2) of the Act is not applicable to the impugned transactions; nevertheless, by virtue of falling within the scope of Sec. 92B(1) of the Act, the TPO may make an adjustment under the transfer pricing provisions.
The tribunal further held that for the purpose of benchmarking only the transactions of direct purchases by the assessee from its foreign AE and purchases by the unrelated Indian company and the AE of the assessee need to be considered. The purchases between the assessee and the unrelated Indian company do not warrant adjustment under the transfer pricing provisions as the same will not result in tax base erosion.
The tribunal, while adjudicating on the matter of functional classification of the assessee for the transfer pricing study held that the assessee had to be classified as a manufacturer for the purpose of benchmarking the purchases between the AE situated in Denmark and the unrelated Indian company, and it has to be classified as a trader for the purpose of benchmarking the purchases directly made by the assessee from its AE situated in Denmark.
This decision of the tribunal has poured light on situations where the revenue authorities can take a holistic view to proceed with charging tax based on the substance of the transaction ignoring the form where through concerted action or arrangement it is brought out in a form which apparently is intended and framed in such a manner as not to attract the provisions of Sec. 92B of the Act.
Lionbridge Technologies Pvt Ltd. v ITO (International Taxation) (TDS)
The assessee is engaged in the business of providing information technology services. In the current case, the assessee has made a payment for purchase of standard off the shelf software to its group company Lionbridge Technologies Inc., USA.
Lionbridge Technologies Inc., USA has entered into an agreement with Microsoft Inc., USA and Skillsoft (vendors) for the purchase of standard off the shelves software to be used by the Lionbridge entities across the globe. Lionbridge USA has made the payment to the vendors for the purchase of the software, which in turn was reimbursed by the various group entities including the assessee who are using the software. The cost of the software has been allocated amongst the various group entities based on headcount (number of desktops at each location) on no mark – up basis.
The assessee while making payment to its group company Lionbridge Technologies Inc., has not made any tax deduction at source treating the payment as re-imbursement of cost. The revenue authorities on the other hand have taken a stand that the assessee should have withheld the tax on the amount remitted to Lionbridge Inc., USA as such a payment amounts to payment towards ‘royalty’.
After hearing the rival contention and also perusing the relevant finding given in the impugned order, the tribunal has made the following observations.
Lionbridge Inc., USA has entered into an agreement with vendors like Microsoft Inc. for the purchase of Standard off Shelves Software to be used by Lionbridge group entities across the globe. The cost of the purchase of the software has been allocated amongst various group entities based on allocation key of number of desktop in each office. The said allocation was made at cost and no mark-up was charged. Accordingly, all the group entities had reimbursed their share of cost to the Lionbridge USA. In support, the copy ofthe agreement along with invoices by the Vendors and allocation key has been placed in the paper book. It has not been disputed that the cost of reimbursement paid to Lionbridge USA is not chargeable to tax in India. If that is so, then assessee was not required to withhold the tax u/s 195 and this proposition is well supported by a decision of Hon’ble Supreme Court in the case of GE India Technology Centre P Ltd. Secondly, here in this case, it is not a question where Lionbridge US has developed software which has been given for use to the assessee. The software has been purchased from Microsoft, the cost of which has been distributed amongst all the group entities. It is pure case of reimbursement of cost and admittedly, there is no mark-up. Accordingly, there was no liability to deduct TDS on such reimbursement of cost.
This decision of the tribunal reinforces the well settled principle that where re-imbursement of costs to non - resident group companies is made in which there is no element of income chargeable to tax, there is no obligation on the assessee to deduct tax at source.
DCIT v AVL Technical Centre Pvt Ltd.
The assessee is an Indian Company and part of the AVL group (Austria). AVL group AVL is the world's largest privately owned and independent company specialized in the design and development of internal combustion engines. The assessee serves as a single window facility offering a broad range of powertrain design development and testing services to the Indian automotive industry. The worldwide network of AVLTC and AVL’s instrumentation & test systems divisions provides additional support.
In the current case, the assessee’s transfer pricing study has been rejected and a fresh study has been undertaken by the departmental authorities classifying the assessee as a “technical support service provider”. The assessee’s main contention is: owing to the intensity of its functions with its AE’s being different from its functions with non – AE’s, it cannot be classified as a technical support service provider. In turn, the comparables used by the Ld. TPO are all engaged in high-end technical consultancy services and hence reflect high margins commensurate with the functions provided by them. The business model of AVLTC is such that it can cater to limited requirements of the ultimate customer.
Ld. AR has taken the argument that the intensity of functions with the non-AEs are higher than the intensity of functions with the AE’s; the nuanced difference, if any, on the business model of the assessee has to be seen. This difference in the intensity of functions is stated to be impacting the characterization of the business model itself which difference is stated to be not considered either by the DRP or the TPO, a position which is borne out from the record. Thus consideration of the difference in the intensity of functions with non-AEs as comparable to lesser intensity of function with AE’s also, as per judicial precedent on facts, is warranted - Bose Corporation of India Pvt Ltd. v ACIT (2014) 150 ITD Delhi.
In the present case though the assessee is providing technical services, the contention of the assessee is that it cannot be compared against full-fledged technical consultancy providers owing to the intensity of the functions performed by the assessee vis – a – vis its AE’s. This decision of the tribunal highlights the importance of determining and considering the intensity of functions undertaken by the assessee while conducting a transfer pricing study.