TMI Blog2020 (5) TMI 458X X X X Extracts X X X X X X X X Extracts X X X X ..... ernational transactions - HELD THAT:- It only remains to be verified as to whether the foreign exchange fluctuations incurred by the assessee relate to the trading items emanating from the international transactions or not. Therefore, for the limited purposes of verifying that the foreign exchange fluctuations of the assessee relate to the trading activities of the assessee, the issue is restored to the file of the Assessing Officer/Ld. TPO to verify the same and if it is found that the foreign exchange fluctuation relate to trading with the associate enterprises the Assessing Officer/Ld. TPO is directed to treat the same as operating item. Thus, this issue stands allowed for statistical purposes. Transfer Pricing Adjustment in the Software Development Segment - HELD THAT:- The issue of Transfer Pricing Adjustment in the Software Development Segment is restored to the file of the AO/Ld. TPO for the limited purposes of verifying the computation of 35th and 65th percentiles and if the same is found correct then no Transfer Pricing Adjustment would have to be made. AO/Ld. TPO is also directed to verify as to whether the foreign exchange fluctuation in this segment relates to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er For the Appellant : Sh. Neeraj Kr. Jain, Adv., Ms. Shaily Gupta, CA For the Respondent : Sh. H.K.Choudhary, CIT-DR ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: This appeal is preferred by the assessee against the final assessment order passed u/s 144C of the Income Tax Act, 1961 (hereinafter called the Act ), subsequent to the directions of the Ld. Dispute Resolution Panel (2), New Delhi {DRP} for the Assessment Year 2015-16. 2.0 As per the records, the brief facts of the case are that the assessee company is a Software Service Company and is a subsidiary of a company based in the United Kingdom. The company provides systems integration, enterprise solution and software development services to the clients of its Associated Enterprises (AE) and also to independent customers in the United Kingdom, the United State of America and others countries in Europe as well as India. The company also provides Information Technology Enabled Services (ITES) in the nature of back- office process outsourcing and inbound and outbound voice-based services. 2.1 The assessee company filed its return of income declaring an income of ₹ 108,61,33,970/-. The ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Price in respect of international transaction was within the permitted range of (+-) 3%. However, the Ld. TPO accepted only three of the comparables selected by the assessee and rejected the remaining six. Thereafter, the Ld. TPO introduced six more comparables and computed the average margin at 24.10% with respect to Information Technology Enabled Services and proposed an upward adjustment of ₹ 17,60,22,947/-. 2.3 Similarly, with respect to the transactions relating to Software Development Services, the Ld. TPO finally selected 17 comparables and computed average margin at 28.76% and proposed an upward adjustment of ₹ 50,29,61,074/-. Thus the total adjustment proposed by the Ld. TPO amounted to ₹ 67,89,84,021/-. 2.4 Apart from this, in the draft assessment order, the Assessing Officer also proposed a disallowance of ₹ 10,17,89,369/- on account of disallowance u/s 40(a)(i) of the Act on the ground that no tax was deducted at source for payment made as remuneration for Management Services to Group SCA (Steria France). Apart from this the Assessing Office also proposed a disallowance of ₹ 9,28,28,017/- on account of non deduction of tax at source ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited (ii) Harton Communications Limited (iii) R Systems International Limited (iv) Informed Technologies India Limited 2.4. That the TPO erred on facts and in law in rejecting R Systems International Limited as comparable allegedly on account of nonavailability of financial data. 2.5. That the TPO erred on facts and in law in rejecting Harton Communications Limited as comparable allegedly on account of failing service income filter of 75% of total income. 2.6. That the TPO erred on facts and in law in rejecting Informed Technologies Limited as comparable allegedlyon account of failing service income filter of 75% of total income. 2.7. Without prejudice that the DRP/TPO erred on facts and in law while in considering foreign exchange fluctuationas non-operating item of income/ expenditure while computing operating margins of the comparable companies under IT enabled services segment. 2.8. That the TPO/DRP erred on facts and in law in considering foreign exchange fluctuation income as non-operating item of income, while computing operating profit margin of the appellant. 