2017 (9) TMI 1799 - AT - Income Tax

Tribunal Partially Allows Assessee's Appeal, Dismisses Revenue's Appeal on Software Royalties

M/s. Allegis Services India Pvt. Ltd. Versus Dy. Commissioner of Income Tax, Circle 11 (1), Bangalore

The Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal. The disallowance under Section 40(a)(ia) regarding payments for ... TDS u/s 195 - payment towards software licenses treated by the AO as royalty for want of TDS - Disallowance u/s 40(a)(ia) - HELD THAT:- There is no dispute that the transaction in question regarding payment of purchase of software was completed in the F.Y. 2008-09 whereas the decision in the case of CIT Vs. Samsung Electronics Co. Ltd. (2011 (10) TMI 195 - KARNATAKA HIGH COURT) was passed on 15.10.2011 much later than the time of transaction carried out by the assessee. It is also not in dispute that this issue of considering the payment for purchase of software as royalty is a highly debatable issue and various High Courts have taken divergent views on this issue. Thus it is clear that the co-ordinate Bench of this Tribunal in M/S. AURIGENE DISCOVERY TECHNOLOGIES LTD. [2016 (11) TMI 1607 - ITAT BANGALORE] while deciding this issue has taken note of various decisions in favour of the assessee on the point that the payment for purchase of software does not fall in the definition of royalty. Respectfully following the decision of co-ordinate Bench of this Tribunal, we delete the disallowance made by the AO. Transfer Pricing Adjustment - allocation of the cost by the assessee between the AE and non-AE transaction - software development services as well as IT Enabled Services transactions - HELD THAT:- Action of the TPO in allocating the direct as well as indirect cost as alleged by the assessee in the ratio of turnover of each segment and transaction is not justified. Further the TPO has accepted the allocation of the cost by the assessee between the AE and non-AE transaction for the Assessment Years 2010-11 to 2012-13. We have gone through the respective orders of the TPO/A.O. and noted that the TPO has not distributed the allocation of cost made by the assessee for the subsequent Assessment Years - so far as the direct cost is concerned the same has to be allocated on actual basis instead of turnover basis. Accordingly, we set aside this issue to the record of the TPO/A.O. for limited purpose of proper verification and allocation of the cost in the light of the above observations as well as in the light of the subsequent orders of the TPO for the Assessment Years 2010-11 to 2012-13. Gain/loss arising due to Forex fluctuation on the receivable from the AE to be treated as operating revenue or cost as the case may be - HELD THAT:- This issue is no longer res integra as the Tribunal has been taking a consistent view that the gain or loss arising due to the foreign exchange fluctuation on the export receivables from AE, then the same is in the nature of operating revenue / operating cost and has to be part of the operating revenue/operating cost as the case may be. Further as a principle of consistency and parity, a similar treatment has to be given in the case of comparables. AR has relied upon the decision of the co-ordinate bench of this Tribunal in the case of M/s. Triology E-Business Software India Pvt. Ltd. Vs. DCIT [2013 (1) TMI 672 - ITAT BANGALORE] Issues Involved:1. Disallowance under Section 40(a)(ia) regarding payments for software licenses treated as royalty.2. Transfer Pricing Adjustments related to software development services and IT-enabled services (ITES).3. Treatment of foreign exchange gain/loss as operating revenue/cost.Issue-wise Detailed Analysis:1. Disallowance under Section 40(a)(ia) regarding payments for software licenses treated as royalty:The assessee contested the disallowance of payments towards software licenses treated as royalty by the Assessing Officer (AO) for want of Tax Deducted at Source (TDS). The assessee argued that, prior to the Karnataka High Court's decision in CIT Vs. Samsung Electronics Co. Ltd., there was a bona fide belief that such payments did not constitute royalty and hence did not require TDS. The Tribunal noted that the transaction occurred before the High Court's decision, and various judicial precedents supported the assessee's stance. The Tribunal cited the case of ACIT Vs. Aurigene Discovery Technologies (P) Ltd., which held that retrospective amendments or subsequent rulings cannot impose TDS obligations on past transactions. Therefore, the Tribunal deleted the disallowance made by the AO.2. Transfer Pricing Adjustments related to software development services and IT-enabled services (ITES):The assessee challenged the Transfer Pricing Officer's (TPO) reallocation of costs between AE and non-AE transactions, arguing that the TPO improperly allocated direct costs on a turnover basis rather than actual costs. The Tribunal agreed with the assessee, stating that direct costs should be allocated on an actual basis, not on turnover. The Tribunal referenced the case of 3D Networks PTE Ltd. Vs. ACIT, which supported this view. The Tribunal also noted that for subsequent assessment years, the TPO accepted the assessee's cost allocation method. Consequently, the Tribunal set aside the issue to the TPO/AO for proper verification and allocation of costs.3. Treatment of foreign exchange gain/loss as operating revenue/cost:The revenue appealed against the CIT(A)'s decision to treat foreign exchange gain/loss as operating revenue/cost. The Tribunal upheld the CIT(A)'s decision, referencing the consistent view of the Tribunal in similar cases, such as M/s. Triology E-Business Software India Pvt. Ltd. Vs. DCIT, which treated foreign exchange fluctuations related to export receivables as operating in nature. The Tribunal emphasized the principle of consistency and parity in treating comparables similarly. Therefore, the Tribunal found no error in the CIT(A)'s order regarding this issue.Conclusion:The Tribunal partly allowed the assessee's appeal and dismissed the revenue's appeal, providing detailed justifications for each issue based on relevant judicial precedents and consistent principles applied in similar cases. The Tribunal emphasized the importance of actual cost allocation for direct costs, the non-retrospective application of TDS obligations, and the consistent treatment of foreign exchange fluctuations as operating revenue/cost.