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2016 (10) TMI 984 - AT - Income TaxTransfer pricing adjustment - revenue submitted that DRP has erred in directing the TPO to consider both the BPO and ERP segment relating to the comparable M/s.Jeevan Scientific Technology Ltd., for the purpose of margin computation, ignoring the fact that the ERP segment is totally different from the BPO segment and also without stating reasons for the same - Held that - Nature of work carried on by M/s.Jeevan Scientific Technology Ltd. is IT Enabled Services, though it was called by different name. The nature of service performed by M/s.Jeevan Scientific Technology Ltd. is IT Enabled Services and when assessee itself included ERP in IT segment, TPO cannot be re-characterised without making any enquiry u/s.133(6) of the Act. In our opinion, the direction given by the DRP that ERP is nothing but ITES and to include the ERP in ITES segment so as to compute the profit margins is justified. The Direction of the DRP is upheld. TDS u/s 195 - non deduction of tds on software expenses representing reimbursement of software cost to its parent company - whether mere reimbursement of expenses on cost to cost basis without any mark-up does not attract TDS u/s.195? - Held that - As decied inAsst. Director of Income-tax (International Taxation) Versus M/s Bartronics India Ltd. 2014 (4) TMI 569 - ITAT HYDERABAD the assessee has acquired a readymade off - the shelf computer programme to be used in their business and no right was granted to the assessee to utilize the copy right of the programme and, therefore, consideration cannot be treated as royalty. As held by the CIT(A), the payments made by the assessee company cannot be held as royalties coming into the ambit of Article 12 of DTAA or fee for technical services u/s 9(1 )(vii) of the IT Act and accordingly no tax need to be deducted u/s 195 of the IT Act - Decided in favour of assessee Provision for bad and doubtful debts - treated as a non-operating expenses in computation of margins of comparables as confirmed by DRP - Held that - In our opinion, if the provision for doubtful debts is the current operating expenses associated with the losses from normal credit sales, it will be treated as operating expenses and usually as a part of selling, general and administrative expenses. If the expense is associated with the extending credit outside of a company s main selling activities, the loss will be non-operating expenses. With this observation, we remit the issue to the file of AO for fresh consideration after giving opportunity of being heard to the assessee.
Issues Involved:
1. Inclusion of ERP segment in ITES for margin computation. 2. Disallowance of software expenses for non-deduction of TDS. 3. Treatment of provision for bad and doubtful debts as non-operating expenses. Issue-wise Detailed Analysis: 1. Inclusion of ERP Segment in ITES for Margin Computation: The Revenue's main grievance was that the Dispute Resolution Panel (DRP) directed the Transfer Pricing Officer (TPO) to include both the BPO and ERP segments of M/s. Jeevan Scientific Technology Ltd. for margin computation, despite the ERP segment being different from the BPO segment. The TPO had initially considered only the ITES segment without including the ERP division. The DRP opined that since the business enterprise itself clubbed ITES and ERP in one segment, and ITES is a generic name for activities dominated by information technology, the ERP should be included in the ITES segment. The Tribunal upheld the DRP's direction, stating that the TPO cannot re-characterize the segments without proper inquiry. Thus, the Revenue's appeal was dismissed, and the assessee's cross-objection supporting the DRP was also dismissed. 2. Disallowance of Software Expenses for Non-Deduction of TDS: The assessee appealed against the disallowance of software expenses amounting to ?9,362,867, which were reimbursed to its parent company, Atmel Corporation, USA, without deducting tax at source under section 195 of the Act. The Assessing Officer (AO) treated these expenses as royalty under section 9(1)(vi) of the Act and disallowed them under section 40(a)(i) due to non-deduction of TDS. The DRP observed that reimbursement of software expenses on a cost-to-cost basis without any mark-up does not constitute income chargeable to tax in India and thus does not attract TDS under section 195. The Tribunal, referencing several judgments, including the Supreme Court's decision in GE India Technology Centre Pvt. Ltd. v. CIT and the Special Bench decision in ITO v. M/s. Prasad Production, concluded that the payment for software was for a copyrighted article and not for the use of copyright, thus not attracting royalty. Consequently, the assessee's ground was allowed. 3. Treatment of Provision for Bad and Doubtful Debts as Non-Operating Expenses: The AO/TPO treated the provision for bad and doubtful debts as non-operating expenses in the case of Nittany Outsourcing Services Pvt. Ltd. for margin computation, which was endorsed by the DRP. The assessee argued that these should be considered operating expenses. The Tribunal referenced the Hyderabad Tribunal's decision in M/s. Kenexa Technologies Pvt. Ltd. v. DCIT, which held that bad debts and provisions for bad and doubtful debts are part of operating expenses. The Tribunal opined that if the provision for doubtful debts is associated with losses from normal credit sales, it should be treated as operating expenses. The issue was remitted to the AO for fresh consideration, allowing the assessee an opportunity to be heard. Conclusion: The appeal of the Revenue and the cross-objections raised by the assessee were dismissed. The assessee's appeal was partly allowed for statistical purposes, with the Tribunal remitting the issue of provision for bad and doubtful debts to the AO for fresh consideration.
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