TMI Blog2020 (10) TMI 750X X X X Extracts X X X X X X X X Extracts X X X X ..... see could not take possession of the office premises and the lessor did not repay the said security deposits - HELD THAT:- We find that the assessee has furnished additional evidences before the DRP. We are of the considered view that such additional evidences should have been examined thoroughly. We, accordingly, restore this issue to the file of the Assessing Officer. The assessee is directed to furnish all the additional evidences in support of the claim of write off and the Assessing Officer is directed to examine the same and decide the issue afresh after giving reasonable opportunity of being heard to the assessee. Income accrued in India - dividend income - benefit of applicable Double Taxation Avoidance Agreement between India and Germany ( DTAA ) qua the rate of tax on payment of dividend to the shareholder (Giesecke Devrient GmbH) - interplay between Section 115-0 of the Act on one hand, and Article 10 of DTAA governing taxation of dividend on the other - whether the Dividend Distribution Tax [DDT] is tax on the company or the shareholder since the admissible surplus stands reduced to the extent of DDT? - HELD THAT:- As in GODREJ AND BOYCE MFG. CO. LTD [ 2010 (8) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17 to 22 of the appeal memo (iii) Disallowance of expenditure u/s 40a(ia) of the Act which covers ground Nos 29 to 38 of the appeal memo. 3. Representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules and have also perused the judicial decisions relied upon by both the sides. 4. G D, the appellant, was incorporated in 2001 as a 100% subsidiary of G D GmbH, with its corporate office located in Gurgaon. The appellant primarily deals in trading of Currency Verification and Processing Systems. G D India imports these machines from its AEs for resale in India and as part of the related services, G D also buys and resells annual maintenance contracts to its customers in India. The appellant is also engaged in distribution and personalization of smart cards in India, which are imported from its AEs. These smart cards are for Payment Card industry and in the nature of chip cards, magnetic cards etc. The primary customer of the smart card is the banking sector. The appellant also r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Other Method 13 Recovery of expenses 2,200,203 Other Method SMART CARD DISTRIBUTION SEGMENT 6. In the transfer pricing study, TNMM was taken as the most appropriate method for benchmarking trading segment dealing with imports from AEs. The appellant reported NPM from distribution of smart cards at 5.26% and compared the same with three years weighted average working capital adjusted NPM of independent comparables at 0.28%. 7. The TPO was not satisfied with the selection of comparables and after analysing the comparables, two comparables were selected, namely, Idea Telesystems Ltd and Priya Ltd., with a working capital adjusted OP/ OR at 8.75% and accordingly, proposed a TP adjustment of ₹ 3,72,23,538/-. We find that the TPO took combined figures of trading and service segments of the assessee rather than restricting to the figures of trading segment. This can be seen from the computation table wherein the operating revenue is taken at ₹ 13,43,67,865/- and operating cost as ₹ 15,98,34,215/-, which matches with the total of trading and service segments. 8. Objecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of 5.26% which is more than the comparables margin of 2.52% and transaction can be safely considered at arm s length price. We have been told that in A.Y 2014 15, the TPO himself has accepted and used segmental profitability of trading segment for benchmarking of import from AEs. 12. In our considered opinion, when segmental details are available and once segmental and allocation of costs are not disputed, then the TPO was not justified in using combined figures of trading and service segments. We, accordingly, direct the TPO to use trading segment only for determining ALP in this segment. We direct accordingly. SOFTWARE DEVELOPMENT SEGMENT 13. At the very outset, the learned counsel for the assessee stated that without prejudice to all the rights and contentions with respect to inclusion and exclusion of set of comparables and application of filters agitated before the lower authorities, his prayer is made for exclusion of the following two comparables included by the TPO: i) Infosys Limited, and ii) Larsen and Toubro Infotech Limited. 14. Under this segment, the appellant has provided software development support services to its AEs with respect to smartca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011-12 in ITA Nos. 5924/DEL/2012, 3865/DEL/2015 and 1431/DEL/2016 respectively. Considering the past history of the appellant in the light of facts mentioned hereinabove, we direct for exclusion of Infosys Limited from the final set of comparables. LARSEN AND TOUBRO INFOTECH LTD. 20. The risk profile is the same as that of Infosys Ltd. The appellant operates at minimal risks as 100% services are provided to AEs whereas Larsen and Toubro Infotech Ltd operates as a full-fledged risk-taking entrepreneur. Similarly, the software development segment of the appellant is being compared whereas segmental details in the case of Larsen and Toubro Infotech Ltd with bifurcation of expenditure for software development and product engineering are not available. In this case also, Larsen and Toubro Ltd owns software of 132 crores. The most alarming fact is that Larsen and Toubro Infotech Ltd has un-allocable expenditure of ₹ 225.73 crores. 