TMI Blog2015 (6) TMI 602X X X X Extracts X X X X X X X X Extracts X X X X ..... matter as it is inextricably linked with the ultimate determination of TP adjustment made by TPO and since the primary/basic facts relating to such issue are already available on record, in our view, the additional grounds raised by assessee required to be admitted in consonance with the principle decided in case of NTPC Ltd. v. CIT [1996 (12) TMI 7 - SUPREME Court] . However, since this issue was not raised by assessee before ld. DRP and was raised for the first time before us, in the interest of fair play and justice, we remit the issue back to the file of TPO to decide afresh after examining the agreements between assessee and M/s Pratt & Whitney as well as assessee and its subsidiaries and other evidences brought on record by assessee. - Decided in favour of assessee for statistical purposes. Selection of two comparables, i.e., M/s Infosys Technologies Ltd. and Wipro Ltd. - Held that:- It is accepted fact that these two companies are leading software companies and have carved out a separate place for themselves. They are in their own league and cannot be compared to any other software development company. The Hon'ble Delhi High Court in case of Agnity India Ltd. (2013 (7) TM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d picnic expenditure - Held that:- Undisputedly, though, assessee has claimed these expenditure, but, he has failed to furnish any documentary evidence towards claim of such expenditure. Therefore, assessee's claim of expenditure cannot be allowed in full. However, considering the fact that assessee maintains guest house and some expenditure must have been incurred towards maintenance of the same. It will be reasonable to allow 50% of the expenditure claimed. Accordingly, we direct AO to sustain the addition to the extent of 50% of the expenditure claimed by assessee. - Decided partly in favour of assessee. Disallowance of deduction towards stores and spares written off - Held that:- There is no dispute with regard to the fact that the expenditure claimed by assessee relates to replacement of certain spares to the computer which was claimed as revenue expenditure. As evident from record, similar expenditure claimed by assessee in AY 2008-09 was allowed by ld. DRP following its own order passed in AY 2006-07 and 2007-08. However, in the impugned AY, AO has again treated the expenditure as capital in nature. Considering the aforesaid factual aspect, we remit the matter back to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Indian company incorporated as private limited company in August, 1991 was subsequently converted to a public ltd. company in the year 1997. Assessee has various subsidiaries located in USA and Europe to provide software development services to its clients. Assessee basically is a global technology services and solutions company specialized in geospatial, engineering design and IT solutions. Assessee operates under two vertical business segments i.e. UTG (utilities, transportation, government) and EMI (Engineering, manufacturing and industrial products). Assessee's range of services include digitization of drawings and maps, photogrammetry, computer aided design/engineering reverse engineering (CAD/CAE), design and modeling, repair development engineering, software products development consulting and implementation. For the AY under consideration, assessee filed its return of income on 24/09/2008 declaring total income of ₹ 24,44,28,898 after claiming deduction u/s 10A of the Act. In course of assessment proceeding, AO while examining the financials of the company noticed that assessee has earned revenue from international transactions entered with its AEs as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. He observed that on the one hand assessee claimed to have rendered software development services to the same subsidiaries and on the other hand it claims of receiving consultancy services from them. TPO observed that assessee could not substantiate whether there was any need for consultancy services and if required whether such services were actually rendered and if rendered whether there are any benefits to assessee in terms of higher profits. Further, he observed that if at all there was any benefit from availing such services, whether the payment made is commensurate with benefits derived. Expressing his view as above, TPO proceeded to determine ALP of the payment made towards consultancy services at Rs. Nil. However, since adjustment on account of the said transaction has already got merged in the adjustment proposed by him u/s 92CA, no separate adjustment was made by him. In terms with the order passed by TPO, AO passed draft assessment order incorporating the addition proposed by TPO towards TP adjustment. That besides, AO also made various other