TaxTMI 
TaxTMI 
2014 (1) TMI 1363
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....e was converted into scrutiny and notice under section 143(2) was issued on 17.10.2007. Thereafter, notices were also issued under section 142(1) and 143(2) along with questionnaire calling for information. 3. The issue of international transaction entered into by the assessee was referred to the TPO after obtaining the prior approval from the CIT-II, Hyderabad. The Transfer Pricing Officer (in short "TPO") in his order dated 30.10.2009 has determined the difference in arms length price at Rs.13,04,00,900/-. With regard to adjustment in respect of loan transaction and guarantees a letter was addressed to the assessee on 18.11.2009 proposing to make additions on account of shortfall in loan transaction and guarantees. The assessee- company reiterated its submissions which were already put-forth before the Disputes Resolution Panel (in short "DRP") and after considering, the DRP has passed the order under section 92CA(3) of the Act. As per the Order of the DRP, the difference in Arms Length Price (in short "ALP") at Rs.27,68,740/- was added to the total income of the assessee. The draft assessment order under section 143(3) read with section 144C of the Income Tax Act, 1961 was pa....
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....09.2011. It was further submitted that differential interest was charged by all the authorities for the entire period of one year whereas, the loan was advanced on 27 t h July, 2005 and so the differential interest should be levied only for the relevant period. 7. The learned D.R. on the other hand relied on the orders of the revenue authorities. 8. We have heard both Parties and perused the matter available on record. The issue in Four Soft Ltd.(supra) relied upon by Assessee was the rate of LIBOR, with the actual LIBOR rate as per Assessee being 4.42% whereas DRP had taken LIBOR at 5.7%, The Tribunal has directed the AO to examine the correct rate of LIBOR and adopt LIBOR + rate in that case. The coordinate benches such as Dr.Reddy's Laboratories Ltd. vs. ACIT (MA No. 217/Hyd/2013 in ITA No.1605/Hyd/2010 dated 29-11-2013), Siva Industries 59 DTR 182 (Che), Tech Mahindra 46 SOT 141 (Mum) & Tata Autocomp Systems 73 DTR 220 (Mum) are approving on different factual situation, LIBOR + 1% to 3% and considering that, we feel that reasonable rate would be LIBOR + 2% and direct the AO to adopt the same. 9. We also direct the Assessing Officer to examine and calculate the differen....
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....ction in the light of decision of the Coordinate Bench of the Tribunal in the case of Four Soft Limited (supra). 13. We have heard both the parties and perused the material available on record. In the present case though the immediate transaction is that of the assessee and CITI Bank India the benefit of the guarantee is for the US Subsidiary and hence the assessee has rendered a service to its US subsidiary for which it must charge fees at an arm's-length. This same logic was applied in Nimbus Communications vs. ACIT (34 taxmann.com 298 Mumbai Trib.). W e also note the introduction of retrospective amendment in Section 92B Explanation (i)(c) which specifically covers such guarantee payments. Furthermore the decision of Swarnadhara Ijmii Integrated Township Development vs. DCIT (Top 100 Income Tax Rulings of 2012 (CCH) (Tax Sutra) was in an altogether different factual matrix concerning the assessee (an Indian Joint Venture) reimbursing corporate guarantee fees paid by its Malaysian AE. We draw support from the order of Mumbai Tribunal in Glenmark Pharmaceuticals vs. ACIT (ITA No.5031/Mum/2012 dated 13.11.2013) which has analyzed this issue in detail and held that 0.53% corporat....
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....,881/- paid to M/s. GE Network Solutions, Netherlands is disallowable under section 40(a)(i) of the I.T. Act, 1961. The Learned Counsel for the assessee further objected to the disallowance proposed by the A.O. as follows : i) that the tax payer offers software solutions to its customers in India and abroad. These solutions include supply of product software marketed by other companies bundled with its software services. ii) It entered into an agreement with GE Network Solutions, a Netherlands based company which had developed and was marketing 'small world software'. By the above agreement, it was appointed the sole distributor for marketing such software in India. iii) It was entitled to a margin upto 30% of the listed price. iv) It procured orders from customers for supplying modules of the software and placed orders on GE Network Solutions. v) The software was licensed to the end customer. License was in the nature of perpetual license and the ownership was transferred to the end customer. As such, there was no royalty payment for using the software considering that the ownership is transferred to the end customer permanently. vi) By any stretch of imagination....
