TMI Blog2020 (10) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... le to withholding of tax under section 195. Disallowance of deduction u/s 10 AA - reasons for restricting the disallowance as AO excluded foreign exchange outgo, telecommunication charges, subsistence allowance for on-site employees and standby and callout charges from the total turnover for the purpose of computing deduction u/s 10 AA - claim of the assessee is that both the export turnover and total turnover for computing that deduction under this Section should be on the same basis - HELD THAT:- In view of the decision of the coordinate benches and the honourable High Court in assessee s own case we reverse the order of the learned assessing officer and direct to consider a sum of all items in total turnover also for computing deduction u/s 10 AA of the income tax act. Accordingly, ground of the appeal is allowed. Disallowance of foreign-exchange loss on account of unrealized foreign exchange forward contracts entered into for hedging the export proceeds against the currency fluctuation holding the same to be contingent in nature - HELD THAT:- Assessee has claimed to place on record party-wise break up of revenue earned by the appellant, which comprises break up of MTP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consolidated order. Stay petitions were also heard on 17 July 2020, which are also disposed of by this order for all these years. 2. ITA No. 741/Del/2017 for AY 2012-13 is filed by the assessee against the assessment order passed u/s 143 (3) read with Section 144C of The Income Tax Act, 1961[ The Act] dated 5/12/2016 passed by The Additional Commissioner Of Income Tax, Special Range 8, New Delhi (The Learned Assessing Officer/ AO ) wherein the returned income of ₹ 1,132,764,007 370 filed by the assessee on 29/11/2012 is assessed at ₹ 1,515,053,700/ . The assessee has raised following grounds of appeal.- 1. That the assessing officer erred on facts and in law in completing assessment under section 144C read with section 143(3) of the Income-tax Act ( the Act ) at an income of ₹ 151,50,53,700 as against the returned income of ₹ 113,27,64,370 under normal provisions of the Act. Transfer Pricing issue: 2. That the assessing officer/DRP erred on facts and in law in making an adjustment of ₹ 11,70,02,000 to the arm s length price of the international transaction of provision of IT enabled services on the basis of the order passed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dependent software service provider. 2.8 That on the facts and in the circumstances of the case and in law, the DRP/TPO erred in rejecting the contention of the assessee regarding risk adjustment, allegedly holding that the computation of risk adjustment provided by the assessee is vague and without any basis. Corporate Tax Issues: Disallowance of Management Services Fees 3. 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 ₹ 20,03,73,067 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. 3.1 That the DRP/assessing officer erred on facts and in law in holding payment made to Groupe Steria SCA ( Steria France ) towards management services fees to be in nature of fees for Technical services ( FTS ) in terms of Article 13 of India-France Double Tax Avoidance Agreement ( the DTAA ). 3.2 That the DRP/ assessing officer erred on facts and in law in erroneously relying upon the order of the Authority of the Advance Ruling ( AAR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication charges ₹ 2,82,619 - Subsistence for onsite employees ₹ 1,09,26,932 - Standby and callout charges ₹ 3,38,42,787 Total ₹ 9,84,43,288 4.2 That the DRP / assessing officer erred on facts and in law in not appreciating that both the export turnover and total turnover have to be computed on the same basis for the purpose of computing deduction under section 10AA of the Act. 4.3 That the DRP/ assessing officer erred, while making the purported adjustment from the export turnover , following the assessment order for preceding assessment years, without appreciating that the said issue has already been decided by the ITAT in favour of the appellant in assessment year(s) 2003-04 to 2009-10. 5. That the DRP / assessing officer erred on facts and in law in not allowing deduction under section 10AA of the Act in respect of expenses disallowed under section 40(a) of the Act to the extent of ₹ 10,01,22,742, computed by apportioning the aggregate disallowance of ₹ 20,03,73,067 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal ground was raised when these appeals were last taken for hearing on 4 September 2019, only the additional grounds were heard, however later on 3 December 2019, the coordinate bench passed an order sheet entry that as only the additional grounds were argued initially which cannot be adjudicated in isolation of the other grounds of the appeal, hence, the additional ground may also be heard and disposed of along with the other grounds of appeal. 5. The assessee submitted that the aforesaid additional ground of appeal raises a purely a legal issue and therefore it should be admitted and adjudicate on merits. The assessee relied upon the decision of the honourable Supreme Court in case of National thermal Power Co Ltd versus Commissioner of income tax 229 ITR 383 and also the decision of June Corporation of India versus CIT 187 ITR 688. Along with the additional ground, the assessee submitted that they chart wherein it is stated that assessee has filed the return of income on 29/11/2012 and the draft assessment order thereon was passed on 30 March 2016. The DRP issued its direction on 22 November 2016 and the due date for passing final assessment order u/s 153 (1) read with Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the facts before us and the decision of the coordinate bench in assessee s own case for assessment year 2015 16 is stated above as well as in case of Religare capital markets Limited (supra) dated 10/10/2019, the additional ground of appeal is dismissed. 11. Ground number 1 of the appeal is general in nature, no specific arguments for advanced, the specific arguments related to each of the ground, which comprised in ground number one dealt with separately, this ground is dismissed. 12. Ground number 2 of the appeal is against the adjustment of ₹ 117,002,000 to the arm s-length price of the international transaction of IT enabled services. In substance, in ground number 2.3 of the appeal the assessee objected to the comparables included by the learned that transfer pricing officer namely (1) E Clerx services Ltd, (2) Infosys BPO Ltd, (3) TCS E serve Ltd, (4) informed technologies Ltd and (5). B N R Udyog limited (segment). The ground number 2.1 2.8 are various sub grounds of the transfer pricing adjustment. However they revolve around the above five comparables only. 13. The assessee is engaged in the business of software development, maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of expenses received from associated enterprise 34,41,225 TNMM OP/OC 14. Assessee benchmarked the international transaction by considering the aggregation of transactions under- Two segments by furnishing the segmental results in its TP study report wherein the Profit level indicator of operating profit as a percentage of cost in software services was determined at 14.48% and in IT enabled services at 20.61%. Assessee considered some payment for IT and communication cost, receipt of management services, receipt of marketing services, and reimbursement of expenses to associated enterprise and reimbursement of expenses from associated enterprise is closely linked to software development services and to its IT enabled services. Assessee benchmarked international transactions relating to IT enabled services using transactional net margin method as the most appropriate method adopting OP/OC as the profit level indicator, selecting eight comparable companies using multiple year data determining their margin at 16.03% and same were considered to be at arm s-length. The learned transfer pricing officer rejected the comparability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant s own case for assessment year 2015-16 (ITA No. 6687/Del/2019) rejected Infosys BPO ltd as comparable on the basis that it enjoys significant brand presence and brand value plays a significant role in its ability to generate profit.