additions, adjustments on non TP issues. Being aggrieved of the draft assessment order, assessee filed objections before ld. Dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment work obtained from M/s Pratt Whitney was parceled out to its subsidiary in USA and the payments made were towards services rendered by subsidiary towards software development services. Thus, in reality, there was no consultancy charged paid by assessee to the subsidiaries. Thus, it was submitted, determination of ALP of the payment made towards software development services at Nil by treating the same as consultancy charges is not only illegal but unreasonable. Ld. AR submitted, in the preceding AYs 2006-07 and 2007-08 also payments were made by assessee to foreign subsidiaries towards similar software development services rendered by them. However, TPO though verified the international transaction did not make any adjustment as far as such payments are concerned, whereas, AO in the draft assessment order disallowed the payments made by applying provisions of sec. 40(a)(i) of the Act. When the disallowance made ultimately came up for consideration before the ITAT in those AYs, ITAT vide its order passed in ITA Nos. 115 2184/Hyd/2011 dated 16/01/2014 Infotech Enterprises Ltd. v. Addl. CIT [2014] 63 SOT 23, after examining the nature of payment, as well as analyzing the ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised the issue, but, on careful perusal of the said written submission we do not find any reference to the issue. Thus, it can be held that assessee has not specifically raised the issue of disallowance of consultancy charges at Nil before ld. DRP. Having held so, it is to be decided whether assessee can raise such issue by way of additional ground. As can be seen, TPO has determined the ALP of consultancy charges at Nil by applying the benefit test. However, it is the specific claim of assessee before us that the amount of ₹ 14,98,07,749 paid to foreign subsidiaries were not consultancy charges, but, towards rendering software development services for a portion of work sub-contracted to them. On perusal of the 'master service agreement between assessee and M/s Pratt Whitney, a copy of which is at page 354 of paper book and the agreement between assessee and its foreign subsidiaries in USA, a copy of which is at page 372, the contention of assessee to certain extent appears to be correct. Further, sample invoices enclosed in the paper book also bear testimony to this fact. It is further evident from record that in the preceding AYs i.e. AY 2006-07 and 2007-08 though t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AI will allocate qualified personnel through Software Services requirements statements and regular project meetings, which may be modified from time to time by IEL. IEAI shall inform IEL at the time of the request, or as soon thereafter as that the information becomes available, should it be unable to deliver the qualified personnel specified in the Work Order. Parties shall within 30 days negotiate in good faith a revised Work Order mutually agreeable to both parties, however if no such agreement can be reached either party may terminate that work order according to provisions of section 1. Obligations of IEL and IEAI under this agreement are detailed in the Annexure. 38. Further, we find that the TPO has found that the operation transaction were effected at arms length price. We also observe that the foreign subsidiaries do not work exclusively for the assessee and they obtain orders on their own from other foreign parties and also sub contract the work to the assessee depending on exigencies. 39. We also find that no operations have been undertaken by foreign subsidiaries in India and no engineers have been deputed by them to India and even they do not have permanent esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent in Finance Act 2007 which read- for the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under clause (v), (vi) and (vii) of sub-section (1), such income shall be included in the total income of the non-resident, whether or not the non resident has a residence or place of business or business connection in India -to overcome the effect of the Ishikawajima-Harima decision (supra) but in the decisions of Clifford Chance v. DCIT as well as Jindal Thermal Power Company v. DCIT it was held that the Finance Act 2007 amendment did not change Ishikawajima's (supra) application. In response, the Government subsequently introduced a modified Explanation to S.9(1) via Finance Act 2010 and it stands till date reading as under: Explanation. - For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not, - (i) the non-resident has a residence or place of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so that the payer of the service could derive an enduring benefit