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.... the Income Tax Act. It set aside the judgment of the High Court for de novo consideration on merits. It had even framed the ground for decision by the. High Court as under: "Whether on facts and circumstances of the case the ITAT was justified in holding that the amount(s) paid by the appellant(s) to the foreign software suppliers was not royalty and that the same did not give rise to any 'income' taxable in India and, therefore, the appeltent/s) was not liable to deduct any tax at source ?" The matter was considered by the High Court and the Supreme Court and is now pending before the High Court of Karnataka. As the matter is sub judice, and the decision of the ITAT having been overruled, we refrain from allowing the claim of the taxpayer. The ground of the taxpayer is rejected." 17. Aggrieved, the assessee filed appeal before the Tribunal. The learned Counsel for the assessee relied on the decision of GE India Technology Centre Pvt. Ltd. vs. CIT 327 ITR 456 wherein it has been held as follows : "The expression "Chargeable under the provisions of the Act" in section 195(1) shows that the remittance has got to be of trading receipt, the whole or part of which is liable....
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....the copy right of software. So, the payment of Rs.52,55,881/- to M/s. GE Network Solutions, Netherlands cannot be regarded as royalty income in the hands of said non-resident in terms of the said DTAA." "In the domestic law, in the Copyright act 1957, the definition of "literary work" has been amended with effect from 1994 (wide act 38 of 1994) to include Computer programs. This amendment in the domestic law is subsequent to the date of DTAA with Netherlands and so cannot be read into the DTAA in the light of the decision of the jurisdictional High Court in the case of M/S Sanofi Pasteur Holding SA vs. The Dept. of Revenue (WP No. 14212 of 2010 etc) in which it was held that "retrospective amendments to the Income Tax Act (vide the Finance Act 2012) have no impact on interpretation of DTAA". Analogously, retrospective amendments in other domestic laws also have no impact on interpretation of a DT AA. The said amendment to the definition of "literary work" is not even retrospective. It is simply subsequent to the date of the DTAA. Similar is the ratio of the decision in WNS North America Inc. vs Assistant Director of Income Tax(lnternational Taxation). Similarly, Explanation 4....
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....dia and Netherlands. 25. We find that the amount in question is not taxable u/s 9(1)(i) because even assuming for a moment there is a business connection between the assessee and the foreign software supplier there are no operations in India of the foreign company to which income may be reasonably attributed to as required under Explanation 1(a) to section 9(1)(i). Hence we find there is no applicability of S.9(1)(i) in the instant case. 26. Now we address the issue of characterization of these payments as Royalty so as to fall under Section 9(1)(vi) or Article 12 of India-Netherlands DTAA. W e find that the assessee has purchased the Small W orld Software from Netherlands and bundled it with its own software and thus customised it and sold it to its own customers both in India and abroad. The assessee cannot meddle with the copies of the software in the process of its customization. W e also observe that the assessee has to purchase the said software each time it wanted to sell the bundled software to its customers and if it had got any right to the copyright to the said software it would not have bought it every time when it wanted to sell. Further, perusing the books of th....
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....i) of the IT Act read with explanation there-under whereas the AO did not invoke provisions of that sub-section. (e) Under Section 9(1)(vii)(b), the payments for technical services abroad for earning income abroad are excepted by the provisions of Sec 9( l)(vii) of the IT Act. (f) The DRP has erred in holding that the explanation to sec 9(l)(vii) incorporated through the Finance Act 2010 applies to the facts of the case. The income must be first deemed to accrue or arise before the Explanation can be invoked. U/s 9(1)(vii)(b), the income from a source outside India is excepted from the deeming provision of accrual or arisal. (g) At any rate the DRP and the AO failed to notice that under the DTAAs the payments made to the foreign subsidiaries are taxable in those countries. (h) The learned AO is not justified in doubting the inclusion of the receipts by the foreign subsidiaries in their returns filed in those countries. He should have given opportunity to prove the inclusion of the said receipts if he had a doubt. The DRP has also committed the same error. (i) The DRP's order is vague. On one hand it says all the evidence could not be obtained for lack of time. On the....
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.... the AO opined that the payments made by the taxpayer are in the nature of fees for technical services. Once the payments either arising through business connection or with reference to technical services, such amounts are chargeable to tax under the provisions of the Income Tax Act. Consequently, the provisions of section 195 of the I.T. Act are applicable. The A.O. found that the, taxpayer did not deduct tax at source and consequently applied the provisions of section 40(a)(i) of the I.T. Act and disallowed the entire amount. The taxpayer objected the treatment given by the AO in respect of the claim of Rs.19,48,02,907/-. The submissions are briefly as, under : * Even though the AO held that there was business connection between the non-resident subsidiary and the payment made, no such business connection existed with reference to explanation (2) to section 9(1)(i) of the I.T. Act. * It furnished a copy of the agreement between the taxpayer and Infotech Enterprises America Inc. (IEAI) which governs the transactions between the taxpayer and the subsidiary in USA. * It furnished copies of returns of IEAI filed in USA for the calendar years 2003 and 2005. * No profits ar....