(Page 566 of Case Law Paper book Transfer Pricing). Reliance in this regard is placed on the decision of the Hon ble Delhi High Court in the case of PCIT vs New River Software Services (P) Ltd (IT Appeal No 924 of 2016) wherein the Hon ble Delhi High Court dismissed the appeal of Revenue against exclusion of Infosys BPO Ltd. (Page 429 of Case Law Paper book Transfer Pricing). Reliance in this regard is also placed on the decision of Delhi Bench of Tribunal in the case of E-Valueserve SEZ (Gurgaon) P Ltd vs ACIT (ITA No. 5147/Del/2017) wherein the Hon ble Tribunal rejected Infosys BPO Ltd. Further, the Hon ble Delhi High Court in ITA No. 241/2018 dismissed the appeal of Revenue against the exclusion of Infosys BPO Ltd (Page 424 of Case Law Paper book Transfer Pricing). Further, the Hon ble Delhi High Court in the case of Pr CIT vs Oracle (OFSS) BPO Services Pvt Ltd 303 CTR 284(Page 503 of Case Law Paper book Transfer Pricing) upheld the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te contracts. The said decision of the Hon ble High Court has been upheld by the Hon ble Supreme Court in SLP (CC) No. 32469/2018. (Page 504 of Case Law Paper book Transfer Pricing) 20. The learned departmental representative referred page number five of the order of the learned dispute resolution panel wherein the nightly LP considered the impact of the brand building expenditure and advertisement expenditure incurred by the comparable company and stated that they are insignificant. Further comparing the turnover of the assessee with the turnover of the comparable company relying on the decision of the honourable Delhi High Court learned dispute resolution panel has stated that it is of no significance. It was further stated that the comparable company Infosys BPO Ltd is functionally comparable. He further submitted that regarding the claim of the assessee that Infosys BPO and TCS E serve is enjoyed a huge brand, Steria compared to these grants of Infosys BPO and TCS E serve is a bigger brand as it is a global brand. He therefore submitted that if the comparison is required to be made with respect to the brand of the comparables with the brand of the assessee, assessee enjoys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) Tech Mahindra Business Services Ltd. (iv) BNR Udyog Ltd. will work 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 Steria (India) Ltd. Vs. ACIT 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the comparability analysis of a particular industry would be zero. If the comparables are excluded on the basis of judicial precedent in somebody else case, it will make the rule 10 D of The Income Tax Rules redundant. Even in the case of same assessee for different years, the situation may arise that a comparable excluded in earlier or subsequent year may be comparable for the current year, because of the change in the functional profile of either the comparable or the assessee. Therefore, to extend the judicial precedent in some other case for exclusion of comparable is not advisable. It is imperative to examine the comparability of each comparable with the functions performed, assets employed and risks assumed by the assessee. 27. It is also to be noted that in the comparability analysis of the IT enabled services assessee has also included Infosys BPO Ltd at serial number (vi). The learned DR has objected to this stating that when assessee has also stated that it is functionally comparable in its TP study report it cannot resile from the same position now. 28. Therefore, it is imperative to analyze the functions, Assets and Risks of comparable for each year to decide fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O. 29. The second comparable challenged before us is TCS E serve Ltd. This comparable is primarily engaged in the business of providing business process services for its customers in banking, financial services and insurance domain. The comparable companies operations include delivering core business processing services, analytics/insights and support services for both the data and voice processes. This company has revenue from its operation of ₹ 1 578.44 crores. According to note number 22 at page number 80 of the financial statement of other expenses, it shows it contributes to the Tata brand equity of ₹ 3.67 crores. Similarly, in this comparable also the claim of the assessee is that it only executes the work subcontracted by the associated enterprise and it is neither exploits any brand/trademark nor enjoys the profit associated with any brand. Naturally, Tata brand has gone into the price of this comparable. Therefore, we direct the learned that the transfer pricing officer/AO to exclude this comparable from comparability analysis. 30. There are no other issues raised before us with respect to the transfer pricing adjustment proposed by the learned that tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, ld AO followed the decision of AAR. On objection before the learned dispute resolution panel, it was noted that assessee challenged the same before the honourable Delhi High Court however, no stay has been granted in this regard and therefore the action of the learned made assessing officer was upheld in the direction. When matter reached before us, now the honourable High Court has rendered its decision in the above said dispute reported in 386 ITR 390 in favour of the assessee as under :- 19. The next question that arises is concerning to extent to which the benefit under the India-UK Double Taxation Avoidance Agreement can be made available to the petitioner. As already noticed, the definition of fee for technical services occurring in article 13(4) of the Indo-UK Double Taxation Avoidance Agreement clearly excludes managerial services. What is being provided by Steria France to the petitioner in terms of the Management Services Agreement is managerial services. It is plain that once the expression managerial services is outside the ambit of fee for technical services , then the question of the petitioner having to deduct tax at source from payment for the manageria ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable under article 7 of the Double Taxation Avoidance Agreement, does not arise. 23. As regards the nature of the service being provided under the management services agreement, again the court is unable to find any case made out by the Revenue before the Authority for Advance Rulings that what was provided was anything other than the managerial service which in any event stands excluded in the definition of the fees for technical services under the Indo-UK Double Taxation Avoidance Agreement. Consequently, this question also does not survive for consideration. 24. For all of the above reasons, this court finds that the impugned order dated May 2, 2014 of the Authority for Advance Rulings holding that the payment made by the petitioner for the managerial services provided by Steria France should be treated as fee for technical services in respect of which tax had to be withheld under section 195 of the Act, is unsustainable in law. The questions posed by the petitioner before the Authority for Advance Rulings are accordingly answered as under : (i) The payment made by the petitioner to Steria France for the managerial services provided by the latter cannot be taxed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gust 2018 has also clarified this issue [Pg 8-10 of CL PB] iii. HC for AY(s)2004-05 to 2006-07 and 2008-09 to 2011-12vide ITA Nos. 756-759/2017, 762-763/2017 and 380/2017[Pg 800-802 and 805-810] a. Department s SLP s for AY(s) 2004-05 and 2005-06 have been dismissed by the Apex Court vide order(s) dated 04.05.2018 [Diary Nos. 12731/2018] and 04.09.2018 [Diary No. 11142/2018 [Pg 803-804] 38. The learned departmental representative vehemently supported the orders of the lower authorities. 