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2016 (8) TMI 57 - ITAT BANGALORE

2016 (8) TMI 57 - ITAT BANGALORE - TMI - TDS u/s 195 - disallowance u/s. 40(a)(ia) - Held that:- We find that the income and expenses recorded in the books of Subex Ltd. in the intervening period between 1.9.2007 and 31.3.2008 were recorded in the assessee’s books by way of journal entry. We have perused the relevant ledger account extracts of the expenses of ₹ 624,983,348 by virtue of such journal entry. We are of the opinion that the impugned payment of ₹ 624,983,348 to STI is mere .....

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mpany is directed against the order dated 25.02.2014 of the CIT(Appeals)-III, Bangalore for the assessment year 2008-09. 2. The assessee is engaged in the development, sales and service of software products. During the year, under a scheme of arrangement approved by the Hon ble High Court of Karnataka, the service business of the assessee s parent company viz., Subex Ltd. was transferred to the assessee company for a consideration of ₹ 31,00,00,000. A return has been filed offering income .....

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t. Accordingly, a sum of ₹ 62,49,438 was disallowed and addition made. 4. Aggrieved, the assessee preferred appeal before the CIT(Appeals) on the following grounds:- 1. Assessment bad in law At the outset, Subex Technologies Limited (hereinafter referred to as 'the Appellant' or 'STL' or 'the Company') prays that the order dated 29 December 20 11, passed under section 143(3) of the Income-tax Act, 1961, ('the Act'), by the Joint Commissioner of Income-tax, ( .....

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3.1 The learned JCIT has erred in disallowing sub-contracting charges of INR 624,985,438 payable by the Company to its Associated Enterprise ('AE') i.e. Subex Technologies Inc. (STI') under the provisions of section 40(a)(i) of the Act for non-deduction of tax at source. 3.2 The learned JCIT has erred in concluding that the subcontracting charges are liable for tax deduction at source under section 195 of the Act. 3.3 The JClT has erred in not taking cognisance of the Company's .....

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transaction between the Company and STI as it is merely a guidance note meant for internal use; • it is not possible to accept that STI did not render any technical services that was not to be called as 'included services' in terms of the India-US Treaty as it is engaged in software development and consultancy services; and • STI has made available services to the Company that involve expertise or special knowledge, as there is human element involved. 4. Interest under section .....

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d Assessing Officer is not justified in referring the case of the Appellant to the TPO only to overcome the time-limit provided under first proviso to Section 153(1). 9. Without prejudice to the above, the Learned Assessing Officer has failed to appreciate that consideration paid by the STI to the Appellant also does not amount to 'fees for technical service' under Section 9(1)(vii) of the Act. 10. Without prejudice to the above, the Learned Assessing Officer has failed to appreciate tha .....

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fied in failing to appreciate that in respect of Appellant's parent Company i,e. Subex Ltd. for the AY 2007- 2008, during the assessment proceedings the Learned ACIT had raised the objection for the very same transaction. Upon filing of the submission by the Subex Ltd, the Learned ACIT accepted the contention of Subex Ltd. and hence the same was not disallowed in the assessment order. 13. Without prejudice to the above, the Learned Assessing Officer has failed to appreciate that even if the .....

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he scheme of arrangement approved by the Karnataka High Court on 27th March 2008, Service Business of Subex Limited, our Parent Company, was transferred to us with effect from 1st September 2007. 1.2 Accordingly, all the income & expenses recorded in the books of Subex Limited in the intervening period (i. e., between 1st September 2007 & 31st March 2008) was recorded in our books by way of journal entry. The relevant Ledger account which reflects the expense of ₹ 624,985,348/- rec .....

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hese payments were duly approved by the official of the Parent Company which is reflected in the vouchers. Sample copy of the voucher along with copy of invoices raised by STI on Subex Limited during the intervening period of 1st September 2007 & 31st March 2008 are enclosed as Annexure 3. 2.3 Further, these amounts have been duly adopted by the board of directors & the shareholders & audited by an independent chartered accountant. This is evident from the financial statements annexe .....

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ade. Further, the Company also submits that it has earned arms length profits which have been offered to tax in India. 7. The ld. CIT(Appeals) was of the opinion that personnel of STI are in possession of technical knowledge and hence were providing technical services to the assessee. The CIT(A) held that the sum of ₹ 62,49,85,348 is paid towards development of software by STI. He observed that the assessee does not fall under the exception provided u/s. 9(1)(vii)(b) of the Act and Explana .....

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hat make available condition in the DTAA is not being satisfied by the assessee and hence the amount cannot be regarded as fees for included services as per Article 12(4) of Indo-US DTAA. The CIT(A) also did not agree with the arguments of the assessee that the technical services which STI provides are directly to the end customers and not to the assessee and hence there is no make available of the technical knowledge to the assessee. The contention of the assessee that the impugned payment is i .....

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he case of CIT v. Crescent Export Syndicate, 33 taxmann.com 253, the CIT(A) held that disallowance u/s. 40(a)(ia) of the Act applies both the amounts which is actually paid and payable to STI during the impugned financial year. The CIT(Appeals) upheld the action of the AO in disallowing a sum of ₹ 62,49,85,348 paid to STI towards sub-contracting charges u/s. 40(a)(ia) of the Act on the basis that the transaction between the assessee and STI was towards development of software and the appel .....

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the officials of the parent company which is reflected in the vouchers. Accordingly all income and expenses recorded in the books of Subex Ltd. in the intervening period were recorded in the books of the assessee by way of a journal entry. In this regard, our attention was invited to the relevant ledger account at page 227 of the assessee s paperbook. It was also pointed out to the sample copy of voucher along with copy of invoice raised by STI on Subex Ltd. during the intervening period placed .....

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