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2016 (7) TMI 1540 - AT - Income TaxTDS u/s 195 - Nature of payment - Royalty or FTS - Disallowance u/s 40(a)(i) - HELD THAT - Non deduction of tax at source in respect of payment made to Equant Network Services Ltd. was subject matter of appeal before the Tribunal in assessee s own case for assessment year 2006 07. While considering the issue relating to demand raised under section 201/201(1A) Tribunal held that the payment made to Equant Network Services Ltd. is not in the nature of royalty or fees for technical service, hence, it does not require deduction of tax at source u/s 195. The same view was again expressed by the Tribunal in assessee s own case while deciding the issue arising out of disallowance made under section 40(a)(i) for the assessment year 2006 07. In a recent decision, the Tribunal, Delhi Bench, in Bharti Airtel Ltd. v/s ITO 2016 (3) TMI 680 - ITAT DELHI , also expressed similar view - the payment made to Equant Network Services Ltd. not being in the nature of royalty or fees for technical service there is no requirement of deduction of tax at source, hence, disallowance made under section 40(a)(i) is not sustainable. TP Adjustment - comparable selection - HELD THAT - Vishal Information Technologies Ltd - It is evident from the material placed before us that personnel cost of Vishal Information Technologies Ltd. as a percentage of its turnover is only 0.95% as against the employee cost of 47.86% of the assessee. The aforesaid fact signifies that the company does not carry out the ITES activities on its own but out sources it to third party vendors. For the very same reason in various decisions of the Tribunal as well as High Court, this company has been rejected as a comparable to ITES services provider. For the aforesaid reasons, we do not find any infirmity in the order of the learned Commissioner (Appeals) in excluding this company. Cepha Imaging Pvt. Ltd. - It is seen from the order of the learned Commissioner (Appeals), he has excluded this company as it is involved in software development and production of spares. He also noted that company is engaged in document scanning and conversion, content conversion, content indexing and extended metadata text encoding. He also noted that company bears collection risk and incurs selling and administration expenses. We have also noted that for this very reason, the Tribunal in the decisions cited by the learned Authorised Representative has found this company to be functionally different from ITES service provider, hence, excluded it as a comparable. As these decisions relied upon by the learned Authorised Representative are for the very same assessment year, respectfully following the same, we uphold the exclusion of the company as a comparable. Payment made by the assessee to its A.E. for availing technical services - Undisputedly, the assessee is remunerated at cost plus of mark up of 10% by the A.E. towards provisions of ITES. Therefore, whatever cost incurred by the assessee is reimbursed by the A.E. with mark up. That being the case, as the cost has already been reimbursed by the A.E. with mark up and has been taken as part of income of the assessee the Transfer Pricing Officer was not justified to disallow the cost without making similar adjustment in the income. In the aforesaid view of the matter, we find the conclusion drawn by the learned Commissioner (Appeals) to be appropriate and logical, hence, there is no reason to interfere with the same. Accordingly, ground raised by the Department is dismissed. Application under rule 27 of the IT(AT) Rules pertains to allowance of risk adjustment - HELD THAT - Assessee having been able to demonstrate that for the impugned assessment year RPT of this company fails more than 25% RPT filter applied by the Transfer Pricing Officer, we are inclined to exclude this company as a comparable. Though, the assessee had also objected to another company viz. Saffron Global Ltd., however, in the course of hearing the learned Authorised Representative fairly submitted that on exclusion of Airline Financial Support Services India Ltd. the margin of the assessee comes within the tolerance band of 5% requiring no further adjustment. In that view of the matter, the issue relating to comparability of Saffron Global Ltd. being of academic interest is not required to be adjudicated upon. One more issue raised by the assessee in the application under rule 27 of the IT(AT) Rules pertains to allowance of risk adjustment. However, considering the fact that after exclusion of certain comparable companies and other relief granted to the assessee, no further adjustment is required to be made to the price charged by theassessee, this issue has become academic, hence, we do not intend to adjudicate the same. However, it is open for the assessee to raise such issue in an appropriate case in future.
Issues Involved:
1. Disallowance under Section 40(a)(i) of the Income Tax Act. 2. Transfer Pricing Adjustment. 3. Exclusion of Comparables. 4. Payment for Technical Services. 5. Additional Issues/ Grounds under Rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963. Issue-wise Detailed Analysis: 1. Disallowance under Section 40(a)(i) of the Income Tax Act: The Department challenged the decision of the Commissioner (Appeals) in deleting the addition of ?15.43 lakh on account of disallowance under Section 40(a)(i). The Assessing Officer (AO) had disallowed the payment made to Equant Network Services Ltd., considering it as "royalty" or "fees for technical services," which required tax deduction at source. The Commissioner (Appeals) followed the precedent set in the assessee's case for the assessment year 2006-07, where it was held that such payments do not constitute "royalty" or "fees for technical services." The Tribunal upheld the Commissioner (Appeals)'s decision, referencing prior Tribunal decisions and a similar case (Bharti Airtel Ltd. v/s ITO), concluding that the payments were not subject to tax deduction at source. 2. Transfer Pricing Adjustment: The Department raised issues regarding the deletion of additions made on account of transfer pricing adjustments. The first issue was the exclusion of two comparables, Vishal Technologies Ltd. and Cepha Imaging Pvt. Ltd., by the Commissioner (Appeals). Vishal Information Technologies Ltd.: The Tribunal agreed with the Commissioner (Appeals) that Vishal Information Technologies Ltd. was not a suitable comparable due to its low employee cost (0.95% of turnover), indicating it outsources ITES activities, unlike the assessee. Cepha Imaging Pvt. Ltd.: The Tribunal upheld the exclusion of Cepha Imaging Pvt. Ltd., noting its involvement in software development and production of spares, making it functionally different from the assessee. The Tribunal referenced previous decisions where this company was excluded as a comparable for ITES service providers. 3. Payment for Technical Services: The Department contested the relief granted by the Commissioner (Appeals) regarding the payment made by the assessee to its Associated Enterprise (A.E.) for technical services. The Transfer Pricing Officer (TPO) had disallowed the payment due to inadequate documentation. The Commissioner (Appeals) reasoned that since the assessee operates on a cost-plus model with a 10% markup, disallowing the cost without adjusting the income was unjustified. The Tribunal found the Commissioner (Appeals)'s conclusion logical and upheld the decision. 4. Additional Issues/ Grounds under Rule 27: The assessee filed an application under Rule 27 to raise additional issues. The Tribunal admitted the application, referencing relevant judicial precedents. Airline Financial Support Services India Ltd.: The assessee argued that this company should be excluded as a comparable due to its Related Party Transactions (RPT) exceeding 25%. The Tribunal agreed, referencing decisions where companies with high RPTs were excluded as comparables. Saffron Global Ltd.: The assessee initially objected to this company as a comparable but later conceded that excluding Airline Financial Support Services India Ltd. brought the margin within the acceptable range, making further adjudication unnecessary. Risk Adjustment: The assessee raised the issue of risk adjustment but, considering the relief already granted, the Tribunal deemed it academic and chose not to adjudicate it, leaving the option open for future cases. Conclusion: The Tribunal dismissed the Department's appeal and allowed the grounds raised by the assessee under Rule 27 to the extent indicated. The order was pronounced in the open court on 29.07.2016.
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