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Deputy Commissioner of Income Tax Company Circle 1 (1) Chennai Versus M/s. Atmel R&D India Private Ltd. and Vica-Versa

Transfer pricing adjustment - revenue submitted that DRP has erred in directing the TPO to consider both the BPO and ERP segment relating to the comparable M/s.Jeevan Scientific Technology Ltd., for the purpose of margin computation, ignoring the fact that the ERP segment is totally different from the BPO segment and also without stating reasons for the same - Held that:- Nature of work carried on by M/s.Jeevan Scientific Technology Ltd. is IT Enabled Services, though it was called by different .....

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representing reimbursement of software cost to its parent company - whether mere reimbursement of expenses on cost to cost basis without any mark-up does not attract TDS u/s.195? - Held that:- As decied inAsst. Director of Income-tax (International Taxation) Versus M/s Bartronics India Ltd. [2014 (4)569 - ITAT HYDERABAD] the assessee has acquired a readymade off - the shelf computer programme to be used in their business and no right was granted to the assessee to utilize the copy right of the p .....

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by DRP - Held that:- In our opinion, if the provision for doubtful debts is the current operating expenses associated with the losses from normal credit sales, it will be treated as operating expenses and usually as a part of selling, general and administrative expenses. If the expense is associated with the extending credit outside of a company’s main selling activities, the loss will be non-operating expenses. With this observation, we remit the issue to the file of AO for fresh consideration .....

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the Assessing Officer dated 08.02.2015 passed u/s.143(3) r.w.s.144C of the Act, which is emanated from direction of the Dispute Resolution Panel (DRP), Chennai dated 23.12.2014 u/s.144C of the Act pertaining to assessment year 2010-11. 1.1 The Revenue s appeal is directed against the order of DRP passed u/s.144C of the Act dated 23.12.2014 and correspondingly, the assessee fled a Cross Objection in C.O.No.59/Mds./2015 in support of direction of DRP. First we take up Revenue s appeal in ITA No.81 .....

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M/s.Jeevan Scientific Technology Ltd. is comparable without including Enterprise Resource Planning (ERP) Division, which is part of ITES segment as mentioned in the company s financial statement. The Dispute Resolution Panel, (DRP) Chennai, has given a direction that income of the M/s.Jeevan Scientific Technology Ltd. includes in ITES segment. The DRP of the opinion that since the business enterprise itself has clubbed ITES and ERP in one segment, and ITES itself is not one homogeneous sector. I .....

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₹ 17,443,276/- and bifurcation As per Schedule-7 is as follows:- Rs. BPO Operations 14,109,784 Enterprise Solution 3,333,492 1,74,43,276 In our opinion, nature of work carried on by M/s.Jeevan Scientific Technology Ltd. is IT Enabled Services, though it was called by different name. The nature of service performed by M/s.Jeevan Scientific Technology Ltd. is IT Enabled Services and when assessee itself included ERP in IT segment, TPO cannot be re-characterised without making any enquiry u/ .....

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of INR 9,362,867 representing reimbursement of software cost to its parent company, viz. Atmel Corporation, USA(Atmel, US) for non-deduction of tax at source u/s.195 of the Act without appreciating that mere reimbursement of expenses on cost to cost basis without any mark-up does not attract TDS u/s.195 of the Act. 5.1. The facts of the issue are that the assessee company has claimed ₹ 93,62,867/- towards Software expenses paid to the parent company, Atmel Corporation, USA. The TDS deducti .....

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in the nature of Royalty as provisions of the section 9(1)(vi) of the Act. The concept of reimbursement without mark-up is the arrangement within the Associated Enterprises (AE). That has no bearing on the applicability of the provisions of the section 9(1)(vi) of the Act and the software was used in India for the purpose of business and profession carried on by the assessee in India. Therefore, the Royalty expenses are taxable in India and upon which TDS liability attracts as per the provision .....

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rovisions of the section 195 of the Act on such reimbursement. Accordingly, the ld. Assessing Officer made addition of ₹ 93,62,867/-. Hence, the assessee is in appeal before us. 6. According to ld.A.R, provisions of the section 195 of the Act cannot be applied as the payment made to non-resident is not chargeable to tax under the Act and there is no question of withholding any tax. He relied on the judgement of Supreme Court in the case of GE India Technology Centre Private Ltd., Vs. CIT r .....

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lhi High Court in the case of Van Oord ACZ India Private Ltd. V. CIT reported in 323 ITR 130. According to him, the payments made by the assessee to Atmel US towards software cost represents pure cost to cost reimbursement without any mark-up and therefore, such reimbursement would not constitute income chargeable to tax in India in the hands of Atmel US. He also relied on the following judgements. i) Asst. Director of Income-tax Vs. Antwerp Diamond Bank NV Engg. Center reported in 44 Taxmann.co .....

