TaxTMI 
TaxTMI 
2020 (5) TMI 458
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....also provides Information Technology Enabled Services (ITES) in the nature of back- office process outsourcing and inbound and outbound voice-based services. 2.1 The assessee company filed its return of income declaring an income of Rs. 108,61,33,970/-. The case was selected for limited scrutiny through CASS. Since, during the year under consideration, the assessee had undertaken 'international transactions' with its AE and the total transactions in this regard had been shown at Rs. 45,44,780,336/-, reference was made to the Ld. Transfer Pricing Officer (TPO) in terms of provisions of Sec.92CA of the Act for determining the Arm's Length Price (ALP) of the international transactions entered into by the assessee with the Associated Enterprises (AE). The details of the international transactions entered into by the assessee company are as under: S. No. Nature of International transaction Method Adopted by Assessee PLI Amount in Rs. 1. Provision of IT services TNMM OP/TC 2,775,946,466 2. Availing of Technical & Consultancy Services TNMM OP/TC 18,178,256 3. Receipt of Marketing Services TNMM OP/TC 73,530,916 4. Cost of sharing IT resources & Infrastructure TNMM ....
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....by raising the following grounds of appeal: 1. That the assessing officer erred on facts and in law in completing assessment under section 143(3) read with section144C of the Income-tax Act, 1961 ('the Act') at an income of Rs. 1,82,85,79,390 as against the returned income of Rs. 1,08,61,33,970 under normal provisions of the Act. 1.1. That on the facts and circumstances of the case and in law, the impugned order passed by the assessing officer is barred by limitation and therefore, is liable to be quashed. Re: Transfer Pricing adjustment in IT Enabled Service Segment 2. That the assessing officer erred on facts and in law in making an addition on account of transfer pricing adjustment of Rs. 27,05,66,054on account of the alleged difference in the arm's length price of the 'international transaction' of provision of IT enabled services on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer ('TPO'). 2.1. That the DRP/TPO erred on facts and in law in resorting to cherry picking and considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the appellant: (i) Inf....
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....ition of the appellant vis-à-vis the comparable companies. Re: Transfer Pricing adjustment in Software Development Service Segment 3. That the assessing officer erred on facts and in law in making an adjustment of Rs. 27,72,61,982 to the arm's length price of the 'international transaction' of provision of software development services on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer ('TPO'). 3.1. That the DRP/TPO erred on facts and in law in resorting to cherry picking and considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the appellant: (i) Cybage Software Private Limited (ii) BhilwaraInfotechnologyPvt. Ltd (iii) Clogeny Technologies Private Limited (iv) Infobeans Technologies Limited (v) Larsen & Toubro Infotech Limited (vi) CybercomDatamatics Information Solutions Limited (vii) Mindtree Limited (viii) Inteq Software Pvt Ltd 3.2. That the DRP/ TPO erred on facts and in law in not appreciating that the aforesaid companies do not satisfy the test of comparability as provided in rule 10B(2) of the income tax rules and therefore ....
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....g that the Protocol to India-France DTAA is an integral part of the treaty and does not require separate notification to be issued by Government of India for its implementation. 5.4. That the DRP/assessing officer erred on facts and in law in not appreciating that the payment for managerial services to Steria France is not covered under the term "technical" or "consultancy" services, in terms of Paragraph 7 of the Protocol read with Article 13 of the India-UK DTAA. 5.5. That the DRP/ assessing officer erred on facts and in law in not appreciating that the said services provided by Steria France does not 'make available' technical knowledge, experience, or skill to the appellant, in order to be taxed as FTS in terms of Paragraph 7 of the Protocol read with Article 13 of the India-UK DTAA. 5.6. Without prejudice, the DRP/ assessing officer erred on facts and in law in not appreciating that the said transaction could not be held as FTS in terms of performance rule in terms of Paragraph 7 of the Protocol read with Article 13(5) of India - Israel DTAA and Article 12(5) of the India - Finland DTAA. 5.7. That the DRP / assessing officer erred on facts and in law in not appreciatin....
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.... subjected to the time limit prescribed u/s 153 of the Act. Thus, the Ld. AR fairly accepted that ground No.1.1 of the assessee's appeal was liable to be dismissed in view of binding to the judicial precedent of the Co-ordinate Bench. 3.1 With respect to Ground No.2 challenging the Transfer Pricing Adjustment with respect to IT Enabled Services segment, the Ld. AR submitted that the assessee had considered nine companies for computing the Arms' Length Price in the segment and that in the TP documentation it had computed their average at 13.67% whereas the assessee's average was 13.61%. It was further submitted that since the assessee is a cost-plus entity, the foreign exchange fluctuation had been considered as an operating item by the assessee but the Ld. TPO and the Ld. DRP had treated the foreign exchange fluctuation as non-operating while calculating the average of the comparables finally selected. The Ld. Authorized Representative submitted that the final set of comparables post the Ld. DRP directions was having five comparables and the average margin calculated was 20.11% by taking foreign exchange fluctuation as nonoperating whereas if the foreign exchange fluctuation was ....
