2020 (5) TMI 458 - AT - Income Tax

Transfer Pricing Adjustment with respect to IT Enabled Services segment - comparable - HELD THAT - Infosys BPO Ltd. cannot be considered as a comparable to the assessee company for the simple reason that the assessee company is engaged in rendering system integration, enterprise solutions and software development services to the clients of its Associated Enterprises (AE) and also to independent customers in the United Kingdom, the United State of America and others countries in Europe as well as India while being a subsidiary of Steria (UK). On the other hand Infosys BPO Ltd. is a part of the Infosys Group, a giant in the field of Information Technologies Services and being a part of the Infosys Group, Infosys , it thus enjoys significant brand presence and brand value plays a significant role in its ability to generate profit. We direct the AO/Ld. TPO to exclude BPO Infosys Ltd from the final set of comparables. Foreign exchange fluctuations gains/losses should be treated as operating item if the same are in relation to the trading items emanating from the international transactions - HELD THAT - It only remains to be verified as to whether the foreign exchange fluctuations incurred by the assessee relate to the trading items emanating from the international transactions or not. Therefore, for the limited purposes of verifying that the foreign exchange fluctuations of the assessee relate to the trading activities of the assessee, the issue is restored to the file of the Assessing Officer/Ld. TPO to verify the same and if it is found that the foreign exchange fluctuation relate to trading with the associate enterprises the Assessing Officer/Ld. TPO is directed to treat the same as operating item. Thus, this issue stands allowed for statistical purposes. Transfer Pricing Adjustment in the Software Development Segment - HELD THAT - The issue of Transfer Pricing Adjustment in the Software Development Segment is restored to the file of the AO/Ld. TPO for the limited purposes of verifying the computation of 35th and 65th percentiles and if the same is found correct then no Transfer Pricing Adjustment would have to be made. AO/Ld. TPO is also directed to verify as to whether the foreign exchange fluctuation in this segment relates to the trading activities with the AEs and if it is so found then the same is to be treated as operating item. TDS u/s 195 - management services fees u/s 40(a)(i) - HELD THAT - Beneficial provision in the DTAA between India and UK can be automatically incorporated in India-France DTAA by applying the Most Favoured Nation clause present in the Protocol to India-France (DTAA). It was also held that the services rendered by Steria France were managerial in nature and were, therefore, outside the ambit of definition of fee for technical services and further that the payments made to Steria France were not liable to withholding of tax under the provisions of section 195 of the Act. Thereafter, for Assessment Years 2010-11 and 2011-12, the Hon ble Delhi High Court went on to decide the issue in favour of the assessee 2017 (11) TMI 200 - DELHI HIGH COURT - Decided in favour of the assessee. TDS u/s 195 - Payments made to Steria France for purchase of computer software licenses for the reason of failure to deduct tax at source - HELD THAT - In the present case, considering that the issue under consideration is payment made towards software, which is a copyrighted article/asset, it needs to be considered whether the payment made is for obtaining rights in respect of copyright in the software, which is governed by the provisions of Copyright Act, 1957. Further, it would be pertinent to note that the Steria France is a resident of France (TRC and no PE certificates are placed in the paper book). As per section 90(2) of the Act, the provisions of the Act shall be overridden by the provisions of the DTAA, to the extent the latter are more beneficial to a nonresident assessee. In the present case, Article 13 of India - France DTAA deals with taxability of royalty paid by an Indian resident to French resident. Accordingly, respectfully following the ratio in DIT vs. Infra Soft Ltd 2013 (11) TMI 1382 - DELHI HIGH COURT we are of the considered the opinion that tax was not required to be deducted at source in respect of the payment made to Steria France for the purchase of computer software license/s and therefore, in view of the above cited judgment we direct the AO/TPO to delete the disallowance. - Decided in favour of assessee.

Issues Involved:
1. Limitation of the impugned order.
2. Transfer Pricing Adjustment in IT Enabled Services (ITES) segment.
3. Transfer Pricing Adjustment in Software Development Services segment.
4. Disallowance of Management Services Fees under section 40(a)(i).
5. Disallowance of payment made towards Recharge of IT Cost under section 40(a)(i).
6. Levy of interest under section 234B.

Detailed Analysis:

1. Limitation of the Impugned Order:
The appellant contended that the assessment order was barred by limitation. The Tribunal, following the precedent set in the case of Religare Capital Markets Ltd. vs. ACIT, held that the provisions of section 144C of the Income Tax Act are a self-contained code and cannot be subjected to the time limit prescribed under section 153. Consequently, this ground was dismissed.

2. Transfer Pricing Adjustment in IT Enabled Services (ITES) Segment:
The assessee challenged the inclusion of certain comparables and the exclusion of others. The Tribunal focused on the inclusion of Infosys BPO Ltd., which the assessee argued was functionally different due to its significant brand presence and ownership of intangibles. The Tribunal agreed, citing judicial precedents, and directed the exclusion of Infosys BPO Ltd. from the final set of comparables. The Tribunal also held that foreign exchange fluctuations should be treated as an operating item if related to trading activities with associated enterprises, directing the Assessing Officer (AO)/Transfer Pricing Officer (TPO) to verify this.

3. Transfer Pricing Adjustment in Software Development Services Segment:
The assessee argued that if foreign exchange fluctuations were considered as an operating item, its margin would fall within the 35th and 65th percentiles of the comparables, negating the need for a transfer pricing adjustment. The Tribunal restored the issue to the AO/TPO for verification of the computation of these percentiles and the nature of foreign exchange fluctuations. The Tribunal dismissed other grounds related to the inclusion of comparables as academic since they were not argued.

4. Disallowance of Management Services Fees under Section 40(a)(i):
The assessee contended that payments made to Steria France for management services were not taxable in India and thus not subject to withholding tax under section 195. The Tribunal noted that the Delhi High Court had ruled in favor of the assessee on this issue in previous years, holding that the services were managerial and not technical, and thus outside the ambit of fee for technical services under the India-France DTAA. Accordingly, the Tribunal directed the deletion of this disallowance.

5. Disallowance of Payment Made Towards Recharge of IT Cost under Section 40(a)(i):
The assessee argued that payments for software licenses were not in the nature of royalty and thus not subject to withholding tax. The Tribunal, relying on the Delhi High Court's judgment in the case of DIT vs. Infrasoft Ltd., agreed that the payments were for the purchase of copyrighted articles and not for the use of copyright, and thus did not constitute royalty. Consequently, the Tribunal directed the deletion of this disallowance.

6. Levy of Interest under Section 234B:
This ground was deemed consequential and required no separate adjudication.

Conclusion:
The appeal was partly allowed for statistical purposes, with directions for the AO/TPO to verify certain computations and the nature of foreign exchange fluctuations, and to delete disallowances related to management services fees and software license payments.

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