TaxTMI 
TaxTMI 
TaxTMI 
2017 (9) TMI 1799
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....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 Associated Enterprises ('AEs').; 7. The learned CIT(A) has erred in law and facts by not accep....
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....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 and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis-à-vis the comparables and concluding that ....
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....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 of the fact that the substantial issue has been raised in the main ground, the additional grounds raised by the assessee on the same issue are admitted for consideration and adjudication along with the Ground Nos.2 to 5. 5. The learned Autho....
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....rgent 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 Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. license to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of c....
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....or 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 Enterprises Ltd of the Hyderabad Bench of the Tribunal wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not d one a nd subseq uent l y b ec ome t a xabl e on a c c ount o f a retrospective legislation. It has also referred to in the case of Sonic Biochem Extractions Pvt. Ltd. (supr....
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....ot 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 of the CIT(A) and dismiss the grounds raised by the Revenue." Thus it is clear that the co-ordinate Bench of this Tribunal 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 ....
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....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 14.64% and 17.54% respectively. The TPO found that the assessee has made a disproportionate cost across the segment and it has been resulted in high margins in AE transaction and loss in non-AE transaction. Accordingly, the TPO has recomputed the margins by reallocation of the cost in para 4 as under : 4. Segmental financial results of the taxpayer for the financial year: 2008-09 according to the TPO Particulars I....
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....egment 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 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. In view of the facts and circumstances of the case as well as the decision of ....
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....t 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/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. 16. We have heard the learned DR as well as learned AR and considered the relevant material on record. 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 operati....