9911796707
TMI Blog2020 (8) TMI 808X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Dispute Resolution Panel are opposed to law and facts of the case. 2. On the facts and in the circumstances of the case, as per the directions of the Dispute Resolution Panel, whether working capital adjustment can be made on the basis of advance received from AEs in absence of debtors and inventory in the case of assessee for calculating the cost of working capital built in the profit margin. 3. On the facts and in the circumstances of the case the Dispute Resolution Panel is not justified in directing the TPO to adjust the profit margin of the assessee for the entire amount of advances received from AE on the ground that there is time value for money. 4. On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing the TPO/A0 to exclude the comparable M/s Infosys Ltd., M/s Persistent System Ltd., M/s KALS Information Systems Ltd. & M/5 Sasken Communication Technologies Ltd. without considering the facts discussed by the TPO for selection of the comparables in the case of assesse and without appreciating the fact that these are qualifying all the qualitative and quantitative filters applied by the TPO. 5. On the facts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned AO/ learned TPO/learned DRP erred in applying onsite filter to reject the companies that are comparable to the Appellant. 10. The learned AO / learned TPO erred in computation of working capital adjustment. ........... 13. The learned AO / learned TPO erred in computation of the mark-up of the Appellant. The learned TPO has erred in considered "Retirement provision written back" as non-operating in nature." The other grounds of assessee's appeal in Assessee's appeal were not pressed. 4. The assessee is a company. It is a subsidiary of Infineon Technologies Asia Pacific P. Ltd. The assessee rendered Software Development Services (SWD services) and marketing support services. During the previous year relevant to AY 2010-11, the assessee rendered SWD services to its Associated Enterprise [AE]. As required under the provisions of section 92 of the Act, the assessee has to establish that the price received in the international transaction from the AE was at arm's length. The assessee in support of its claim that the price received was at arm's length filed a TP analysis in which the assessee adopted Transactional Net Margin Method (TNMM) as the most appropriate me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inksoft Global Services Ltd. 17.65% AVERAGE MARGIN 21.98% 7. The TPO computed the ALP and the suggested addition to the total income as follows:- "3.9.4 Computation of Arms Length Price The arithmetic mean of the Profit Level indicators is taken as the arms length margin. Please see Annexure B for details of computation of PLI of the comparables. Based on this, the arms length price of the services rendered by the taxpayer to its AE(s) is computed as under: SOFTWARE DEVELOPMENT SERVICES Arm's Length Mean Margin on cost 21.98% Less: Working Capital Adjustment (Annex. C) 0.30% Adjusted margin 21.68% Operating Cost 150,79,56,951 Arms Length Price (ALP) @ 121.68% of Operating Cost 183,48,82,018 Price Received 157,51,33,244 Shortfall being adjustment u/s 92CA: 25,97,48,774 "The above shortfall of Rs. 25,97,48,774/- is treated as transfer pricing adjustment u/s 92CA in respect of software development segment of the taxpayer's international transactions." 8. The addition suggested by the TPO on a reference by the AO u/s. 92CA of the Act was incorporated by the AO in the draft order of assessment. Against the draft order of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and income from maintenance contracts. Sasken Communication Technologies Ltd. was having income from 3 segments and there was no segmental reporting so that the operating margins of SWD services of this company can be compared with the assessee. As far as Kals information Systems Ltd. is concerned, the Tribunal in the very same aforesaid order at para 15 held that this company was into software products and the segmental results of the SWD services were not available, hence not comparable. In the light of the aforesaid decision of the Tribunal, we do not find any merit in ground No.4 raised by the revenue. 11. As for ground No.5 of the revenue is concerned, in the aforesaid order of Tribunal i.e., CSG Systems International (I) P. Ltd. (supra), vide para 9, the Tribunal held that Tata Elxsi cannot be regarded as a comparable company on the ground that this company was engaged in diverse activities in the software development segment. This company was held to be dealing in software products also and segmental details of revenue were not available. Following the aforesaid decision, we find no merit in ground No.5 raised by the revenue. 12. As far as Grd.No.6 regarding inclusion of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % of the revenue earned from Dubai office whereas the assessee has earned 100% revenue from India operations. The learned Authorised Representative has pointed out that this fact has been inappropriately interpreted by the TPO as the Annual Report of the company clearly stated that the company has its offices only in Mumbai and USA and no office at Dubai. He has referred the objections raised before the DRP at pages 156 & 157 of the paper book and submitted that the assessee has reproduced the Director's Report wherein it is stated that the company's outsourcing business from clients in Dubai facing steep pricing pressure due to which the income for the year was lower in comparison to the earlier year. The assessee has specifically mentioned that the export income from Dubai accounted for 90% of total income. The learned Authorised Representative has submitted that the export income from Dubai is stated as income from operations of Dubai office. Thus the learned Authorised Representative has submitted that this company is functionally comparable with the assessee and shall be included in the set of comparables. 