TaxTMI 
TaxTMI 
2022 (1) TMI 33
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....ding Billing and OSS Software to "Communication service providers" worldwide. Besides the above, the assessee also renders software services to its clients both for maintenance and core development. 4. We shall first adjudicate the common issue urged in all the three years, viz., disallowance of commission expenses u/s. 40(a)(i) for non-deduction of tax at source. The assessee had paid commission to its foreign agents in all the three years without deducting tax at source. The AO took the view that the assessee is liable to deduct tax at source and accordingly disallowed commission expenses u/s. 40(a)(i) of the Act. The commission expenses disallowed by the AO are Rs. 2.64 crores, Rs. 2.73 crores and Rs. 0.50 crores respectively in the years relevant to AY 2012-13, 2014-15 and 2016-17. The Ld CIT(A) held that the services provided by the agents are not simple marketing services, but involve providing technical and non-technical services. Accordingly the Ld CIT(A) held that the services provided by foreign agents are in the nature of managerial, technical and consultancy services and they would fall under the category of "Fee for Technical Services". Hence the assessee is liable ....
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....ign agents will assist the assessee in relation to both technical and non-technical including commercial issues and provide necessary support in fulfilling its obligations both statutory and contractual. Further they will assist in matters related to work permits and visa. Further they also provide services in connection with legal compliance, work permit and visas. They also help in marketing of products, generating future business promotion activities and arranging logistic support. Accordingly, the Ld CIT(A) has taken the view that these services fall under the category of managerial, technical or consultancy services. He also noticed that the agreement itself provide for deduction of tax at source. Accordingly, the Ld CIT(A) has taken the view that the assessee is liable to deduct tax at source from the payments made to the foreign agents. 9. We notice that the Ld CIT(A) has considered the clauses mentioned in the agreement entered between the parties. However, in the grounds of appeal filed before us, the assessee has furnished details of actual services provided by foreign agents in each of the years as under:- (A) Assessment year : 2012-13:- (a) Taap Co.:- Adm....
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....other and, the Hon'ble Supreme Court in case of Toshuku Ltd. (supra)** while dealing with non resident commission agent has held that if no operations of business are carried out in the taxable territories, the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. The Apex Court in paragraphs 12 and 13 of the aforesaid judgment has held as under: (** 1981 AIR 148) 12. The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to section 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the Department, had either accrued or arisen through and from the business connection in India that existed between the nonresident assessees and the statutory agent. This contention overlooks the effect of clause (a) of the Explanation to clause (i) of sub-section (1) of section 9 of the Act which provide....
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....d in allowing the appeal of the assessee." 12. The Ld A.R also invited our attention to the order passed by the coordinate bench in the assessee's own case for AY 2010-11 and 2011-12 in ITA No. 1447 & 1448/Bang/2017 and ITA Nos. 1519 & 1520/Bang/2017 dated 03-07-2019. The Ld A.R submitted that the Tribunal, in the above said years, has examined the applicability of amendments made in sec. 9(1)(vii) and sec. 195 of the Act and concluded that these amendments do not make the payments received by foreign agents as income accrued in their hands in India. For the sake of convenience, we extract below the decision rendered by the co-ordinate bench in the hands of the assessee in AY 2010-11 and 2011-12:- "10. Ground No. 6 : Disallowance of commission expenses paid to Foreign Parties under section 40(a)(i) of the Act for non-deduction of tax at source on such payments. 10.1 In this ground (supra), the assessee assails the order of the CIT(A) in upholding the action of the AO in disallowing export commission expenses amounting to Rs. 4,17,10,537/- and commission paid for hiring of apartments amounting to Rs. 1,11,111/- paid to non-resident parties under section 40(a....
