2016 (3) TMI 280 - AT - Income Tax

Transfer pricing adjustment - selection of comparable - Held that - Direct the AO to exclude Vishal International Technology Ltd. and Mold-Tek Technologies Ltd. while determining the arm s length price of the assessee relating to the transactions with its AEs. Disallowance of club entrance fees - the assessee has made a claim that the special membership would help in building better relationship with clients - Held that - Hon ble Punjab & Haryana High Court in the case of CIT vs. Groz Beckert Asia Ltd. reported as (2013 (2) TMI 375 - PUNJAB & HARYANA HIGH COURT ), wherein held that no capital asset is created or comes into existence on account of obtaining corporate membership. The corporate membership obtained was for a limited period and it was obtained for running the business with a view to produce profit and the said corporate membership fee paid to the club was to be treated as revenue expenditure. Relying on the said the Full Bench decision of the Hon ble Punjab & Haryana High Court, this ground is decided in favour of the assessee. Disallowance of tax credit of branch profit tax paid in USA - Held that - The scope of Article II relating to Taxes Covered has been explained in the said guide/technical explanation. It has been specifically provided that the taxes covered in the case of US, as indicated in paragraph 1(a) of Article II, are the Federal income taxes imposed by the Code, together with the excise tax imposed on insurance premiums paid to foreign insurers (Code section 4371). The Article specifies that the Convention does not apply to the accumulated earning tax (Code section 531), the personal holding company tax (Code section 541) or the social security taxes (Code sections 1401, 3101 and 3111). State and local taxes in the United States are also not covered by the Convention. A perusal of the Article II of the DTAA read with the technical explanation to the convention reveals beyond doubt that the taxes which have been excluded from the purview of the DTAA have been specifically mentioned therein. Further, as observed above, the accumulated earning tax, which has been provided under section 531 of the Internal Revenue Code of the US, is different from branch profit tax which is dealt with under separate section 884. The section 884 dealing with branch profit tax has not been specifically excluded from the DTAA and thus being a part of the Internal Revenue Code is covered by the US treaty. This issue is accordingly decided in favour of the assessee. TDS u/s 195 - disallowance of expenditure incurred for purchase of off the shelf software from QAD Singapore Pvt. Ltd. under section 40(a)(i) for non tds - whether the term literary work as mentioned in the definition of royalty in the treaty would include software or not? - Infringement of Copyright - Held that - Contention of the Ld. D.R. that the definition of royalty as under the Income Tax Act is in paramateria as under the DTAA can not be accepted as it is apparent that the definition under the DTAA is short and restrictive whereas the definition under the Income Tax Act is wide, inclusive and extended. Since the definition provided under the royalty in the DTAA is more beneficial to the assessee, hence as per the provisions of section 90, the definition of royalty as provided under DTAA is to be taken. DRP has given a specific finding of fact that what the assessee in the present case has purchased is the shrink wrapped /off the shelf software. It has also been discussed in detail in paras above that the definition of royalty given in the treaty is more beneficial to the assessee as compared to the provisions of section 9 of the Income Tax Act and the assessee has opted for the definition that is provided under the DTAA, thus as per section 90 of the Income Tax Act, definition of royalty as provided in the DTAA will prevail as over the general definition of royalty provided under the Income Tax Act. Hence, without expressing our opinion or any view in relation to the definition of royalty vis- -vis computer software as provided under the Income Tax Act, we have given our findings only in respect of the scope of royality under the DTAA. In view of our detailed discussion made above, the assessee can not be said to have paid the consideration for use of or the right to use copyright but has simply purchased the copyrighted work embedded in the CD- ROM which can be said to be sale of good by the owner. The consideration paid by the assessee thus as per the clauses of DTAA can not be said to be royalty and the same will be outside the scope of the definition of royalty as provided in DTAA and would be taxable as business income of the recipient. The assessee is entitled to the fair use of the work/product including making copies for temporary purpose for protection against damage or loss even without a license provided by the owner in this respect and the same would not constitute infringement of any copyright of the owner of the work even as per the provisions of section 52 of the Copyright Act,1957. - Decided in favour of assessee

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Club Entrance Fees Disallowance
3. Tax Credit for Branch Profit Tax Paid in USA
4. Disallowance of Expenditure on Software Purchase
5. Levy of Interest under Sections 234B and 234C

Detailed Analysis:

1. Transfer Pricing Adjustment
The primary issue revolves around the adjustment of Rs. 3,30,70,534 proposed by the Transfer Pricing Officer (TPO). The assessee provided 12 comparables, but the TPO accepted only 4 and added 25 more. The TPO used the Transactional Net Margin Method (TNMM) and found the Operating Profit/Operating Cost (OP/OC) ratio to be 28.23% against the assessee's 19.91%. The assessee objected to the inclusion of Mold-Tek Technologies Ltd. and Vishal International Technology Ltd. as comparables, arguing that Mold-Tek was engaged in high-end structural engineering services and Vishal International had a different business model with low employee costs. The Tribunal agreed with the assessee, citing the Special Bench decision in "Maersk Global Centres (India) (P.) Ltd. vs. ACIT" and the Delhi High Court decision in "Rampgreen Solutions Pvt. Ltd. vs. CIT," and directed the AO to exclude these companies while determining the arm's length price.

2. Club Entrance Fees Disallowance
The AO disallowed Rs. 5,50,000 incurred towards club entrance fees, arguing that no cogent evidence was provided to show it helped in building better client relationships. The assessee contended it was a corporate membership for its CEO and Chief Engineer Operations. Citing the Punjab & Haryana High Court's full bench decision in "CIT vs. Groz Beckert Asia Ltd.," the Tribunal ruled that corporate membership fees are revenue expenditures and allowed the claim.

3. Tax Credit for Branch Profit Tax Paid in USA
The AO denied tax credit for the Branch Profit Tax paid in the USA, arguing it was akin to the "accumulated earning tax" excluded under the Indo-US DTAA. The assessee argued that Section 884 of the US Internal Revenue Code, dealing with Branch Profit Tax, is different from Section 531, which deals with accumulated earning tax. The Tribunal, agreeing with the assessee, noted that the Branch Profit Tax is covered under the US treaty and directed the AO to allow the tax credit.

4. Disallowance of Expenditure on Software Purchase
The AO disallowed Rs. 9,53,437 incurred for purchasing "off the shelf" software from QAD Singapore Pte Ltd., arguing it was subject to TDS under Section 195. The assessee contended it purchased a copyrighted article, not the copyright itself. The Tribunal, relying on decisions from the Delhi High Court in "DIT vs. Infrasoft Ltd." and "DIT vs. Ericson A.B.," ruled that the payment for off-the-shelf software is not royalty but business income and not subject to TDS. The Tribunal emphasized that the definition of royalty under the DTAA is more beneficial to the assessee and should prevail over the Income Tax Act.

5. Levy of Interest under Sections 234B and 234C
The Tribunal did not provide a detailed analysis for this issue, as it was contingent on the outcomes of the other issues.

Conclusion
The Tribunal ruled in favor of the assessee on all grounds. The Transfer Pricing adjustments were modified by excluding certain comparables, the club entrance fees were allowed as revenue expenditure, tax credit for Branch Profit Tax paid in the USA was granted, and the expenditure on software purchase was not subject to TDS. The appeal was allowed for statistical purposes.