27. On the other hand, the learned Departmental Representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrow for working capital and has direct bearing on the profitability of the concerned. The grievance of the assessee is accordingly allowed. The AO is directed to compute the working capital adjustment by considering the advances received from AE as part of the average trade payable. 20. The next aspect to be considered is Ground No.13 with regard to computation of OP/OC of the assessee. The plea of the assessee is that OP/OC should be computed as done by the assessee by considering the retirement provision written back as part of operating expenditure. The assessee's claim that for earlier AY its operating profit was considered after treating the provision for retirement benefit no longer required as part of operating expenses. This aspect was not verified either by the DRP/AO/TPO. Hence we deem it fit and appropriate to set aside the issue to TPO/AO for consideration of the claim of assessee with regard to past treatment of similar write back for computing its operating profit. The AO/TPO will afford opportunity of being heard to the assessee, before deciding the issue of determination of ALP in accordance with the directions contained in this order. 21. The other corporate gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 26.02.2014 was made by the Assessee. The Assessee explained that the payments towards usage charges of Electronic Design Automation (EDA) tools (software) by the Assessee were initially paid by Infineon Technologies AG, Germany ("Infineon Germany") and cross-charged to the assessee without any markup depending on their software tools usage. The assessee company reimburses these charges to Infineon Germany, without any mark up. The payment being a pure reimbursement does not result in income; therefore, there is no requirement for tax to be deducted at source. Hence, the provisions of section 195 of the Act are not applicable. Alternatively it was submitted that the payment is towards the usage charges of copyrighted software and not towards a right in copyright of the software. The assessee has only the right to use the software for its own internal use without any right to make any translation / adaptation or issue copies of the software to public or sell or give on hire a copy of the computer programme. In this regard, the Assessee relied on the extract of the agreement entered into by Assessee with Infineon Germany in which restrictions have been provided on use of software (p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduct tax at source on such payment. 24. The DRP confirmed the order of AO. In appeal before the Tribunal, the submission made was that even assuming that the payment in question is not in the nature of reimbursement, but was a consideration for purchase of standard off-the-shelf product and in the nature of royalty, the assessee did not deduct tax at source on the ground that as on 31.3.2010, the last date of the previous year, the law in this regard was that payment for purchase of off-the-shelf software was not in the nature of royalty and therefore there was no obligation to deduct tax at source from payments made to non-residents. In this regard, the ld. counsel for the assessee placed reliance on the decision of ITAT Bangalore Bench in the case of Ingersoll Rand (I) P. Ltd. [2019] 112 taxmann.com 743 [Bang Trib.] wherein it was held that as on the date of payment to the non-resident there was no obligation to deduct tax at source but on a subsequent date due to retrospective application of a law or on the basis of decision rendered subsequent to the date of payment an obligation is imposed on the payer, then there can be no disallowance u/s.40(a)(ia) of the Act. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). 26. The above decisions have been considered and discussed in the case of Ingersoll Rand (India) Ltd. (supra) by the Bangalore Bench of the ITAT and it was held therein that prior to the decision of Hon'ble jurisdictional High Court in the case of CIT v. Samsung Electronics Co. Ltd. (supra) which was passed on 15.10.2011 transactions carried out on purchase of off the shelf software are not liable to TDS and hence there can be no disallowance u/s.40(a)(ia) of the Act based on subsequent development of law after the date on which payments are made. 27. we are of the view that in the light of law as laid down by this Tribunal in the case of Ingersoll Rand (I) Ltd. (supra), there cannot be a retrospective obligation to deduct tax at source and therefore as on the date when the assessee made payments to the non-resident for acquiring off-the-shelf software cannot be regarded as in the nature of royalty and therefore there was no obligation on the part of assessee to deduct tax at source. The payment would be in the nature of business profits in the hands of non-resident and since admittedly the non-resident does not have a Permanent Establishment in India, the sum in question ..... X X X X Extracts X X X X X X X X Extracts X X X X
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