TMI Blog2022 (1) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... ration and direct the AO to delete the disallowance made u/s. 40(a)(i). TP adjustment - transfer pricing adjustment in respect of transactions relating to provision of software services - HELD THAT:- We notice that the co-ordinate bench has directed exclusion of Infosys Ltd., Larsen and Toubro Infotech Ltd. and Persistent Systems Ltd. in the case of SAP Labs India P Ltd [ 2021 (7) TMI 1301 - ITAT BANGALORE] wherein it has followed the decision rendered by another co-ordinate bench in the case of NXP India P Ltd. [ 2020 (5) TMI 86 - ITAT BANGALORE] . Negative working capital - It is the contention of the assessee that the negative working capital should be ignored, since the assessee is a risk free enterprise - A.R placed his reliance on the decision rendered in the case of ACIT vs. e4e Business Solutions India P Ltd. [ 2020 (12) TMI 1255 - ITAT BANGALORE] wherein it has been held that the negative working capital should be ignored, since it artificially increases Arms Length Price. Accordingly, we restore this issue to the file of TPO with the direction to follow the principles laid down in the case of e4e Business solutions India P Ltd. (supra). - ITA Nos. 3156, 3157 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for deduction of TDS also. Accordingly, the Ld CIT(A) confirmed the addition made by the AO u/s. 40(a)(i) in all the three years under consideration. 5. The Ld A.R submitted that the foreign agents are marketing Technotree's products in foreign countries by arranging meetings with customers and other potential clients. They also provide administrative assistance which included procuring Visa, lodging, boarding, travel and other logistics requirements. The Ld A.R submitted that these services will not fall under the category of Fee for technical services. He submitted that the income did not accrue in India in the hands of these foreign agents and hence there is no requirement of deducting tax at source from the payments made to them. He submitted that identical payments made by the assessee in the year relevant to AY 2013-14 were disallowed by the AO. However, the Tribunal deleted the disallowance and the order passed by the Tribunal has since been upheld by the Hon'ble jurisdictional Karnataka High Court, vide its order dated 07-06-2021 passed in ITA No. 834/2018. He further submitted that the Tribunal has examined similar types of payments made in the years relevant to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trative assistance including procuring Visa, lodging, boarding, travel and other logistical requirements, arranging meetings with customers and other potential clients at all the levels (B) Assessment Year : 2014-15 and 2015-16:- (a) SAEI IT Consulting Limited:- Recommending potential clients in Middle east and South Africa, Providing region specific support services like Visa Assistance and work permits, arranging meetings etc. (b) Tramlee Enterprises:- Providing region specific marketing information, to arrange meetings with clients, Providing region specific support services like Visa Assistance and work permits 10. On a perusal of above said services, we notice that the foreign agents have been mainly providing marketing support services and other services provided by them are incidental to the main marketing support services. In our view these services would not fall under the category of managerial, technical or consultancy services contemplated in Explanation 2 to sec. 9(1)(vii) of the Act. In this view of the matter, the payments made to the foreign agents for providing above said services, in our view, would not fall under the category of Fee for technica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. (See Commissioner of Income-tax, Punjab v. R.D. Aggarwal Co. Anr.(1) and M/s. Carborandum Co. v. C.I.T., Madras(2) which are decided on the basis of section 42 of the Indian Income-tax Act, 1922, which corresponds to section 9(1)(i) of the Act.) 13. In the instant case the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission aggregating to ₹ 4,18,21,648/- in foreign currency, to non-resident/foreign parties, without deducting tax at source under section 195 of the Act on such payments. The assessee contended that these payments were made to non-residents operating overseas; who do not have any presence in India and therefore there was no requirement to deduct tax at source on such payments. The AO, however, was of the view that, since the services were rendered in relation to the assessee's business carried out in India from undertakings eligible for deduction under section 10A of the Act, it is liable to be taxed in India and therefore held that the assessee was under obligation to deduct tax at source on such payments. As the assessee had not deducted tax at source on the said commission payments to non-residents, the AO invoked the provisions under section 40(a)(i) of the Act and disallowed these expenses claimed. On appeal, the CIT(A) upheld the order of the AO on this issue. 