21. For this very reason, the coordinate bench in the case of Pitney Bowes Software India Ltd 192TTJ778 has excluded Larsen and Toubro Infotech Ltd from the final set of comparables on account of major unallocable expenses observing that in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the findings given by the Tribunal in assessee s own case in A.Y 2011 12. Accordingly, grounds Nos 29 to 38 are treated as allowed for the statistical purposes. DISALLOWANCE OF ADVANCE WRITTEN OFF. 28. Facts on record show that the assessee entered into a lease deed with E-Lights Techno Park Pvt Ltd for office premises in Chennai and paid following deposits to the lessor: - Security deposit - ₹ 35,35,760/- - Maintenance Security Deposit - ₹ 11,33,256/- 29. For some reason, the assessee could not take possession of the office premises and the lessor did not repay the said security deposits. In A.Y 2011 12, the assessee made a provision for doubtful advances but the same was added back in the computation of income. However, in the present A.Y, that is, 2013 14, as the security deposit could not be recovered, the same were written off from the provisions and claimed as deduction in computation of income. 30. The Assessing Officer disallowed the claim of write-off by holding that the same has to be considered in terms of section 36(1)(vii) read with section 36(2) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , therefore, as per the ratio laiddown by the Hon ble Supreme Court in the case of NTPC 229 ITR 383, the same deserves to be admitted and adjudicated. 36. The ld. DR strongly opposed to the admission of additional grounds. The ld. DR vehemently stated that this issue was never taken before the assessing officer nor before the DRP and it is nothing but a malafide attempt to distort the appellate proceedings. It is the say of the ld. DR that the issues raised vide additional grounds are not only legal issues but also need verification of facts. The ld. DR further stated that the lower authorities have followed due process of law and there was no denial of natural justice and this action of the assessee is nothing short of malafide. 37. We have given thoughtful consideration to the rival contentions. We have carefully perused the additional grounds. A similar grievance was raised by way of additional ground of appeal in the case of Maruti Suzuki India Ltd 961/DEL/2014 and the Tribunal, vide interim order dated 31.10. 2019, admitted the additional ground for adjudication. The revenue approached the Hon ble High Court of Delhi by way of writ petition and the Hon ble High Court of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dend: 44. The genesis of charge for levy of additional Income Tax u/s 115-0 on the profits declared/distributed and paid by a corporate assessee by way of dividend can be traced to the charging provisions of Section 4 of the Act which provides as under: 4. Charge of income- tax (1) Where any Central Act enacts that income- tax shall be charged for any assessment year at any rate or rates, income- tax at that rate or those rates shall be charged for that year in accordance with, and 2 subject to the provisions (including provisions for the levy of additional income- tax) of, this Act] in respect of the total income of the previous year] of every person. 45. It can be seen from the above that this section provides for charge of tax, including additional Income tax on the total income of every person. 46. Section 2(24) defines Income which includes: a) profits and gains; and b) dividend. Xxxxxx 47. Tax has been defined in section 2(43) as under: Tax in relation to the assessment year commencing on the 1st day of April, 1965 , and any subsequent assessment year means income- tax chargeable under the provisions of this Act, and in relation to any ot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evied u/s 115-0 is a tax on income and definition of Income includes dividend. 52. As per the Income Tax Rules, relevant details regarding payment of DDT have to be provided in the Income Tax return form and have to be disclosed in the Tax Audit Return [Form 3CD]. Further, the Income tax assessment order read with the Income tax computation form quantifies DDT liability. It would not be out of place to mention that the Act does not provide for a separate adjudication/passing of separate order with regard to adjudication of liability of DDT. Section 115-Q merely provides for the consequences of non-payment of DDT, but there is no separate/specific provision in the Act for collection and recovery of DDT in default. 