Income Tax Appellate Tribunal - Bangalore
Ingersoll - Rand International (India) ... vs Acit, Bangalore on 25 October, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
"A" BENCH: BANGALORE
BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND
SHRI G. MANJUNATHA, ACCOUNTANT MEMBER
IT(TP)A Nos. &
Assessment Appellant Respondent
Years
1557/Bang/2012 M/s. Ingersoll Rand (India) Assistant Commissioner
2008-09 Ltd., Plot No. 35, KIADB of Income Tax,
Industrial Area, Bidadi, Circle 11(4),
Bengaluru-562109. Bengaluru.
PAN : AABCI 3371 E
259/Bang/2014 -do- Deputy Commissioner
2009-10 of Income Tax,
Circle 11(4),
Bengaluru.
Assessee by : Shri. K. R. Vasudevan, Advocate
Revenue by : Shri. C. H. Sundar Rao, CIT(ITAT)(DR), Bengaluru
Date of hearing : 21.10.2019
Date of Pronouncement : 25.10.2019
ORDER
Per G. Manjunath, Accountant Member
These two appeals filed by the assessee are directed against the directions of DRP, Bengaluru, issued under section 144C(8) of the Income Tax Act, 1961, dated 16.08.2012, in turn which has arisen out of draft assessment order passed by the AO under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 dated 12.12.2011 and they pertains to Asst. Years 2008-09 and 2009-10. Since, the facts are identical and issues are common, for the sake of convenience, these appeals were heard together and are disposed off, by this consolidated order.
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 2 of 26
2. IT(TP)A No. 1557/Bang/2012 The assessee has raised the following grounds:
Transfer Pricing
1. That the order of the learned Assistant 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 risk nature of the design and engineering services provided by the Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO that the services rendered by the Appellant as high end Knowledge Process Outsourcing (`KPO') services;
2.3. Upholding the selection of companies with functional dissimilarity and having abnormal/fluctuating profit margins such as Mold Tek Technologies Ltd., Coral Hub Ltd and Eclerx Services Pvt Ltd.
2.4. Upholding the inclusion of the following non-operating/extra-ordinary costs from the cost base while computing the net profit margin of the Appellant:
a. Over-run of lease rentals and associated costs: Rs.1,427,373 b. Training expenses: Rs.4,075,409 IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 3 of 26 c. Depreciation on assets capitalized: Rs.4,706,672; and, d. Prior period items Rs.1,075,000 2.5. In modifying the lower limit for sales turnover filter from Rs. 1 crore to Rs.10 crore without providing any empirical analysis and therby rejecting Accuspeed Engineering Design Services Ltd. and Chakkilam Infotech Ltd which are functionally comparable to the design and engineering services provided by the Appellant; 2.6. In accepting companies like Mold Tek Technologies Ltd and Eclerx Services Limited without taking into consideration the peculiar economic circumstances surrounding their operations during the year under review;
2.7. Upholding the reliance of the learned TPO on the unaudited data requisitioned and consequently obtained by taking recourse to the provisions of Section 133(6) of the Act; and 2.8. In considering 25 percent as the threshold limit for the Related Party Transactions filter arbitrarily without any economic or business justification.
3. The learned AO and the learned Panel erred in not allowing the benefit of range of +1- 5% as provided in proviso to Section 92C(2) of the Act to the Appellant, while determining the arm's length price.
4. That the learned AO and the learned Panel erred in confirming the action of learned TPO of disregarding the use of multiple year data, instead of accepting the use of contemporaneous data due to non-
availability of current year data in the public domain at the time of preparing the documentation.
Corporate Tax Ground No 1: Disallowance of expenditure 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.
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 4 of 26 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 not giving consequential depreciation amounting to Rs 2,09,193 arising from the assessment order of AY 2007-08.
Ground No 3: Brought forward losses not set off against the assessed income.
a. Notwithstanding and without prejudice to foregoing grounds, the learned AO erred in computing the taxable income at Rs. 7,37,60,847 without setting off the brought forward business loss amounting to Rs.80,99,371 and brought forward unabsorbed depreciation amounting to Rs. 1,02,15,609. , b. The learned AO erred in not setting off the losses as mentioned above which are arising from the order of learned AO passed under section 154 of the Act for AY 2007-08.
Ground No 4: Interest under section 234B of the Act The learned AO has erred in levying interest under section 234B of Rs.10,791,945 which is consequential in nature.