and utilize the knowledge or know-how on his own in future without the aid of the service provider. In other words, to fit into the terminology making available , the technical knowledge, skills, etc., must remain with the person receiving the services even after the particular contract comes to an end. It is not enough that the services offered are the product of intense technological effort and a lot of technical knowledge and experience of the service provider have gone into it. The technical knowledge or skills of the provider should be imparted to and absorbed by the receiver so that the receiver can deploy similar technology or techniques in the future without depending upon the provider. Technology will be considered made available when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service that may require technical knowledge, skills, etc., does not mean that technology is made available to the person purchasing the service, within the meaning of paragraph (4)(b). Similarly, the use of a product which embodies technology shall not per se be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opportunity of being heard. Thus, the additional grounds raised along with sub-ground No. (i) of Ground No. 2 are considered to be allowed for statistical purposes. 10. As far as sub-ground no. (ii) of Ground No. 2 is concerned, assessee has objected to selection of Infosys Technologies Ltd and Wipro Ltd. Ld. AR submitted before us, these two companies cannot be treated as comparables to assessee as the turnover of these companies are huge and these companies are in a different league. Ld. AR submitted, while the turnover of Infosys Technologies Ltd. during the year was ₹ 15,677 crores that of Wipro Ltd. was ₹ 11,258, whereas, assessee's turnover is only ₹ 435 crores. Thus, the turnover of these two companies being in excess of 10 times of assessee's turnover, these two companies cannot be treated as comparable to assessee. For such proposition, ld. AR relied upon the decision of Hon'ble Delhi High Court in case of CIT v. Agnity India Technologies (P.) Ltd, and a number of decisions of ITAT as referred to in the revised written submissions. 11. Ld. DR, on the other hand, submitted before us, two companies objected to by assessee cannot be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid, we direct TPO to exclude these two companies from the list of comparables. In view of the above TPO is directed to compute, ALP afresh interms with the observations made by us hereinabove. 13. In Ground No. 3, assessee has challenged the disallowance of an amount of ₹ 2,29,78,128 u/s 40(a)(i) of the Act. 14. Briefly the facts are, during the assessment proceeding, AO noticed that assessee has debited an amount of ₹ 5,02,70,792 towards purchase of computer software. On verification of the details submitted by assessee in response to query raised by AO, it was found that out of such sum debited to P L A/c, an amount of ₹ 2,29,78,128 represents payments made to non-resident companies towards software licenses. AO being of the view that aforesaid payment made by assessee being in the nature of royalty as explained in section 9(1)(vi), assessee was required to deduct tax u/s 195 of the Act. As assessee has not withheld tax on such payments, AO proposed to disallow the amount claimed as expenditure by applying section 40(a)(i) of the Act. Though, assessee objecting to the proposed disallowance advanced elaborate arguments explaining that the payments cannot b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o not controverted the fact that M/s G.E. Network Solutions, Netherlands neither has permanent establishment in India nor has any business activity in India giving rise to income taxable under the Indian Income-tax Act. It is further evident from the record that ld. DRP while confirming the disallowance has relied upon its finding in AY 2006-07 and 2007-08. It will be pertinent to mention here, when similar issue relating to disallowance of amounts paid to M/s G.E. Network Solutions, Netherlands towards purchase of 'small world software' came up for consideration before the ITAT in assessee's own case for AYs 2006-07 and 2007-08, the Tribunal after considering the nature of payment and going through the Indo-Netherlands DTAA in the context of provisions contained u/s 195 read with section 9(1)(vi) of the Act, held that the payments made by assessee to M/s G.E. Network Solutions, Netherlands is not in the nature of royalty. Further, the Tribunal held that when the payment made to non residents is not assessable to tax under the Indian Income-tax Act, there cannot be any withholding of tax u/s 195 and consequentially no disallowance can be made u/s 40(a)(i). The findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l licence is given directly to the end customer by the vendor company. Copies of the invoice raised by Net Work Solutions on the assessee and at paper book 176 to 178 support the view of the assessee where the invoice mentioning name of the end customer supports our view. Hence, in our opinion, when there is no transfer of even the license to the assessee even though it is the purchaser, it cannot be said that there is any royalty payment by the assessee to the vendor company. The amount of ₹ 52,55,81/- is simply the cost of imported trading goods and not royalty payment. 