53. At this stage, it is important to examine the legislative history of section 115-0 of the act. The Memorandum to the Finance Bill, 1997 discusses the erstwhile system of collecting Income tax on profits distributed by the companies and relevant extract is reproduced as under: Under the existing system of collection of tax on dividends, every company, at the time of paying dividend to a shareholder in excess of '₹ 2500, is required to deduct tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se maybe, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, provisions of this Act shall apply to the extent they are more beneficial to the assessee. 59. The Hon ble Andhra Pradesh High Court in the case of Visakhapatnam Port Trust 144 ITR 146 held that provisions of sections 4 and 5 of the Act are made subject of the provisions of the Act which means that they are subject to provisions of section 90 of the Act by necessary implication they are subject to terms of DTAA, if any, entered into by the Government of India. 60. The Hon ble High Court of Calcutta in the case of CIT Vs. Devi Ashmore India Ltd 190 ITR 626, while dealing with the correctness of Circular number 333 dated 2nd April, 1982 137 ITR statute 1 held that: The conclusion is inescapable that, in case of inconsistency between the terms of the Agreement and the taxation statute, the Agreement alone would prevail. 61. The Hon ble Calcutta High Court in the case had expressly approved the correctness of CBDT Circular No. 333 dated 02.04.1982 on the question as to what the Assessing Officer would have to do when they found that the provisions of DTAA were not i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of dividend in the hands of the company was re-introduced by the Finance Act 2003 since it was easier to collect tax at a single point and new system was leading to increase in compliance burden. In view of the above, it is proposed to carry out amendments so that dividend is taxable in the hands of the shareholders at the applicable rates and the domestic company is not required to pay DDT. 65. A conjoint reading of the Memorandum to Finance Bill 1997, 2003 and 2020 would show that levy of DDT was merely for administrative conveniences and withdrawal of DDT is keeping in mind that revenue was across-the-board, irrespective of marginal rate, at which recipient is otherwise taxed. 66. To recapitulate, the DDT is levy on the dividend distributed by the payer company, being an additional tax is covered by the definition of Tax as defined u/s 2(43) of the Act which is covered by the charging section 4 of the Act and charging section itself is subject to the provisions of the Act which would include section 90 of the Act. 67. In our humble opinion, the liability to DDT under the Act which falls on the company may not be relevant when considering applicability of rates of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such a case the provisions of Article 7 or Article 14, as the case may be, shall apply. (5) Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other State may not impose any tax on the dividends paid by the company, except insofar as such dividends are paid to a resident of that other State or insofar as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other State, nor subject to the company's undistributed profits to a tax on the company's undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd entered into at a political level go ahead and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief , David R. Davis, Principles of International Double Taxation Relief , Pg.4 (London Sweet Maxwell, 1985)points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions. It is observed (vide para 1.06): The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s power to breach very much exists; Courts in India have no jurisdiction in the matter, because in the absence of enactment through appropriate legislation in accordance with Article 253 of the Constitution, courts do not possess any power to pronounce on the power of the State to enact a law contrary to its treaty obligations. The domestic courts, in other words, are not empowered to legally strike down such action, as they cannot dictate the executive action of the State in the context of an international treaty, unless of course, the Constitution enables them to. That being said, the amendment to a treaty is not on the same footing. The Parliament is simply not equipped with the power to, through domestic law, change the terms of a treaty. A treaty to begin with, is not drafted by the Parliament; it is an act of the Executive. Logically therefore, the Executive cannot employ an amendment within the domestic laws of the State to imply an amendment within the treaty. Moreover, a treaty of this nature is a carefully negotiated economic bargain between two States. No one party to the treaty can ascribe to itself the power to unilaterally change the terms of the treaty and a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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