9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2024 (7) TMI 840 - AT - Income TaxTP Adjustment - upward adjustment on account interest charged to the Associated Enterprise (AE) - CIT(A) deleted addition - HELD THAT - TPO s reliance on loan data from the US and Europe for benchmarking is inappropriate given the distinct economic environments and sovereign risks associated with Bahrain. That, the Prime Lending Rate of the Central Bank of Bahrain already incorporates regional economic factors and risks, aligning with the financial context of the Assessee's AE. Adding spreads for country and foreign exchange risks, as proposed by the TPO, constitutes duplicative adjustments, considering these factors are inherently reflected in the Prime Lending Rate adopted by the Assessee. CUP method, as per Rule 10B, necessitates adjustments only if they have a material impact on the price. The Prime Lending Rate's comprehensiveness negates the necessity for further adjustments. Assessee s method of calculating interest has been consistently applied in previous and subsequent financial years without challenge, underscoring its reliability and appropriateness. CIT(A) has thoroughly addressed and resolved the issues raised, aligning with the principles of fair benchmarking and appropriate risk adjustments - we uphold the Ld.CIT(A)'s order, thereby dismissing the TPO s adjustment - Decided in favour of assessee. Non-deduction of withholding tax u/s 195 - disallowance of Product Certification Expenses paid to non-resident - non-genuineness of the expenditure - HELD THAT - We conclude that the services rendered for product certification, which include evaluating technical quality and issuing certificates, do not fall under the definition of Fees for Technical Services as per Section 9(1)(vii) of the Act. This view is consistent with the CIT(A) s findings and supported by the judgments cited by the AR, particularly the Hon ble Supreme Court decision in CIT Vs. Kotak Securities Ltd. 2016 (3) TMI 1026 - SUPREME COURT which clarified that routine services not involving technical knowledge do not constitute technical services and it is mere in the nature of facility offered or available. Under the DTAA provisions, the payments for certification services rendered by entities in the USA, UK, Korea, and China are not taxable in India in the absence of a fixed place of business in India. Hence, the payments are not liable for withholding tax under Section 195 - As decided in TUV Bayern (India) Ltd. 2012 (7) TMI 220 - ITAT MUMBAI that certification services are not fees for technical services under the Act or the DTAA. Thus, concluded that the services rendered to the assessee for product certification, which include evaluating technical quality and issuing certificates, do not fall under the definition of Fees for Technical Services as per Section 9(1)(vii) of the Act.The assessee provided sufficient evidence, including certificates, invoices, and agreements, to establish the genuineness and business necessity of the expenses. The AO's contention on the non-genuineness of the expenditure is not substantiated by any contradictory evidence. - Decided in favour of assessee. TDS u/s 195 - disallowance of provision for royalty expenses - HELD THAT - The provision for royalty expenses made by the assessee was appropriate given the business practice of recording sales and subsequently making provisions for royalty expenses due upon activation by the end user. The royalty becomes payable only when the end user activates the software, creating a legitimate time gap between the recording of sales and the actual payment. We agree with the Ld.CIT(A) that the withholding tax liability under Section 195(2) of the Act does not arise until the royalty payment is actually due and payable. The income embedded in the payment must be taxable under the Act for the withholding tax provisions to apply. In this case, since the royalty is not immediately payable, the withholding tax liability does not get triggered. We acknowledge the relevance of the judicial pronouncements relied upon by the Ld.CIT(A) and the assessee. The principles laid down in the cases of Saira Asia Interior Private Limited 2017 (4) TMI 242 - ITAT AHMEDABAD and Sophos Technologies Pvt. Ltd. 2018 (12) TMI 1556 - ITAT AHMEDABAD support the view that the withholding - uphold the CIT(A)'s decision to delete the disallowance of the provision for royalty expense u/s 40(a)(i) - Decided against revenue.
Issues Involved:
1. Upward adjustment of Rs. 2,26,243/- on account of interest charged to the Associated Enterprise (AE). 2. Disallowance of Product Certification Expenses of Rs. 60,57,180/- due to non-deduction of withholding tax under Section 195 and non-genuineness of the expenditure. 3. Disallowance of provision for royalty expenses of Rs. 1,69,66,598/- under Section 40(a)(i). Detailed Analysis: Ground Nos. 1 and 2: Upward Adjustment of Rs. 2,26,243/- on Account of Interest Charged to AE Facts and Arguments: - The Assessee charged interest at 2.25% p.a. based on the Prime Lending Rate of the Central Bank of Bahrain. - The TPO benchmarked the loan transaction using loan data from the US and Europe, concluding a rate of 5.42% and made an upward adjustment of Rs. 2,26,243/-. - The Ld.DR argued that the Assessee did not account for foreign exchange risk. - The Ld.AR contended that the TPO's benchmarking was inappropriate due to geographical differences and that the Prime Lending Rate already incorporated regional risks. Judgment: - The TPO's reliance on loan data from US and Europe was deemed inappropriate due to different economic environments. - The Prime Lending Rate of Bahrain already incorporates regional risks. - Adding spreads for country and foreign exchange risks was considered duplicative. - The CUP method necessitates adjustments only if they have a material impact, which was not the case here. - The Assessee's method of calculating interest was consistently applied in previous and subsequent years without challenge. - The Ld.CIT(A) had thoroughly addressed and resolved the issues. - The Tribunal upheld the Ld.CIT(A)'s order, dismissing the TPO's adjustment of Rs. 2,26,243/-. Ground No. 3: Disallowance of Product Certification Expenses of Rs. 60,57,180/- Facts and Arguments: - The Assessee paid Product Certification Expenses to non-resident entities from the USA, UK, Korea, and China for certifying the technical quality of software products. - The AO disallowed the expenses due to non-deduction of withholding tax under Section 195 and questioned the genuineness of the expenditure. - The Ld.CIT(A) deleted the disallowance, relying on a similar case in the Assessee's own proceedings and judicial precedents. Judgment: - The services rendered for product certification do not fall under the definition of Fees for Technical Services as per Section 9(1)(vii) of the Act. - Under DTAA provisions, payments for certification services are not taxable in India in the absence of a fixed place of business. - The Assessee provided sufficient evidence to establish the genuineness and business necessity of the expenses. - The Tribunal upheld the Ld.CIT(A)'s order, deleting the disallowance of Rs. 60,57,180/-. Ground No. 4: Disallowance of Provision for Royalty Expenses of Rs. 1,69,66,598/- under Section 40(a)(i) Facts and Arguments: - The Assessee made a provision for royalty expenses, which was payable only upon the activation of the software by the end user. - The AO disallowed the amount, stating that the Assessee had shifted its TDS liability to the subsequent year. - The Ld.CIT(A) deleted the disallowance, relying on judicial precedents that withholding tax liability depends on the actual receipt of payment by the non-resident payee. Judgment: - The provision for royalty expenses was appropriate given the business practice of recording sales and making provisions for royalty expenses due upon activation by the end user. - Withholding tax liability under Section 195(2) does not arise until the royalty payment is actually due and payable. - Judicial precedents support that withholding tax liability is dependent on the actual receipt of payment by the non-resident payee. - The Tribunal upheld the Ld.CIT(A)'s decision to delete the disallowance of Rs. 1,69,66,598/-. Conclusion: The appeal filed by the Revenue was dismissed, and the Tribunal upheld the Ld.CIT(A)'s decisions on all grounds.
|
