TMI Blog2020 (5) TMI 704X X X X Extracts X X X X X X X X Extracts X X X X ..... rder for the assessee and its entire activity has been carried out from outside India and no part of the business activity has been carried out in the India by M/s GD Egypt. The business connection has to be looked into the business operations of M/s GD Egypt in India and not business connection between the operation of the GD Egpyt and business of the assessee in India, because any workfor which the assessee is making payment will always be associated and part of the business of the assessee. Obviously, in the instant case no business connection exist and thus the finding of the learned DRP on the issue is set aside. DRP has held that the services rendered by M/s GD Egypt require expertise and knowledge in the specific area of work and such expertise cannot be developed overnight, but it is the result of long period of the work in this line of activities coupled with accumulated experience of operations and therefore the payment made by the assessee to GD Egypt partakes the character of the FTS under domestic law. In the instant case, the assessee has not invoked any Double Taxation Avoidance Agreement (DTAA) and therefore we are examining only the FTS under domestic law - A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,67,549] 1. On the facts and in law, the Ld. TPO/AO and Hon ble DRP erred in determining the adjustment of ₹ 1,94,67,549/- to the value of international transactions pertaining to Software Development Services Segment. 2. That on facts and in law, the Hon ble DRP and Ld. TPO/AO failed to appreciate the business model and business realities of the Appellant and its Associated Enterprises ( AE ) while conducting the transfer pricing analysis and adopted an entirely flawed approach to reach a conclusion that the Appellant is not compensated at arm s length for its Software Development Services Segment. 3. On the facts and in law, the Ld. TPO erred in not discharging his statutory onus to establish that any of the conditions specified in clause (a) to (b) of section 92C(3) of the Act have been satisfied before disregarding the arm s length price determined by the Appellant and proceeding to determine the arm s length price himself. 4. On the facts and in law, the Hon ble DRP and Ld. TPO/AO have erred in rejecting the economic analysis undertaken by the Appellant without proper justification and conducting a fresh search using arbitrary filters for identifying compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions of the Hon ble DRP that the treatment of foreign exchange gain/loss should be considered as a non-operating item, while finalizing the order section 143(3) read with section 144C of the Act. 14. Without prejudice, on facts and in law, the Ld. AO/TPO and Hon ble DRP erred in not appreciating that adjustment, if any, in computing the profit margin of SIM card Assembly Segment ought to have been restricted to international transaction with AE s and not the whole segment. 15. On facts and in law, the Hon ble DRP and Ld. TPO/AO ered in applying the profit margin of comparable companies to that of the Appellant without taking into account economic commercial reasons and factual data to support the losses incurred in the SIM card assembly segment. 16. On facts and in law, the Hon ble DRP and the Ld. TPO/AO have failed to make appropriate adjustments to account for varying risk profiles of the Appellant vis- -vis the comparables and in the process also neglected the Indian transfer princing regulations, OECD guidelines on transfer pricing and judicial procedure. 17. On the facts and in law, the Hon ble DRP and the Ld. TPO/AO grossly erred in taking the margin on SIM Car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in law, the Ld. AO and the Hon ble DRP grossly erred in not appreciating that the Appellant had actually written off Debtors aggregating to ₹ 29,73,346/- as bad debts which represents income relating to earlier year s which remained unpaid and could not be realized and hence written off. C. Other Grounds 26. On the facts and in the circumstances of the case, the Ld. AO erred in levying interest under section 234B and 234D of the Act. 27. On the facts and in law, the Ld. AO and the Hon ble DRP erred on facts and in law in initiating penalty under section 271(1)(c) of the Act. 2. Briefly stated facts of the case are that the assessee company is engaged in the business of trading of currencies verification and currency processing machines , its after sales warranty services and software services etc. For the year under consideration, the assessee filed return of income on 07/10/2010 declaring total income of ₹ 17,77,56,570/-. The return of income filed by the assessee was selected for scrutiny assessment and statutory notices under the Income-tax Act, 1961 (in short the Act ) were issued and complied with. In view of the international transactions un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 15,94,04,791/-, available on page 92 to 100 of the paper book is reproduced as under: 5.3.1 Functions G D India renders software development services to G D GmbH wherein it develops application software(s) for G D GmbH. In this regard, G D India has entered into a software development agreement effective from December 12, 2005. G D