TaxTMI 
TaxTMI 
2026 (7) TMI 1710
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....,63,99,830/- was made in respect of international transaction of providing software development services to the Associated Enterprise [in short "AE"] viz., Value Lab SDN BHD Malaysia [in short "VSB, Malaysia"]. The said addition made by the Assessing Officer was based on the TP adjustment recommended by the Transfer Pricing Officer [in short "TPO"] was deleted by this Tribunal vide Order dated 27.04.2018 in ITA.No.305/Hyd./2015 and ITA.No.405/ Hyd./2015 for the assessment year 2010-2011. During the financial year 2009-2010 relevant to the assessment year under consideration, the assessee purchased software from its AE VSB, Malaysia for a consideration of Rs. 69,40,25,750/- which was also subjected to TP proceedings and the TPO held the Arm's Length Price [in short "ALP"] of the of the acquisition of the software at Rs. NIL and made the adjustment of the entire amount. However, the Disputes Resolution Panel [in short "DRP"] restricted the adjustment/addition to Rs. 19.22 crores which was further challenged before the Tribunal and this Tribunal vide Order dated 27.04.2018 deleted the addition made on account of TP adjustment for acquisition of Software/Intellectual Property [in short....
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....Appeals) erred both in law and on facts of the case in holding that the assessee cannot be treated as 'assessee in default u/s. 201(1)/(1A)'. 2. On the facts and in the circumstances of the case, and in law, whether the CIT(Appeals) is justified in holding that the payments made by the assessee to the foreign entity i.e Value Labs SDN BHD, Malaysia (VSB Malaysia) are not 'other income' when the findings of survey u/s. 133A established the work for DSP Software is conducted by the Indian entity ie the assessee alone and there is no logical justification for the payment on account of software to VSB Malaysia? 3. On the facts and in the circumstances of the case, and in law, whether the CIT(Appeals) is justified in holding that the assessee cannot be treated as 'assessee in default u/s. 201(1)/(1A)' on the ground that the remittances made by the assessee to foreign entity i.e Value Labs SDN BHD, Malaysia (VSB Malaysia) are in the nature of business income and also the sum paid for purchase of IP Rights as 'royalty' without appreciating the factual findings recorded in survey u/s. 133A of the Act in particular the statement of Sri Sudhi....
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.... the Hon'ble ITAT during the appellate proceedings." 4. The learned DR has submitted that the assessee has made the remittance to the foreign entity which is in the nature of royalty as it was for purchase of IP rights and therefore, as per the provisions of sec.195 the said payment made by the assessee is subjected to TDS however, the assessee has not deducted the TDS on the said payment and therefore, the assessee is to be treated as assessee-in-default u/sec.201(1)/201(1A) of the Act. The learned DR has further submitted that during the course of survey proceedings it was found from the financial statements of VSB, Malaysia for the financial years 2009-2010 and 2010-2011 that the said AE of the assessee introduced computers as fixed assets first time in the financial year 2010-2011 and prior to that the said entity was having only fixed assets consisting of furniture and fixtures and office equipment therefore, when the said AE of the assessee was not having any infrastructure to develop the software which is allegedly purchased by the assessee then, the payment made by the assessee is otherwise falling as other payments not for purchase of any goods or product. The learn....
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....eged acquisition of the DSP software with IP rights constitutes 'other income' in the hand of VSB Malaysia which is taxable as per the Income Tax Act and consequently, non-deduction of TDS by the assessee on the said payment attracts the provisions of sec.201(1)/201(1A) of the Act. 5. On the other hand, the learned Authorised Representative of the Assessee has submitted that the learned CIT(A) has relied upon the Order of this Tribunal in assessee's own case arising from the assessment order and TP adjustment made by the TPO/Assessing Officer wherein the Tribunal has held that this is a business transaction of transfer of product which is purchased by the assessee along with the IP rights. The learned Authorised Representative of the Assessee has further submitted that the payment made by the assessee towards the IP rights was subjected to TDS and therefore, the assessee already deducted the TDS on the said amount which is 10% of the total cost and also paid to the Government Account and therefore, to the extent of the payment of Rs. 7,22,44,500/- towards acquisition of IP rights there is no default on the part of the assessee for TDS. The learned Authorised Representative of th....
