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2019 (5) TMI 1543 - AT - Income TaxTDS u/s 195 - Addition u/s 40(a)(i) - non-deduction of TDS from the payment made for Microsoft licence fees - mere reimbursement of expenditure - India-Netherland DTAA - HELD THAT - It was held by the Tribunal 2018 (8) TMI 1056 - ITAT KOLKATA that the amount in question paid by the assessee was not in the nature of royalty. It was held that since the said amount was paid towards purchase of software, it would have been assessable as business profits in the hands of Netherland based Associated Enterprise and since the said Associated Enterprise did not have a permanent establishment in India, the business profits could not be taxed in India under Article 7 of the Indo Netherland DTAA. It was held by the Tribunal that there was no element of profit involved in the transactions representing remittance made towards purchase of licence software for use by the assessee, which was taxable in India in the hands of the Associated Enterprise and the assessee, therefore, was not required to deduct tax at source from the said payment u/s 195. It was further held by the Tribunal that the assessee was entitled for relief on this issue even on the basis of non-discrimination clause contained in Article 24(4) of the Indo-Netherland DTAA. We, therefore, respectfully follow the decision of the Tribunal rendered in assessee s own case and delete the disallowance made by the AO u/s 40(a)(i) and confirmed by the ld. CIT(Appeals) - Decided in favour of assessee Disallowance of conversion charges on account of prior period expenses - HELD THAT - The amount in question payable by the assessee on account of difference between the actual conversion charges and minimum conversion charges for the year under consideration representing contractual liability was in dispute and the same was settled and crystallized only in the F.Y. 2006-07 relevant to A.Y. 2007-08. As rightly contended by the ld. D.R., the assessee, therefore, was not entitled for deduction on account of this contractual liability pertaining to the year under consideration as the same represented disputed liability and since this dispute was settled and the liability was crystallized only in the F.Y. 2006-07, the assessee was entitled for the deduction of the same only in A.Y. 2007-08. We, therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) confirming the disallowance made by the Assessing Officer on this issue and upholding the same, we dismiss Grounds of the assessee s appeal. TP adjustment - comparison of segment involving export of goods to unrelated parties which was substantially higher than the PLI of other segment involving export of goods to Associated Enterprise - HELD THAT - We find that not only the nature of products manufactured in both these segments compared by the Transfer Pricing Officer as well as the risk undertaken by the assessee in these two segments was different, even the business model or business process adopted by the assessee in these two segments was different and the same cannot be taken as comparables for the purpose of transfer pricing analysis in order to determine the arm s length price. We, therefore, delete the addition made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of transfer pricing adjustment and allow Grounds of the assessee s appeal. TP adjustment made in respect of international transactions with its AE involving payment of audit fees - HELD THAT - Certain specific benefits were derived by the assessee-company from the internal audit services rendered by its Associated Enterprise and the authorities below were not justified in making the impugned addition on account of transfer pricing adjustment by taking the arm s length price of the internal audit services rendered by its Associated Enterprise to the assessee at nil on the ground that no benefit, directly or indirectly, was received by the assessee by availing the said services. In that view of the matter, we delete the addition made by the Assessing Officer and confirmed by the ld. CIT(Appeals) by way of transfer pricing adjustment on this issue and allow Ground of the assessee s appeal.
Issues Involved:
1. Disallowance under section 40(a)(i) for non-deduction of tax at source on Microsoft license fees. 2. Disallowance of conversion charges as prior period expenses. 3. Transfer pricing adjustment on account of sales to Associated Enterprises. 4. Transfer pricing adjustment for internal audit fees paid to Associated Enterprise. Issue-wise Detailed Analysis: 1. Disallowance under section 40(a)(i) for non-deduction of tax at source on Microsoft license fees: The assessee, a company engaged in pharmaceutical manufacturing, paid ?41,20,200 to its Netherlands-based Associated Enterprise, M/s. Organon NV, as reimbursement for Microsoft license fees. The Assessing Officer (AO) disallowed this amount under section 40(a)(i) on the grounds that it was taxable as royalty, requiring tax deduction at source under section 195. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this disallowance, agreeing that the payment constituted royalty. The Tribunal, however, referenced its prior decision in the assessee's case for A.Ys. 2003-04 and 2004-05, where it was held that such payments were not royalties but business profits not taxable in India under the Indo-Netherlands DTAA, as the Associated Enterprise had no permanent establishment in India. The Tribunal followed this precedent, deleted the disallowance, and allowed the assessee's appeal on this ground. 2. Disallowance of conversion charges as prior period expenses: The assessee claimed ?35,87,454 as conversion charges for A.Y. 2005-06, which was initially debited in F.Y. 2006-07. The AO disallowed this claim, citing the Supreme Court decision in Goetze India Limited, which requires claims to be made in the return or revised return. The CIT(A) upheld the AO's decision. The Tribunal noted that the liability was disputed and crystallized only in F.Y. 2006-07, making the deduction allowable only in A.Y. 2007-08. Thus, the Tribunal upheld the disallowance of the conversion charges for A.Y. 2005-06. 3. Transfer pricing adjustment on account of sales to Associated Enterprises: The AO made a transfer pricing adjustment of ?1,40,04,097, comparing the profit margins of two segments: one involving sales to Associated Enterprises and the other to unrelated parties. The assessee argued that the segments were functionally different, with different risks and product types. The CIT(A) upheld the AO's adjustment, stating that the segments were comparable. The Tribunal, however, found that the products and risks in the two segments were indeed different. It noted that the products sold to Associated Enterprises were intermediates, while those sold to unrelated parties were final products. The Tribunal also observed that the Transfer Pricing Officer (TPO) accepted these differences in A.Y. 2007-08 and did not make a similar adjustment. Consequently, the Tribunal deleted the transfer pricing adjustment. 4. Transfer pricing adjustment for internal audit fees paid to Associated Enterprise: The assessee paid ?14,00,719 for internal audit services to its Associated Enterprise, Akzo Nobel South East Pte. Ltd., Singapore. The TPO determined the arm's length price of these services as 'nil', stating no tangible benefit accrued to the assessee. The CIT(A) upheld this adjustment. The Tribunal, referencing the CIT(A)'s decision for A.Y. 2004-05, noted that the internal audit provided benefits like better control and administration. The Tribunal found that the internal audit services did benefit the assessee and deleted the transfer pricing adjustment. Conclusion: The Tribunal partly allowed the assessee's appeal, deleting the disallowances and adjustments related to the Microsoft license fees and transfer pricing for internal audit fees and sales to Associated Enterprises, while upholding the disallowance of conversion charges as prior period expenses.
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