2.9. That the DRP/TPO erred on facts and in law in not allowing app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO erred on facts and in law in not allowing appropriate risk adjustment to establish comparability on account of the appellant being a low-risk-bearing captive service provider as opposed to the comparable companies who were independent software service provider. 3.6. That on the facts and in the circumstances of the case and in law, the DRP/TPO erred in rejecting the contention of the appellant regarding risk adjustment, allegedly holding that in absence of robust and reliable data, no risk adjustment can be allowed. 4. That the DRP/TPO erred on facts and in law in not allowing adjustments to the appellant to account for the differences in the working capital position of the appellant vis- -vis the comparable companies. Corporate Tax Issues: Re: Disallowance of Management Services Fees 5. That on the facts and in the circumstances of the case and in law, the DRP/ assessing officer erred in disallowing under section 40(a)(i) of the Act, expenditure of ₹ 10,17,89,369 incurred on account of management services fees, allegedly on the ground that the appellant failed to deduct tax at source therefrom under section 195 of the Act. 5.1. That the DRP/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 195 of the Act for lower or no deduction of tax at source. Re: Disallowance of payment made towards Recharge of IT Cost under section 40(a)(i) of the Act 6. That the DRP/assessing officer erred on facts and in law in making disallowance ofpayments made to Steria France for purchase of computer software licenses, aggregating to a sum of ₹ 9,28,28,017,under section 40(a)(i) of the Act, for non-deduction of taxes at source under the provisions of section 195 of the Act. 6.1. That the DRP/assessing officer erred on facts and in law in failing to appreciate that payment for purchase of software made outside India was not chargeable to tax under the provisions of the Act read with the overriding provisions of the India-France DTAA and therefore, there was no default in not deducting tax at source. 6.2. Without prejudice to the above, the DRP/ assessing officer failed to appreciate that disallowance under section 40(a)(i) of the Act was, in any case, not warranted, since non-deduction of tax was on account of bona fide view taken by the appellant. 7. That the assessing officer erred on facts and in law in levying interest under section 234Bof the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Services Ltd. and BNR Udyog Ltd. It was further submitted that the assessee was also contesting the incorrect rejection of comparables selected by the assessee viz. Allsec Technologies Ltd., Hartron Communication Ltd., R Systems International Ltd. and. Informed Technologies India Ltd. The arguments advanced by the Ld. AR with respect to the IT Enabled Services segment were as under: Infosys BPO Ltd.: The Ld. Authorized Representative submitted that this company has been incorrectly held to be functionally comparable to the assessee s company. It was argued that Infosys BPO Ltd. is functionally different, has the benefit of synergies and holds intangibles including goodwill amounting to ₹ 19 crores. It was further submitted that Infosys BPO Ltd. is a part of the Infosys Group, a giant in the field of IT Services and, therefore, it enjoyed benefits such as the use of brand name Infosys , availability of skilled manpower and technical know-how etc. It was also submitted that it incurs significant marketing expenses being 3.22% of the gross Revenue whereas in the case of assessee there were Nil marketing expenses. It was submitted that this company is to be excluded on the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. DRP s directions had 13 comparables with an average of 20.84%. It was submitted that while calculating this average the foreign exchange fluctuation was not considered as an operating item and that further the 35th percentile was calculated at 16.76% and 65th percentile at 28.76%. It was submitted that if the foreign exchange fluctuation is considered as operating item, the operating margin of the assessee would come to 13.59% and that in the final set of comparables, the 35th percentile would come to 11.51% and 65th percentile would come to 25.64%. It was submitted that, thus, the margin of the assessee would lie within the 35th and 65th percentiles and no Transfer Pricing Adjustment would be warranted in the segment. 