India is primarily engaged in the following software business: Development of software for the Smartcard module, which is sold to G D GmbH. The chip set module software is developed as per the general requirements of the markets and is primarily developed for G D GmbH. About 90% of the total development activity relates to the development software used as a part of the Smartcard module and is sold as a part of the Smartcard. The software development process for the development of the chip set module is further explained in the following parts. Development of application software as per the specific requirements of the clients of G D group. The services are offered to G D GmbH and Giesecke Devrient Asia Pte Ltd. Further, these services are provided to the SIM card distribution division of G D India. This account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et applications, high level architectures, cost estimates and product definition plan ( PDP ) which defines resources and deliverables required to complete the product. Initial product idea is presented along with the business case, requirements, architecture and project plan before the management of G D GmbH. This process allows management to control the allocation of resources to a project starting from its approval and till it is ready to be launched into development. The time schedule as to when to complete each phase of the module is also decided along with the management approval. 5.3.1.3.3 Software specification and Requirement analysis G D GmbH defines the exact specifications/requirement of the project, methodologies and tools to be used in the project, time lines for the completion of the project and standards thereof. The function pertaining to the conceptualization of services is a key aspect and is undertaken by G D GmbH. G D Indian provides its inputs in the requirement analysis phase of the software development process, but this is restricted to the information required by G D GmbH. Thus, G D GmbH is wholly responsible for defining the specification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds to fill in the market place. At the time of finalization of work to be done by G D India, G D GmbH identifies the resources required to undertake the project and also identifies the areas where G D India s assistance would be required. G D GmbH deploys a Senior R D and Marketing Management team to analyze the software requirement and design an architecture based on the analysis. The project team at G D India works in close co-ordination with the project team at G D GmbH. The resources are mobilized depending upon the requirements of the project. Thus, the overall project responsibility remains with G D GmbH which is also responsible for monitoring and managing the entire project. 5.3.1.6 Support Services As per the services agreement entered into between G D GmbH and G D India, G D GmbH may specify post-delivery support obligations. With regard to the support services, based on follow-up with customers, if there is any but in the software, the customers would reach out to Sales Marketing team of G D GmbH are subsequently the Engineering Team is informed of the problem in the software. G D GmbH then takes a call on which team shall be appointed to resolve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnologies. Hence, in that case, business units may face loss of potential revenues due to inefficiencies arising from obsolete products. G D GmbH bears the technology risk as it is the owner of the final software product developed. As the technology is ever-evolving, G D GmbH is constantly upgrading the software. 5.3.3.5 Manpower Risk G D India has skilled workforce to perform various functions relating to development of software. There is a risk of trained manpower leaving the company. Software industry is plagued with high risk of attrition. Thus, G D India bears the manpower risk. However, since G D India functions as a captive unit, G D GmbH in turn also faces manpower risk. 5.3.3.6 Service liability risk Service liability risk refers to the risk associated with the possibility of facing legal action form customers, due to defects in the products provided. G D India provides software services only to its AEs. The risk of service liability to customers of G D GmbH rests with G D GmbH. However, in case of any default, G D India is liable to rework. 5.3.3.7 Credit risk Since G D GmbH sells the products to third party customers on credit ter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of G D India s risk-n-reward matrix. On detailed examination of the functional matrix of software development services rendered by G D India, as outlined in section 5.3.1 above, we understand that G D India is a low risk service provider which is not vested with the capacity utilization decision/risk. The key characteristics of the risk-nreward matrix of software development services rendered by G D India are: G D India executes defined tasks; The KRA of the software head of G D India is linked to the quality of service delivery and he is not responsible to source work from group entities; The software developed by G D India is not sold as a standalone product and is used by G D GmbH as a part of the final deliverable; G D India only participates in the decision-making process regarding capacity utilization with the final decision vesting with G D GmbH; G D India is allocated a specific budged in the Group s global R D scheme; G D India determines the number of employees to be employed in its software development centre based as deductive analysis of the work outsourced by G D GmbH; and The capex decision in relation to the software develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /rejecting the comparables. He also submitted that majority of the revenue of the Infosys was from off-site activities. 