Ground No 5: Interest under section 244 A of the Act Thelearned AO has erred in adding interest under section 244A of Rs.123,236 as recoverable from Appellant which was never granted to the Appellant. The appellant craves leave to add, alter and modify the above grounds during the course of the appeal.
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 5 of 26 Forthe above and any other grounds which may be raised at the time of hearing, it is prayed that necessary relief may be provided.
3. The Brief facts of the case are that the assessee company, M/s. Ingersoll Rand India Pvt. Ltd., is engaged in the business of providing design and engineering services to its Associated Enterprises (AE). For this purpose, it has established a unit registered with the Software Technology Parks of India, Ministry of Information Technology, and Government of India. The assessee has filed its return of income for the Assessment Year 2008-09 on 30.09.2008 declaring a loss of Rs.6,34,85,375/-. The case was selected for scrutiny and notices under section 143(2) and 142(1) of the Income Tax Act, 1961 were issued. In response to notice, the Authorized Representative (AR) of the assessee appeared from time to time and filed various details, as called for. During the course of assessment proceedings, the AO noticed that the assessee has entered into various international transactions with its AE and hence a reference was made under section 92CA of the Income Tax Act, 1961, to the Transfer Pricing Officer (TPO) to determine Arm's Length Price (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:-
Revenue Rs.27,56,00,775
Cost* Rs.27,42,57,535
PBIT Rs.13,43,240
PBIT as % of Cost 0.49%
IT(TP)A Nos. 1557/Bang/2012 and
259/Bang/2014
Page 6 of 26
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 (PLI) 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 assessee is rendering engineering design services to its AE. These services are in the nature of knowledge process outsourcing within ITES/BPO services. He further observed that knowledge process outsourcing involves transfer of knowledge intensive business process that requires significant domain expertise, to other geographic locations. For global corporations looking to move their higher and research like market research and equity research, analytical based services, engineering design, IPR, legal services, remote education and publishing India is currently location of change. Thus, as can be seen from the type of services rendered by the assessee, the assessee's engineering design services provided to its AE are in the nature of KPO services. Therefore, the TPO had considered only those companies that are engaged in KPO services. Accordingly, rejected TP study conducted by the assessee and made fresh TP analysis by applying certain filters and finally selected 6 comparable companies with an average margin of 49.88% and made TP adjustment of Rs.13,67,99,658/- under section 92CA of the Income Tax Act, 1961. The relevant findings of the TPO are as under:-
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 7 of 26 "10. Final Comparables The final comparables were selected based on the search of Prowess andCapitaline Plus databases and examination of the following a. The Annual Reports of the company. No company is considered as a comparable without its Annual Report either downloaded from the public domain or obtained from the company. The Annual Reports of all the final comparables are enclosed as a soft copy with this notice.
b. Wherever complete information of a company is available either in the database / Annual Report or in the replies received in response to 133(6) notices, final decision is taken regarding that company. But, in some of the companies, complete information is yet to be received. In such cases, the decision is taken based on the information available in the Annual Report / databases.
The following are the final comparables proposed by the TPO.
Sl Name of the Comparable Functional Lines
1No Acropetal Technologies (Seg.) The engineering design services segment
of the company is engaged in
engineering design
2 Coral Hubs Ltd (Formerly services.
The company is mainly engaged in data
VishalInformationTechnologies processing services
Ltd)
3 Crossdomain Solutions Ltd The company is mainly engaged in data
processing, insurance claims processing
and payroll processing services
IT(TP)A Nos. 1557/Bang/2012 and
259/Bang/2014
Page 8 of 26
4 Eclerx Services Ltd The company is mainly engaged in data
analytics and data process services.
Pricing analytics, bundling optimization,
content operations, sales and marketing
support, product data management,
revenue management and data analytics
are some of the offerings to Retail and
Manufacturing clients. To its Financial
Services clients, it offers real-time capital markets, middle and back office support, portfolio risk management services and various critical data management services.