3.7 It was further submitted that in case this contention of the assessee is accepted, then ground Nos.3.1 to 3.6 and Ground No.4 would become academic. The Ld. AR further submitted that in case the Bench holds a different view then the assessee should be given an opportunity to argue on these grounds as well. 3.8 With respect to Ground No.5 challenging the action of the Ld. DRP/AO in making the disallowance u/s 40(a)(i) amounting to ₹ 10,17,89,36 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. DRP/ Assessing Officer in making disallowance of the payment made to Steria France for purchase of computer software licenses aggregating to a sum of ₹ 9,28,28,017/- u/s 40(a)(i) of the Act for the reason of non-deduction of tax at source. The Ld. AR submitted that since the assessee is engaged in the business of providing Information Technology Solutions in India and abroad, which requires various hardware and software from time to time, in order to meet these requirements, the assessee had entered into an intra-group suppliers agreement with Steria France which in turn negotiated with the external suppliers and made centralized purchases in the interest of all its group affiliates. It was further submitted that under the terms of the agreement Steria France would purchase the material and sell it to the Steria Group Entities without adding a markup or rendering any additional services. It was submitted that these payments were not chargeable to tax in terms of Section 9(1)(vi) of the Act read with Article 13 of the India-France DTAA and, therefore, no tax was required to be deducted at source. It was submitted that under the provisions of Section 195 of the Act, tax i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... response to the arguments advanced by the Ld. AR, the Ld. CIT-DR submitted that as far as the issue of foreign exchange fluctuation being treated as an operating item was concerned, there should be consistency in the approach and the option should not be exercised with a view to suit the trading results. 4.1 On the issue of the exclusion of the comparable Infosys BPO Ltd, the Ld. CIT-DR submitted that the assessee was also having a substantial turnover and was a well known company and, therefore, the assessee s prayer for exclusion of Infosys BPO Ltd. was not justified. It was submitted that the TNMM method sought broad comparability and it was not essential that the selected comparable should be an exact replica of the assessee company. 4.2 With respect to the assessee s contention with respect to the comparables and the mean falling between 35th and 65th percentile in the Software Development Services segment, the Ld. CITDR submitted that the Ld. TPO should be given an opportunity to verify the computation of the 35th and 65th percentiles and take a decision thereafter. 4.3 In respect on ground Nos.5 6 regarding disallowance in respect of deduction of tax at source wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out to 16.15% and since the operating margin of the assessee is 13.61%, the mean of the comparables will be within the permitted range and no Transfer Pricing Adjustment would be warranted in respect of ITES segment. 5.3 Having gone through the submissions of the assessee as well as the annual report of BPO Infosys Ltd. and the judicial precedents relied upon by the Ld. Authorized Representative, we are of the considered opinion that Infosys BPO Ltd. cannot be considered as a comparable to the assessee company for the simple reason that the assessee company is engaged in rendering system integration, enterprise solutions and software development services to the clients of its Associated Enterprises (AE) and also to independent customers in the United Kingdom, the United State of America and others countries in Europe as well as India while being a subsidiary of Steria (UK). On the other hand Infosys BPO Ltd. is a part of the Infosys Group, a giant in the field of Information Technologies Services and being a part of the Infosys Group, Infosys , it thus enjoys significant brand presence and brand value plays a significant role in its ability to generate profit. The Hon ble Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT vs. Ameriprise India Pvt. Ltd. (supra) has held that in respect of foreign exchange gains earned by the assessee which is in relation to trading items and emanating from international transactions, direct value derived from it cannot be treated as non-operating losses and gains. Similar view was taken by the Hon ble Delhi High Court in the case of Pr. CIT Vs. Cashedge India Pvt. Ltd. in Appeal No.279/2016 as well as in case of Pr. CIT vs. BC Management Services Pvt. Ltd. (supra). Therefore, we agree with the contentions of the AR that foreign exchange fluctuations gains/losses should be treated as operating item if the same are in relation to the trading items emanating from the international transactions. It only remains to be verified as to whether the foreign exchange fluctuations incurred by the assessee relate to the trading items emanating from the international transactions or not. Therefore, for the limited purposes of verifying that the foreign exchange fluctuations of the assessee relate