3.5 The objection of the assessee of the significant brand value of Infosys also rejected by the Learned TPO. The Learned TPO held that brand building expenses (₹ 57 crores) and marketing expenses (₹ 15 crores) constitute only 0.34% of the total revenue. He also held that brand may have helped Infosys in increasing its No. of clients and retention of the existing client and thus increasing its market, but it has not necessary resulted in better profit margins and there are several other factors which go into the profitability of a concern. Regarding the argument of the assessee that Infosys has incurred substantial R D expenditure and is developing intellectual property and therefore it is different from the taxpayer, the learned TPO held that R D expenses (₹ 438 crores) constitute only 2.07% of the revenue, which cannot be said to be substantial by any standard. In view of the observations, the learned TPO included the company as comparable. 3.6 Before the Learned DRP, the assessee contested that Infosys sells software product for banking ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee that this comparable has been rejected in Assessee s own case in immediately preceding year, i.e. AY 2007- 08 by the Tribunal on account of different risk profile, scale, nature of services, revenue ownership of branded/ proprietary products, onsite and offshore services etc. This fact is not contradicted by the revenue. 79. Further, the Assessee has placed reliance on Aircom (supra), in order to exclude this comparable company on the basis of its magnitude. The coordinate bench has rejected this comparable by making following observations:- 17.2. We have considered the rival submissions and perused the relevant material on record. It can be seen that the TPO has included this company in the list of comparables by rejecting the assessee s contentions. The assessee is providing and assigning software services to its AE alone without acquiring any intellectual property rights in the work done by it in the development of software. The Hon ble Delhi 31 ITA NO. 5924/Del/2012 (Giesecke Devrient India Pvt. Ltd.) High Court in CIT vs. Agnity India Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the giantness of Infosys Ltd., in terms of risk profile, nature of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dismissed as infructuous. 6. The ground Nos. 20-23 of the appeal relates to disallowance of the export commission on account of non-deduction of the tax at source. 6.1 The assessee submitted before the Assessing Officer that it paid commission amounting to ₹ 39,47,160/- to M/s G D LLC, Egypt, for forwarding the sales order to the assessee for sales in the region of Middle East and North Africa. It submitted that the services are carried out by the G D Egypt outside India and not qualify as fee for technical services or royalty as defined under section 9(1) of the Act. It further submitted that payment for such services was also received by the G D Egypt outside India. Therefore, it was submitted that as a non-resident operates out of India, no part of its income accrues arises in India and accordingly such sum would not be liable for withholding tax under the provisions of the section 195 of the Act. Further the assessee relied on the Circular No. 23 of 1969 issued by the Central Board of the Direct Taxes (CBDT) and subsequently reiterated by the CBDT in Circular No. 786 of 2000. 6.2 The Learned Assessing Officer rejected the contention of the assessee. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia to GD Egypt against a right vested in it, the value being computed with reference to the value of the orders, is chargeable to tax in terms of section 5 read with section 9 or not. 11.4.4Considering the facts of the case, it can be said that there is a strong business connection between GD India and GD Egypt. The sale order received by GD India is not possible without honoring the agreement with GD Egypt. GD Egypt is allegedly obtaining and forwarding the orders for GD India for the region. GD Egypt, in terms of the agreement carries out necessary tasks in that region by deputing its representatives etc. to the prospective customers. Thus, the principles laid down by various courts on the issue of business connection when applies to the taxpayer s case do lead to a logical conclusion that there is a strong and vibrant business connection between the taxpayer and the GD Egypt. In this context, the decision in ADIT Vs. Star Cruise India Travel Services, wherein ITAT Mumbai held that: the expression business connection does not cover mere canvassing for business by an agent in India. It postulates a real and intimate relation between business activity carried on outsid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f consultancy services