TaxTMI 
TaxTMI 
2017 (9) TMI 1799
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....e payments made by the Appellant amounting to Rs. 2,60,62,411 in relation to 'software' license are in the nature of 'royalty' 3. The learned CIT(A) has erred in law and facts by upholding the order of the learned AO that the payments made by the Appellant amounting to Rs. 39,62,893 in relation to 'software' license are in the nature of 'royalty'. 4. The learned CIT(A) has erred in law and in facts, by not accepting the contentions filed by the Appellant while distinguishing the case of the Appellant from the decision of the Karnataka High Court in the case of CIT Vs Samsung Electronics Co Ltd and Others (ITA No 2808 of 2006 and others) 5. The learned CIT(A) has erred in law and in facts, by upholding the actions of the learnedAO in considering some of the 'software' expenses amounting to Rs. 2,10,206 to be in the nature of capital expenditure and disallowing the same. Transfer pricing matters 6. The learned CIT(A) has erred in law and facts, by upholding the addition of Rs. 3,14,50,365 made by the learned AO / TPO on account of adjustment to the arm's length price of the international transactions entered by the Appellant with its Assoc....
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....period other than 12 months)should not be rejected. d. The learned CIT(A) has erred in law and in facts, by not acceptingthe Appellant's plea that in case of certain comparable companies consolidated results can be used for analysis. The Appellant had considered the consolidated results in only those cases where the income of the Indian company constituted more than 75% of the consolidated company-wide/ segmental revenues. 11. The learned CIT(A) has erred, in law and in facts,by upholding the action of AO/TPO in accepting/ rejecting certain comparable companies based on unreasonable comparability criteria. 12. The learned CIT(A) has erred in law and in facts by upholding the action of the AO/ TPO in rejecting certain comparable companies on an adhoc basis stating that the working capital adjustments in relation to such companies distorts the profit margins. Further, the learned CIT(A) has erred in law and in facts by upholding the actions of the AO/ TPO in restricting the working capital adjustment on an adhoc basis to the average cost of capital computed at 1.71 percent in the case of comparable companies 13. The learned CIT(A) has erred, in law....
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.... 'the Act') of payment towards software licenses treated by the Assessing Officer as royalty for want of TDS. The assessee has also raised additional grounds which are as under : Corporate tax matters 21. " Without prejudice to the grounds 2 to 4, the Learned CIT(A) has failed to appreciate that during the Financial Year 2008-09 relevant to the Assessment Year 2009-10, the Appellant was not liable to withhold tax on the payments made as there was no provision under the Act mandating the deduction of tax at source on the payments made on purchase of computer software and there were many favorable judicial precedence including the jurisdictional tribunal rulings. 22. Without prejudice to the grounds 2 to 4, the learned CIT(A) erred in not appreciating the fact that explanation 5 to Section 9(1)(vi) was inserted vide Finance Act, 2012 with effect from 1 June 1976 and was hit by the doctrine of 'impossibility of performance'." The additional grounds raised by the assessee are not new issues but an additional plea/argument raised by the assessee regarding the disallowance made by the Assessing Officer under Section 40(a)(ia) of the Act. Therefore in view ....
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....0.2011 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. The co-ordinate Bench of this Tribunal in the case of ACIT Vs. Aurigene Discovery Technologies (P) Ltd. (supra) has considered an identical issue in paras 3 to 5 as under : " 03. We heard the rival submissions and gone through the relevant orders. The assessee resubmitted the plea taken before the lower authorities and placed on the ruling of the Hon'ble Bangalore ITAT in Sonata Information Technology Ltd v. ACIT (103 ITD 324) which had held that payments for software licenses do not constitute royalty under the provisions of the Act and hence disallowance under section 40(a) (ia) of the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the closure of the FY 2010-11. Subsequently, the Finan....
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....of Virola International, wherein it was held that - "The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax-deductor cannot be expected to have clairvoyance of knowing how the law will change in future." Further, software payment was included in definition of royalty only vide Explanation to section 9(1)(vi)inserted retrospectively vide Finance Act, 2012 and when the purchase was made, the appellant did not have the benefit of clarification brought by the retrospective amendment. It is impossible to fasten liability for deducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. This view has been upheld by the Bangalore Tribunal in the case of DCIT vs M/s WS Atkins India Pvt Ltd (ITA No 14671Bang12014 and the Mumbai Tribunal in the case of Channel Guide India Ltd. vs ACIT ([2012] 25 taxmann.com 25). 5.2 The ITAT 'C' Bench in the case M/s WS Atkins India Pvt. Ltd and in the case of Infotech Ente....
