TaxTMI 
TaxTMI 
2019 (10) TMI 1371
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....sistant Commissioner of Income-tax, Circle 11(4), Bangalore ('Assessing Officer' or 'AO') to the extent prejudicial to the Appellant, is bad in law, contrary to facts and circumstances of the case and liable to be quashed. 2. The learned AO and the learned Dispute Resolution Panel (Tanen erred in facts and law in confirming the action of the learned Deputy Commissioner of Income Tax (Transfer Pricing - V), Bangalore ("Transfer Pricing Officer" or "TPO") of making an adjustment to the transfer price of the Appellant in respect of its design and engineering services provided to Associated Enterprises by Rs. 136,799,658, holding that the international transactions do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 (the Act') and thereby grossly end in; 2.1. Upholding the rejection of comparability analysis of the Appellant in the Transfer Pricing ("TP") documentation without appreciating the contentions, arguments, and evidentiary data furnished by the Appellant during the course of the proceedings, and confirming the fresh comparability analysis as adopted by the learned TPO; 2.2. Ignoring the limited ....
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....e on computer software u/s. 40(a)(ia) of the Act. a. The learned AO erred in disallowing the expenditure amounting to Rs. 242,386 incurred on purchase of computer software, under section 40(a)(ia) of the Income Tax Act, 1961 ("the Act") on the contention that the tax has not been deducted at source. b. The learned AO erred in not appreciating the fact that the software purchased by the company from the vendors are standard off-the-shelf product and are not transferred to the assessee company. c. The learned AO erred in placing reliance on the decision of the Honorable Karnataka High Court dated 15th October, 2011 (ITA No. 2808 of 2005), wherein the said decision is yet to reach finality as an appeal has been filed before the Honorable Supreme Court against the said order. Ground No. 2: Non-allowance of depreciation on software expenditure considered as capital expenditure for AY 2007-08. a. The learned AO erred in not allowing the claim for depreciation on the 'Computer Software' which was treated as capital in nature by learned AO in the course of completion of assessment for the AY 2007-08. b. The Learned AO erred in n....
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....ALP) of international transactions with its AE. 4. During the course of TP proceedings, the TPO observed that as per the information in Form 3CEB, the assessee company has entered into the following international transactions with its AE. The financials of the tax payer for the Financial Year 2007-08 are as under:- 5. The assessee has determined the ALP of international transactions representing software development services provided to the AE by applying the Transactional Net Margin Method (TNMM), stating to be the most appropriate method in the facts and circumstances of the case. The OP/OC ratio is taken as the profit level indicator (PIT) in TNMM analysis. The assessee has arrived at PLI at 8.07% on cost by reducing extraordinary expense i.e., training expenses, depreciation and prior period expenses to the tune of Rs. 1,12,84,454/-. The assessee had also arrived at PLI of the comparables at 8.27% after working capital adjustment in respect of software development services. The assessee has selected 4 comparables based on the criteria applied in its TP study. 6. The TPO, after considering relevant facts and submissions of the assessee, observed that the asses....
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....ed 04.10.2011. 11. Computation of ALP In view of the above discussion, it is concluded that the information as well as the data used in computation of the arms length price is not reliable and correct. Thus the provisions of Sec. 92C(3)o?= are invoked and the TP document is proposed to be rejected. The TPO proceeds to determine arm's length price of the international transactions entered into by you (IT enabled services to associated enterprises) as under. 11.1 Methodology: TNMM. 11.2 Profit Level Indicator: Operative Profit/Operative Cost as explained above. 11.3 Comparables: 6 companies as discussed above 11.4 Data used : Data pertaining to the FY 2007-08 as mandated under Rule 10B(4). 11.5 Computation of Arms Length Price: The arithmetic mean of the Profit Level indicators is taken as the arms length margin. (Based on this, the arms length price of the Engineering Design services (KPO services) rendered by taxpayer is computed as under: The above shortfall of Rs. 13,67,99,658/- is treated as transfer pricing adjustment u/s. 92CA." 7. Consequent to TP adjustment as suggested by the TPO vide its order d....
