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TMI Blog2024 (7) TMI 840X X X X Extracts X X X X X X X X Extracts X X X X ..... and 24Online, 24Online. Cyberoam business of the Assessee has been demerged into another company called Cyberoam Technologies Private Limited with effect from AY 2012-13. The name of Cyberoam Technologies Private Limited as on date has been changed to Sophos Technologies Private Limited. Now, the assessee-company is merged with Sterlite Technologies Ltd. 2.1. The Assessee filed its return of income for the A.Y. 2011-12 on 29th November 2011 declaring total income of Rs. 18,70,45,719/- under the normal provisions of the Act. Thereafter, the return was selected for scrutiny assessment and notice under section 143(2) of the Act was issued. In response to the said notice, the Assessee submitted various details, explanations and submissions during the course of assessment proceedings. The Assessee received the assessment order dated 25th March 2015, under section 143(3) of the Act for the A.Y. 2011-12, wherein the Deputy Commissioner of Income-tax, Circle-2(1)(1) ("the AO") made certain additions disallowances and determined the total income of the Assessee at Rs. 21,98,21,020/- as against the returned income of Rs. 18,70,45,719/-. 3. Being aggrieved by the assessment order passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased on the said search, the average spread charged over LIBOR was taken as 338.93 basis points. The prevailing LIBOR rate was 0.53%. The TPO increased this spread by 100 basis points on account of country and foreign exchange risk and an additional 50 basis points towards country risk as the sovereign country rating of Bahrain was worse than USA. Accordingly, TPO computed the rate at 5.42% (0.53% + 3.3893% + 1% +0.50%). The TPO thus concluded that the Assessee had short-charged interest to the tune of 3.17% (5.42% - 2.25%) and made an addition of Rs. 2,26,243 to the amount of interest charged by the Assessee from its AE while passing the pricing assessment order. 5. The Ld.Departmental Representative (DR) contented that the assessee has not taken into account foreign exchange risk while adopting the rate of interest based on loan analysis. He pointed out the conclusion of AO that the sovereign credit rating of Bahrain is worse than USA. The DR contented that since the risk is more AO was right in adding more spread while making an adjustment. 6. The Ld. Authorized Representative (AR) for the assessee, on the other hand, contented that the TPO has mistakenly benchmarked the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng and appropriate risk adjustments. 7.1. Based on the above findings, we uphold the Ld.CIT(A)'s order, thereby dismissing the TPO's adjustment of Rs. 2,26,243/-. Thus, Ground Nos. 1 and 2 of Revenue's appeal are dismissed. On Ground No.3 8. This ground relates to disallowance of Product Certification Expenses of Rs. 60,57,180/- paid to non-resident on account of non-deduction of withholding tax u/s 195 of the Act and non-genuineness of the expenditure. 8.1 The facts are such that the assessee paid Product Certification Expenses as details below: Sr. No. Name of the Vendor Amount Rs. Country of Vendor 1 ICSA Lab 35,11,206 USA 2 Virtual Network Private Consortium 1,39,234 USA 3 West Cost Lab 12,21,396 UK 4 Network Test Inc 3,79,200 USA 5 Estech Co. Ltd 1,54,530 Korea 6 Kevin Gao 6,51,614 China Total 60,57,180 8.2. In this regard, the assessee submitted before AO that the company is required to get its software product certified from various authorities for which product certification charges have been paid. The services include measuring and evaluating technical quality of the software product against standardized set of quality ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in relation to the payments made to ISCA labs, separate proceedings under section 201 of the Act had been initiated wherein the payments were held to be taxable. However, the Commissioner of Income-tax (Appeals) accepted the contentions of ETPL and held that such payments are neither taxable under the treaty nor taxable under the provisions of the Act. Copy of the said order was also submitted to the AO. Therefore, the company was not liable to deduct tax on payments made for product certification/ registration charges. 8.7. The AO was not satisfied with the reply and concluded that the expenses are not reasonable and genuine. He also concluded that since the income derived by these parties, to whom payment was made, is from the source in India, in terms of provisions of section 5(2)(b) of the Act, this income is deemed to accrue or arise in India and since the assessee has failed to withhold tax u/s 195(2), added back u/s 40(a)(i) of the Act. 8.8. The Ld.CIT(A) in his order while deciding the issue deleted the disallowance u/s 40(a)(i) of the Act. While doing so, he relied on the order of the Ld.CIT(A) case of in assessee's own proceedings u/s. 201 of the Act in case for A.Y. