TaxTMI 
TaxTMI 
2015 (6) TMI 602
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....98,07,749, but, subsequently, in course of hearing, ld. AR admitted that the said ground has been mistakenly raised as there is no disallowance made u/as 40(a)(i) of the Act. In addition to the issues in ground No.2, assessee also raised two additional grounds as under: "(1) The TPO and the Hon'ble DRP and the AO erred in determining the arm's length price of the so called consultancy charges paid by the appellant company to its non resident subsidiaries at NIL as against the claim by the appellant of Rs. 14,98,07,749. (1.1) The said authorities ought to have realized that the so called consultancy charges were actually payments made by the appellant to its foreign subsidiaries for the software services rendered by them." Additional ground which corresponds to sub-ground No. (i) will be dealt with at a later stage while considering the issue of determination of ALP for consultancy charges paid of Rs. 14,98,07,749 at Nil. 3. Briefly the facts relating to the issue raised in sub-ground Nos. (i) & (ii) are, assessee an Indian company incorporated as private limited company in August, 1991 was subsequently converted to a public ltd. company in the year 1997. Assessee has va....
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....rocess yielded 19 comparable companies (including three selected by assessee) with arithmetic mean of 26.20%. After allowing working capital adjustment of 0.11%, the adjusted arithmetic PLI was worked out at 26.09%. By applying the adjusted arithmetic mean PLI to the operating cost, ALP was determined at Rs. 483,32,88,400 after excluding the sales to non-AEs of Rs. 221,49,20,530, ALP of sales to AEs was determined at Rs. 261,83,67,870 as against the price shown by assessee of Rs. 216,73,07,289. Thus, the shortfall of Rs. 45,10,60,581 was treated as adjustment to be made u/s 92CA of the Act. 3.2 As far as the payment of Rs. 14,98,07,749 towards consultancy services (intra group services) is concerned, TPO observed that assessee is the parent company and the companies from whom services were claimed to have been received are as subsidiary. He observed that on the one hand assessee claimed to have rendered software development services to the same subsidiaries and on the other hand it claims of receiving consultancy services from them. TPO observed that assessee could not substantiate whether there was any need for consultancy services and if required whether such services were actua....
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....e margin of these two companies at 30.92% and 25.78% respectively. 6. Addressing on the issue of determination of ALP of consultancy charges at Nil, ld. AR submitted before us, the finding of TPO and ld. DRP on the issue has no basis of law. It was submitted, though the amount of Rs. 14,98,07,749 is described in the account as consultancy charges paid by assessee to non-resident subsidiaries, but, actually the payment was made for the software development services rendered by them. Ld. AR referring to the 'master services agreement' entered with M/s Pratt and Whitney, USA and the agreement entered into between assessee and its subsidiary in USA, submitted before us, assessee has obtained some orders from M/s Pratt and Whitney, USA for development of certain software. A portion of the software development work obtained from M/s Pratt & Whitney was parceled out to its subsidiary in USA and the payments made were towards services rendered by subsidiary towards software development services. Thus, in reality, there was no consultancy charged paid by assessee to the subsidiaries. Thus, it was submitted, determination of ALP of the payment made towards software development servi....
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....,749 was merged into the addition of Rs. 45,10,65,081 on account of TP adjustment, the issue relating to determination of ALP at nil cannot be looked into in an isolated manner. Thus, he requested for consideration of the additional ground raised on the issue. 9. We have considered the submissions of the parties and perused the orders of revenue authorities as well as other material on record. At the outset, the issue relating to admission of additional ground needs to be resolved. It is a fact on record that assessee has specifically not raised any objection before ld. DRP with reference to determination of ALP of so called consultancy charges of Rs. 14,98,0-7,749 at Nil. Though, in course of hearing, ld. AR submitted before us, in the written submissions filed before ld. DRP assessee has raised the issue, but, on careful perusal of the said written submission we do not find any reference to the issue. Thus, it can be held that assessee has not specifically raised the issue of disallowance of consultancy charges at Nil before ld. DRP. Having held so, it is to be decided whether assessee can raise such issue by way of additional ground. As can be seen, TPO has determined the ALP o....
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....e gone through the copy of the "Master Terms Agreement" (in short "MTA") entered into by the assessee with United Technology Corporation (PWC) which is filed at pages 179 to 196 of the paper book. Similarly, we have perused intercompany agreement entered into by the assessee with its subsidiaries placed in the paper book at page 197 to 222. This proves that the assessee obtained orders on its own behalf and it has only parcelled out a portion of its work to its foreign subsidiaries. As per the terms of the agreement, the assessee "shall release the work order" before the commencement of the work by IEAI USA and each work order shall be supported by end customers order copy. Clause 3 of the agreement reads as under : "Commencing on the date(s) specified in each Work Order, IEAI will allocate qualified personnel through Software Services requirements statements and regular project meetings, which may be modified from time to time by IEL. IEAI shall inform IEL at the time of the request, or as soon thereafter as that the information becomes available, should it be unable to deliver the qualified personnel specified in the Work Order. Parties shall within 30 days negotiate in good fai....
