2020 (5) TMI 704 - AT - Income Tax

TP Adjustment to the transaction of software development services - exclusion of comparable namely M/s Infosys Ltd. - HELD THAT - Respectfully following the view taken by the Coordinate bench in assessment year 2008-09 we direct the Ld AO/TPO to exclude M/s Infosys Technologies Ltd. from the final set of the comparables. The ground No. 1 to 10 of the appeal of the assessee are accordingly allowed. TDS u/s 195 - Disallowance of the export commission on account of non-deduction of the tax at source - disallowance u/s 40(a)(i) - AO concluded that there existed a business connection between G D Egypt and G D India - HELD THAT - We find that for having business connection in India the business operations carried out side India and inside India must have relationship as to contribute the business operations as a whole. In the instant case M/s GD Egypt is responsible for marketing and sales for assessee in the region of middle east and north Africa and has procured sales for the assessee. The business operation of the M/s GD Egypt of procuring sales order for the assessee and its entire activity has been carried out from outside India and no part of the business activity has been carried out in the India by M/s GD Egypt. The business connection has to be looked into the business operations of M/s GD Egypt in India and not business connection between the operation of the GD Egpyt and business of the assessee in India because any workfor which the assessee is making payment will always be associated and part of the business of the assessee. Obviously in the instant case no business connection exist and thus the finding of the learned DRP on the issue is set aside. DRP has held that the services rendered by M/s GD Egypt require expertise and knowledge in the specific area of work and such expertise cannot be developed overnight but it is the result of long period of the work in this line of activities coupled with accumulated experience of operations and therefore the payment made by the assessee to GD Egypt partakes the character of the FTS under domestic law. In the instant case the assessee has not invoked any Double Taxation Avoidance Agreement (DTAA) and therefore we are examining only the FTS under domestic law - As decided in M/S. EVERGREEN INTERNATIONAL LTD. 2018 (4) TMI 81 - ITAT DELHI payment made for procuring of export sale order for Indian taxpayer by any foreign entities from outside India cannot be held as Fee for Technical Services. In view of holding that payment for services of GD Egypt are not in the nature of Fee for Technical Services (FTS) the other finding of the learned DRP of the applicability of explanation below section 9(2) i.e. there is no requirement of rendering services in India for income deemed to accrue or arise in India as per section 9(1)(vii) of the act are rendered merely academic and we are not required to examine applicability of the same in the year under consideration. The payment made by the assessee is not chargeable under the provisions of the Act in the hands of GD Egypt no tax is required to be deducted in terms of section 195 of the Act and consequently no disallowance could be made under section 40(a)(i) of the Act for non-deduction of the tax at source.- Decided in favour of assessee. Disallowance of bad debt written off - HELD THAT - No documentary evidence in support of the claim that income pertaining to such write off had been offered to tax as required under the provisions of the Act. In view of the above circumstances we feel it appropriate to restore this issue back to the file of the learned Assessing Officer with the direction to the assessee to produce all necessary documents in support of its claim before the Assessing Officer who then will decide the issue in accordance with law. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard.

Summary

Issues Involved:
1. Transfer Pricing Adjustment for Software Development Segment
2. Transfer Pricing Adjustment for SIM Card Assembly Segment
3. Disallowance of Export Commission under Section 40(a)(ia)
4. Addition on Account of Bad Debts under Section 36(1)(vii)
5. Levy of Interest under Sections 234B and 234D
6. Initiation of Penalty under Section 271(1)(c)

Detailed Analysis:

1. Transfer Pricing Adjustment for Software Development Segment:
The Tribunal addressed the grounds related to the transfer pricing adjustment of ?1,94,67,549/- for the software development services segment. The assessee contended that the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) failed to appreciate the business model and rejected the comparables proposed by the assessee without proper justification. The TPO included M/s Infosys Technologies Ltd. as a comparable, which the assessee argued was functionally dissimilar due to its brand value, high turnover, and significant R&D expenses. The Tribunal, following its earlier decisions for assessment years 2008-09 and 2011-12, directed the exclusion of Infosys Technologies Ltd. from the final set of comparables, thereby allowing the grounds related to the software development segment.

2. Transfer Pricing Adjustment for SIM Card Assembly Segment:
The grounds related to the adjustment of ?3,90,60,721/- for the SIM card assembly segment were dismissed as infructuous since the adjustment had already been deleted by the Assessing Officer in a rectification order dated 22/06/2015.

3. Disallowance of Export Commission under Section 40(a)(ia):
The assessee challenged the disallowance of ?39,47,160/- paid as commission to M/s G & D LLC, Egypt, arguing that the services were rendered outside India and thus not taxable in India. The Assessing Officer and DRP held that the payment was in the nature of "fees for technical services" (FTS) under section 9(1)(vii) and required TDS deduction under section 195. The Tribunal, however, found that the services rendered by GD Egypt for procuring export orders did not qualify as FTS and were not taxable in India. Consequently, no TDS was required, and the disallowance under section 40(a)(i) was not justified. The grounds related to the export commission were allowed.

4. Addition on Account of Bad Debts under Section 36(1)(vii):
The assessee claimed a deduction for bad debts amounting to ?29,73,346/-, which the Assessing Officer disallowed for lack of evidence that the debts had been offered as income in earlier years. The Tribunal restored the issue to the Assessing Officer, directing the assessee to provide necessary documentation to substantiate its claim. The grounds related to bad debts were allowed for statistical purposes.

5. Levy of Interest under Sections 234B and 234D:
The ground related to the levy of interest under sections 234B and 234D was dismissed as consequential.

6. Initiation of Penalty under Section 271(1)(c):
The ground related to the initiation of penalty under section 271(1)(c) was dismissed as premature.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes, directing the exclusion of Infosys Technologies Ltd. from the comparables for the software development segment, dismissing the grounds related to the SIM card assembly segment as infructuous, allowing the grounds related to the export commission, and remanding the issue of bad debts to the Assessing Officer for verification. The grounds related to the levy of interest and initiation of penalty were dismissed.