39. We have carefully considered the rival contentions and perused the orders of the lower authorities. In view of the decision of the coordinate benches and the honourable High Court in assessee s own case as stated above, we reverse the order of the learned assessing officer and direct to consider a sum of ₹ 98,443,288 in total turnover also for computing deduction u/s 10 AA of the income tax act. Accordingly, ground number 4 of the appeal is allowed. 40. The ground number 5 is with respect to the claim of the assessee to allow/enhance the deduction by disallowance u/s 40 (a) of the act of ₹ 200,373,067. As we have already deleted the above disallowance as per ground, nu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO to restrict the foreign-exchange loss disallowance to the net foreign-exchange loss, which has been debited to the profit and loss account. Thereafter in view of the direction of the DRP the learned assessing officer disallowed the difference of ₹ 245,904,852 and 19,00,50,000 i.e. 5,58,54,852/ . This addition/disallowance is challenged by ground number 6 of the appeal. 42. The learned authorised representative submitted that in terms of the Software Products and IT/ ITES Services Agreement dated 01.04.2010 entered into between the assessee company and Steria Limited, UK, its group company, revenue which is being billed by the assessee company, includes foreign exchange currency loss/ gain which is accounted for in the books of accounts and accordingly, the loss suffered by the assessee company is reimbursed by Steria Limited, UK under the said Agreement. Thus, there is no loss borne by the assessee, so there is no question of any disallowance. The relevant extracts of the agreement are reproduced as under: 3.3. Invoices raised by SIL on SL UK for the fee will be raised in two parts: 3.3.1 MTP invoice in arrears on a monthly basis for the services rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has finally been debited to the profit and loss account. To make it clear, if the assessee has debited X amount under foreign exchange loss and has credited Y amount being reimbursed of foreign exchange loss from AE to the P L a/c, then disallowance should be restricted to X-Y. In view of the aforesaid, at the preliminary stage itself, it was submitted, that there was no warrant to make any disallowance of foreign exchange losses since the revenue component billed by the appellant company, includes both foreign exchange currency losses/ gain which is accounted in the books of account, thereby having no impact on the profit and loss. The assessing officer, however, while giving effect to the directions of the DRP has allowed deduction of ₹ 19,00,50,000, being the amount debited to Profit and loss account, which is computed after setting off gains amounting to ₹ 5,58,54,486 arising on forward contracts from total loss of ₹ 24,59,04,852 on mark to market of forward contracts, thereby resulting in net figure of ₹ 19,00,50,000, thereby sustaining the disallowance of ₹ 5,58,54,486. In doing so, it was stated that assessing officer grossly erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 100 100 Net -FX Loss as per Books 20 24 Net- FX (Gain) as per Books -6 -5 Total (B) 100 120 94 119 Profit (A-B) 14 14 14 14 Margin on Cost (Assumed @ 14%) 14% 14% 14% 14% He submitted that from perusal of the aforesaid table, it will be observed that the amount to be compensated is calculated on cost incurred for the contract and not on the amount after considering the amount of foreign exchange gain/ loss. It would be appreciated that where there is a loss, the entire loss is compensated to the assessee company without any mark up, which is considered as a part of revenue. In a situation where gain arises, the said amount of gain is reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was booked and the balance sheet date was debited to Profit Loss Account. The aforesaid accounting treatment was also in line with the Accounting Standard-30 on Financial Instruments: Recognition and Measurement read with AS-11 on the Effects of changes in Foreign Exchange rate issued by the Institute of Chartered Accountants of India ( ICAI ) providing that loss/gain on outstanding forward/derivative contracts are to be recognized on mark to market basis. Accordingly, an enterprise has to report the outstanding liability using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the balance sheet for the reporting period. In line with the aforesaid, the appellant recognized the foreign exchange difference arising on unutilized forward contracts as at the balance sheet date which was the difference between the foreign currency amount translated at the date of inception of forward exchange contract and/or last reporting date and the foreign currency amount of contract translated at the exchange rate at the balance sheet date which resulted in MTM loss. On account of reinstatement of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y should be reported using the exchange rate at the date of the transaction; and (c) non-monetary items which are carried at fair value or other similar valuation denominated in a foreign currency 36. An enterprise may enter into a forward exchange contract or another financial instrument that is in substance a forward exchange contract, which is not intended for trading or speculation purposes, to establish the amount of the reporting currency required or available at the settlement date of a transaction. The premium or discount arising at the inception of such a forward exchange contract should be amortized as expense or income over the life of the contract. Exchange differences on such a contract should be recognised in the statement of profit and loss in the reporting period in which the exchange rates change. Any profit or loss arising on cancellation or renewal of such a forward exchange contract should be recognised as income or as expense for the period. 38. A gain or loss on a forward exchange contract to which paragraph 36 does not apply should be computed by multiplying the foreign currency amount of the forward exchange contract by the differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come statement. Net gains are ignored. Accounting policy for forward exchange contracts is given in point (iv) of note (h) above. 45. It is further respectfully submitted that the aforesaid loss represents crystallized loss as on the balance sheet date for the relevant assessment years and hence allowable as business loss while computing the taxable income, as elaborated hereunder: (i) kind attention is further invited to section 145(1) of the Act which provides that income chargeable under the head 'profits and gains of business or profession' or ' income from other sources' shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. (ii) Further, section 209(3) of the Companies Act, 1956, inter alia, provides that a company shall be deemed not to have kept proper books of accounts if such books are not kept on accrual basis and according to the Double Entry System of Accounting. (iii) Under the mercantile system of accounting, the impact of the exchange rate fluctuation in respect of the various trade balances as on the close of the year is to be accounted on accrual basis, i.e., the trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act and followed AS-11 and AS-30 issued by ICAI. The Court further held that the CBDT instruction could not override the existing decisions of Supreme Court and High Courts on similar issues. (viii) The Bombay High Court in the case of V.S. Dempo and Co. (P) Ltd.: 206 ITR 291 has succinctly culled out the principles to determine whether loss on account of exchange fluctuation is allowable as business loss. The Court inter-alia held that (i) a loss arising in the process of conversion of foreign currency which is part of the trading asset of the assessee is a trading loss as any other loss; (ii) The cause which occasioned the loss is immaterial; what is material is whether the loss has occurred in the course of carrying on the business or is incidental to it; .. (ix) kind attention, in this regard, is further invited to the decision of Special Bench of Tribunal in case of DCIT v. Bank of Bahrain Kuwait: 41 SOT 290, where after relying on the decision of CIT v. Woodward Governor India (P) Ltd.: 312 ITR 254 (SC), it was held that loss arising on un-matured derivative contracts, on mark to market basis, is allowable deduction, in accordance with the mercantile system of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luctuation has to be recognized in the year in which such increase/ decrease takes place. 