also includes an advisory service, whether or not expertise in technology is required to perform it. The ITAT Hyderabad in case of Tecumseh Products (I) Ltd. Vs. DCIT, 86 ITD 791 has observed that technical services does not include providing some technical knowledge for manufacturing alone. Technical knowledge includes management or consultancy services. In view of the above, and considering the nature of services rendered by GD Egypt, it can be said that the services rendered are such which require expertise and knowledge in the specific area of work, such expertise cannot be developed overnight but is the result of long period of work in this line of activities coupled with accumulated experience of operations. The Panel therefore, believes that the payments made by the taxpayer to GD Egypt partakes the character of FTS under the domestic law. 6.5 Further, the learned DRP held that in view of the explanation below section 9(2), which has been inserted by the Finance Act 2010 with retrospective effect from 01/06/1976, even the income of non-resident deemed to accrue or arise in India irrespective of whether or not business connection in India o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Finance Act, 1976 has amended the Income-tax Act clearly specifying the circumstances in which income by way of fees for technical services will be deemed to accrue or arise in India and also defining the expression fees for technical services . For this purpose, a new clause (vii) has been inserted in section 9(1). 16.2 Under the new provision, income by way of fees for technical services of the following types will deemed to accrue or arise in India: (a) fees for technical services payable by the Central Government or any State Government; (b) fees for technical services payable by a resident, except where the payment is relatable to a business or profession carried on by him outside India or to any other source of his income outside India; and (c) fees for technical services payable by a non-resident if the payment is relatable to a business or profession carried on by him in India or to any other source of his income in India. 16.3 The expression fees for technical services has been defined to mean; 16.4 The aforesaid amendment has come into force with effect form 1-6-1976, and will apply in relation to the assessment year 1977-76 and subsequent years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business connection and according to him the services are in the nature of the consultancy. 6.11 The learned Counsel in the rejoinder submitted that nature of the export commission has never been doubted by the authorities and only issue in dispute is whether the said commission payment for the services are in the nature of the Fee for Technical Services (FTS). According to the assessee, the payment was for only securing orders and not for rendering any managerial technical consultancy services and thus not liable for Fee for Technical services. 6.12 We have heard rival submission of the parties on the issue in dispute. In the case, the assessee has made payment to nonresident company M/s GD Egypt for procuring export order for the assessee. The claim of the assessee that M/s GD Egypt has rendered services out of the India and payment has been also made to the said company outside India. The claim of the assessee that payment in the hands of M/s GD Egypt is not taxable in India and therefore no tax was deducted at source on said payment. The contention of the Revenue is that said payment is income taxable in India in the hands of M/s GD Egypt due to following reasons: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther, according to the Explanation -2 below the section 9(1)(i) also business activity need to carried out in India by any other person on behalf of the non-resident. In the case, there are no such allegation that business activity has been carried out in India by any other person on behalf of GD Egypt. 6.17 Thus, according to the explanation if part of the business operation are carried out in India then such part of the income which is attributable to the operations carried out in India , shall accrue or arise in India. 6.18 The coordinate bench of Tribunal in the case of Evergreen International Ltd (supra) has referred to decisions in the case of GVK industries Ltd Vs. ITO 228 ITR 564 wherein the term business connection has been analysed as under: 4.8.3 Further, Hon ble Andhra Pradesh High Court in the case of GVK Industries Ltd. versus Income Tax Officer, (1997) 228 ITR 564 analysed various decisions of the courts and laid certain principles to decide existence of business connection , as under: 12. Clause (i) of sub-s. (1) of s. 9, extracted above, brings within the fold of the said expression all income accruing or arising, whether directly or indirectly, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. The Indian company employed personnel made available by the foreign company, who worked under the direct control of the Indian company. The Supreme Court held that the services of the foreign company in making the employees available were rendered wholly outside India and that the activities of the foreign personnel lent or deputed by the foreign company did not amount to a business activity carried on by the foreign company