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....y indeed be construed as Fees for Technical Services. However this is only due to the fact of the retrospective amendment by Finance Act 2010. Prior to that, the Hon'ble Supreme Court in Ishikawajima-Harima Heavy Industries Ltd., v. DIT [2007] [288 ITR 408] had held that Section 9(1)(vii) as it stood then envisaged two conditions which need to be met simultaneously namely that services have to be rendered in India and said services have to be utilized in India. The Apex Court held that merely the "source" of income being located in India would not render sufficient nexus to tax the income from that source. The Apex Court held that there must be a direct live link between the services rendered and India. The Government subsequently introduced a retrospective amendment in Finance Act 2007 which read- "for the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clause (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non resident has a residence or place of business or business connection in India" -to overcome the e....
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....al design placement has been transferred by US subsidiary to the assessee. What IEAI did was only in fulfilment of contractual requirement with PRATT & WHITNEY and not for the benefit of the assessee. The non resident has simply executed the portion of work parcelled out to it by the assessee. The Karnataka High Court in CIT v. De Beers India Minerals Pvt. Ltd. (ITA No.549 of 2007 dated 15th May 2012) lucidly explained the concept of "make available" as follows: "What is the meaning of 'make available'. The technical or consultancy service rendered should be of such a nature that it "makes available" to the recipient technical knowledge, know-how and the like. The service should be aimed at and result in transmitting technical knowledge, etc., so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology "making available", the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of int....
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....se of NTPC Ltd. v. CIT [1998] 229 ITR 383 (SC). However, since this issue was not raised by assessee before ld. DRP and was raised for the first time before us, in the interest of fair play and justice, we remit the issue back to the file of TPO to decide afresh after examining the agreements between assessee and M/s Pratt & Whitney as well as assessee and its subsidiaries and other evidences brought on record by assessee. Further while deciding the issue, TPO must keep in view the findings of the coordinate bench in assessee's own case for AYs 2006-07, 2007-08 in ITA Nos. 115 & 2184/Hyd/2011 Infotech Enterprises Ltd. (supra) and for AYs 2002-03, 2004-05 and 2005-06 in ITA Nos 1450, 1452, 1451 & 1453/Hyd/2013. The assessee must be given an opportunity of being heard. Thus, the additional grounds raised along with sub-ground No. (i) of Ground No. 2 are considered to be allowed for statistical purposes. 10. As far as sub-ground no. (ii) of Ground No. 2 is concerned, assessee has objected to selection of Infosys Technologies Ltd and Wipro Ltd. Ld. AR submitted before us, these two companies cannot be treated as comparables to assessee as the turnover of these companies are huge a....
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....selves. They are in their own league and cannot be compared to any other software development company. The Hon'ble Delhi High Court in case of Agnity India Ltd. (supra) has also observed that big companies like Infosys cannot be considered as comparable to other software development companies. Different benches of ITAT have also expressed similar view while examining the comparability of Infosys Technologies Ltd and Wipro Ltd. In view of the aforesaid, we direct TPO to exclude these two companies from the list of comparables. In view of the above TPO is directed to compute, ALP afresh interms with the observations made by us hereinabove. 13. In Ground No. 3, assessee has challenged the disallowance of an amount of Rs. 2,29,78,128 u/s 40(a)(i) of the Act. 14. Briefly the facts are, during the assessment proceeding, AO noticed that assessee has debited an amount of Rs. 5,02,70,792 towards purchase of computer software. On verification of the details submitted by assessee in response to query raised by AO, it was found that out of such sum debited to P&L A/c, an amount of Rs. 2,29,78,128 represents payments made to non-resident companies towards software licenses. AO being of th....
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....at the issue is covered by the decisions of ITAT nevertheless relied upon the reasoning of the AO as well as ld. DRP. 17. We have considered the submissions of the parties and perused the material on record. There is no dispute to the factual aspect that an amount of Rs. 2,29,78,128 was paid to M/s G.E. Network Solutions, Netherlands towards purchase of a software called 'small world software'. The department has also not controverted the fact that M/s G.E. Network Solutions, Netherlands neither has permanent establishment in India nor has any business activity in India giving rise to income taxable under the Indian Income-tax Act. It is further evident from the record that ld. DRP while confirming the disallowance has relied upon its finding in AY 2006-07 and 2007-08. It will be pertinent to mention here, when similar issue relating to disallowance of amounts paid to M/s G.E. Network Solutions, Netherlands towards purchase of 'small world software' came up for consideration before the ITAT in assessee's own case for AYs 2006-07 and 2007-08, the Tribunal after considering the nature of payment and going through the Indo-Netherlands DTAA in the context of provis....