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...., submitted that the assessee has entered into agreement with its AE as per which the services rendered are mainly in the nature of engineering design services. The TPO has accepted the fact that the assessee is mainly providing engineering design services, however, recharacterized services into KPO services without assigning any reasons. The AR further submitted that no doubt the assessee is into ITES services, but the revenue from ITES segment is insignificant because, out of the total revenue generated for the year in respect of services rendered to its AE, revenue from ITES services is only 19% of total revenue. Therefore, the assessee has aggregated all transactions into engineering design services and determined ALP of international transactions with its AE by applying TNMM as most appropriate method. The TPO, without assigning any reasons characterized the services rendered by the assessee into KPO/BPO services which is incorrect. 10. The learned DR, on the other hand referring to TP study conducted by the assessee submitted that the assessee itself has admitted the fact that services rendered to its AE are in the nature of ITES services. Therefore, the TPO has rightly re....
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....ng services is very insignificant and hence the international transactions have been aggregated to determine the ALP. When the assessee is having different stream of services including engineering design services and ITES services, it has to furnish complete segmental details while carrying out its TP study. But, the assessee has aggregated its services while carrying out TP study to determine ALP of international transactions with AE. At the same time, the TPO has recharacterized services rendered to the AE into ITES services without assigning any reasons as to how services rendered by the assessee are coming within the ambit of ITES services. Therefore, we are of the considered view that there are some lapses from both sides while determining ALP of international services with AE. We, further, noted that the Co-ordinate Bench of ITAT, in the case of Continental Automotive Components (India) Pvt. Ltd., (supra) has considered identical issue and restored the issue back to the file of the TPO/AO for characterization of services rendered by the assessee to its AE. Therefore, considering the facts and circumstances of this case and also consistent with view taken by the Co-ordinate Be....
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....S and consequently, for non-deduction of tax at source the impugned amount can be disallowed under section 40(a)(ia) of the Income Tax Act, 1961. We find that an identical question has been considered by the Co-ordinate Bench of ITAT, in the case of Teekays Interiors Solutions (supra) where the Tribunal, after considering relevant facts and also the decision of Hon'ble Karnataka High Court in the case of CIT Vs. Samsung Electronics Co. Ltd., held that the assessee cannot be fastened with the liability to deduct tax at source retrospectively on the basis of subsequent judgment of jurisdictional High Court, when the law stood at that point of time was very clear that there is no requirement of TDS on such payments. The relevant observations of the Tribunal are as under:- 11. We heard the learned DR and perused the record. We noticed that an identical issue was considered by the coordinate bench in the case of Allegis Services India Pvt. Ltd. (supra) and identical disallowance made was deleted by the co-ordinate bench on the reasoning that the TDS liability cannot be fastened upon the assessee retrospectively. For the sake of convenience, we extract below the operating po....
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....e thrust upon the assessee for deduction of tax in respect of a transaction completed much prior to the said decision. In support of his contention, he has relied upon decision of the co-ordinate bench of this Tribunal dt. 23.11.2016 in the case of ACIT Vs. Aurigene learned Authorised Representative has submitted that disallowance made by the Assessing Officer is not justified when there was no such law or declaration of law at the time of payment made by the assessee to cast the duty on the assessee to deduct tax. 6. On the other hand, the learned Departmental Representative has submitted that the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. (supra) though was subsequent to the transaction in question however, the said decision has not brought into statute any new law but it is only a declaration and interpretation of existing law. He has relied upon the orders of the authorities below. 7. We have considered the rival submissions as well as the relevant material on record. There is no dispute that the transaction in question regarding payment of purchase of software was completed in the F.Y. 2008-09 whereas....
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....s passed on October 15, 2011). Courts have consistently upheld this principle as seen in: * ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann. Corn. 115) * Kerala Vision Ltd. v. ACIT (46 taxmann.com 50) * Sonic Biochem Extractions (P.) Ltd. v. ITO (35 taxmann.com 463) * Channel Guide India Ltd. v. ACIT (25 taxmann.com 25) * DCI v. Virola International (2014 (2) TMI 653) * CIT v. Kotak Securities Ltd. (20 taxmann. com 846). 04. The relevant portion of the CIT (A) order is extracted as under: "Disallowance of expenses under 40(a)(i)/40(a)(id) 5.1. As regards disallowance of expenses under 40(a)(i)/40(a)(ia), it has been submitted that the company had determined the rate of tax to be deducted and following the judgments that were prevalent at the time of tax deduction, Supreme Court in the case of Tata Consultancy Services and jurisdictional Tribunal in the case of Samsung Electronics Co. Ltd. the appellant submitted that the said judgment shall not be applicable since it was pronounced on 15/10/2011 and Velankani Mauritius Ltd., whereas the liability to deduct tax for the appellant was the F.Y....
