TaxTMI 
TaxTMI 
2021 (5) TMI 658
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.... section 145(3) of the I.T. Act in this case? 2. Whether on the fact and the circumstance of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 9,12,600/- u/s. 40(a)(ia) of the IT Act without appreciating the assessee is liable to deduct TDS of payment made to non-resident for purchase of software because same would constitute 'royalty' under section 9 of the Act? 3. On the facts and circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the assessing officer. 4. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of assessing office may be restored to the above extent." 3. Now, we shall take ground no.1 raised by Revenue which relates to deleting the addition of Gross Profit of Rs. 2,86,01,036/-. 4. Brief facts qua the issue are that during the assessment proceedings, the assessee was asked to furnish comparative chart of the Gross Profit ratio (GP ratio) and Net Profit ratio(NP ratio) for the last three years and the reasons for notable variation, if any in GP ratio and NP ratio for the year under consideration. In response, the assessee, vide his submi....
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....f not more than 6-7%. The case of the assessee is genuine and there is only a marginal drop in margins due to extremely poor business conditions, increased competition and global slowdown due to which the business was very badly impacted resulting in drastic reduction in the turnover." 5.The above explanation of the assessee was not accepted by the assessing officer. The assessing officer noticed that the GP, for the year under consideration, has shown negative growth of 1.05% and NP has fall drastic 3.60% of the total turnover. On analyzing the above it appears to the assessing officer that there is huge increase in indirect expenses and direct expense. In the explanation so filed by the assessee does not justify the continuous fall of GP and NP for the last three previous years including the current year. On perusal of the audited financial statement, it is observed that there is fall in the total turnover of the assessee from 65.17 Crore to 33.12 Crore, however, manufacturing and operating cost is remained the same, in fact, there is rise around of Rs. 10.00 lakhs which can be seen from the following chart: A.Y. 2014-15 A.Y. 2013-14 Sales and Other opera....
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....as such for the purpose of calculation of operating margin. Thus, if you add these figures of Rs. 1,15,84,592/-, the operating margin is positive." 7.About business model of import and export with the foreign parties, the assessing officer stated that assessee has grossly failed to submit the copy of agreement with those parties to prove the genuiness of transaction/arrangement, value addition if any made by it, working of actual amount billed to those parties for the services rendered against each import/export and income earned from those transactions. In other words, the AO noticed that the reply submitted by assessee is very general in nature. Further, during the course of assessment proceedings, assessee has also not provided whether such arrangement with foreign parties is legal under the import and export policy where assessee is filing wrong declaration in respect of valuation of goods exported under self-declaration scheme. Furthermore, assessee has also not provided any evidence in respect of its relation with those parties from whom it is importing and exporting without any value addition or proper value addition, if any and under such circumstance, when the import pa....
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....hare of product segment has increased by more than 6 times in comparison to A.Y.2012-13, which has resulted into decline in profit margins. The Ld. CIT(A) has also held that the AO himself has accepted that there was overall fall in total turnover from Rs. 65.17 crores in A.Y.2013-14 to Rs. 33.12 crores in A.Y.2014-15. The AO has failed to point out any serious defect in maintenance of books of accounts except comparing Gross Profit Ratio of preceding years and making fall in GP ratio as main basis for rejection of books results. The Ld. CIT(A) has also held that there was no change in method of accounting and it is settled law that AO cannot doubt the genuineness of books of accounts merely because there has been reduction in Gross Profit Ratio in comparison to earlier years. The Ld. CIT(A) has relied upon the decision of Hon`ble Gujarat High Court in the case of CIT Vs. Vikram Plastics & Others (239 ITR 161) (Guj.), wherein it was held that if there was no discrepancy or defect pointed out in the books of accounts and if there is no material brought on record that purchases and expenses were inflated or sales suppressed then books of accounts cannot be rejected. The Ld. CIT(A) ha....
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....ich the consideration is paid is of paramount importance for the interpretation of the expression 'royalty'. Thus, only if some right in respect of a patent, invention, model, design, secret formula, process, copyright, literary or scientific work or the use of the right in a patent, invention, model, design, secret formula or process or trademark or similar property are transferred, it cannot be regarded as royalty. It is evident that where the consideration paid is for the purchase of a product, as envisaged in category (2) described above, and not for the transfer of the intellectual property per se, it may not be regarded as royalty. For example, the purchase of a book by a customer does not tantamount to the purchase of the copyright in the book, even though the publisher publishes the book by purchasing the copyright. Drawing a parallel from this example, purchase of a shrink-wrap product by an Indian company from a foreign company should not be regarded as purchase of a copyright but only a purchase of a copyrighted article and thus the payment therefor should not be regarded as royalty. An important aspect that has been emphasized by the Indian cou....
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....ght in the software. What has been transferred is not copyright or the right to use copyright but a limited right to use the copyrighted material and does not give rise to any royalty income. The consideration received on grant of licenses for use of software is not royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America - Decided against Revenue," This settled situation has been upheld in numerous decisions of the Tribunal and High Courts viz. * [2014] 43 taxmann.com 16 (Hyderabad - Trib.) Assistant Director of Income-tax (International Taxation) -I, Hyderabad vs. Bartronics India Ltd. * Mumbai IT AT - M/s. Galatea Ltd. Vs. DCIT International Taxation * Director of Income-tax vs. Nokia Networks OY in the present case, the assessee could not be said to have paid the consideration for use of or the right to use copyright but had simply purchased the copyrighted work embedded in the CD-ROM or any other media which could be said to be sale of 'goods' by the owner. The Consideration Clauses to the India - UAE DTAA could not be said to be royalty and the sam....