2017 (3) TMI 1755 - AT - Income Tax

Transfer pricing adjustment - comparable selection - as per assessee TP study of the assessee has been rejected for the reason that the foreign AE was taken as a tested party - Whether the foreign entity in international transactions can be selected as a tested party for the purpose of carrying out comparability analysis? - HELD THAT - TPO has rejected foreign AE as the tested party for the reason that no reliable data in respect of foreign comparables was available. Thus as far as the foreign party being the least complex entity to the controlled transactions and not owning any valuable intangible or unique assets is concerned, there is no dispute that the foreign entity to the transactions i.e. IDS-A is the least complex and does not own any valuable intangible or unique assets. The only issue on which the acceptance or rejection of the foreign entity as a tested party rests is vis- -vis availability of the appropriate foreign comparables. The only reason with the TPO for holding so, which emerges from the above discussion and arguments made before us and on the basis of the facts which were brought to our notice for rejection of the foreign entity as the tested party, is that the data in respect of comparable transactions was not available. At this juncture, we would like to point out that the I.T.A.T. in a number of decisions, pointed out by the Ld.Counsel for the assessee, held that if an assessee wishes to take a foreign entity as a tested party, it can do so provided a relevant data for comparison is either available in the public domain or is furnished to the tax department/administration. Assessee is engaged in the business of providing software solution and IT enabled service in the areas of litigation support, publishing and content management, engineering services and healthcare support services. The assessee had given entire detail of the search conducted by it so as to finally arrive at the 11 comparable companies given business description of these companies also and also provided their profits and loss accounts to arrive at the PLI i.e. OP/ OC. Thus, all relevant data had been provided by the assessee to the TPO also. The TPO, we find, besides giving a general statement which is also incorrect, that no description was given regarding activities in which the comparable companies were involved, pointed out no other anomaly was in the data of the comparable companies furnished by the assessee. Therefore, following the decisions of the I.T.A.T. as quoted above, we set aside the rejection of the foreign entity IDSA as the tested party. For determining the ALP of the international transactions relating to marketing services provided by IDS-A and IDS-UK also, we find, that the assessee had taken the foreign entities as the tested party. These were not rejected by the TPO. Clearly, therefore, there is inconsistency in the stand of the TPO rejecting the selection of foreign entity as a tested party for the purpose of IT enabled services while accepting the same for marketing support services. For this reason also, the rejection of the foreign entities as a tested party needs to be set aside. As pointed out by the assessee, in the preceding assessment year also the assessee had taken IDS-A as its tested party, which was duly examined by the TPO. Submissions in this regard were also placed before the TPO. TPO in the preceding year had accepted the same and made no adjustment in this regard. Thus, having accepted foreign entity as a tested party in the preceding year ,the Revenue cannot now take a different stand without pointing out any change in facts vis a vis the preceding year. We hold that the action of the TPO, accepted by the AO and CIT (Appeals), in rejecting the foreign entity in the controlled transaction i.e. IDS-A, as a tested party is wrong and is, therefore, set aside. We may add that with regard to the rejection of the foreign entity as the tested party, we have considered all the arguments raised before us and no other arguments were raised before us. The decision rendered by us is on the context of solely the arguments which were raised before us. Since we have upheld the treatment of the foreign entity as a tested party and since no other anomaly was pointed out in the arm s length price determined by the assessee by treating foreign entity as a tested party, the arm s length price determined by the assessee is treated as correct and adjustment made in this regard by the TPO amounting to ₹ 45,68,000/- is deleted. TDS u/s 195 - Disallowance u/s 40(a)(ia) - non deduction of TDS on commission, legal and professional charges, marketing and selling expenses and outsourcing and business development expenses - HELD THAT - Assessee for assessment year 2009-10, with the impugned disallowance of expenses having been made for the reason that the same were taxable in India since they were sourced from India on account of the agreement entered into with the assessee an Indian Company and also on account of the utilization of the services for the benefit of the assessee Indian Company. In the present case also we find that there is no finding of the lower authorities with regard to the fact that the income to the payees of the said expenses arose or was deemed to arise in India as per the provisions of section 9 of the Act. There is no finding regarding the existence of any business connection, as defined, under section 9(1) nor of any permanent establishment of the payees in India. Moreover in the present case also there is no finding that the payments in question were fees for technical services . Therefore the decision laid down in the preceding year will squarely apply to the present case also, following which we delete the disallowance made u/s 40(a(ia). Non deduction of tax u/s 194I - non deduction of TDS on rent paid - Addition applying the provisions of Section 40a(ia) - HELD THAT - It is evident from the said lease deeds, which was there even before the Assessing Officer, that there are several co-owners of the properties which have been taken on lease by the assessee and rent paid thereon. The income in such circumstances cannot, therefore, be said to be the income of the recipient of the rent only. When they have received the same only on behalf of other co-owners the rent paid constitutes the income of all the co-owners and the same is to be apportioned among them as per the method prescribed, if any, in the lease agreement or in proportion of their co-ownership and thereafter only if the rental income in the case of any co-owners exceeds the prescribed limit for the purpose of deduction of tax u/s 194I the tax is to be deducted at source. Restore the matter back to the AO to apportion the rental income in the hands of the co-owners as per legally permissible, determine the rental income attributable to each co-owner and thereafter apply the provisions of section 194(I) of the Act to the same as also the provisions of section 40(a)(ia) of the Act for non deduction of tax, if found in any case. TDS u/s 192 - addition for non deduction of tax on salaries paid outside India applying the provisions of Section 40a(iii) - HELD THAT - The income of the non-residents on account of this salary is not deemed to have accrued or arisen in India and, therefore, was not chargeable to tax in India as salary. Thus, in such circumstances, section 192 was not applicable requiring the assessee to deduct tax at source on the said payment of salary and consequently, provisions of section 40(a)(iii) could also not be invoked to disallow the same. The contention of the Revenue all along we find, has been that section 40(a)(iii) is attracted because the payments have been made outside India to non-residents. Revenue, we find, has picked up only one of the conditions enumerated u/s 40(a)(iii) for making disallowance, choosing to completely ignore the basic condition required to be fulfilled, which is taxability of the said salary in India. Therefore, the disallowance, we hold, has been made on an incorrect interpretation of law. In view of the above, we hold that no disallowance u/s 40(a)(iii) on account of non deduction of tax on salary paid outside India is warranted and the disallowance made is directed to be deleted. Disallowance of interest made by invoking the provisions of section 36(i)(iii) - HELD THAT - The facts in the present case, we find are identical to that in assessment year 2009-10, wherein, disallowance has been made on account of investment made by the assessee company in wholly owned subsidiary. Since the ITAT in the preceding year has held the said investment to be for business purposes, being commercially expedient, following the same, we hold the identical investment in the impugned year also to be commercial expedient for the assessee company and having held so, there can be no case for making any disallowance u/s 36(i)(iii) on account of making the aforesaid investment. The disallowance made u/s 36(i)(iii) is therefore, deleted and the order of the CIT(A) on this ground is therefore, set aside. Addition of account of alleged non declaration of receipts on sale of assets to M/s Aeromatrix Info Solutions Private limited - HELD THAT - We find that the sale of Catia V5 licence of M/s Aeromatrix Info Solutions Pvt. has been duly reflected in the ledger account of M/s Aeromatrix Info Solutions Pvt., the software account, in the fixed asset chart shown by the assessee and depreciation on account of sale of the said asset has been also duly reversed in the ledger of depreciation. All books of account were produced before the lower authorities and it can, therefore, be safely concluded that all material was placed before the lower authorities to substantiate its claim. The disallowance having been made on account of the fact that the assessee had not reflected the said amount in its books, the same is directed to be deleted in view of our above observations in this regard. - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS
3. Disallowance under Section 40(a)(iii) for Non-Deduction of TDS on Salaries Paid Outside India
4. Disallowance of Interest under Section 36(1)(iii)
5. Addition for Alleged Non-Declaration of Receipts on Sale of Assets