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....ders though which orders were given to the subsidiaries. Such purchase orders were not furnished along with the agreement. Without such purchase orders, it is not possible to understand the nature of work given to the subsidiaries by the taxpayer. Further, the A.O. stated that the copies of returns do not reflect whether the payments made by the taxpayer were reflected in such returns in the absence of any reconciliation and working, in terms of rupees considering that the returns in USA were filed in US Dollars and on calendar year basis : The AO has given a finding that the taxpayer has been having a 'habitual' business connection with the subsidiaries. In the absence of all the relevant facts before us, we are unable to examine the issue and give a finding. The AO has considered the payments as fee for technical services while dealing with the communication expenses. Though elaborate discussion was not made about the applicability of section 9(1)(vii)(b) of the LT. Act, such provision is applicable in respect of fee for technical services. It requires to be examined whether the case of the taxpayer falls within the exceptions provided in the said section. The first exception ....
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...., that is not the fact in the present case. One of the reasons for sub- contracting to IEAI is that IEAI has its office in California which is near to PWC delivery centre. It was also submitted that each-work order shall be supported by the end customers order copy. Further, the foreign subsidiary did not work exclusively for the assessee and they have their own orders obtained from other foreign parties. It was also pointed out that the A.O. / T.P.O. has found that the operational transactions were effected at arms length price. Further it was submitted that there is no operations have been undertaken by foreign subsidiaries in India and so no income of the foreign subsidiary is taxable in India in terms of either section 9(1)(i) of the I.T. Act or the concerned articles relating to business profits in the respective DTAAs. It was submitted that Circular 29 dated 23.07.1969 it is mentioned that "forming a local subsidiary company to sell the products of the non-resident parent company" is one of the indicative factors for the existence of "business connection" within the meaning of section 9 of the I.T. Act. It was pointed out that in the example given by the Board, the non-reside....
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....of work parcelled out to it by the assessee. The assessee relied on the decision of Inter Tech Testing Services India Pvt. Ltd. 307 ITR 418. It was submitted that provisions of section 40(a)(ia) are not attracted in the light of decision of the Tribunal in the case of GE India Technology Pvt. Ltd. vs. CIT 327 ITR 456 wherein it was held that an amount of Rs.19,48,02,907/- paid to the non resident, cannot be held to be taxable in India either as business profits or income by way of technical services if either under the domestic law or DTAA with USA. 34. The learned D.R. on the other hand relied on the Order of the Disputes Resolution Panel. 35. We have heard both the parties. We find that the A.O. disallowed the amount of Rs.19,48,02,907/- on the ground that there is a business connection in terms of Explanation 2 to Section 9(1)(i) of the I.T. Act between the assessee and its concerned foreign subsidiaries to whom the said amount has been paid. He held that the assessee has been "habitually/ securing orders in India for the benefit of non-resident in terms of clause (c) of the said Explanation. 36. With respect to IEAI USA, we find that factually the assessee has secured ....
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.... do not have permanent establishment in India. In terms of the respective DTAA, no income of the foreign subsidiary is taxable in India in terms of either section 9(1)(i) of the I.T. Act or the concerned Articles relating to business profits (Article 7 r.w. Article 5) in the respective DTAAs. As submitted by the assessee, the Board Circular No. 29 dated 27.3.1969 is inapplicable to the present case as the example given by the Board, the non-resident is the parent company whereas, in the present case, the Indian Company is the parent company and the assessee has not sold the products of its US subsidiaries or any other foreign subsidiaries. The contention of the assessee that the rate of tax in India is lesser than the rates in USA is also well taken. Hence there is no income taxable in India u/s 9(1)(i) and hence no requirement for TDS and there can be no application of S.40(a)(i). 40. The AO seems to have invoked S.9(1)(vii) only on the communication expenses incurred and in such a case the assessee is right in as much as said amount of communication expenses should be excluded while assessing the purview of taxability of income u/S.9(1)(i). However, we point out that the DRP i....
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....ether or not,-- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." 42. Thus, it is seen clearly that at the time of the payment in the instant case Ishikawajima-Harima (supra) was the law of the land and the twin condition laid down of rendering and utilizing the technical service in India was clearly not satisfied in the assessee's case as the foreign subsidiaries rendered the service which was utilized by the clients (such as PWC). Thus the assessee could have been of the bonafide belief that TDS was not necessary on payments to the foreign subsidiaries. Furthermore, the assessee could not have been expected to know that TDS should have been deducted in accordance with a law that was to be brought in subsequently. Hence any disallowance u/s 40(a)(i) based on the application of a retrospective amendment which the assessee could not have foreseen is wholly erroneous. This rationale is upheld by various decisions of the Tribunals which we rely on such as Channel Guide (139 ITD 49) & Sterling Abrasives (IT No.2243, 2244/Ahd/ 2008 dated 23-12-2010) and Metro & Metro vs. ACIT (ITA....
