TMI Blog2017 (9) TMI 1799X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinate Bench of this Tribunal, we delete the disallowance made by the AO. Transfer Pricing Adjustment - allocation of the cost by the assessee between the AE and non-AE transaction - software development services as well as IT Enabled Services transactions - HELD THAT:- Action of the TPO in allocating the direct as well as indirect cost as alleged by the assessee in the ratio of turnover of each segment and transaction is not justified. Further the TPO has accepted the allocation of the cost by the assessee between the AE and non-AE transaction for the Assessment Years 2010-11 to 2012-13. We have gone through the respective orders of the TPO/A.O. and noted that the TPO has not distributed the allocation of cost made by the assessee for the subsequent Assessment Years - so far as the direct cost is concerned the same has to be allocated on actual basis instead of turnover basis. Accordingly, we set aside this issue to the record of the TPO/A.O. for limited purpose of proper verification and allocation of the cost in the light of the above observations as well as in the light of the subsequent orders of the TPO for the Assessment Years 2010-11 to 2012-13. Gain/loss arising due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2006 and others) 5. The learned CIT(A) has erred in law and in facts, by upholding the actions of the learnedAO in considering some of the software expenses amounting to ₹ 2,10,206 to be in the nature of capital expenditure and disallowing the same. Transfer pricing matters 6. The learned CIT(A) has erred in law and facts, by upholding the addition of ₹ 3,14,50,365 made by the learned AO / TPO on account of adjustment to the arm s length price of the international transactions entered by the Appellant with its Associated Enterprises ( AEs ).; 7. The learned CIT(A) has erred in law and facts by not accepting the Appellant s plea in entirety and confirming with the learned AO/TPO on not accepting the economic analysis undertaken by the Appellant in accordance with the provisions of the Act read with the Income-tax Rules, 1962 ( Rules ), and conducting a fresh economic analysis for the determination of the arm s length price in connection with the impugned international transaction and holding that the Appellant s international transaction is not at arm s length; 8. The learned CIT(A) has erred in law and facts by upholding the action o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in law and in facts by upholding the action of the AO/ TPO in rejecting certain comparable companies on an adhoc basis stating that the working capital adjustments in relation to such companies distorts the profit margins. Further, the learned CIT(A) has erred in law and in facts by upholding the actions of the AO/ TPO in restricting the working capital adjustment on an adhoc basis to the average cost of capital computed at 1.71 percent in the case of comparable companies 13. The learned CIT(A) has erred, in law and facts, by not making suitable adjustments to account for differences in the risk profile of the Appellant vis- -vis the comparables and concluding that once the working capital adjustment is granted, there is no necessity of providing any further adjustments.; IT enabled services transaction 14. The learned CIT(A) erred in upholding the actions of AO/TPO in rejecting certain comparables considered by the Appellant in the comparability analysis by applying different quantitative and qualitative filters; a. The learned CIT(A) has erred, in law and in facts, by upholding the actions of the AO/ TPO in rejecting certain comparable companies ide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 The ITAT 'C' Bench in the case M/s WS Atkins India Pvt. Ltd and in the case of Infotech Enterprises Ltd of the Hyderabad Bench of the Tribunal wherein it has been held that section 40(a)(ia) would not apply to disallow payments when TDS was not d one a nd subseq uent l y b ec ome t a xabl e on a c c ount o f a retrospective legislation. It has also referred to in the case of Sonic Biochem Extractions Pvt. Ltd. (supra), identical issue was considered and decided by the Mumbai Tribunal. Following were the relevant observations:- The assessee purchased software, capitalized the payment to the computers account as the software came along with the hardware of computers and claimed depreciation. On the ground that purchase of software is essentially purchase of copyright whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecisions 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 d one and sub s eq uent l y b ec ome ta xa bl e on a c c ount o f 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 ITR (Trib) 447, respectively. We uphold the decision of the CIT(A) and dismiss the grounds raised by the Revenue. Thus it is clear that the co-ordinate Bench of this Tribunal 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 disallowance made by the Assessing Officer. 8. Ground Nos.6 to 9 are regarding Transfer Pricing Adjustment in respect of software development services as well as IT Enabled Services transactions. 9. The assessee has reported the international transactions in two segments i.e. software development servi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Enabled Services Unallocated (Non AE) Operating Revenues (including foreign exchange gain, other operating income) 2,03,97,026/- 4,06,15,470/- 19,77,38,181/- Operating Expenses 1,77,91,212/- 3,45,53,058/- 25,61,84,058/- Operating Profit / Loss 26,05,814/ 60,62,413/- (-) 5,84,45,877/- OP / Total Cost % 14.64% 17.54% (-) 22.81% 12. The assessee has shown the operating margin of international transactions in software development segment and ITES segment at 14.64% and 17.54% respectively. The TPO found that the assessee has made a disproportionate cost across the segment and it has been resulted in high margins in AE transaction and loss in non-AE transaction. Accordingly, the TPO has recomputed the margins by reallocation of the cost in para 4 as under : 4. Segmental financial results of the taxpayer for the financial year: 2008-09 according to the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the total operating cost in the ratio of turnover of three segments. It is pertaining to note that the allocation of cost can be made only in respect of indirect common cost incurred in respect of all the segments. Therefore the allocation of the cost can be made only in respect of the indirect cost. The cost which is directly related to a particular segment cannot be reallocated. The same can be examined for the purpose of allowability and genuineness but not for the purpose of reallocation. Accordingly, we find that the action of the TPO in allocating the direct as well as indirect cost in the ratio of turnover of each segment is not proper and justified. Hence we do not find any error or illegality in the impugned order of the CIT(A) which has taken note of the fact that if the direct cost is taken out from the allocation then the adjustment made by the TPO will not survive. Hence we uphold the impugned order of the CIT(A) qua this issue. Thus the action of the TPO in allocating the direct as well as indirect cost as alleged by the assessee in the ratio of turnover of each segment and transaction is not justified. Further the TPO has accepted the allocation of the cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue. 5. The CIT (A) erred in law as well as on facts in holding that, as the working capital adjustment provided by the TPO has negative impact on adjusted margin, the assessee is entitled to risk adjustment as per prevailing norms, which shall be worked out by the TPO and granted to the assessee in ITES segment without appreciating that risk adjustment could not be allowed in the absence of specific difference in risk and its impact on profit margin when TP regulations in India are against making any assumptions in respect of any adjustments and such risk adjustment cannot be provided without making necessary assumptions. 6. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (A) be reversed and that of the Assessing Officer be restored. 7. The appellate craves to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 15. The only issue arises in the appeal of the revenue is regarding the gain/loss arising due to Forex fluctuation on the receivable from the AE to be treated as operating revenue or cost as the case may be. 16. We have heard the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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