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.... the Explanations inserted in the Section, came up for discussion. The learned AR for the assessee submitted that the fundamental and primary requirement of Section 9 of the Act is that the income should accrue or arise in India; whether directly or indirectly through or from any business in India. According to the learned AR, this primary requirement has not undergone any change due to amendments made to the Section and the Explanations inserted at the end of the Section only dispensed with the requirement that was earlier read into the Section; that the non-resident should have a place of business or business connection in India or that the non- resident should have rendered services in India. Similarly, the Explanation 2A, inserted by Finance Act, 2018 has only expanded the scope of "business connection". However, the primary requirement that the income should accrue or arise in India has not been diluted. 10.4.2 Per contra, the learned DR for Revenue emphatically supported the orders of the authorities below. 10.5.1 We have carefully considered the rival contentions on the issue before us and perused and carefully considered the material on record; including t....
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....e or place of business or business connection in India; or (ii) any other presence in any manner whatsoever in India." This Explanation has only added a further fiction in respect of the person making payment to a non-resident and not the person receiving the payment, i.e., nonresident agent who is receiving the payment. 10.5.4 To elaborate further, Section 195 of the Act can be divided into three limbs:- (a) Any person responsible for paying to non-resident, not being a company (i.e., the assessee company in case on hand) (b) There has to be payment of any other sum chargeable under the provisions of the Act. (c) The recipient of the payment has to be non-resident (i.e., Foreign commission agent in the case on hand). So the person responsible to pay to the non-resident is the assessee in the case on hand, as stated in limb "a" above and therefore as per Section 195(1) of the Act, he is under obligation to deduct tax on payment made to non-resident; provided the payment is chargeable to tax as laid down in limb "b". This Explanation - 2 (supra) clarifies that the person who is obliged to comply with sub-section (1) of S....
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....gn commission agents accrues or arises from any business connection in India. In this regard, the Hon'ble Apex Court in its decision in the case of CIT Vs. Toshoku Ltd., (1980) 125 ITR 525 (SC) held that the commission amounts which were earned by non-residents for the services rendered outside India cannot be deemed to be incomes that have either accrued or arisen in India. 10.5.8 The Explanations introduced to explain and expand the scope of "business connection" in Section 9(1) of the Act are as under:- "[Explanation 2.--For the removal of doubts, it is hereby declared that 'business connection" shall include any business activity carried out through a person who, acting on behalf of the non-resident,-- (a) has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the nonresident; or (b) has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or habitually secures orders in India, mainly or wholly....
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....er or not,-- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India." As can be seen from the above, this Explanation applies to clause (v), clause (vi) and clause (vii) of sub-section (1) of section 9 of the Act, (i) which relates to income by way of interest, royalty and "fees for technical services." In the case on hand, it is the commission income of the non-resident for the services rendered outside India and therefore this Explanation has no application to the facts of the assessee's case. 10.5.10 In view of the factual and legal matrix of the case, as discussed above, we hold that as the services are provided outside India, the commission payments made by the assessee to non-residents cannot be treated as income deemed to accrue or arise in India and therefore the provisions of Section 195 of the Act are not applicable in the case on hand. In order to invoke the provisions of Section 195 of the Act, the income should be chargeable to tax in India. In the case on hand, since the commission payments to non-residents are not chargeable to tax in In....
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....% 7. Persistent Systems Ltd 27.20% 8. R S Software (India) Ltd 15.34% 9. Sasken Communication Technologies Ltd 12.15% 10. Spry Resource India P Ltd 26.18% Average 22.63% The TPO noticed that the working capital adjustment results in negative rate of 4.86%. Accordingly, the TPO added the same to the average margin of 22,63% arrived above and accordingly arrived at adjusted margin of 27.49%. Accordingly, he made transfer pricing adjustment of Rs. 2,24,47,737/-. 15. The Ld CIT(A) excluded three comparable companies, viz., Datamatics Global Services Ltd., Genesys International Corpn. Ltd. and ICRA Techno Analytics Ltd. from the above list. With regard to the negative working capital adjustment made by TPO, the Ld CIT(A) has simply observed that the assessee has not provided any detailed working of the adjustment it was seeking. It appears that the Ld CIT(A) has misunderstood that the assessee is seeking working capital adjustment, whereas the claim of the assessee was that there is no necessity of making any working capital adjustment, when the workings turnout to be negative. 16. Before us, the assessee seeks exclusion of th....