46. In the case of the appellant, the forward contracts were booked to hedge against the foreign currency fluctuation risk relating to business transactions, viz., export orders undertaken by the assessee and hence taking of the aforesaid hedge cover was incidental to its business. Further, since the forward contracts were related to the export proceeds, whether backed by invoice or in relation to expected receivables, the same were in the course of business and not for acquisition of any capital asset, the loss arising on the same would be on revenue account. In this regard, it is also imperative to note that no part of liabilities/ payables have been hedged by the assessee company, which goes on to demonstrate that the assessee is not engaged in speculation activity. 47. The details tabulating the total rvenue and export revenue earned by the assessee, during the preceding financial years, is as under: Financial Year ending on Total Revenue Export Revenue Interco. Revenue (Out of export revenue) % of Export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rket losses dealt with by the instruction, it is respectfully submitted that the said issue is no longer res-integra in view of the decision of the Supreme Court in the case of Woodward Governor (supra). It is respectfully submitted that it is a settled law that circular/ instruction issued by the Board cannot override the position of law as explained in the binding decisions of the Supreme Court/ High Court on the similar issues. Reliance in this regard is placed on the judgment of the Hon ble Supreme Court in the case of Hindustan Aeronautics Ltd v. CIT : 243 ITR 808, wherein the Court concurred with the view that though circulars or instructions given by the board are binding in law on the authorities under the Act but when the Supreme Court or the High Court has declared the law on the question arising for consideration it will not be open to a Court to direct that a circular should be given effect to and not the view expressed in a decision of the Supreme Court or the High Court. To the same effect are the following decisions: - CCE v. Ratan Melting Wire Industries : 220 CTR 98 (SC) - J K Synthetics vs. CIT: 83 ITR 335 (SC) - CIT vs. Hero Cycles Pvt Ltd : 228 ITR 46 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rising on account of foreign exchange transactions not yet matured, is incorrect as per law after due consideration of the aforesaid judicial precedents. The direction given in the said Instruction to disallow mark to market losses, therefore, it is respectfully submitted, cannot be the basis to disallow unrealized losses since: (a) the said disallowance would be in violation of the law laid down by the apex Court, which is binding on all the authorities; (b) any instruction issued by the CBDT directing a quasi-judicial authority to disallow a particular claim is violative of section 119 of the Act and hence not binding on the assessing officer and/ or the appellate authority; (c) the instruction issued by the CBDT being contrary to the decision of the apex Court, the Instruction must be regarded as having been overruled by the said decision. On perusal of the above, it is clear that the foreign exchange fluctuation loss claimed on mark to market basis on the closing balance sheet date for the year ending 31st March 2012 was neither contingent nor notional loss and was hence allowable deduction. 52. It is further respectfully submitted that the claim of deduction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing officer should disallow only the net amount of expenditure debited to the profit and loss account on account of Mark to market foreign exchange losses. The claim of the assessee that it is not debited any expenditure but recovered everything from its associated enterprise and therefore it needs verification. 56. The learned authorised representative reiterated that that Mark to market losses incurred by the appellant has been fully recovered from its Associated Enterprises ( AEs ). In this regard, he submitted as under: 1. The appellant suffered MTM loss of ₹ 24,59,04,852, which is included in the net loss of ₹ 19,00,50,366 debited to Profit Loss Account. The relevant extracts of audited financial statements along with break-up of the foreign exchange loss are enclosed herewith as Annexures 1 and 2 respectively (also placed at Pages 667 and 799of Merit PB-II respectively). 2. As per Clause 3 of the Software Products and IT/ ITES Services Agreement dated 01.04.2010 entered into between the appellant and Steria Limited, UK, the loss suffered by the appellant company is fully recovered by the appellant from its AEs, without any mark up. A copy of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion panel also made it clears that if the assessee has debited excess amount on the foreign exchange loss and is credited why amount being reimbursed by the associated enterprise of foreign exchange loss to the profit and loss account than disallowance should be restricted to only X-Y. Clause 3 of the Software Products and IT/ ITES Services Agreement dated 01.04.2010 entered into between the appellant and Steria Limited, UK, the loss suffered by the appellant company is fully recoverable by the appellant from its AEs, without any mark up. Assessee also contested by submitting certificate dated 12.10.2016 issued by statutory auditors of the appellant, wherein having regard to the revenue computation mechanism followed by the appellant, it has been certified that that the revenue recorded in the books of account includes recovery of the foreign exchange currency loss suffered by the appellant in terms of sub-clauses 3.3.2 of the agreement with AEs. Assessee has also made available back-up working of the certificate comprising of segment wise computation of revenues derived by the appellant whereby it is clearly demonstrated that the revenue from operations of ₹ 626.655 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing officer erred on facts and in law in completing assessment under section 144C read with section 143(3) of the Income-tax Act ( the Act ) at an income of ₹ 147,63,84,824 as against the returned income of ₹ 123,46,67,790. Transfer Pricing Issues: Software Development Service Segment 2. That the assessing officer erred on facts and in law in making an adjustment of ₹ 23,42,50,069 to the arm s length price of the international transaction of provision of software development services on the basis of the order passed under section 92CA(3) of the Act by the Transfer Pricing Officer ( IPO ). 2.1 That the DRP/TPO erred on facts and in law in considering the following companies in the final set of comparables for the purpose of benchmarking analysis not appreciating that these companies are functionally not comparable to the appellant: a. Larsen Toubro Infotech Ltd. (seg) b. Mindtree Ltd. c. Thirdware Solutions Limited 2.2 That the DRP upheld the inclusion of Larsen Toubro Ltd. (seg) allegedly holding that broad functional similarity is to be established while applying Transactional Net Margin Method ( TNMM ). 