5 Mold-Tek Technologies Ltd The company is mainly engaged in Engineering design services 6 Triton Corp Ltd The company is mainly engaged in knowledge process outsourcing and legal process outsourcing services FINAL SET OF COMPARABLES -- AY 2008-09 Sl Name of the Comparable Sales Total Cost Op. Profit OP / TC No 1 Acropetal Technologies (Seg.) 208000505 153737300 54263205 35.30% 2 Coral Hubs Ltd (Formerly Vishal 380784348 252713811 12807053 50.68% Information Technologies Ltd) 7 3 Crossdomain Solutions Ltd 265981723 209497067 56484656 26.96% 4 Eclerx Services Ltd 122199000 736670000 48532000 65.88% 5 Mold-Tek Technologies Ltd 178458000 90743000 87715000 96.66% 6 Triton Corp Ltd 146034280 1179500427 28084237 23.81% Average 6 9 49.88% * The above search process is not intimated to the taxpayer through a show cause notice because, it has filed the reply only on 28.10.2011 and it has not utilized opportunity of IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 9 of 26 personal hearing which was communicated through show cause notice dated 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)© 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.
11.1Methodoloov: TNMM.
11.2Profit Level Indicator: Operative Profit/Operative Cost as explained above.
11.3 Comparables: 6 companies as discussed above 11.4Data 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:
Arm's length mean margin 49.880/0
Operating Cost Rs. 27,42,57,535/-
Arms Length Mean Margin 49.88% of the
Operating Cost
Arms Length Price (ALP) - 149.88% of Rs. 41,10,57,193/-
Price charged Rs. 27,56,00,775/-
Shortfall being adjustment Rs. 13,67,99,658/-
The above shortfall of Rs. 13,67,99,658/- is treated as transfer pricing adjustment u/s 92CA."
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 10 of 26
7. Consequent to TP adjustment as suggested by the TPO vide its order dated 31.10.2011, under section 92CA of the Income Tax Act, 1962, the AO has passed draft assessment order under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 and made TP adjustment as suggested by the TPO in respect of international transactions of the assessee with its AE.
8. Aggrieved by the draft assessment order, the assessee has filed its objections before the Dispute Resolution Panel (DRP), Bengaluru. Before the DRP, the assessee has challenged the findings of the AO in characterization of international services rendered to its AE on the ground that TPO has considered services rendered by the assessee to its AE as ITES without appreciating the fact that the services rendered by the assessee to its AE are mainly in the nature of engineering design services. The assessee has also challenged the findings of the TPO in so far as selection of comparables. During the proceedings before the DRP, the issue was remanded to the file of the TPO. The TPO, vide its remand report dated 17.04.2012, observed that the tax payer is rendering services in the category of engineering design services to its AE. However, reiterated its observations with regard to recharacterization of services as the ITES/BPO services which are in the nature of knowledge process outsourcing services. The DRP, after considering the relevant submissions of the assessee and also taking into account remand report of the TPO, observed that the reasoning given by the TPO is correct in arriving at the conclusion that the services rendered by the assessee to its AE are in the nature of KPO services and accordingly, rejected objections filed by the assessee. The AO, consequent to the directions of the DRP, passed final assessment order under section 143(3) r.w.s. 144C of the Income Tax Act, 1961, on 28.09.2012 and determined total income at Rs.7,37,60,847/-. Aggrieved by the DRP's order, the assessee is in appeal before us.
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 11 of 26
9. The learned AR for the assessee submitted that the learned DRP has erred in upholding the findings of the TPO in recharacterization of services rendered by the assessee to its AE, ignoring the fact that the services rendered by the assessee are in the nature of design and engineering services which cannot be considered as ITES/BPO services which are in the nature of knowledge process outsourcing services. The AR for the assessee referring to paper book filed, 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 rejected the TP study conducted by the assessee and adopted fresh study to determine ALP of international transactions. The DR further submitted that although no adjustment has been made in respect of international transactions for Assessment Year 2007-08, but reasons for no adjustment is that the assessee has characterized services rendered to AE as ITES services and also conducted the TP study by selecting comparables similar to ITES/BPO services. Therefore, it is incorrect on the part of the IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 12 of 26 learned AR for the assessee to argue that in earlier years, the TPO has accepted the services rendered by the assessee as engineering design services. The DR further submitted that the assessee in its own TP study has stated that it is into the business rendering services in the area of ITES/BPO which is evident from the fact that it has derived revenue from ITES services, but aggregated all transactions into one service i.e., engineering design services. The DR further submitted that although the assessee has relied upon the decision of Continental Automotive Components (India) Pvt. Ltd., Vs. DCIT in IT(TP)A No.457/Bang/2016, the facts remains that the assessee has failed to give details of services rendered in each segment and hence a suitable direction may be given to the assessee to bifurcate its revenue from its AE into ITES and engineering design services, if at all the issue is set aside to the file of TPO for fresh consideration.
11. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. The main dispute between the assessee and the department is with regard to characterization of services rendered to its AE. The assessee claims that services rendered to its AE are in the nature of engineering design services. The TPO has accepted the fact that the assessee is into mainly engineering design services; however, he has characterized the services rendered by the assessee to AE as ITES/BPO services. We find that although the assessee is mainly into the activity of providing engineering design services but, it is also into the activity of providing ITES services to its AE which is evident from the fact that the assessee has itself in its TP study has accepted the fact that the proportion of ITES and the integration services rendered to its AE when compared with the engineering as well as outsourcing 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 IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 13 of 26 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 Bench, we restore the issue to the file of the TPO for denovo consideration and to decide the issue of characterization of services rendered by the assessee to its AE. We, further, noted that as observed by the learned DR although the assessee is deriving revenue from two segments, but failed to provided separate segmental details in its TP study and therefore the assessee is directed to segregate its services into engineering design services and ITES services for the purpose of determination of ALP of international transactions with its AE.
12. The next issue that came up for our consideration from ground No.5 of assessee's 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. The AO has disallowed a sum of Rs.2,42,386/- on the ground that the assessee has failed to deduct tax at source even though the payment made for purchase of computer software is liable for TDS. Therefore, following the decision of the Hon'ble Karnataka High Court in the case of Samsung Electronics India Pvt. Ltd., Vs. CIT (2011) 203 Taxmann.com 47, disallowed an amount of Rs.2,42,386/- and added back to the total income of the assessee.
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 14 of 26
13. The learned AR for the assessee, at the time of hearing submitted that this issue is squarely covered in favour of the assessee by the decision of the ITAT, Bengaluru 'C' Bench in the case of M/s. Teekays Interiors Solutions Vs. DCIT in ITA No.400/Bang/2017, where the Tribunal, after considering the submissions of the assessee and also the decision of the Hon'ble Karnataka High Court, in the case of Samsung Electronics Co. Ltd., (supra) held that assessee cannot be fastened with the liability to deduct tax at source retrospectively, when the law at that point of time was very clear that there is no requirement for deduction of tax at source, that too on the basis of subsequent judgment of a court.
14. The learned DR, on the other hand fairly accepted that the issue is covered in favour of the assessee by the decision of the ITAT. However, he strongly supported order of the lower authorities.
15. We have heard both the parties, perused the material available on record and gone through orders of the authorities below. The question that came up for our consideration is whether payment made for purchase of software is liable for TDS 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:-
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 15 of 26
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 portion of the order passed by the co-
ordinate bench:-
"4. Ground Nos.2 to 5 are regarding disallowance under Section 40(a)(ia) of the Income Tax Act, 1961 (in short 'the Act') of payment towards software licenses treated by the Assessing Officer as royalty for want of TDS. The assessee has also raised additional grounds which are as under :
Corporate tax matters
21. " Without prejudice to the grounds 2 to 4, the Learned CIT(A) has failed to appreciate that during the Financial Year 2008-09 relevant to the Assessment Year 2009-10, the Appellant was not liable to withhold tax on the payments made as there was no provision under the Act mandating the deduction of tax at source on the payments made on purchase of computer software and there were many favorable judicial precedence including the jurisdictional tribunal rulings.
22. Without prejudice to the grounds 2 to 4, the learned CIT(A) erred in not appreciating the fact that explanation 5 to Section 9(1)(vi) was inserted vide Finance Act, 2012 with effect from 1 June 1976 and was hit by the doctrine of 'impossibility of performance'."
The additional grounds raised by the assessee are not new issues but an additional plea/argument raised by the assessee regarding the disallowance made by the Assessing Officer under Section 40(a)(ia) of the Act. Therefore in view of the fact that the substantial issue has been raised in the main ground, the additional grounds raised by the assessee on the same issue are admitted for consideration and adjudication along with the Ground Nos.2 to 5.