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.... of the Bangalore Bench of the Tribunal in the case of NXP Semiconductor India Private Limited in IT(PA) No. 1634/Bang/2014 for assessment year 2009-2010 - order dated 22nd July, 2015. 6.1 We have carefully gone through the order of the co- ordinate Bench in the case of NXP Semiconductor India Pvt. Ltd. (supra) for the assessment year 2009-2010, wherein it was observed that Persystent Systems Limited was engaged in product development and product design and analysis services is functionally different from a pure software service provider and therefore, excluded it from the list of comparables for software development services. The same view was taken in the case of Saxo India Pvt. Ltd. in ITA No. 6148/Del/2015 - order dated 05th February, 2016, by observing that Persystent Systems Limited is engaged in running software development services as well as sale of software products. Albeit the percentage of software products in the total revenue is less, as has been noted by the TPO, and also there is no precise information about the contribution made by such small sale of software products to the total profits of the company. As no segmental information is available in respect ....
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....les to the tune of 2402.67 million as evident from its balance sheet ended on 31.03.2012. Being so, it is not comparable to assessee's case. We, therefore, direct the TPO to exclude Persystent Systems Limited from the list of comparables. LARSEN & TOUBRO INFOTECH LIMITED 7. The learned AR relied on the order of the ITAT Bangalore Benches in the case of CGI Information Systems and Management Consultants Private Limited in IT(TP)A No. 586/Bang/2015 - order dated 11.04.2018 and submitted that it was excluded from the list of comparables for the reason that Larsen & Toubro Infotech Limited was a software product company and segmental information on SWD services was not available. In the present case, Larsen & Toubro Infotech Limited engaged in development of software onsite and its overseas revenue for the financial year 2011-2012 was Rs. 27,838,752,995 and domestic revenue was Rs. 1,756,792,454. Further in the case of Huawei Technologies India Pvt. Ltd. in IT(TP)A No. 1939/Bang/2017 for assessment year 2012-2013 - order dated 31.10.2018 has taken the same view that it cannot be a comparable with that of the assessee. Being so, we direct the TPO to exclude the sam....
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....ith regard to this comparable has held as follows:- "11.0 Infosys Technologies Ltd. 11.1 This was a comparable selected by the TPO. Before the TPO, the assessee objected to the inclusion of the company in the set of comparables, on the grounds of turnover and brand attributable profit margin. The TPO, however, rejected these objections raised by the assessee on the grounds that turnover and brand aspects were not materially relevant in the software development segment. 11.2 Before us, the learned Authorised Representative contended that this company is not functionally comparable to the assessee in the case on hand. The learned Authorised Representative drew our attention to various parts of the Annual Report of this company to submit that this company commands substantial brand value, owns intellectual property rights and is a market leader in software development activities, whereas the assessee is merely a software service provider operating its business in India and does not possess either any brand value or own any intangible or intellectual property rights (IPRs). It was also submitted by the learned Authorised Representative that:- (i) the....
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....e to this year also. We are inclined to concur with the argument put forth by the assessee that Infosys Technologies Ltd. is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we hold that this company ought to be omitted from the set of comparable companies. It is ordered accordingly." The decision rendered as aforesaid pertains to A.Y. 2008-09. It was affirmed by the learned counsel for the Assessee that the facts and circumstances in the present year also remains identical to the facts and circumstances as it prevailed in AY 08-09 as far as this comparable company is concerned. Respectfully following the decision of the Tribunal referred to above, we hold that Infosys Ltd. be excluded from the list of comparable companies." 10.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of Cisco Systems Services BE, India Branch (supra), we direct the Assessing Officer/TPO to omit this company from the final set of comparables as it is functionally dif....