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees 1,83,35,898 5,18,09,969 7,01,45,866 Standby and callout charges 21,50,660 21,50,660 Total 7,22,96,526 3.2 That the DRP/ assessing officer erred on facts and in law in not appreciating that both the export turnover and total turnover have to be computed on the same basis for the purpose of computing deduction under section 10AA of the Act. 3.3 That the DRP/ assessing officer erred, while making the purported adjustment from the export turnover , following the assessment order for preceding assessment years, without appreciating that the said issue has already been decided by the ITAT in favour of the appellant in assessment year(s) 2003-04 to 2011-12. 4. That the assessing officer has erred on facts and in law in allowing short credit of advance tax paid to the extent of ₹ 97,70,469/-. 5. That the assessing officer erred on facts and in law in levying interest under Section 234B and 234D of the Act. 61. The brief facts of the case shows that assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16 the forex loss or gain was considered as an operating income on expenditure. 64. The learned departmental representative women to read the page number three of the direction of the learned Dispute Resolution Panel stating that as per the transfer pricing document the assessee is shielded from any loss on account of foreign exchange fluctuation with respect to the transactions with its associated enterprises and therefore the foreign exchange risk remains on the assessee only to the extent of services provided to 3rd party. Therefore, the operating profit or loss gain be adjusted only to the extent of foreign exchange loss or gain earned by the assessee on its transactions with third parties and not with associated enterprises. 65. We have carefully considered the rival contention and perused the order of the coordinate bench in case of the assessee for assessment year 2015 16 wherein in para number 5.6 the issue of whether the forex is an operating income or loss was discussed with respect to ITeS segment. However, there was no issue before the coordinate bench with respect to IT services as the issue in the impugned appeal. For the purpose of considering the forex lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable to the assessee s activities rather than the consolidated account. He further stated that the issue of unallocated expenses and segmental accounting being incorrect has never been raised before the authorities below. He further stated that in case of a company that is no question of giving an allocation Kiefer unallocated expenditure. In case of a corporate, there may be certain expenditure, which are not at all to be allocated to the any of the segments, and therefore only for this reason the segmental results cannot be rejected. He further stated that the several judicial precedent raised by the learned authorised representative are not relevant as the functional profile of the assessee is not comparable with those assessees. He once again reiterated the principle regarding the exclusion of or inclusion of any comparable should be made only qua the functions performed by the assessee and not on the basis of certain judicial precedents, which have dealt with different functional profile of different assessee. 69. We have carefully considered the rival contentions. We fully agree with the contentions principally that the comparability analysis should be restricted to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nto three segments service cluster, which includes banking and financial segment and insurance segment, industrial cluster that includes high-tech in consumer electronics consumer retail and former energy et cetera and telecom sector which refers to the product engineering services. Accordingly, the segmental information of this comparable was presented. The assessee is objecting that it has certain unallocated expenses and therefore the comparison of the industrial cluster segment with the assessee though functionally comparable but for this reason this comparable should be excluded. We do not agree with this argument of the learned authorised representative. This information is provided in the annual accounts of the comparable in terms of Accounting Standard 17 Segment Reporting . This stanadard is mandated as per law by the Ministry of Company affairs, therefore it have binding effect of a law. The expenses should be allocated in terms of that standard for preparing of segment reporting as per following provision of that standard:- 5.6 Segment expense is the aggregate of (i) the expense resulting from the operating activities of a segment that is directly attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for that segment and over all lower profit as MNE. It is not the case of the assessee that segmental information presented by the Larsen and Toubro InfoTech Ltd suffers from any non-compliance with the accounting standard segmental information. In case of any company, which is dealing in different segments, there would be certain unallocated expenses, which are never allocated to any of the segment. The reason is that that expenditure does not belong to the segment and should not be considered in the profitability of that segment. Therefore, for the simple reason that there are unallocable expenses, which are, not related to any of the segment, on this ground the comparable should be excluded. We are of the view that unless there is a specific qualification by the auditor of not following the relevant accounting standard with respect to the segmental information then only there can be doubt on the audited financial statement of the comparable company. In this case the segmental information has been accepted by the directors in their directors report while discussing the performance of the company, the auditor has also stated that proper accounting standards have been followed which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vities in the domain of e-business, data warehousing and business intelligence, ERP and maintenance and re-engineering of legacy mainframe applications. The company also undertaken full life cycle product engineering and owns proprietary IP building blocks in the area of Bluetooth, VOIP, Telecom, industrial automation etc. (Pg 115 of annual report paper book).In the annual report it is further stated that the company is engaged in providing solutions in the form of proprietary products / technologies such as MindTest, Mwatch, mpromo etc. (Pg 37 of Annual Report paper book). Further, the company has a proprietary delivery platform namely ONEmind (Pg. 39 of Annual Report paper book). In addition, the company has filed numerous patents in India as well as in the USA (Pg 76 of annual report paper book). Accordingly, it is submitted that since the company has developed and it owns various proprietary products platforms and has filed for various patents, it cannot be regarded as an appropriate comparable for the purpose of benchmarking the international transactions undertaken by the appellant, a captive software service provider. 75. The learned departmental representative submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the range of 3%. However according to us both this comparable are correctly included in the comparability analysis. 