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....duct which embodies technology shall not per se be considered to make the technology available. In other words, payment of consideration would be regarded as "fee for technical included services" only if the twin test of rendering services and making technical knowledge available at the same time is satisfied." 44. In the instant case, the UK and USA subsidiaries did only contractual work parcelled out to it whose results were given to clients directly and no technical knowledge was made available to assessee. Hence, even under the respective DTAA, the payments made to UK and US subsidiaries/companies would not fall under the ambit of FTS. 45. In any case, as we have shown above, under the IT Act, none of the payments made by the assessee can be disallowed u/s 40(a)(i) based on effect of retrospective amendment of Explanation to S.9(1). Accordingly, ground No.6 is allowed in favour of the assessee. 46. Ground No.7 reads as under : "7. The A.O. is not justified in excluding the communication expenses of Rs.1,16,67,429 from the export turnover. (b) As the assessee did not provide technical services but only developed computer software for its clients abroad, the provis....
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.... following distinction : "The assessee did not render any independent technical services. It developed software on contract basis as per the agreement and handed over the same to the customer........ There is software development agreement between the client and the assessee. The expenditure incurred is for development of Software .... Such expenses incurred cannot be said to be expenditure for technical services. If the technical services are rendered independently which are being agreed to be separately charged in addition to the price of the goods, in such circumstances, expenditure incurred could be in the nature of expenditure for the purpose of technical services...... Such expenditure is not in the nature of expenditure for technical services. Since the expenditure is not for technical services, there is no need to exclude these expenditures from consideration received in convertible foreign exchange for the purpose of calculating 'export turnover' as defined in cl. (iv) of Expln 2 to S. 10A". 48. It was further submitted by the learned Counsel for the assessee that more importantly, the amount of Rs.1,16,67,429/- is a payment made by the assessee which has not been ch....
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....he tax payer". It was submitted that this reasoning is untenable. EEFC is the acronym for Exchange Earners Foreign Currency i.e. the foreign currency allowed by the RBI to be retained abroad by an earner. Evidently, the earner is one who earned the exchange by exports. So the source of the EEFC balance could only be sale proceeds by way of exports. It was further submitted that the deposit of currency in foreign exchange has everything to do "with the / business operations of the tax payer". So the said gain of Rs.8,52,831/- should not be reduced from the business profit in the light of the decision of Sanyo LSI Technology India Private Ltd. vs. Deputy Commissioner of Income Tax ITA No.977/Bang/2010 dated 13.5.2011 53. We have heard both the parties and perused the material available on record. We find that the Order in the case of Sanyo LSI Technology India Private Limited (supra) is squarely applicable to the facts of the present case and the relevant observations are extracted below: "8.1.4 .... (iii) With regard to the foreign exchange fluctuation is a part of 'profits from business and profession, the Hon'ble Apex Court in its ruling in the case of Sutlej Cotton Mills....
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....n PARA 8 "8. We have heard both Parties and perused the matter available on record. The issue in Four Soft Ltd.(supra) relied upon by Assessee was the rate of LIBOR, with the actual LIBOR rate as per Assessee being 4.42% whereas DRP had taken LIBOR at 5.7%, The Tribunal has directed the AO to examine the correct rate of LIBOR and adopt LIBOR + rate in that case. The coordinate benches such as Dr.Reddy's Laboratories Ltd. vs. ACIT (MA No. 217/Hyd/2013 in ITA No.1605/Hyd/2010 dated 29-11-2013), Siva Industries 59 DTR 182 (Che), Tech Mahindra 46 SOT 141 (Mum) & Tata Autocomp Systems 73 DTR 220 (Mum) are approving on different factual situation, LIBOR + 1% to 3% and considering that, we feel that reasonable rate would be LIBOR + 2% and direct the AO to adopt the same" The same directions as above extracted shall apply for this Ground 2 in ITA No. 2184/Hyd/2011 for AY 2007-08. Hence this Ground is allowed for statistical purposes. 58. Ground No. 3 (consisting of 3(a), 3(b) and 3(c)) relates to addition of Rs.13,04,400/- in respect of the corporate guarantee given by the assessee in favour of the bankers of the AE (Associated Enterprise). This is similar to Grounds No. 3 and 4 of ITA ....