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e assessee s counsel that the payment was made towards cost of the software namely Cadence and Synopsis paid to the Atmel Corporation USA at a cost without any mark-up and it does not include any profit element. However, the AO is of the opinion that it is payment in the nature of Royalty as per provisions of the section 9(1)(vi) of the Act. Since the software is used in India for the purpose of business or profession carried on by the assessee in India, he invoked the provisions 195 of the Act .....

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rder of Tribunal in the case of ADIT Vs.Bartronics India Ltd.,(supra) is squarely applicable to the facts of the case wherein held as follows:- 39. In order to qualify as royalty payment, it is necessary to establish that there is transfer of all or any rights (including the granting of any licence) in respect of copyright of a literary, artistic or scientific work. In order to treat the consideration paid by the Licensee as royalty, it is to be established that the licensee, by making such paym .....

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transfer of all or any right including licence in respect of copyright. Copyright or even right to use copyright is distinguishable from sale consideration paid for copyrighted article. This sale consideration is for purchase of goods and is not royalty. 40. The license granted by the Assessee is limited to those necessary to enable the licensee to operate the program. The rights transferred are specific to the nature of computer programs. Copying the program onto the computer s hard drive or ra .....

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opyright rights and consideration for transfer of copyrighted articles. Right to use a copyrighted article or product with the owner retaining his copyright, is not the same thing as transferring or assigning rights in relation to the copyright. The enjoyment of some or all the rights which the copyright owner has, is necessary to invoke the royalty definition. Viewed from this angle, a non-exclusive and nontransferable licence enabling the use of a copyrighted product cannot be construed as an .....

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ed by the Treaty. Merely authorizing or enabling a customer to have the benefit of data or instructions contained therein without any further right to deal with them independently does not, amount to transfer of rights in relation to copyright or conferment of the right of using the copyright. The transfer of rights in or over copyright or the conferment of the right of use of copyright implies that the transferee/licensee should acquire rights either in entirety or partially co-extensive with t .....

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only integral to the use of copyrighted product. Apart from such incidental facility, the licensee has no right to deal with the product just as the owner would be in a position to do. 43. There is no transfer of any right in respect of copyright by the Assessee and it is a case of mere transfer of a copyrighted article. The payment is for a copyrighted article and represents the purchase price of an article and cannot be considered as royalty either under the Income Tax Act or under the OTAA. 4 .....

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l include Intra Asia Trading (P) Ltd. copyright and all copies of the software shall be exclusive properties of Intra Asia Trading (P) Ltd. Licensee was allowed to use the software only for its own business as specifically identified and was not permitted to loan/rent/sale/sub-licence or transfer the copy of software to any third party without the consent of Intra Asia Trading (P) Ltd. 45. The licensee has been prohibited from copying, decompiling, de-assembling, or reverse engineering the softw .....

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return the software including supporting information and licence authorization device to lntra Asia Trading (P) Ltd.. 46. The incorporeal right to the software i.e. copyright remains with the owner and the same was not transferred by the Assessee. The right to use a copyright in a programme is totally different from the right to use a programme embedded in a software and the payment made for the same cannot be said to be received as consideration for the use of or right to use of any copyright t .....

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of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the Assessee is covered by the DTAA, the provisions ot which are more beneficial. The amount received by the Assessee under the licence agreement for allowing the use of the software is not royalty under the DTAA. 48. What is transferred is neither the copyright in the software nor the use of the copyright in the software, but what is transferred is the right to use the copy .....

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present case, the assessee has acquired a readymade off - the shelf computer programme to be used in their business and no right was granted to the assessee to utilize the copy right of the programme and, therefore, consideration cannot be treated as royalty. As held by the CIT(A), the payments made by the assessee company cannot be held as royalties coming into the ambit of Article 12 of DTAA or fee for technical services u/s 9(1 )(vii) of the IT Act and accordingly no tax need to be deducted u .....

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ng the same. 9.1 The facts of the issue are that TPO treated the provision for bad and doubtful debts as a non-operating expense in the case of Nittany Outsourcing Services Pvt Ltd. for computation of the net margins. The DRP endorsed the view of TPO and holds that bad and doubtful debt though operating in nature, but it does not pertain to the operating revenues for the relevant financial year. Therefore, if it is allowed as deduction, it will amount to expenditure of earlier years has been deb .....

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per directions of the DRP. Against this, the assessee is in appeal before us. 9.2 Before us, ld.A.R submitted that AO/TPO had erred in computing the margin of comparable companies by considering provision for bad and doubtful debts as non-operating expenses. He placed reliance on the order of Hyderabad Tribunal in the case of M/s.Kenexa Technologies Pvt. Ltd., Vs. DCIT in ITA No.243/Hyd./2014 dated 14.11.2014 wherein held that:- 41. We place reliance on the decision of ITAT Delhi Bench in the ca .....

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ation for computing the same. We can therefore make a general observation that all business enterprises are making and writing back liabilities as a normal incident of operating business. Therefore on facts do not see any justification for excluding provisions written both in the profit and loss account as not forming port of the operating profit of the taxpayer. Accordingly claim of the taxpayer is accepted 107. The next item relates to balances written back. In our considered opinion, finding .....

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