78. With respect to the Thirdware solutions Ltd (overseas segment) included by the learned transfer pricing officer it was submitted by the learned authorised representative that overseas segment has been included in case of the company and further there are unallocable expenses of ₹ 401.12 lakhs. However on looking at the direction of the learned dispute resolution panel at page number 6 and 7 we find that the is no such argument advanced by the assessee on this comparable as advanced before us. Even otherwise, in view of our finding with other comparable, we do not see it correct to exclude a comparable on unallocable expenses . In segment reporting this is mandate of As 17 and Law. On looking at the revenue recognition note at page number 72 of the standalone financial statement of this comparable it is found that its revenues are from software development and implementation. Further comparison of the overseas segment also not suffer from any infirmity because assessee is also providing services to its overseas associated enterprises. In view of this, we d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing officer allowed only 18,80,82,642. The main reason is the exclusion of the expenditure of ₹ 72,296,526/ from the total turnover of the assessee for the purpose of computing deduction u/s 10 AA of the act. Learned assessing officer while calculating the deduction has excluded the expenditure of subsistence for on-site employees and standby and callout charges of ₹ 72,296,526 from the total turnover. The learned dispute resolution panel also upheld the finding of the learned assessing officer. the appellant, for the purpose of computing allowable deduction under section 10AA of the Act, reduced those expenditure, incurred in foreign currency, from both export turnover as well as the total turnover of each of the units. The learned assessing officer computed the deduction allowable under section 10AA of the Act from ₹ 18,83,49,607 to ₹ 18,08,82,642 on the ground that subsistence for onsite employees and standby and callout charges needs to be reduced from the value of export turnover but not from total turnover for the purpose of computing deduction under section 10AA of the Act on the basis of detailed reasoning given in order for assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under section 143(3) read with section 144C of the Income-tax Act, 1961 ( the Act ) at an income of ₹ 170,83,44,980 as against the returned income of Rs.l 10,55,66,130 under normal provisions of the Act. Transfer Pricing Issues; 2. That the assessing officer erred on facts and in law in making transfer pricing adjustment of ₹ 29,50,00,656 to the arm s length price of the international transactions of provision of software development services undertaken with the associated enterprise on the basis of order passed by the Transfer Pricing Officer ( TPO )/ Dispute Resolution Panel ( DRP ). 3. That the DRP/ TPO erred on facts and in law in resorting to cherry picking and considering following companies in the final set of comparable companies allegedly holding them to be functionally comparable to the Appellant. a. Larsen Turbo Infotech Ltd. (Seg) b. Thirdware Solutions Limited c. Persistent Systems Limited d. Cybercom Datamatics Information Solutions Ltd. e. Tata Technologies Ltd. f. ABM Knowledgeware Ltd. g. Technosoft Engineering Projects Ltd h. Wipro Ltd i. Sasksen Technologies Ltd (Seg) j. Mindtree Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover , following the assessment order for preceding assessment years, without appreciating that the said issue has already been decided by the Delhi High Court in favour of the appellant in assessment year(s) 2004-05 to 2011-12 and subsequently been confirmed by the Supreme Court in the case of CIT vs. HCL Technologies Ltd.: 404 ITR 719 and directed not be pressed as per subsequent Circular No. 4/2018 dated 14th August 2018 issued by the CBDT. Disallowance of Management Services Fees 11. 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 ₹ 20,60,44,024 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. 11.1 That the DRP/ assessing officer erred on facts and in law in holding payment made to Groupe Steria SCA ( Steria France ) towards management services fees to be in nature of Fees for Technical services ( FTS ) in terms of Article 13 of India-France Double Tax Avoidance Agreement ( DTAA ) read with Protocol thereto. 11.2 That t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) of the Act, for non-deduction of taxes at source under the provisions of section 195 of the Act, on purchase of computer software licenses. 12.1 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. 12.2 Without prejudice to the above, the the DRP/ assessing officer has erred in law and on facts in not appreciating that the disallowance provisions under section 40(a)(i) of the Act are applicable only in relation to amounts 'payable as at March 31 and not in relation to amounts paid during the year. 12.3 Further without prejudice to the above, the DRP / assessing officer further 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. 13. That the assessing officer has erred on facts and in law by not allowing credit of Tax Deducted at Source ( TDS ) to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to ₹ 206,044,024/ c. disallowance of Mark to market losses on forward contracts of ₹ 318,349,259 d. disallowance u/s 40 (a) (ia) of ₹ 110,744,356 97. Thus the draft assessment order determined the total income of the assessee at ₹ 204,49,91,225/ . Against which the assessee preferred an objection before the learned Dispute Resolution Panel and consequent to that the learned Assessing Officer passed the final assessment order on 18th of July 2018 detailing the following adjustment/ additions or disallowances :- (i) adjustment on account of the transfer pricing provisions with respect to the arm s-length price of the software services of ₹ 295,000,656 (ii) disallowance of deduction u/s 10 AA of the act of ₹ 1,536,691 (iii) disallowance/addition on account of payment of management and services fees to group company ₹ 206,044,024/ (iv) Disallowance u/s 40 (a) (ia) of ₹ 100,197,482. 98. Ground number 2 9 of the appeal is with respect to the challenge to the transfer pricing adjustment of ₹ 295,000,656/- of the international transaction of provision of Software Development Services. After the direction of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded from the set of comparable companies. 101. The learned departmental representative submitted that no such submission was made before the lower authorities objecting that it fails the export filter. He further submitted that the assessee challenges based on only in two lines in annual report that there is only domestic turnover during the year. At the same time annual report contains how foreign exchanges are treated in its accounts therefore there appears to be a mismatch. In profit and loss account there is no further division. Since the transfer-pricing officer has applied export turnover filter and this company has passed the filter it means that data uploaded there pertaining to the export turnover is correct. 102. We have carefully considered the rival contention and perused the orders of the lower authorities. The assessee has submitted the standalone balance sheet of the above company at page number 1 24 of the paper book. In the present case when the CIT DR himself says that there is an inconsistency in data whether the above comparable company meets the export filter applied by the learned transfer pricing officer or not is not clear, on such inconsistent data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be verified. The annual accounts of this comparable are furnished by the assessee at page number 324 361. It is considered. Merely because assessee has not challenged the same before the learned dispute resolution panel, when it is not the comparable selected by the assessee, we are of the view that it can be challenged by the assessee before us. It is not the case that assessee is changing its stand from his own documents. On looking at the annual accounts of this comparable company at note number 14 it is that intangible assets on goodwill. This company also on technical know-how and patents trademarks and rights of ₹ 3535 million. The assessee does not have any such advantage of the assets employed. Therefore, there is a basic difference between the assets employed by the assessee as well as the comparable company for earning revenue. Further, the comparable company has revenue from operation of ₹ 387,651 million. On these two factors, itself this comparable company i.e. Wipro deserves to be excluded from the comparability analysis. Hence, we direct the learned transfer-pricing officer to exclude it. 106. In case of Third ware Solutions It is submitted that as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y consulting, cloud, digital business s, independent testing, infrastructure management services, mobility, product engineering and SAP services (Pg 76 of annual report). At page 30 of the annual report it is stated that the CTO of the company leads the technology thrust through platforms and products for non-linear revenue growth. Also, at page 31 of the annual report, the company has described various proprietary platforms and products such as Vmunify, VMware etc. under the heading non linear products and platforms. Accordingly, it is submitted that the company develops, owns and exploits platforms and products and accordingly cannot be regarded as an appropriate comparable for benchmarking the international transactions undertaken by the appellant, a captive service provider. Thus it needs to be excluded. 