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....as also placed on numerous other judicial precedents for the argument that BPO Infosys Ltd. had to be excluded on account of its non comparability to a small service provider, on account of this company having a huge turn over and on account of BPO Infosys Ltd. having economies of scale. 3.4 The Ld. AR submitted that foreign exchange fluctuation has to be considered as an operating item in terms of judgment of the Hon'ble Delhi High Court in the case of BC Management Services Pvt. Ltd. in ITA No.1064/2017 and another judgment of Pr. CIT Vs. Ameriprise India Pvt. Ltd. in ITA 2065/2016. The Ld. AR further submitted that if the foreign exchange fluctuation is considered as an operating item and Infosys BPO Ltd. is rejected as a comparable, the operating margin of the remaining four companies i.e., (i) Jindal Intellicom, (ii) Microland Ltd., (iii) Tech Mahindra Business Services Ltd. & (iv) BNR Udyog Ltd. would work out to 16.15% and since the operating margin of assessee was 13.61%, the difference would fall within the (+-) 3% range and, therefore, no transfer pricing adjustment would be warranted in the ITES segment. 3.5 The Ld. AR submitted before the Bench that in case this argum....
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....ds of Steria France in view of the provisions of India-France Double Taxation Avoidance Agreement (DTAA) and on the aspect as to whether if Steria France was not taxable in India for the managerial services provided to Steria India, whether Steria India will not be liable to withhold tax as per the provisions of Section 195 of the Act. It was further submitted that the Ld. AAR pronounced a ruling against the assessee holding that the payments made to Steria France were in the nature of Fee for Technology Services (FTS) against which the assessee filed a writ petition before the Hon'ble Delhi High Court. It was further submitted that vide order dated 28.07. 2016 in WP (C) No.4793/2014 and CM Appeal 9551/2014, the Hon'ble Delhi High Court held in favour of the assessee company and held that service rendered by Steria France were managerial in nature and were, therefore, outside the ambit of definition of FTS provided in India- UK DTAA and, therefore, payments made to Steria France were not liable to withholding of tax u/s 195 of the Act. It was submitted that following this order of the Hon'ble Delhi High Court for Assessment Years 2010-11 & 2011-12 in ITA Nos.762/2017 & 380/2017 r....
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....ansactions under which the assessee had acquired a non-exclusive non-transferable right to use the software and that further the assessee was prohibited for copying, modifying or further developing the software. It was submitted that this purchase of software in terms of the agreement only resulted in the transfer of the copyrighted article and not the copy right and, therefore, the same was not in the nature of royalty in the hands of Steria France for the purposes of deduction of tax at source. Reliance was placed on the judgment of the Hon'ble Delhi High Court in the case of DCIT Vs. Infra Software Ltd. reported in 220 Taxmann 274 wherein the Hon'ble Delhi High Court had upheld that order of the Tribunal wherein it was held that the amount received by the assessee under the License Agreement for allowing the use of software would not be royalty under the DTAA since what was transferred was neither the copy right nor the use of the copyright in the software but what was transferred was the right to use the copyrighted material or article which was distinguishable from the rights in the copyright. The Ld. AR also submitted that in this judgment the Hon'ble Delhi High Court had dis....
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....TA NO.1881/Del/2014, 1583/Del/2015, 753/Del/2016 & 1763/Del/2017 vide order dated 10.10.2019 wherein the Tribunal has held that the provisions contained in section 144C of the Act are a self contained code and that the same cannot be subjected to the time limit prescribed u/s 153 of the Act. Accordingly, ground No.1.1 is dismissed by respectfully following the ratio of the decision rendered by Co-ordinate Bench of the Tribunal as aforesaid. 5.2 With respect to the Transfer Pricing Adjustment in respect of IT Enabled Segment, although the assessee has challenged selection of comparables as well as rejection of comparables in the grounds of appeal, the Ld. Authorized Representative has argued at length only against the inclusion of Infosys BPO Ltd. in the final set of comparables on the grounds that this company is functionally different, having ownership of intangibles and enjoys benefit of synergies. The Ld. Authorized Representative has placed reliance on numerous judicial precedents for buttressing the arguments in this regard. The Authorized Representative has also submitted that the assessee has treated foreign exchange fluctuation as an operating item whereas the Revenue has....
