TMI Blog2019 (10) TMI 1371X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Continental Automotive Components (India) Pvt. Ltd. [ 2019 (4) TMI 1929 - ITAT BANGALORE] 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. TDS Liability - Disallowance of expenditure on computer software under section 40(a)(ia) - HELD THAT:- We find that an identical question has been considered by the Co-ordinate Bench of ITAT, in the case of Teekays Interiors Solutions [ 2019 (4) TMI 193 - ITAT BANGALORE] where the Tribunal, after considering relevant facts and also the decision in the case of CIT Vs. Samsung Electronics Co. Ltd [ 2011 (10) TMI 195 - KARNATAKA HIGH COURT] 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant 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' J 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: ₹ 1,427,373 b. Training expenses: ₹ 4,075,409 c. Depreciation on assets capitalized: ₹ 4,706,672; and, d. Prior period items ₹ 1,075,000 2.5. In modifying the lower limit for sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im 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 ₹ 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 ₹ 7,37,60,847 without setting off the brought forward business loss amounting to ₹ 80,99,371 and brought forward unabsorbed depreciation amounting to ₹ 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 ₹ 10,791,945 which is consequential in nature. Ground No. 5: Interest under section 244 A of the Act The learned AO has erred in adding interest under section 244A of ₹ 123,236 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g adjustment u/s. 92CA. 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 des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring 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 ₹ 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 In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... astened upon the assessee retrospectively. For the sake of convenience, we extract below the operating portion of the order passed by the coordinate 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 'impossibili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase 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 coordinate 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 section 40(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 Karna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 010-11. 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- 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. 1467/Bang/2014 and the Mumbai Tribunal in the case of Channel Guide India Ltd. vs. ACIT ([2012] 25 taxm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is correct to say that it is not possible 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. 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) of the Act. Therefore disallowance 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 Ltd. in ITA 115/HYD/2011 wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not done and subsequently 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 ITJ 498 Sonic Biochem Extractions Pvt. Ltd. 23 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 (YP) documentation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stead 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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