2017 (4) TMI 1006 - AT - Income Tax

TPA - rejecting the foreign AE as the tested party is that no reliable data in respect of foreign comparables is available - Held that - 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. 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, placed before us at Paper Book page Nos. 455-483. The 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. Thus we hold that the action of the TPO, accepted by the Assessing Officer and Ld. 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.- Decided in favour of assessee TDS u/s 195 - Disallowance made 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 - In the present case are identical to that in the case of 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) of the Act 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) - Decided in favour of assessee Non deduction of tax u/s. 194-I 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. 194-I the tax is to be deducted at source. In the light of the above, we, therefore, restore the matter back to the Assessing Officer 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. This ground of appeal of the assessee is, therefore, allowed for statistical purposes. Non deduction of tax on salaries paid outside India applying the provisions of Section 40a(iii) - Held that - Going by the provisions of section 9(1)(ii), clearly and undisputedly the salary has not been earned in India. Having said so, 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. The 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 - Decided in favour of assessee Disallowance of interest paid up by applying the provisions of section 36(1)(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(1)(iii) on account of making the aforesaid investment. In view of the same, the disallowance made u/s. 36(1)(iii) is therefore, deleted and the order of the CIT (A) on this ground is therefore, set aside. - Decided in favour of assessee Non declaration of receipts on sale of assets - Held that - We find merit in the contention the Ld. counsel for the assessee. On perusal of the above documents produced before us, 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 on Various Expenses
3. Disallowance under Section 40(a)(i) for Non-Deduction of TDS on Rent
4. Disallowance under Section 40(a)(iii) for Non-Deduction of TDS on Salaries Paid Outside India
5. Disallowance of Interest under Section 36(1)(iii)
6. Addition for Non-Declaration of Receipts on Sale of Assets

Issue-Wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee challenged a transfer pricing adjustment of ?45,68,000/- made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee, engaged in software and IT-enabled services, had justified the arm's length price 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, stating that the tested party should have the least complex functions and reliable comparable data, which was not available for the foreign AE. The Tribunal found that reliable data for foreign comparables was indeed available in the public domain and provided by the assessee. The Tribunal set aside the rejection of the foreign AE as the tested party and deleted the transfer pricing adjustment of ?45,68,000/-.

2. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Various Expenses:
The assessee faced disallowance of ?2,84,52,914/- for non-deduction of TDS on payments for commission, legal and professional charges, marketing and selling expenses, and outsourcing expenses. The AO and CIT(A) held these payments taxable in India as the source of income was India. The Tribunal referred to its decision in the preceding year, where it held that the lower authorities had not established that the income accrued or arose in India or that the non-resident payees had any business connection or permanent establishment in India. Following this precedent, the Tribunal deleted the disallowance.

3. Disallowance under Section 40(a)(i) for Non-Deduction of TDS on Rent:
The assessee paid rent to representatives of a family without deducting TDS, arguing that the rent was below the limit for each family member. The AO and CIT(A) disallowed the rent for lack of proof of bifurcation. The Tribunal found merit in the assessee's contention, noting lease agreements showing multiple co-owners. The Tribunal remanded the matter to the AO to apportion the rental income among co-owners and apply Section 194-I accordingly.

4. Disallowance under Section 40(a)(iii) for Non-Deduction of TDS on Salaries Paid Outside India:
The assessee paid salaries of ?39,73,746/- outside India without deducting TDS, arguing the services were rendered outside India and the salaries were taxable in the Netherlands. The AO and CIT(A) disallowed the amount under Section 40(a)(iii). The Tribunal noted that Section 9(1)(ii) deems salary to accrue in India only if earned in India, which was not the case here. Thus, the Tribunal held that the salary was not chargeable to tax in India, and no TDS was required. The disallowance was deleted.

5. Disallowance of Interest under Section 36(1)(iii):
The AO disallowed ?3,40,000/- of interest on secured loans, citing investment in subsidiaries as non-business purposes. The CIT(A) upheld this, referencing a similar disallowance in a prior year. The Tribunal referred to its decision in the preceding year, where it held that investments in wholly-owned subsidiaries were commercially expedient. Following this precedent, the Tribunal deleted the disallowance.

6. Addition for Non-Declaration of Receipts on Sale of Assets:
The AO added ?57,68,163/- for non-declaration of receipts from the sale of assets to Aeromatrix Info Solutions Pvt. Ltd. The assessee argued that the amount was accounted for in its books. The Tribunal found that the sale was reflected in the assessee's ledger accounts and depreciation records. The Tribunal directed the deletion of the addition, as the amount was duly recorded in the books.

Conclusion:
The Tribunal provided relief to the assessee by deleting several disallowances and adjustments made by the AO and upheld by the CIT(A), based on precedents and detailed examination of the facts and applicable legal provisions.