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....loying sheet breath in terms of economies of scale and diversity and geographical dispersion of customers. The presence of the aforesaid factories will take this company out of the list of comparables. We therefore accept the contention of the assessee that this company cannot be regarded as a comparable. Similar view was also taken in case of Symphony Marketing Solution India (Pvt.) Ltd. (supra) by the Banglore Bench. Therefore, we direct the Assessing Officer/TPO to exclude the same." 5.4 Accordingly, in view of the judicial precedents cited above we direct the AO/Ld. TPO to exclude BPO Infosys Ltd from the final set of comparables. 5.5 Since the Ld. Authorized Representative has submitted that if Infosys BPO Ltd. is excluded from the final set of comparables, the assessee's challenge to exclusion of the two comparables of the assessee viz. Allsec Technologies Ltd. and Informed Technologies Ltd, will become academic in nature and the same were also not argued by the Ld. AR, these two comparables will remain to be excluded and the assessee's challenge to their exclusion is dismissed as not pressed. 5.6 With respect to the ITES Segment, it is the plea of the Ld. Authorized Repr....
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....mitted that the AO/TPO should verify the computation of this 35th and 65th percentile before the Transfer Pricing Adjustment in this segment is to be deleted. The Ld. Authorized Representative has no objection to the same. Accordingly, the issue of Transfer Pricing Adjustment in the Software Development Segment is restored to the file of the AO/Ld. TPO for the limited purposes of verifying the computation of 35th and 65th percentiles and if the same is found correct then no Transfer Pricing Adjustment would have to be made. The Assessing Officer/Ld. TPO is also directed to verify as to whether the foreign exchange fluctuation in this segment relates to the trading activities with the AEs and if it is so found then the same is to be treated as operating item. 5.8 Since it has been submitted by the Ld. Authorized Representative that the grounds relating to inclusion of other companies as comparables by the Ld. TPO/AO would become academic and no arguments were advanced by the Ld. Authorized Representative on the inclusion of such comparable companies by the Ld. Authorized Representative, the related grounds are dismissed as not pressed. 5.9 Ground No.5 challenges the action of the ....
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....vices fee and consequently deleting the disallowance made by the Ld. Assessing Officer u/s 40(a) (i) of the Act ?" 5.10 This question was answered against the Revenue and in favour of the assessee. Therefore, in light of the settled judicial precedent in favour of the assessee on the issue by the Hon'ble Delhi High Court in assessee's own case, there is no reason for us to sustain this disallowance. Accordingly, respectfully following the judgment of the Hon'ble Delhi High Court, as aforementioned, in assessee's own case, we direct the deletion of this disallowance. 5.11 Ground No.6 challenges the action of the Assessing Officer in making disallowance of Rs. 9,28,28,017/- being payments made to Steria France for purchase of computer software licenses for the reason of failure to deduct tax at source. It is the contention of the assessee that the payment for purchase of software licenses is not in the nature of royalty and, therefore, no deduction of tax is required. In this regard reliance has been placed on the judgment of the Hon'ble Delhi High Court in the case of DCIT vs. Infrasoft Ltd., reported in 220 taxaman273. It has also been submitted that although the lower authoriti....
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....re (P) Ltd v. CIT: 327 ITR 456]. Further, if we consider the ambit of definition of 'royalty' as defined in section 9(1)(vi) of the Act, it is seen that clause (v) of explanation to section 9(l)(vi) provides that consideration paid for transfer of inter alia all or any rights in respect of any copyright as falling within the meaning of royalty. In the present case, considering that the issue under consideration is payment made towards software, which is a copyrighted article/asset, it needs to be considered whether the payment made is for obtaining rights in respect of copyright in the software, which is governed by the provisions of Copyright Act, 1957. Further, it would be pertinent to note that the Steria France is a resident of France (TRC and no PE certificates are placed in the paper book). As per section 90(2) of the Act, the provisions of the Act shall be overridden by the provisions of the DTAA, to the extent the latter are more beneficial to a nonresident assessee. In the present case, Article 13 of India - France DTAA deals with taxability of royalty paid by an Indian resident to French resident. The said Article reads as under: "ARTICLE 13 - Royalties and fees for te....
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....such software, the assessee acquires a non-exclusive, nontransferable right to distribute the software and is prohibited from copying, modifying or further development of the software. Therefore, the purchase of software by the assessee in terms of the Agreement only results in the transfer of a copyrighted article rather than a copyright right and payment received for the same would not be in the nature of royalty in the hands of Steria France. 5.16 We are guided to reach such a finding by relying on the judgment of the Hon'ble Delhi High Court in the case of DIT v. Infrasoft Ltd.: (220 Taxman 274). In this case, the assessee, an international software marketing and development company of an international group, had claimed that amount received by it under license agreement for allowing use of software was not taxable as royalty. The Hon'ble Delhi High Court upheld the order of the Tribunal wherein it was held that amount received by the assessee under the license agreement for allowing the use of the software would not be royalty under the DTAA since what was transferred was neither the copyright in the software nor the use of the copyright in the software, but what was transfe....