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty offered or available. For the sake of clarity, we produce relevant part of the judgment - "8. A reading of the very elaborate order of the Assessing Officer containing a lengthy discourse on the services made available by the Stock Exchange would go to show that apart from facilities of a faceless screen based transaction, a constant upgradation of the services made available and surveillance of the essential parameters connected with the trade including those of a particular/ single transaction that would lead credence to its authenticity is provided for by the Stock Exchange. All such services, fully automated, are available to all members of the stock exchange in respect of every transaction that is entered into. There is nothing special, exclusive or customised service that is rendered by the Stock Exchange. "Technical services" like "Managerial and Consultancy service" would denote seeking of services to cater to the special needs of the consumer/user as may be felt necessary and the making of the same available by the service provider. It is the above feature that would distinguish/identify a service provided from a facility offered. While the former is special and exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liance for the "Certification Body" in Munich. The Certification body issues the Certificate after reviewing the report for compliance. Audits are carried out in various stages. Pre-assessment Audit A Pre-assessment audit is conducted to evaluate the feasibility of a successful certification audit. The company is informed whether or not they are ready for a Certification audit. Certification Audit The certification audit is conducted to assess the clients' conformity to an International Standard. A report is prepared and sent to Germany for review & issue of the Certificate. Surveillance Audit The above certificate is valid for 3 years. Audits are carried out every 6 months (or 12 months) to assess if the company is continuing to meet the International standard. Reports of the audit are sent to the "Certification Body" in Germany for review & their decision to allow the certificate validity to continue. Certification Fees. The certificate is issued to the client by the "Certification Body" from Germany after reviewing the Auditor's report. The Fee is charged at a flat rate to compensate the Certification Body for it's activity of reviewing the reports, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. (4) The term "fees for technical services" as used in this article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this Agreement. (5) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical service arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 14, as the case may be, shall apply." 10.2 The assessee's case does not in any manner comes within the meaning of 'royalties', as there is no right to use of any other items des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certification of ISO, is not borne out from the records as the same has neither been examined by the Assessing Officer nor by the CIT(A). Both the authorities have simply observed that even the audit work and certification work comes within the realm of FTS. From the print out of the website, it is also not very clear as to whether these kind of services were also rendered in the year 1997-1998. On the contrary in the IAF guidance note provided by the learned AR, it has been clearly prohibited that the auditor will not give any prescriptive advise or 17 ITA Nos : 4944/02, & 7588/04 consultancy as a part of an assessment, which has been noted by us in the foregoing paragraphs. This goes to prove the assessee's contention that it was not engaged in any kind of consultancy services. Thus, the entire nature of services and activities carried out by the assessee comes within the realm of 'professional services' and not within the meaning of 'FTS' as provided in the Article 12(4) and Section 9(1)(vii). Accordingly, we hold that services rendered by the assessee company are not covered under 'fees for technical services' under Article 12 of Indo-German DTAA." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e / recipient of income. When income embedded in a payment is not taxable under the Act, the tax withholding liability does not get triggered at all. The withholding tax provision cannot be applied in vacuum and it should be read in conjunction with the charging provisions under the Act, read with the provisions of the tax treaty. Under the provisions of the tax treaty, taxability of royalty is dependent on payment by a taxpayer and receipt of the same by the Non-resident payee. Furthermore, the term "royalties" means payments of any kind "received". Thus, unless the royalty amount is actually received, taxability under the DTAA does not arise. The Appellant has procured software from the vendors located in Russia and Israel, whereas in the case if Saira Asia Interior Private Limited (supra) the vendor was in Italy." 11. The Ld.AR for the assessee placed his reliance on order of the Ld.CIT(A), who relied on following judicial pronouncements: 1. Saira Asia Interior Private Limited Vs. ITO [2017] 79 Taxmann.com 460 (Ahmedabad ITAT). 2. Sophos Technologies Pvt. Ltd. Vs. DCIT (ITA No.1565/Ahd/2017 0 (Ahmedabad ITAT). 12. We have heard the rival contentions and perused the materia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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