10.3.1 Before us, the learned AR for the assessee reiterated the submissions put forth before the authorities below. It is submitted that the only reason for disallowance of these expenses incurred on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the AO is that since the services were rendered in relation to the business of the assessee in India, the payments for such services rendered are liable for deduction of tax at source thereon and since TDS was not done thereon, the payments are liable for disallowance under section 40(a)(i) of the Act. 10.5.2 Section 195 of the Act deals with the deduction of tax at source from out of the payments made to non-residents. Under Section 195 of the Act, an obligation is cast on a person making payment to a non-resident of any sum, which is chargeable to tax under the provisions of the Act, to deduct tax at the time of payment of such sum or at the time of credit thereof to the account of the payee, whichever is earlier. In terms of the aforesaid provision, tax is required to be withheld in respect of payments to non-residents only if such payment is chargeable to tax in India. The Hon'ble Apex Court in the case of GE India Technology Centre (P) Ltd., Vs. CIT (327 ITR 456) (SC), explaining its earlier decision rendered in the case of Transmission Corporation of AP Vs. CIT (239 ITR 587) (SC), held that only if the income is chargeable to tax in India in the hands of the no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hence, this Explanation (supra) is only to define and clarify the opening words of Section 195(1) of the Act which reads : any person responsible for paying to non-resident. Therefore, it only defines the person responsible for paying to non-resident and not the payee i.e., the non-resident to whom the payment is being made. 10.5.5 It is, therefore, imperative to first analyze whether the commission paid by the assessee to the non-resident commission agents are chargeable to tax in India. If the answer to the said question is in the affirmative, only then the provisions relating to the withholding of tax under section 195 of the Act shall be applicable/attracted. As per Section 5(2) of the Act, a non-resident is liable to be taxed in India in respect of: (a) income received or is deemed to be received in India in such year by or on behalf of such person; or (b) income accrues or arises or is deemed to accrue or arise in India during such year. Section 5(2) of the Act, the charging section for taxing non-resident income, provides for two conditions (supra). The first condition of receipt of income in India is not applicable to the case on hand, as th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gent having an independent status is acting in the ordinary course of his business. Explanation 2A.--For the removal of doubts, it is hereby clarified that the significant economic presence of a non-resident in India shall constitute business connection in India and significant economic presence for this purpose, shall mean-- (a) transaction in respect of any goods, services or property carried out by a nonresident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or (b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means. Explanation 3.--Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India. From a plain reading of these explanations, it is clear that it is applicable only if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to foreign agents are mainly towards marketing services only. Other services rendered by them are in the nature of support services only, which are incidental to the main marketing support services. Hence we hold that these services do not fall under the category of Fee for technical services. Following the decision rendered by the co-ordinate bench in the assessee's own case AY 2010-11 and 2011-12 and also the decision rendered by Hon'ble High Court of Karnataka in AY 2013-14 in assessee's own case, we hold that no income chargeable in India has accrued in the hands of the foreign agents. Accordingly, we hold that the assessee is not liable to deduct tax at source from the payments made to the foreign agents. Accordingly, we set aside the orders passed by Ld CIT(A) on this issue in all the three years under consideration and direct the AO to delete the disallowance made u/s. 40(a)(i) of the Act. 14. We shall now take up another issue urged in assessment year 2012-13, i.e., the addition made on account of transfer pricing adjustment. At the time of hearing, the Ld A.R pressed only ground no. 6 7 urged in respect of transfer pricing adjustment. The assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of the assessee was that there is no necessity of making any working capital adjustment, when the workings turnout to be negative. 16. Before us, the assessee seeks exclusion of three comparable companies, viz., Infosys Ltd., Larsen and Toubro Infotech Ltd. and Persistent Systems Ltd. The assessee also contends that negative working capital should be ignored. The Ld A.R placed his reliance on the decision rendered by the Tribunal in the case of M/s. SAP Labs India P Ltd. vs. DCIT (ITA No. 684/Bang/2017 dated 23.7.2021) and submitted that the above said three comparable companies have been directed to be excluded in the above said case by the Tribunal. He submitted that the decision rendered in the above said case also pertains to AY 2012-13 and accordingly prayed for exclusion of above said three companies. 