27. It is therefore clear that the payments made by assessee to the Netherlands company will not fall under the ambit of Royalty as per Article 12 of the India-Netherlands DTAA. Hence there is no question of tax withholding required by the assessee and hence S.40(a)(i) disallowance is erroneous. Accordingly, ground No.5 is allowed. It is worth mentioning, department challenged the aforesaid decision of the coordinate bench by filing an appeal before the jurisdictional high court. The Hon'ble High Court, however, dismissed the appeal of the department on this issue by upholding the view expressed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 50% of the expenditure claimed by assessee. This ground is partly allowed. 23. In Ground No. 6, assessee has challenged the disallowance of picnic expenditure of ₹ 11,27,340. This issue is similar to ground No. 5. Following the decision therein, we direct AO to sustain the addition to the extent of 50% of the expenditure claimed by assessee. ITA No. 395/Hyd/2014 for AY 2009-10 24. Ground No. 1 7 being general, do not require any specific adjudication, hence, they are dismissed. 25. In Ground No. 2, assessee has challenged the disallowance of an amount of ₹ 49,81,113 u/s 40(a)(i) of the Act. 26. We have heard the parties and perused the materials on record. This issue is identical to the issue raised by assessee in Ground No. 3 of ITA No. 1780/Hyd/14, following our decision therein as expressed in para No. 17 Of the order we delete the addition made by AO. 27. In Ground No. 3, assessee has challenged the disallowance of consultancy fees of ₹ 17,11,39,243 paid to its foreign subsidiaries by invoking the provisions of section 40(a)(i). 28. Briefly the facts are, during the assessment proceeding, while examining the financial statement of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance made in these assessment years deleted the additions while holding that payments made were towards software development charges and not consultancy charges. Ld. AR submitted, the order passed by the Tribunal on this issue was accepted by the department as no appeal was preferred before the Hon'ble High Court on this issue. He further submitted, same view was expressed by the Tribunal while disposing assessee's appeals for AYs 2002-03, 2004-05 and 2005-06 in order dated 25/03/2015 in ITA Nos. 1450, 1452 and 1453/Hyd/2013. Thus, he submitted, addition made has to be deleted. 30. Ld. DR, though, agreed that the issue is covered by the decisions of ITAT in assessee's own case, but, she supported the reasoning of AO and ld. DRP. 31. We have considered the submissions of the parties and perused the relevant material on record. On perusing the master service agreement between assessee and Pratt Whitney as well as inter company agreement, we find merit in assessee's contention that the amounts paid were actually towards software development charges towards a portion of work sub-contracted to the non-resident subsidiaries, though in the accounts, it has been ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de by AO, assessee objected before ld. DRP. Ld. DRP, however, rejecting objections of assessee upheld the disallowance. 34. Ld. AR submitted before us, the expenditure claimed is allowable either u/s 31 of the Act as current repairs or u/s 37 as revenue expenditure. He submitted, similar expenditure claimed by assessee in AY 2008-09 was allowed by ld. DRP following the decision of the jurisdictional High Court, hence, there is no reason why it was disallowed in the impugned AY. 35. Ld. DR, however, relied upon the assessment order. 36. We have considered the submissions of the parties and perused the material on record. There is no dispute with regard to the fact that the expenditure claimed by assessee relates to replacement of certain spares to the computer which was claimed as revenue expenditure. As evident from record, similar expenditure claimed by assessee in AY 2008-09 was allowed by ld. DRP following its own order passed in AY 2006-07 and 2007-08. However, in the impugned AY, AO has again treated the expenditure as capital in nature. Considering the aforesaid factual aspect, we remit the matter back to the file of AO to verify the nature of expenditure vis- -vis- ..... X X X X Extracts X X X X X X X X Extracts X X X X
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