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....ce retrospectively as tax is to be deducted at source at the time when the payment is credited or made. When purchase of software was made the assessee did not have the benefit of the c l ar i f i cat ion br oug ht about b y the r et r osp ec t i v e amendment. The contention of the appellant is correct that the software payment disallowed by the AO did not warrant withholding of the tax u/s 40(a)(ia) and 40(a)(ia) (by an order of corrigendum dt 20.11.2015) of the Act. Therefore disallowance made by the AO on account of software payment want of withholding of tax is hereby deleted." 05. The CIT(A) followed the decision of this Tribunal in M/s WS Atkins India Pvt. Ltd, supra, which referred the decisions of Hyderabad Bench of the Tribunal in Infotech Enterprises Ltd in ITA 115/HYD/2011 wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not d one and sub s eq uent l y b ec ome ta xa bl e on a c c ount o f a retrospective legislation. It has also referred to the decisions of the Delhi & Mumbai Tribunal in SMS Demag Pvt Ltd , 132 ITJ 498 & Sonic Biochem Extractions Pvt. Ltd. 23 ITR (Trib) 447, respectively. We uphold the decision ....
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....on of cost on the basis of ratio of turnover is proper and justified. Since the profit on the transaction with AE is eligible for deduction under Section 10A of the Act the assessee is allocating the cost disproportionately to the non-AE transaction to avoid the tax. He has relied upon the orders of the authorities below. 11. We have considered the rival submissions as well as the relevant material on record. The segmental financial results of the assessee as per the TP document has been reproduced by the TPO in para 3 as under : 3. Segmental financial results of the taxpayer for the financial year: 2008-09 as per TP Document. Particulars SWD Services IT Enabled Services Unallocated (Non AE) Operating Revenues (including foreign exchange gain, other operating income) 2,03,97,026/- 4,06,15,470/- 19,77,38,181/- Operating Expenses 1,77,91,212/- 3,45,53,058/- 25,61,84,058/- Operating Profit / Loss 26,05,814/ 60,62,413/- (-) 5,84,45,877/- OP / Total Cost % 14.64% 17.54% (-) 22.81% 12. The assessee has shown the operating margin of international transactions in software development segment and ITES segment at 14.6....
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.... the purpose of bench marking its international transaction. The TPO then undertaken the exercise of reallocation of the total operating cost in the ratio of turnover of three segments. It is pertaining to note that the allocation of cost can be made only in respect of indirect common cost incurred in respect of all the segments. Therefore the allocation of the cost can be made only in respect of the indirect cost. The cost which is directly related to a particular segment cannot be reallocated. The same can be examined for the purpose of allowability and genuineness but not for the purpose of reallocation. Accordingly, we find that the action of the TPO in allocating the direct as well as indirect cost in the ratio of turnover of each segment is not proper and justified. Hence we do not find any error or illegality in the impugned order of the CIT(A) which has taken note of the fact that if the direct cost is taken out from the allocation then the adjustment made by the TPO will not survive. Hence we uphold the impugned order of the CIT(A) qua this issue." Thus the action of the TPO in allocating the direct as well as indirect cost as alleged by the assessee in the ratio of tur....
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....ssued are beyond the mandate of the provisions of Section 251(l)(a) of the I.T. Act which do not empower the CIT (A) to set aside the issue. 5. The CIT (A) erred in law as well as on facts in holding that, as the working capital adjustment provided by the TPO has negative impact on adjusted margin, the assessee is entitled to risk adjustment as per prevailing norms, which shall be worked out by the TPO and granted to the assessee in ITES segment without appreciating that risk adjustment could not be allowed in the absence of specific difference in risk and its impact on profit margin when TP regulations in India are against making any assumptions in respect of any adjustments and such risk adjustment cannot be provided without making necessary assumptions. 6. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (A) be reversed and that of the Assessing Officer be restored. 7. The appellate craves to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 15. The only issue arises in the appeal of the revenue is regarding the gain/los....