in India. It was further held that the fee did not accrue or arise in India nor could it be deemed to have accrued or arisen in India and that to rope in the income of a non-resident under the deeming provision of s. 42(1) of the 1922 Act it must be shown by the Department that some of the operations were carried out in India in respect of which the income is sought to be assessed. In CIT vs. Hindustan Shipyard Ltd. 1975 CTR (AP) 97 : (1977) 109 ITR 158 (AP), the respondent-company entered into an agreement with a Polish company for the purchase of diesel engines with accessories. The agreement provided that the Polish company would render services for the effective fulfillment of the contract of sale, which included organizing of a training course in P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the foreign company was to be technical adviser of the assessee-company in the matter of exploration, mining and mineral dressing operations. The foreign company was to be paid a retainers fee at the rate of 7,000 per annum in London. The ITO treated the assessee-company as the agent of the foreign-company within the meaning of s. 163 of the IT Act and treated 7,000 payable by the assessee-company to the foreign company as its income accruing in the hands of the assessee-company. On appeal, the AAC held that even if the assessee-company was to be treated as an agent within the meaning of s. 163(1), there was no business connection within the meaning of s. 9(1) of the Act so the income accruing to the non-resident foreign company could not be assessed through its agent. That order was affirmed by the Tribunal. On a reference to the High Court of Patna, it was held that the sum of 7,000 was not the income which the foreign-company had received in India or an income which had accrued to the foreign company within the meaning of s. 5(2) of the Act and that the sum paid to the foreign company at London for technical advice given from London could not be attributed to the opera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny part has been carried out by the non-resident entity in India. We find that for having business connection in India the business operations carried out side India and inside India must have relationship as to contribute the business operations as a whole. 6.21 But in the instant case, M/s GD Egypt is responsible for marketing and sales for assessee in the region of middle east and north Africa and has procured sales for the assessee. The business operation of the M/s GD Egypt of procuring sales order for the assessee and its entire activity has been carried out from outside India and no part of the business activity has been carried out in the India by M/s GD Egypt. The business connection has to be looked into the business operations of M/s GD Egypt in India and not business connection between the operation of the GD Egpyt and business of the assessee in India, because any workfor which the assessee is making payment will always be associated and part of the business of the assessee. Obviously, in the instant case no business connection exist and thus the finding of the learned DRP on the issue is set aside. 6.22 Further, the learned DRP has held that the services rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fall under fee for technical services as defined in Explanation -2 below the section 9(1)(vii) of the Act. 4.8.9 Further, we find that the assessee has claimed that no part of services was rendered in India. The contention of the Ld. DR is that in view of the Explanation inserted below the section 9(2), now even if services are rendered outside India, same may fall under fee for technical services. The relevant explanation is reproduced as under: Explanation.-For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the non-resident, whether or not,- (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India. 6.25 In view of the above decision, the payment made for procuring of export sale order for Indian taxpayer by any foreign entities from outside India cannot be held as Fee for Technical Services. 6.26 In view of holding that payment for services of GD Egypt are n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s has been asked vide question number 17 of the questionnaire dated 23 January 2014. Here it is important to mention that the assessee had failed to provide response on the following points: Details asked from the assessee Response of assessee Details of bad debts Assessee had only provided a list of bad debts amounting to ₹ 29,73,346 wherein partywise amounts have been mentioned without any documents. Supporting documents to substantiate whether income pertaining to such write off had been offered to tax in any previous/earlier assessment year Assessee had not provided any documentary evidence.- 7.5 It is evident that no documentary evidence in support of the claim that income pertaining to such write off had been offered to tax as required under the provisions of the Act. In view of the above circumstances, we feel it appropriate to restore this issue back to the file of the learned Assessing Officer with the direction to the assessee to produce all necessary documents in support of its claim before the Assessing Officer, who then will decide t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