110. The learned departmental representative submitted that assessee itself is taken this company is functionally comparable in its transfer pricing study report and assessee has not excited any specific reason as to why its TP study report with respect to this comparable is wrong. It was further stated that the learned that transfer pricing officer and dispute resolution pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales 886.18 RPT/Sales 87.68% In view of the previously mentioned, since the company fails the RPT filter i.e. the related party transactions of the company are more than 25% of its revenue, the company ought to be excluded from the set of final comparable companies. 113. The learned departmental representative submitted that appellant has challenged that in that the RPT filter fails. He submitted that certain challenges been made for the first time and therefore same should not be entertained however he stated that if the RPT filter fails then the matter back to the learned transfer pricing officer to examine this. 114. We have carefully considered the rival contention and perused the standalone financial statement submitted before us by the learned that authorised representative in the paper book at page number 169 201. The learned authorised representative has also extracted certain financial information from the annual accounts, which shows that according to him the related party transactions in proportion to the sale is 87.68% in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the paper book at page number 110 153 (annual report page number 156 198). In its revenue stream as per page no 166 of Standalone Financial statements its revenue recognition shows that:- Income from software services Revenue from time and material engagements is recognized on time proportion basis as and when the services are rendered in accordance with the terms of the contracts with customers. In case of fixed price contracts, revenue is recognized based on the milestones achieved as specified in the contracts, on proportionate completion basis. Revenue from royalty is recognized in accordance with the terms of the relevant agreements. Revenue from maintenance contracts is recognized on a pro-rata basis over the period of the contract. Unbilled revenue represents revenue recognized in relation to work done on time and material projects and fixed price projects until the balance sheet date for which billing has not taken place. Unearned revenue represents the billing in respect of contracts for which the revenue is not recognized. The Company collects service tax and value added taxes (VAT) on behalf of the government and, therefore, these are not economic benefits f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee. 121. We have carefully considered the rival contentions and standalone annual financial statements (abridged) submitted by the assessee. It requires to be noted First that this comparable company was selected by the assessee accepting segmental information given in the annual accounts taking the multiple year data and considering the weighted average PLI of the comparable of OP/OC at the rate 7.45%. Subsequently, when the transfer-pricing officer held that multiple year data couldn t be allowed, the same segment of the same comparable companies profit level indicator , taken on single year data basis now reached at 33.20%. Now it is claimed by the assessee that this comparable requires to be excluded. Before us, the assessee has not submitted stand alone complete financial statement of the comparable company. Assessee has submitted the consolidated annual report of the company, which included abridged financial statement of the comparable. In absence of these standalone financial statement of the comparable company made available before us, we are not in a position to state that on what basis assessee held it 1st to be comparable and when found that the profit level indic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annual report paper book). Further, the company is engaged in the business of development, testing, implementation, migration of home grown and other applications, marketing and manufacturing of various information and technology products and services. Accordingly, it is submitted that the nature of services provided by this company is different from the software services provided by the appellant and therefore, this company cannot be regarded as an appropriate comparable for benchmarking analysis. However, the TPO has considered this company as comparable on the basis that under TNMM only broad comparability is to be seen. It is submitted that the aforesaid contention of the TPO is contrary to the findings of the Hon ble Delhi High Court in the case of Rampgreen Solutions Pvt Ltd vs CIT 377 ITR 533 wherein the Hon ble Court held that selection of TNMM cannot be a consideration for dilution of comparability standards. To the same effect is the decision of the Hon ble Delhi High Court in the case of Avenue Asia Advisors Pvt Ltd (ITA No. 350/2016) wherein the Hon ble Court held that the principles governing the selection of comparables remains the same irrespective of the method appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be regarded as an appropriate comparable. It is submitted that the company is engaged in provision of services as well as sale of products. At page S-1227 (Pg _____of annual report paper book) of the annual report it is stated that the company won awards for innovative products like Sapphire and Campus Next. Further, the company has recorded a sum of ₹ 54.82 crores towards cost of bought out items for resale, which substantiates the contention of the appellant that the company is engaged in sale of software products (pg _________ of annual report paper book). It is further submitted that the company owns significant intangibles in the form of software and business rights. Accordingly, it is submitted that for this reason too, this company cannot be regarded as an appropriate comparable for undertaking benchmarking analysis. (Pg ______of annual report paper book) (Pg S-1245 of the Annual report) It is submitted that the TPO has considered the Industrial Cluster segment of this company for the purpose of benchmarking analysis. However, it is submitted that the segmental information with respect to sale of services and sale of products is not available in the annual report of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S1225 of the annual report wherein the directors report is available. The Directors report says that this company has initiated and completed the transfer of its product engineering services business unit to another company effective from January 1, 2014. Therefore, it is apparent that the revenue of that division was included in the revenue of the comparable company from 1 April 