5. The learned Authorised Representative of the assessee has submitted that prior to the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. 320 ITR 209, the assessee was under the bona fide belief that the payment on account of software licenses does not fall under the definition of royalty and therefore the assessee was under no obligation to deduct tax at source on the said payment for software license. He has further submitted that there were number of judicial precedents on this IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 16 of 26 issue wherein this Tribunal has held that the payment made for purchase of software does not fall under the definition of royalty provided under Section 9(1)(vi) of the Act. Thus he has submitted that a subsequent amendment or a decision cannot be 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 the decision of Hon'ble jurisdictional High Court in the case of CIT Vs. Samsung Electronics Co. Ltd. (supra) was passed on 15.10.2011 much later than the time of transaction carried out by the assessee. It is also not in dispute that this issue of considering the payment for purchase of software as royalty is a highly debatable issue and various High Courts have taken divergent views on this issue. The co- ordinate Bench of this Tribunal in the case of ACIT Vs. Aurigene Discovery Technologies (P) Ltd. (supra) has considered an identical issue in paras 3 to 5 as under :
" 03. We heard the rival submissions and gone through the relevant orders. The assessee resubmitted the plea taken before the lower authorities and placed on the ruling of the Hon'ble Bangalore ITAT in Sonata Information Technology Ltd v. ACIT (103 ITD 324) which had held that payments for software licenses do not constitute royalty under the provisions of the Act and hence disallowance under section40(a) (ia) of the Act would not be applicable. The change in the legal position on taxation of computer software was on account of the ruling of the Karnataka High Court in CIT v. Samsung Electronics Co. Ltd. (320 ITR 209), which was pronounced on 15.10.11 that is much later than the closure of the FY 2010-11. Subsequently, the Finance Act 2012 also introduced, retrospectively, Explanation 4 to section 9(1 (vi) of the Act to clarify that payments for, inter alia. License t o us e comp ut er sof twa r e woul d qualif y as ro yalt y. D uri ng the FY 10-11, the assessee did not have the benefit of clarification brought IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 17 of 26 by the respective amendment. As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section1941/195 of the Act. It is submitted that liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment thedefinition of royalty with retrospective effect from 01.04.1976) or asubsequent ruling of a court (the Karnataka HC in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15,2011). Courts have consistently upheld this principle as seen in:
ITOv. Clear Water Technology Services (P.) Ltd. (52 taxmann.corn115) 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) DCIv. Virola International (20 14(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) (ia)
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. 2010-11. The appellant has relied on the judgment of Cochin Tribunal in the case of Kerala Vision Ltd and Agra Tribunal in the case of Virola International, wherein it was held that -
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 18 of 26 "The law amended was undoubtedly retrospective in nature but so far as tax withholding liability is concerned, it depends on the law as it existed at the point of time when payments, from which taxes ought to have been withheld, were made. The tax-deductor cannot be expected to have clairvoyance of knowing how the law will change in future."
Further, software payment was included in definition of royalty only vide Explanation to section 9(1)(vi)inserted retrospectively vide Finance Act, 2012 and when the purchase was made, the appellant did not have the benefit of clarification brought by the retrospective amendment. It is impossible to fasten liability for deducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. This view has been upheld by the Bangalore Tribunal in the case of DCIT vs M/s WS Atkins India Pvt Ltd (ITA No 14671Bang12014 and the Mumbai Tribunal in the case of Channel Guide India Ltd. vs ACIT ([2012] 25 taxmann.com 25).
5.2 T he IT AT 'C ' Be nch in th e case M/s WS At kins India Pv t. L td and in the c ase of Infot ec h Ent erpris es Ltd of the Hyderabad Ben ch o f the Tribunal wher ein it has been hel d that section 40(a)(i a) woul d not appl y to disallow payments when TD S was not done an d subs equ ent ly b ecome ta xable on account o f a retrospecti ve l egislation. It has also ref erre d to in the case of So ni c Biochem Extracti ons Pvt. Ltd. (supra), identical issue was considered and de cided by t he Mumbai T ribunal. Following were th e r elevant ob servati ons:-
" T h e a s s e s s e e p u r ch a s e d s o f t w a r e , c a p i t a l i z e d t h e pa y m e n t t o t h e c o mp u t e r s a c c o u n t a s t h e s o f t w a r e c a me a l o n g w i t h t h e h a r d w a r e o f c o mp u t e r s a n d c l a i m e d d e p r e c i a t i o n . On t h e g r o u n d t h a t p u r c h a s e of software is essentially purchase of copyright which attracts tax deduction at source under section 1943, the Assessing Officer i n v o l v e d t h e p r o v i s i o n s o f s e c t i o n 4 0 (a ) (i a ) a n d d i s a l l o w e d t h e depreciation claimed. The Commissioner (Appeals), confirmed the action of the Assessing Officer on the ground that the purchase of software amounted to acquisition of intangible asset and therefore, the payment was royalty and disallowable.