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....llowable. On appeal: Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright and royalty. The assessee did not acquire any rights for making copies, selling or acquiring which generally could be considered within the definition of "royalty". Explanation 2 to section 9(1)(vi) cannot be applied to purchase of a copyrighted software, which does not involve any commercial exploitation thereof. The assessee simply purchased software delivered along with computer hardware for utilization in the day-to-day business." 5.3 Relying on the above decision, the ITAT 'C' Bench, Bangalore upheld the order of the CIT(A) who had observed that the assessee did not have the benefit of the clarification brought brought about by the retrospective amendment that the payments tantamount to payment for royalty and consequently tax was to be deducted u/s. 194J. The law as extant on the date when the payment for obtaining the software was made, has not categorically laid down that tax is required to be deducted. It is impossible to fasten liability for deducting tax at source retrospectivel....
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....itions made towards disallowance of expenditure under section 40(a)(ia) of the Income Tax Act, 1961. 17. The next issue that came up for our consideration from assessee's appeal is non-allowance of depreciation on software expenditure considered as capital expenditure for Assessment Year 2007-08. The learned AR for the assessee, at the time of hearing submitted that he did not want to press the ground and hence the ground of appeal taken by the assessee challenging the issue has been dismissed as not pressed. 18. The next issue that came up for consideration from ground No. 3 of assessee appeal is brought forward loss not set off against assessed income. The learned AR for the assessee, at the time of hearing submitted that he did not want to press the ground and hence the same is dismissed as not pressed. 19. The next issue that came up for consideration from ground Nos. 4 and 5 of assessee appeal is interest levied under section 234B and 244A of the of the Income Tax Act, 1961. Levy of interest under section 234B and 244A of the of the Income Tax Act, 1961 is mandatory in nature and which also depends upon total income computed for the year under consideration and he....
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....es Ltd. 1.5. In wrongly computing mark-up for Acropetal Technologies Ltd. 1.6. In applying export earnings filter of greater than 25 percent of the revenues while determining the comparables companies; 1.7. In not applying the employee cost filter of 25 percent of sales for selecting the comparable companies; 1.8. In not excluding certain non-operating/extra-ordinary costs associated with depreciation of excess space, training and scholarship expenses, special consultancy expenses and others from the cost base while computing the net profit margin of the Appellant. 4. The learned AO and the learned Panel erred in not taking cognizance the fact that the functional profile of design and engineering services provided by the Appellant can be broadly compared with Information Technology ('IT') enabled service providers and thereby erred in not considering the following companies as comparable to the Appellant * Lee & Nee Software Exports Limited; * Caliber Point Solutions Limited; * R Systems International Limited; * Allsec Technologies Limited; * Aditya Birla Minac Worldwide Limited; ....
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.... appeal is transfer pricing adjustment in respect of international transactions with AE. We find that in respect of TP adjustment, the facts and issues involved in this appeal are identical to the facts and issues which we have already considered in IT(TP)A No. 1557/Bang/2012 for Assessment Year 2008-09. The reasons given by us in preceding paragraphs shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we set aside the issue to the file of the AO/TPO for characterization of international transactions of the assessee with its AE. 23. The next issue that came up for consideration from ground No. 2 of appeal is disallowance of expenditure on computer software under section 40(a)(ia) of the Income Tax Act, 1961 for failure to deduct tax at source. We find that an identical issue has been considered by us in IT(TP)A No. 1557/Bang/2012 for Assessment Year 2008-09. The reasons given by us in preceding paragraphs shall mutatis mutandis apply to this appeal also. Therefore, for similar reasons, we direct the AO to delete the additions made towards disallowance of expenditure under section 40(a)(ia) of the Income Tax Act, 1961. 24. The next issue that came....