2021 (1) TMI 478 - AT - Income Tax

TDS u/s 194J - disallowance of leased line charges (link service cost) on account of non-deduction of tax at source - leased line charges got the final dressing up as Royalty u/s 9(1)(vi) - HELD THAT - Once there is no liability to deduct tax at source at the material time, the fortiori is that there can be no question of disallowance u/s 40(a)(ia) of the Act. When the payment of leased line charges was made, no existing provision at that time made the assessee clearly liable to deduct tax at source. Since the leased line charges got the final dressing up as Royalty u/s 9(1)(vi) of the Act after the close of the relevant Financial year, we have no hesitation in holding that - even though the amount became chargeable to tax as royalty in the hands of the recipient under the Act for the year under consideration - but the same did not fasten an obligation to deduct tax at source as the assessee could not have activated its sixth sense to ascertain beforehand that an obligation to deduct tax at source was in offing. As the scope of Royalty came to be expanded after the close of the financial year when the assessee had already paid lease line charges, we hold that the same could not have triggered deduction of tax at source so as to warrant any disallowance u/s.40(a)(ia) of the Act. Thus, ground No.1 by the assessee is allowed. Deduction u/s 10AA unit - Having held that the payment of leased line charges not as royalty oo question of making any separate disallowance in respect of 10AA unit. The finding rendered by the ld. CIT(A) in sustaining the disallowance and simultaneously allowing deduction u/s 10AA at the resultant enhanced income has, thus, become academic. Disallowance of expenditure on purchase of RSA tokens - AO did not allow the deduction despite the assessee s contention that the RSA tokens were used in rendering services to its Associated Enterprise and were charged at a mark up at 15% along with other costs incurred by it in rendering services - HELD THAT - As assessee was getting remunerated by its AE at cost plus 15%. The assessee specifically stated before the AO that the cost of RSA tokens was repaid by its AE with 15% mark up and such amount was considered as part of income of the year under consideration. Once the amount of expenditure, debited to the Profit and loss account, gets specifically credited to the Profit and loss account with a certain mark-up, there can be no question of disallowing the expenditure so charged while continuing to treat the amount credited as income. Thus RSA tokens are in the nature of revenue expenditure and hence deductible. Comparable selection - inclusion of Infosys Technologies Ltd. in the determination of the Arm s Length Price of the international transaction - HELD THAT - As seen that the international transaction is that of Provision of software services for which the assessee was compensated at cost plus 15%. The assessee is acting as a captive unit to its AE for rendering software services. In contrast, the Infosys Technologies Ltd. is a giant company rendering on-shore and off-shore services at a very high scale. Thus we are satisfied that the ld. CIT(A) was justified in excluding this company from the list of comparables.

Summary

Issues Involved:
1. Disallowance of leased line charges due to non-deduction of tax at source.
2. Disallowance of expenditure on purchase of RSA tokens.
3. Inclusion of Infosys Technologies Ltd. in the determination of the Arm’s Length Price (ALP) of the international transaction.

Detailed Analysis:

1. Disallowance of Leased Line Charges:
The primary issue was whether the assessee was liable to deduct tax at source on leased line charges paid to various vendors in India, warranting disallowance under section 40(a)(ia) of the Income-tax Act, 1961. The Assessing Officer (AO) considered these payments as fees for technical services, requiring tax deduction under section 194J. The CIT(A) upheld this view, categorizing the payments as "Royalty" under Explanation 6 to section 9(1)(vi).

The Tribunal examined the applicability of section 194J and the definition of "Royalty" as per Explanation 2 and Explanations 5 and 6 to section 9(1)(vi). It concluded that leased line charges, being payments for transmission by technology, fell under "Royalty" per the Finance Act 2012, effective retrospectively from 01-06-1976.

However, the Tribunal noted that the Finance Act, 2012, postdated the relevant financial year (F.Y. 2011-12). Since there was no obligation to deduct tax at source at the time of payment, the Tribunal held that the retrospective amendment could not impose such an obligation retroactively. Consequently, the disallowance under section 40(a)(ia) was not warranted, and the assessee's appeal on this ground was allowed. The Revenue's related ground was dismissed as infructuous.

2. Disallowance of Expenditure on RSA Tokens:
The assessee claimed RSA tokens worth ? 25,00,344/- as repair expenses. The AO treated this as capital expenditure, allowing only depreciation and disallowing ? 22,07,044/-. The CIT(A) upheld this disallowance.

The Tribunal found that the cost of RSA tokens was reimbursed by the Associated Enterprise (AE) with a 15% markup, and this amount was included in the assessee's income. Referencing a similar case (Amdocs Development Centre India Pvt. Ltd. Vs. JCIT), the Tribunal held that RSA tokens were revenue expenditure and deductible. Thus, the disallowance was deleted, and the assessee's appeal on this ground was allowed.

3. Inclusion of Infosys Technologies Ltd. in ALP Determination:
The assessee's international transaction involved providing software services to Barclays Bank Plc., benchmarked under the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) included Infosys Technologies Ltd. as a comparable, leading to a transfer pricing adjustment. The CIT(A) directed the exclusion of Infosys Technologies Ltd., which the Revenue challenged.

The Tribunal observed that Infosys Technologies Ltd. was a giant company providing high-scale services, unlike the assessee, which operated as a captive unit rendering software services to its AE at cost plus 15%. The Tribunal referenced the Delhi High Court's decision in CIT Vs. Agnity India Technologies Pvt. Ltd., which excluded Infosys from the list of comparables for a similar captive service provider.

The Tribunal upheld the CIT(A)'s decision to exclude Infosys Technologies Ltd., dismissing the Revenue's appeal on this ground. Consequently, the additional grounds raised by the assessee for inclusion/exclusion of other companies were dismissed as academic.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance of leased line charges and expenditure on RSA tokens, while dismissing the Revenue's appeal concerning the inclusion of Infosys Technologies Ltd. in the ALP determination. The judgment emphasized the non-retroactive application of tax deduction obligations and the appropriate selection of comparables in transfer pricing analysis.