On appeal:
Held, (i) that mere purchase of software, a copyrighted article, for utilisation of computers cannot be considered as purchase of copyright IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 19 of 26 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 R e l y i n g o n t h e a b o v e d e c i s i o n , t h e I T A T ' C' Bench, Bangalor e upheld th e ord er of the CIT(A) who had obse rv ed that the assess ee did not hav e th e benefit of th e clarificatio n brough t brought about by the r etros pecti ve amend ment that the pay ments t antamount to paym ent for ro ya lty and c onse quentl y tax was to be d ed ucted u/ s 194J. T he law as ex tant on the dat e when the pa yment for obtaining the s oft ware was made, has not c ategorically laid down t hat ta x is requir ed to be de ducte d. It is impo ssible to fast en li ability for dedu cting ta x at so urce r etrosp ectiv ely.
5.4 In view of the above decisions, it is correct to say that it is not possible to f asten liability for deducting tax at source retrospectively as tax is to be deducted at source at the time when the payment is credited or made. When purchase of software was made the assessee did not have the benefit of the clarification brought about by the retrospective amendment. The contention of the appellant is correct that the software payment disallowed by the AO did not warrant withholding of the tax u/s 40(a)(ia) and 40(a)(ia) (by an order of corrigendum dt 20.11.2015) o f the Ac t. T herefore disall owance made by the AO on account of software payment want of withholding of tax is hereby deleted."
05. The CIT(A) followed the decision of this Tribunal in Mis WS Atkins India Pvt. Ltd, supra, which referred the decisions of Hyderabad Bench of the Tribunal in Infotech Enterprises L td in IT A 115/HY D/2011 wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not done and subseque ntly become taxable on account of a retrospective legislation. It has also referred to the decisions of the Delhi & Mumbai Tribunal in SMS Demag Pvt Ltd , 132 IT J 498 & Sonic Biochem Extractions Pvt. Ltd. 23 ITR (Trib) 447, respectively. We uphold the decisi on of the CIT(A) and dismiss the grounds raised by the Revenue."
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 20 of 26 T hus it is clear t hat the co-ordinate Bench of this T ribunal while deciding this issue has taken note of various decisions in favour of the assessee on the point that the payment for purchase of software does not fall in the definition of royalty. Respectfully following the decision of co-ordinate Bench of this Tribunal, we delete the disal lowance made by the Assessing Officer.
12. Consistent with the view taken on the above case, we also hold that the assessee cannot be fastened with the liability to deduct tax at source retrospectively and accordingly, we set aside the order passed by the learned CIT (A) on this issue and direct the A.O. to delete the impugned addition ."
16. In this view of the matter and consistent with view taken by the Co- ordinate Bench, we are of the considered view that the AO was incorrect in disallowing expenditure on computer software under section 40(a)(ia) of the Income Tax Act, 1961, for failure to deduct tax at source. Accordingly, we direct the AO to delete the additions 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.
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 21 of 26
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 hence the AO is directed to re-compute interest under section 234B and 244A of the of the Income Tax Act, 1961 on total income computed as per the provisions of the Act.
20. In the result, appeal filed by the assessee in IT(TP)A No.1557/Bang/2012 is partly allowed for statistical purposes.
IT(TP)A No.259/Bang/2014
21. The assessee has raised the following grounds:
Transfer Pricing
1. The learned Deputy Commissioner of Income-tax, Circle 11(4), Bangalore ('Assessing Officer' or 'AO') and the learned Dispute Resolution Panel (Panel') 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 its Associated Enterprises (`A.Es') by Rs.148,401,076 holding that the international transactions in connection with design and engineering services segment do not satisfy the arm's length principle envisaged under the Income Tax Act, 1961 (the 'Act') and thereby grossly earned in;
1.1. 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 IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 22 of 26 of the proceedings and confirming the fresh comparability analysis as adopted by the learned TPO;
12. Ignoring the limited risk nature of the design and engineering services provided by the Appellant as detailed in the TP documentation and in upholding the conclusion of the learned TPO that the services rendered by the Appellant is a Knowledge Process Outsourcing (`ICP0') services;
13. In rejecting companies that are comparable to the Appellant while performing the comparability analysis. Specifically, the following companies should have been included as comparables:-
Chakkilam Infotech Limited;
C S S Technergy Ltd; and Tata Elxsi Limited.