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The primary issue was the transfer pricing adjustment of ?45,68,000/- made by the Assessing Officer and upheld by the CIT (Appeals). The assessee, engaged in software solutions and IT-enabled services, had justified the arm’s length price (ALP) of international transactions using the Transactional Net Margin Method (TNMM) with the foreign associated enterprise (AE) as the tested party. The Transfer Pricing Officer (TPO) rejected this approach, citing the lack of reliable data for foreign comparables and instead took the assessee as the tested party. The TPO’s analysis led to an adjustment of ?45,68,000/-. The Tribunal, however, found merit in the assessee's argument that the foreign AE was the least complex entity and that reliable data for foreign comparables was available. The Tribunal set aside the TPO's rejection of the foreign AE as the tested party and deleted the adjustment.

2. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS:
The assessee had incurred expenses on commission, legal and professional charges, marketing and selling expenses, and outsourcing expenses amounting to ?2,84,52,914/- without deducting TDS. The Assessing Officer disallowed these expenses under Section 40(a)(ia), stating that the payments were taxable in India. The CIT (Appeals) upheld this view. However, the Tribunal referred to its decision in the assessee’s case for the preceding year, where it was held that the non-resident payees had no business connection or permanent establishment in India, and thus, the payments were not taxable in India. Following this precedent, the Tribunal deleted the disallowance.

3. Disallowance under Section 40(a)(iii) for Non-Deduction of TDS on Salaries Paid Outside India:
The assessee had paid salaries amounting to ?39,73,746/- to employees outside India without deducting TDS. The Assessing Officer disallowed the amount under Section 40(a)(iii). The CIT (Appeals) upheld this disallowance. The Tribunal, however, noted that the salaries were paid for services rendered outside India and were not taxable in India under Section 9(1)(ii). Consequently, there was no requirement to deduct TDS, and the disallowance under Section 40(a)(iii) was deleted.

4. Disallowance of Interest under Section 36(1)(iii):
The Assessing Officer disallowed interest of ?3,40,000/- under Section 36(1)(iii), citing that the assessee had invested in its wholly-owned subsidiaries. The CIT (Appeals) upheld this disallowance. The Tribunal referred to its decision in the assessee’s case for the preceding year, where it was held that investments in subsidiaries were commercially expedient. Following this precedent, the Tribunal deleted the disallowance.

5. Addition for Alleged Non-Declaration of Receipts on Sale of Assets:
The Assessing Officer added ?57,68,163/- to the assessee’s income, alleging non-declaration of receipts from the sale of assets to M/s Aeromatrix Info Solutions Pvt. Ltd. The CIT (Appeals) upheld this addition. The Tribunal found that the assessee had duly accounted for the receipt in its books, as evidenced by various ledger accounts and documents. Consequently, the Tribunal deleted the addition.

Conclusion:
The Tribunal allowed the appeal partly, deleting the transfer pricing adjustment, the disallowances under Sections 40(a)(ia) and 40(a)(iii), the interest disallowance under Section 36(1)(iii), and the addition for alleged non-declaration of receipts.