2020 (10) TMI 750 - AT - Income Tax

Appeal partially allowed in transfer pricing case involving smart cards & software development

Giesecke And Devrient [India] Pvt Ltd Versus The Addl. C.I.T Special Range -04 New Delhi

The appellant's appeal was partially allowed in the case involving transfer pricing adjustments in the smart cards distribution and software development ... TP Adjustment - comparable selection - HELD THAT:- Appellant has provided software development support services to its AEs with respect to smartcards business thus companies functionally dissimilar with that of assessee and comparing with risk profile need to be deselected from final list. Also exclusion on major unallocable expenses criteria. Addition u/s 40(a)(i) on account of non-deduction of tax at source on reimbursement - some additional evidences were furnished before the DRP - HELD THAT:- As assessee has claimed that pertains to pension of the Managing Director, this needs to be re-verified by the Assessing Officer. We, accordingly, direct the assessee to furnish necessary evidence relating to pension and the Assessing Officer is directed to examine the same and decide the issue in the light of the findings given by the Tribunal in assessee’s own case in A.Y 2011–12. Disallowance of advance written off - assessee entered into a lease deed with E-Lights Techno Park Pvt Ltd for office premises in Chennai but f or some reason, the assessee could not take possession of the office premises and the lessor did not repay the said security deposits - HELD THAT:- We find that the assessee has furnished additional evidences before the DRP. We are of the considered view that such additional evidences should have been examined thoroughly. We, accordingly, restore this issue to the file of the Assessing Officer. The assessee is directed to furnish all the additional evidences in support of the claim of write off and the Assessing Officer is directed to examine the same and decide the issue afresh after giving reasonable opportunity of being heard to the assessee. Income accrued in India - dividend income - benefit of applicable Double Taxation Avoidance Agreement between India and Germany (“DTAA ”) qua the rate of tax on payment of dividend to the shareholder (Giesecke & Devrient GmbH) - interplay between Section 115-0 of the Act on one hand, and Article 10 of DTAA governing taxation of dividend on the other - whether the Dividend Distribution Tax [DDT] is tax on the company or the shareholder since the admissible surplus stands reduced to the extent of DDT? - HELD THAT:- As in GODREJ AND BOYCE MFG. CO. LTD [2010 (8) TMI 77 - BOMBAY HIGH COURT] has unequivocally held that DDT is tax ‘on the company’ and not ‘on the shareholder’. DDT is levy on the dividend distributed by the payer company, being an additional tax is covered by the definition of ‘Tax’ as defined u/s 2(43) of the Act which is covered by the charging section 4 of the Act and charging section itself is subject to the provisions of the Act which would include section 90 of the Act. Liability to DDT under the Act which falls on the company may not be relevant when considering applicability of rates of dividend tax set out in the tax treaties. The generally accepted principles relating to interpretation of treaties in the light of object of eliminating double taxation, in our view does not bar the application of tax treaties to DDT. Tax rates specified in DTAA in respect of dividend must prevail over DDT. Article 10.4 above specifies that clause 1 and 2 will not be applicable if beneficial owner of dividend carries on business in other contracting state of which the company paying dividend is a resident through PE situated therein. Though supporting documents have been filed before us, but these documents need verification from primary officer, that is, the Assessing Officer. We, therefore, deem it fit to restore this issue for limited purpose of verification in the light of the aforesaid Articles of DTAA. DDT levied by the appellant should not exceed the rate specified in Article 10 in India Germany DTAA. Assessee's additional ground is allowed in part for statistical purposes. Issues Involved:1. Transfer pricing adjustment in smart cards distribution segment.2. Transfer pricing adjustment on software development segment.3. Disallowance of expenditure under section 40(a)(ia) of the Act.4. Disallowance of advance written off.5. Additional grounds regarding the rate of tax on payment of dividend under DTAA.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment in Smart Cards Distribution Segment:The appellant reported a Net Profit Margin (NPM) of 5.26% for the distribution of smart cards, compared to independent comparables at 0.28%. The TPO was dissatisfied with the comparables and selected two others, resulting in a proposed TP adjustment of Rs. 3,72,23,538/-. The TPO erroneously combined figures from trading and service segments. The DRP provided partial relief by directing benchmarking based on earlier years. The TPO later adjusted the margin and reduced the adjustment to Rs. 2,88,52,420/-. The Tribunal found that segmental details should be used, and the appellant's margin of 5.26% was higher than the comparables' 2.52%, thus considering the transaction at arm’s length. The TPO was directed to use only the trading segment for determining the ALP.2. Transfer Pricing Adjustment on Software Development Segment:The appellant provided software development services to its AEs with NCP margins of 12.62% and 12.02% for different divisions. The TPO retained six comparables and added eight new ones, resulting in a final set of 14 comparables with a margin of 20.71%. Adjustments of Rs. 3,28,86,862/- and Rs. 1,88,81,141/- were proposed. The appellant sought exclusion of Infosys Ltd and Larsen and Toubro Infotech Ltd due to differences in risk profiles, services provided, and scale of operations. The Tribunal agreed, noting that Infosys Ltd and Larsen and Toubro Infotech Ltd were excluded in previous years and other cases. Accordingly, these comparables were directed to be excluded.3. Disallowance of Expenditure Under Section 40(a)(ia) of the Act:The Assessing Officer disallowed Rs. 17,76,704/- for non-deduction of tax at source on reimbursements. The DRP directed partial deletion but sustained Rs. 10,32,445/-. The appellant claimed these were reimbursements for the Managing Director's pension and other expenses. The Tribunal noted that similar claims were allowed in A.Y. 2011-12 and directed the Assessing Officer to re-verify the evidence and decide based on previous findings.4. Disallowance of Advance Written Off:The appellant entered into a lease deed and paid security deposits, which were not refunded when possession was not taken. The Assessing Officer disallowed the write-off, treating it as bad debts under section 36(1)(vii) read with section 36(2). The DRP did not accept the appellant's claim. The Tribunal restored the issue to the Assessing Officer to examine additional evidence and decide afresh.5. Additional Grounds Regarding the Rate of Tax on Payment of Dividend Under DTAA:The appellant raised additional grounds concerning the rate of tax on dividends under the India-Germany DTAA. The Tribunal admitted the additional grounds, noting that similar issues were admitted in other cases. The Tribunal examined the interplay between section 115-O and Article 10 of the DTAA, concluding that the DDT should not exceed the rate specified in the DTAA. The issue was restored to the Assessing Officer for verification of documents.Conclusion:The appeal was allowed in part for statistical purposes, with directions for re-verification and re-examination of specific issues by the Assessing Officer. The order was pronounced on 13.10.2020.