to the trading activities of the assessee, the issue is restored to the file of the Assessing Officer/Ld. TPO to verify the same and if it is found that the foreign exchange flu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement with Steria France wherein Steria France had agreed to provide certain management services to the assessee and pursuant to this agreement the assessee had paid the impugned amount to Steria France. The assessee had approached the Authority for Advance Rulings and had sought ruling on the issue as to whether the payment made by the assessee for management services to Steria France will not be taxable in India in the hands of Steria France as per the provisions of India-France DTAA and that if Steria France was not taxable in India, whether the assessee was liable to deduct tax at source. The AAR, however, ruled against the assessee and the assessee, being aggrieved, approached the Hon ble Delhi High Court in a Writ Petition which was disposed of in favour of the assessee wherein the Hon ble Delhi High Court held that the Protocol of India-France DTAA was in integral part of the treaty and it did not require any notification by the Government of India for its implementation. The Hon ble Delhi High Court also held that the beneficial provision in the DTAA between India and UK can be automatically incorporated in India-France DTAA by applying the Most Favoured Nation clau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng information technology solutions in India and abroad. The assessee requires various hardware(s) and software(s), from time to time. In order to meet such requirements, in a cost effective manner, the assessee had entered into an Intra-Group Supplier Agreement. Steria France had negotiated with external suppliers and subscribed centralized purchases from them, in the interest of all its group affiliates. The objective for undertaking centralized purchases was to bargain competitive prices for the Steria Group s purchase requirements. Under the terms of the Agreement entered by the assessee, Steria France would purchase material (hardware or software) or services and thereafter resale within the Group entities for subsidiaries local needs. Such resale, as per the Agreement, is done without rendering additional services and without adding any markup. It has been further submitted that apropos the aforesaid Agreement, the assessee has purchased certain software licenses for a sum aggregating to ₹ 9,28,28,017/- from Steria France in the course of the year and the licenses, as per the invoices, are as under: - Paulo Alto Wildfire -Software License charge -Messaging 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayments may also be taxed in the Contracting State, in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of these categories of income, the tax so charged shall not exceed 10 per cent of the gross amount of such royalties, fees and payments. 3. The term royalties as used in this Article means payments of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience. 5.14 The definition of royalty under the India-France DTAA is, thus, much narrower in scope than the definition under the Act. 5.15 The Copyright Act, 1957 defines computer programme as a set of instructions expressed in words, codes, schemes, or any other form including a machine readable medium capable of causing a computer to perform a particular task or achieve a particular result. The Copyright Act further defines the term literary wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resaid decision has distinguished the ratio decidendi laid down by the Karnataka High Court in the case of CIT v. Samsung Electronics Co. Ltd. (supra). Accordingly, the reliance placed by the assessing officer on the decision of Samsung Electronics (supra) is misplaced. 5.17 We have also perused the Intra- Group Supplier Agreement entered into between Steria France and the asessee we find that it is provided that the hardware and software purchases by Steria France is re-sold to the assessee without additional services and without any markup. Thus, there is no transfer of any right in respect of the copy of right and it is a case of mere transfer of a copy of righted article. The payment is in the purchase of license or a copy righted article and it represents only the purchase price and the same cannot be considered as royalty either under the Act or under the provisions of DTAA. It will be worthwhile to extract the following observations of the Hon ble Delhi High Court from the judgment in the case of DIT vs. Infra Soft Ltd. (Del) (supra) at this juncture: 96. The amount received by the Assessee under the license agreement for allowing the use of the software is not roy ..... X X X X Extracts X X X X X X X X Extracts X X X X
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