2013 to 31 December 2013. On careful reading of note number AB, AD it is apparent that the details of the discontinued businesses are provided. This argument was raised by the assessee before the learned dispute resolution panel at the page number four of its direction. This argument was not at all considered by DRP. Learn a dispute resolution panel retained this comparable company. This comparable is selected by the transfer-pricing officer. Therefore it is evident that there is an extraordinary event during the mid-of the year in case of comparable company which has a material impact on profitability statement of the comparable company as there is significant amount of revenue which is required to be adjusted on account of discontinuing operations. For this reason, for assessment year 2014 15 we direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Noida SEZ Unit 3 Total (in INR) Telecommunication charges 89,75,804 25,46,308 1,15,22,112 Total 1,15,22,112 The appellant, for computing allowable deduction under section 10AA of the Act, reduced such telecommunication charges from export turnover as well as total turnover of each of the units. The assessing officer, however, recomputed the deduction allowable under section 10AA of the Act from ₹ 23,12,73,820 to ₹ 22,97,37,129 on the ground that telecommunication charges needs to be reduced from the value of export turnover but not from total turnover for the purpose of computing deduction under section 10AA of the Act. The DRP, though appreciating that the issue stands covered in appellant s favour by order(s) of the Hon ble Delhi High Court in the appellant s own case for AY(s) 2004-05 to 2011-12, dismissed the appellant s objections on the ground that Department s SLP against the order of Delhi High Court is pending before Supreme Court. Accordingly, the deduction under section 10AA of the Act was disallowed to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2012 13 and 2013 14 by this order wherein the disallowance is deleted. For similar reasons given therein, we also direct the learned assessing officer to delete the above disallowance for non-deduction of tax. In view of this ground number 11 is allowed. 134. Ground number 12 along with its sub grounds is challenging the disallowance of payment made to Steria France of ₹ 100,197,482/ u/s 40 (a) (i) of the act for non-deduction of tax at source u/s 195 of the act on purchase of computer software licenses. During the course of assessment proceedings, the assessee furnished details in this regard showing payment of ₹ 100,197,482 Under the head repairs and maintenance (others) to the group company on which tax deduction at source has not been made. However, during the course of hearing before the learned dispute resolution panel the assessee filed additional evidences, which were admitted, remand report of the assessing officer was called for and rejoinder of the assessee was also obtained. The learned dispute resolution panel in its direction at para number 2.5.2.2 held as Under:- 2.5.2.2 we have considered the submissions of the assessee. In its submissions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mp sum consideration, for the transfer of all or any right (including the granting of a license) in respect of a copyright, patent, trademark, design and model, or secret formula et cetera. In order to acquire the limited right to use the software, one does not require the copyright, one merely requires to become a lawful possessor of the computer program. The license usually gives licensee the same limited right to bona fide use which Section 52 of the Copyright act otherwise allowed to and since the granting of license involves granting of right to use the copyright, consideration for use of copyright is covered in both income tax act and DTAA. Clearly what is licensed in these transactions is the copyright and other intellectual property rights in the software along with the physical software, there is no assignment of rights, rather only the right to which use has been granted which is well covered within the definition of royalty and as long as the consideration is in respect of specified intellectual properties, the consideration is for royalty. Besides, a software program is not a product but process that is made available by the AE and payment for license to use such comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices 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. Apropos the aforesaid Agreement, the appellant has purchased certain software licenses from Steria France in the course of the year. The licenses, as per the invoice, are as under: - Paulo Alto Wildfire -Software License charge - Messaging 360 One - Call Windows - Antivirus + Tactem - IBM License cost - Active Directory costs - Microsoft Maintenance - One IT Catalogue - Desktop Services SCCM The aforesaid payments, not being chargeable to tax in terms of section 9(1)(vi) of the Act read with Article 13 of the India France DTAA, were made without deduction of tax at source. During the course of assessment proceedings, the assessing officer, vide questionnaire dated 28.09.2017, directed the assessee to submit party wise detail and information of TDS compliance of other expenses reflected in Note 16 of the audited Profit and Loss account. In compliance thereto, the assessee submitted the requisite details vide letters dated 30.10.2017 and 10.11.2017. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent to French resident. The definition of royalty under the India-France DTAA is much narrower in scope than the definition under the Act. - In the present case, the software purchased by the appellant are standardized and not customized products and in terms of the contracts with the external suppliers/ Steria France of such software. The appellant acquires a non-exclusive, non-transferable right to distribute the software and is prohibited from copying, modifying or further development of the software. Therefore, the purchase of software by the appellant in terms of the Agreement only results in the transfer of a copyrighted article, rather than a copyright right and payment received for the same would, on that note, in our respectful submission would not be in the nature of royalty in the hands of Steria France. - Reliance is placed on the following decisions of the jurisdictional Delhi High Court, wherein it has been held that software purchased and sold without obtaining any right to exploit the copyright in such literary work, which remains with the Licensor, payment made there against is not in the nature of royalty: - DIT v. Infrasoft Ltd.: 220 Taxman 274 - It may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce the payments made under the agreement were to acquire software products or purchase of copyrighted article and not to exploit/use the copyright itself, the said payments did not fall within the meaning of royalty under Article 13 of the India France DTAA. Therefore, the disallowance made by the DRP/ assessing officer in terms of provisions of section 40(a)(i) of the Act is not warranted. 136. The learned authorised representative therefore submitted that issue is squarely covered in favour of the assessee by the decision of the honourable Delhi High Court in case of decision of DIT versus infra soft Ltd (supra). 137. The learned departmental representative vehemently supported the order of the learned AO and the learned dispute resolution panel. 138. We have carefully considered the rival contention and perused the orders of the lower authorities. The learned dispute resolution panel has categorically held that as the revenue has not accepted the decision of the honourable Delhi High Court in case of DIT versus infra soft Ltd (2013) 39 taxmann.com 88) the decision of the honourable jurisdictional High Court and therefore the addition made by the learned assessing offi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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