17. On the contrary, the Ld D.R submitted that assessee seeks exclusion of above said three companies mainly for the reason that their profit margin is high. He submitted that other comparable companies like Mindtree Ltd. R S software (India) Ltd. have not been sought for exclusion, though they also have brand value and further they fall under the category of companies l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se information about the contribution made by such small sale of software products to the total profits of the company. As no segmental information is available in respect of this company and the figures have been adopted by the TPO at entity level, it was directed to exclude Persystent Systems Limited from the list of comparables. In the present case also, it is noticed that Persystent Systems Limited is engaged in software products development. There is a difference between the outsourced software product development and IT services, which is evident from page nos. 973 and 974 of the paper book, as under:- Outsourced Software Product Development (OPD) is different from IT services. Unlike a typical IT services project, where requirements are fixed while time and money are variable, a software product development project starts with fixed time and money, thus leaving requirements as the only variable. Essentially, the product development team's task is to produce the best set of requirements within a fixed time and budget. Persistent Systems has emerged as a leader in the OPD segment - a segment which is fast growing. OPD and outsourced IT services: the differe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er dated 31.10.2018 has taken the same view that it cannot be a comparable with that of the assessee. Being so, we direct the TPO to exclude the same from the list of comparables. INFOSYS LIMITED 8. The argument of the learned AR is that Infosys Limited is functionally different from the assessee. It owns intangible and undertakes research and development. The learned AR also submitted that it has high brand value and turnover. On the contrary, the learned DR submitted that the nature of services remains the same irrespective of whether it is engaged in providing onsite/offsite services. 8.1 We have heard the rival submissions and perused the material on record. Similar issue came up for consideration before the Tribunal in the case of NXP Semi Conductors India Pvt. Ltd. v. DCIT in IT(TP)A No. 1634/Bang/2014 - order dated 27.07.2015, wherein it was held as under:- 10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a coordinate bench of the Tribunal in the case of Cisco Systems Services B.V., India Branch (supra), for Assessment Year 2009-10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l property rights (IPRs). It was also submitted by the learned Authorised Representative that:- (i) the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. in ITA No. 227/Bang/2010 has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any intangible and hence does not have an additional advantage in the market. It is submitted that this decision is applicable to the assessee's case, as the assessee does not own any intangibles and hence Infosys Technologies Ltd. cannot be comparable to the assessee; (ii) the observation of the ITAT, Delhi Bench in the case of Agnity India Technologies Pvt. Ltd. in ITA No. 3856 (Del)/2010 at para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk; (iii) the company has generated several inventions and filed for many patents in India and USA; (iv) the company has substantial revenues from software products and the break up of such revenues is not available; (v) the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mit this company from the final set of comparables as it is functionally different from the assessee in the case on hand, who is purely a software service provider. 8.2 In the present case also, Infosys Limited is engaged in a leading global technology services corporation. The company provides business consulting, technology, engineering and outsourcing services to help clients build tomorrows enterprise. In addition, the company offers software products for the banking industry. It owns high brand value at ₹ 56,286 crore in the year 2012 and percentage of brand value to revenue is 1.67% and brand value as a percentage of market capitalization is 34.2%, and also incur huge amount for research and development at ₹ 5 crore as a capital expenditure and ₹ 655 crore as a revenue expenditure for the year ended 31st March, 2012. Therefore, it cannot be said to be a comparable. We, therefore, direct the TPO to exclude Infosys Limited from the list of comparables. 19. We notice that the co-ordinate benches are consistently holding that the above said three companies are not comparable to a small company like that of assessee. Accordingly, following the above sa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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