2014 (9) TMI 276 - AT - Income Tax

Transfer pricing adjustment - Software development services Held that - The application of CUP method has been rejected by the TPO as the most appropriate method and a corroborative internal TNMM by relying on the view taken by him in the preceding year as decided in assessee s own for the earlier assessment year, it has been held in Hughes Systique India Pvt. Ltd. Versus ACIT, Circle 12(1), New Delhi 2013 (8) TMI 812 - ITAT DELHI - the internal CUP should be applied and if, for any reasons the CUP method cannot be applied, then TNMM should be resorted to - the CUP method can be used only if the products or services of the assessee are comparable to those of the other uncontrolled transaction - it is of utmost importance to first precisely determine the nature of services offered by the assessee to its AEs in order to make an effective comparison with the services rendered by it to the non-AEs - Unless the nature of services rendered by the assessee to its AEs and non-AEs is accurately ascertained, there can be no question of making a meaningful comparison thus, the matter is to be remitted back to theAO/TPO for a fresh determination of the ALP of the international transactions Decided in faovur of assessee. International transaction in the nature of Marketing support services Held that - The Tribunal for the immediately preceding two AYs restored the matter to the file of AO/TPO for a fresh determination of ALP under this segment as well - The directions given by the tribunal were common to both the segments, namely, Software development services segment and Marketing support services the matter is remitted back to the AO/TPO for fresh determination Decided in favour of assessee. Excess claim of depreciation on computer UPS and other peripherals rate of depreciation to be @ 60% or 15% - Held that - Following the decision in CIT Vs BSES Rajdhani Powers Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT - UPS and other computer peripherals are eligible for depreciation @ 60% - Decided in favour of assessee. Addition u/s 40(a)(ia) - Management fees paid Article 12 Indo-US DTAA - Held that - In order to make a disallowance by invoking section 40(a)(i), it is sine qua non that apart from other things, the amount which is paid to the person outside India should be the one on which tax is deductible at source and such tax has not been deducted or not paid after deduction - unless the amount paid by the assessee in India is not chargeable to tax in the hands of the resident of other country, there can be no question of invoking section 195 and consequently section 40(a)(i) of the Act - consideration for Managerial services is chargeable to tax in India as per Expl.2 to section 9(1)(vii) - the foreign AE rendered services in USA, which were consumed there itself - By rendering such services, nothing was made available to the assessee for use in future - As the foreign AE has not made available any technical knowledge, experience, skill etc. to the assessee for use in present or in future, the consideration for such services cannot be brought within the ambit of making available of anything to the assessee, so as to considered as Fees for included services . The provisions of the DTAA or the Act, whichever are more beneficial to the assessee, are to be applied - the amount is chargeable to tax as per section 9(1)(vii) of the Act in the hands of the foreign AE on standalone basis, but going by Article 12(4) of the DTAA, it is clear that the payment cannot be considered as Fees for included services so as to be charged to tax in the hands of foreign AE - once the amount is not chargeable to tax in India as per Article 12 of the DTAA, there can be no question of imposing any liability on the payer assessee to make deduction of tax at source thus, the provisions of sec. 40(a)(i) cannot be invoked Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment in 'Software Development Services' segment.
2. Transfer Pricing Adjustment in 'Marketing Support Services' segment.
3. Excess claim of depreciation.
4. Disallowance under Section 40(a)(i) of the Income-tax Act.

Detailed Analysis:

1. Transfer Pricing Adjustment in 'Software Development Services' Segment:
The assessee, engaged in software development, reported international transactions including receipts on account of software development services. The Transfer Pricing Officer (TPO) rejected the Comparable Uncontrolled Price (CUP) method and internal Transactional Net Margin Method (TNMM) used by the assessee, opting instead for an external TNMM. The TPO selected sixteen comparable companies and determined an arithmetic mean Profit Level Indicator (PLI) of 21.17%, resulting in a Transfer Pricing Adjustment of Rs. 8.56 crore. The tribunal noted that the TPO's rejection of the CUP method was based on the previous year's view, which had been remanded by the tribunal for reconsideration. The tribunal directed the Assessing Officer (AO)/TPO to reassess the applicability of the CUP method, emphasizing the need for detailed data on transactions with all associated enterprises (AEs) and non-AEs for a meaningful comparison. If the CUP method is found inapplicable, the TPO may then resort to TNMM.

2. Transfer Pricing Adjustment in 'Marketing Support Services' Segment:
The issue of Transfer Pricing Adjustment amounting to Rs. 9.13 crore in the 'Marketing Support Services' segment was also remanded to the AO/TPO. The tribunal noted that the approach taken by the TPO for this segment was similar to that of the 'Software Development Services' segment, and the tribunal's directions for reassessment applied to both segments.

3. Excess Claim of Depreciation:
The assessee claimed depreciation on computer UPS and peripherals at 60%, which the AO reduced to 15%. The tribunal, referencing the jurisdictional High Court's decision in CIT Vs BSES Rajdhani Powers Ltd. and a Special Bench order in DCIT Vs Datacraft India Ltd., upheld the assessee's claim for 60% depreciation. The tribunal noted that similar views had been taken in the assessee's own case in earlier years.

4. Disallowance under Section 40(a)(i) of the Income-tax Act:
The AO disallowed Rs. 19.81 lakh paid as management fees to a foreign AE, citing non-deduction of tax at source under Section 195. The tribunal examined the nature of services rendered, which were managerial services provided in the USA. The tribunal noted that such services did not qualify as 'Fees for included services' under Article 12 of the India-USA Double Taxation Avoidance Agreement (DTAA) because they did not 'make available' technical knowledge or skills. Consequently, the payment was not chargeable to tax in India under the DTAA, and the provisions of Section 40(a)(i) could not be invoked. The tribunal directed the deletion of the disallowance.

Conclusion:
The tribunal remanded the issues of Transfer Pricing Adjustments in both 'Software Development Services' and 'Marketing Support Services' segments to the AO/TPO for fresh determination, upheld the assessee's claim for 60% depreciation on computer peripherals, and directed the deletion of the disallowance under Section 40(a)(i) due to non-applicability of tax deduction provisions under the DTAA. The appeal was partly allowed.