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....erusing the books of the assessee at pages 170 to 175 of the paper book, we find that there are multiple purchases of software during the year and each purchase of single item on software is merely one thousand rupees and not huge amount. Hence, we are of the opinion that they are simply purchase cost of trading goods especially when the licence in respect of software is not obtained by the assessee and the perpetual licence is given directly to the end customer by the vendor company. Copies of the invoice raised by Net Work Solutions on the assessee and at paper book 176 to 178 support the view of the assessee where the invoice mentioning name of the end customer supports our view. Hence, in our opinion, when there is no transfer of even the license to the assessee even though it is the purchaser, it cannot be said that there is any royalty payment by the assessee to the vendor company. The amount of Rs. 52,55,81/- is simply the cost of imported trading goods and not royalty payment. 27. It is therefore clear that the payments made by assessee to the Netherlands company will not fall under the ambit of Royalty as per Article 12 of the India-Netherlands DTAA. Hence there is no que....
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....dence towards claim of such expenditure. Therefore, assessee's claim of expenditure cannot be allowed in full. However, considering the fact that assessee maintains guest house and some expenditure must have been incurred towards maintenance of the same. It will be reasonable to allow 50% of the expenditure claimed. Accordingly, we direct AO to sustain the addition to the extent of 50% of the expenditure claimed by assessee. This ground is partly allowed. 23. In Ground No. 6, assessee has challenged the disallowance of picnic expenditure of Rs. 11,27,340. This issue is similar to ground No. 5. Following the decision therein, we direct AO to sustain the addition to the extent of 50% of the expenditure claimed by assessee. ITA No. 395/Hyd/2014 for AY 2009-10 24. Ground No. 1 & 7 being general, do not require any specific adjudication, hence, they are dismissed. 25. In Ground No. 2, assessee has challenged the disallowance of an amount of Rs. 49,81,113 u/s 40(a)(i) of the Act. 26. We have heard the parties and perused the materials on record. This issue is identical to the issue raised by assessee in Ground No. 3 of ITA No. 1780/Hyd/14, following our decision therein as expre....
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....dent subsidiaries for convenience and to meet delivery schedules. Ld. AR submitted, the issue is more or less covered by the decision of the ITAT, Hyderabad Benches in assessee's own case for AY 2006-07 and 2007-08 in ITA Nos. 115 & 2184/Hyd/2011 dated 16/01/14 Infotech Enterprise Ltd. (supra) as the Tribunal while considering similar disallowance made in these assessment years deleted the additions while holding that payments made were towards software development charges and not consultancy charges. Ld. AR submitted, the order passed by the Tribunal on this issue was accepted by the department as no appeal was preferred before the Hon'ble High Court on this issue. He further submitted, same view was expressed by the Tribunal while disposing assessee's appeals for AYs 2002-03, 2004-05 and 2005-06 in order dated 25/03/2015 in ITA Nos. 1450, 1452 and 1453/Hyd/2013. Thus, he submitted, addition made has to be deleted. 30. Ld. DR, though, agreed that the issue is covered by the decisions of ITAT in assessee's own case, but, she supported the reasoning of AO and ld. DRP. 31. We have considered the submissions of the parties and perused the relevant material on record.....
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....hich is capital in nature, hence, cannot be allowed as a revenue expenditure. However, he held that assessee is entitled for depreciation on such amount of expenditure. Accordingly, after allowing depreciation for an amount of Rs. 30,79,998, AO disallowed the balance amount of Rs. 92,39,994. Being aggrieved of such disallowance made by AO, assessee objected before ld. DRP. Ld. DRP, however, rejecting objections of assessee upheld the disallowance. 34. Ld. AR submitted before us, the expenditure claimed is allowable either u/s 31 of the Act as current repairs or u/s 37 as revenue expenditure. He submitted, similar expenditure claimed by assessee in AY 2008-09 was allowed by ld. DRP following the decision of the jurisdictional High Court, hence, there is no reason why it was disallowed in the impugned AY. 35. Ld. DR, however, relied upon the assessment order. 36. We have considered the submissions of the parties and perused the material on record. There is no dispute with regard to the fact that the expenditure claimed by assessee relates to replacement of certain spares to the computer which was claimed as revenue expenditure. As evident from record, similar expenditure claimed b....