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.... and further as regards the International Transaction pertaining to purchase of DSP Software and its IPR from VSB Malaysia, the TPO observing that the total product i.e., DSP Software was developed by the assessee determined the price of the same as NIL and proposed an adjustment of Rs.69,40,25,750/-. The AO on receipt of the TPO order completed the assessment and passed Draft Assessment u/s 144C(1) dated 27.01.2014 arriving at total income of Rs.54,07,00,081/-. Aggrieved, the assessee filed its objections against the variation proposed in the Draft Order before the Hon'ble Dispute Resolution Panel. The Hon'ble DRP vide its order dated 28.11.2014 partly agreeing with the assessee's contention determined the ALP for the purchase of Software at Rs.50,17,81,250/- as against Rs.62,17,81,250/- determined by the TPO. The Hon'ble DRP further in its directions giving partial relief to the appellant and directed the TPO to re-compute the ALP to verify the depreciation claims of comparable companies and that of the assessee and to exclude cost of depreciation from the companies in the operating cost and arrive profit margin and accordingly rework the ALP acc....
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....the IP Rights i.e., payment of 10% of the total cost towards IP Rights, this is the business decision. The DRP accepted that Value Labs Malaysia has undertaken the activity, consequentially the Copy Rights in the product lies with Value Labs Malaysia. In view of that, we do not find any reason to support the contention of the DRP that payment of 10% of total cost towards IP Rights cannot be allowed in the hands of the assessee. In fact, neither the TPO nor the DRP can question the business decision of the assessee to state that the value was NIL. The Co-ordinate Bench in the case of IWM Constructions (P.) Ltd Vs. ACIT vide order dated 20th July, 2016, relying on the decision of the Hon'ble Delhi High Court in the case of CIT VS. EKL Appliances Ltd., (2009 Taxman 200) has held that TPO as well as AO are not correct in holding that the transaction between the assessee and it's AE are sham, particularly since the assessee (IWM Constructions (P.) Ltd) was responsible for designing Highway. Similarly, in the present case also since the product was developed by Value Labs Malaysia, it cannot be stated that it has no Copy Rights. Since the entire value for purchase of software, in....
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....ct. Now coming to the TDS provisions u/s 195 applicable to the purchase of the IP Rights to the tune of Rs.7,22,44,500/- being in the nature of royalty the appellant had has deducted tax at source at the rate of 10% as prescribed under Article 12(2) of the India Malaysia Tax Treaty (Notification No 257 dated 12.10.2004) treating the same as royalty and the appellant furnished the challan evidencing the payment along with the copy of e-TDS return filed. Hence to that extent too, the assessee cannot be held as assessee in default u/s 201/201(1A) of the IT Act. In totality for the total amount paid to the Value Labs Malaysia as discussed above and as per the findings of the Hon'ble ITAT, the transaction is outright purchase of software by the assessee and hence goes out of the ambit of TDS provisions u/s 195 and for the IP Right the required TDS has been deducted as per the treaty provisions, hence the assessee cannot be treated as assessee in default and charging of interest u/s 201(1)/201(1A) is not warranted. Accordingly the AO is directed to delete the same. In view of the above facts and the relief granted in the appeal proceedings ground No 7 to 13 are allo....
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....act that the Hon'ble ITAT in its earlier order dated 27.04.2018 (ITA No. 305 & 405/Hyd/15) already upheld the genuineness of the transaction and now the Ld. Revenue cannot question the same issue which stands concluded by Hon'ble ITAT. Technical Ground 5. The Ld. CIT(A) has rightly rejected other income characterization because the survey findings are not conclusive and are overruled by Hon'ble ITAT in the original assessment proceedings. Technical Ground 6. The Ld. Revenue ought to have considered that the AO's reliance on selective sworn statements ignores the complete statement and the validation of Deputy Commissioner of Customs, which was accepted by RBI and other authorities at the time of payment of consideration, which needs to be treated as a business receipt in the hands of AE. Ground Technical 7. The Ld. Revenue's contention is factually incorrect as it completely ignores the fact that VL Malaysia has procured infrastructure from MCS, Government of Malaysia as recorded by the DRP and has also availed services from the Indian entity for development of the software and the entire cost is borne by VL Malaysia as evident from it....