i..4. In including companies that do not satisfy the test of comparability specifically, the following companies selected as comparable by the learned TPO should have been rejected --
Genesys International Corp Limited;
Coral Hub Ltd; and Eclerx Services 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 compafable 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 11 , 11 , 11 , 1V7I i~iirii~ii inn ^ ~ roan 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;
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 23 of 26 Caliber Point Solutions Limited;
R Systems International Limited;
Allsec Technologies Limited;
Aditya Birla Minac Worldwide Limited;
Microland Limited; and
Informed Technologies India Limited.
5 The learned AO and the learned Panel erred in confirming the action of learned TPO of disregarding the use of multiple year data, instead of accepting the use of contemporaneous data due to non-availability of current year data in the public domain at the time of preparing the documentation.
6 The learned AO/ leaned TPO/ learned Panel erred in ignoring the limited risk nature of the contractual services provided by the Appellant and in not providing an appropriate adjustment towards the risk differential, even when the full-fledged entrepreneurial companies are selected as comparable companies.
7 The learned AO and the learned Panel ought to have treated foreign exchange gain as operating in nature and included the same as part of operating revenue while computing the operating margin on cost of the Appellant.
Corporate Tax 8 The learned AO and learned Panel have erred in disallowing an amount of Rs.1,216,675 paid towards purchase of computer software under section 40(a)(ia) of the Act without appreciating that;
Payment made for purchase of software was not taxable under the provisions of the Act on the date of transaction and such payment has become taxable pursuant to the retrospective amendment made in the definition of royalty by Finance Act 2013;
The Appellant cannot be held to be liable to deduct tax relying on subsequent amendments made in the Act with retrospective effect (i.e. impossibility of performance); and IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 24 of 26 Payment towards service tax amounting to Rs. 91,183 (under reverse charge mechanism) on software licenses purchased from non-resident vendors is not subject to tax withholding under the provisions of the Act 9 Without prejudice to the above, payment made to following parties towards software licenses are below threshold limit prescribed under section 194J of the Act and therefore cannot be subject to tax withholding:
Particulars Amount
(Rs.)
Reylon Softech Limited 8,000
B T Mohan 3,096
Vishwanatha B 7,069
10. The learned AO has erred in grating TDS credit of Rs. 3,796,741 as against Rs.4,346,365 claimed in the return of income.
11. The learned AO has erred in levying interest of Rs. 9,439,268 and Rs. 727,504 under section 234B and 234D respectively which is consequential in nature.
22. The first issue that came up for consideration from this 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.
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 25 of 26
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 up for our consideration from ground No.8 of assessee's appeal is short credit for TDS for the year under consideration. We find that the AO has allowed TDS of Rs.37,96,741/- as against Rs.43,46,365/- claimed in the return of income. Therefore, the issue has been set aside to the file of the AO and direct the AO to verify the same and in case short credit has indeed been given, full credit for the TDS should be given to the assessee, after due verification of records.
25. The next issue that came up for consideration is levy of interest under section 234B and 234D of the Income Tax Act, 1961. Levy of interest under section 234B and 234D of the Income Tax Act, 1961 is mandatory and consequential in nature and depends upon the total income computed for the year under consideration. Therefore, we direct the AO to re-compute interest chargeable under section 234B and 234D of the Income Tax Act, 1961 on total income computed for the year under consideration in accordance with law.
26. In the result, appeal filed by the assessee is partly allowed for statistical purpose.
IT(TP)A Nos. 1557/Bang/2012 and 259/Bang/2014 Page 26 of 26
27. As a result, both the appeals filed by the assessee are partly allowed for statistical purpose.
Pronounced in the open court on this 25th day of October, 2019.
Sd/- Sd/-
(N. V. VASUDEVAN) (G. MANJUNATHA)
Vice President Accountant Member
Bangalore.
Dated: 25th October, 2019.
/NS/*
Copy to:
1. Appellants
2. Respondent
3. CIT
4. DR, ITAT, Bangalore.
5. Guard file
By Order
Assistant Registrar
ITAT, Bangalore