9911796707
TMI Blog2015 (1) TMI 1363X X X X Extracts X X X X X X X X Extracts X X X X ..... eal filed by the Assessee relate to the addition made by the AO of Rs. 2,92,24,427/- to the total income of the Assessee on account of adjustment in the arm's length price (ALP) of international transaction entered into by the Assessee with it's Associated Enterprise (AE) under the provisions of Sec.92 of the Income Tax Act, 1961 (Act). 4. The Assessee provided Software Development Services to its AE. The said transaction was an international transaction with an Associated Enterprise (AE) and have to pass the Arm's Length Price (ALP) test as provided u/s.92 of the Income Tax Act, 1961 (Act). Financial Results of the Assessee for the F Y 2006-07 Description Amount Operating Revenue Rs.25,95,40,100/- Operating Cost Rs.23,50,18,401/- Operating Profit (PBIT) Rs.2,45,21,699/- Operating Profit to Cost Ratio 10.43 % The segmental details pertaining to software development Services is as under (as per the TP report). Description Software development services Operating Revenue Rs.25,95,40,100 Operating Expenses Rs.23,19,89,306 Operating Profit Rs. 2,75,50,794 Operating Profit to Cost Ratio 11.88 % 5. Comparables ultimately selected by TPO and their ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : The price charged by the tax payer to its Associated Enterprises is compared to the Arms Length Price as under: Arms Length Price (ALP) at 123.18% of operating cost Rs.28,57,64,427/- Price charged in the international transactions Rs.25,95.,40,100/- Shortfall being adjustment u/s. 92CA Rs.2,62,24,427/- The above shortfall of Rs. 2,62,24,427/- is treated as transfer pricing adjustment u/s 92CA." 7. Against the said adjustment proposed by the TPO which was incorporated in the draft assessment order by the AO, the assessee filed objections before the DRP. The DRP rejected those objections and confirmed the transfer pricing adjustment suggested by the TPO. The adjustment confirmed by the DRP was added to the total income of the assessee by the AO in the fair order of assessment. Against the said order of the Assessing Officer, the assessee has preferred the present appeal before the Tribunal. 8. The assessee filed a chart explaining as how some of the comparable companies chosen by the TPO were not comparable for the reason that these companies were not functionally comparable. The Chart also gives the cases decided by various Benches of the ITAT where the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions. We are of the view that the question as to whether the aforesaid two companies are comparable or not with the Assessee company in terms of FAR analysis, has to be decided on the basis of data which is available in the public domain i.e., published annual report of these two companies.. Therefore facts necessary to apply the filter sought to be relied upon by the Assessee in the additional ground of appeal are already available on record. Therefore there can be no valid objection to deciding the question of applying the aforesaid filter, if otherwise it is found to be a valid filter. On the question of the Assessee having chosen the aforesaid two companies as comparable and therefore cannot be permitted to chance its stand now, we are of the view that the decision of the Special Bench, Chandigarh in the case of Quark Systems (supra) clearly supports the plea of the Assessee. The Special Bench in the aforesaid decision in the case of Quark Systems (supra) has after considering the OECD Commentaries observed as follows: 35. In para 4.16 of latest report, the OECD provides the following guidelines : "In practice, neither countries nor taxpayers should misuse the burden o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies were held to be software product companies and therefore not comparable with software development service provider such as the Assessee in several decisions rendered by the Tribunal, the main decision being in the case of Trilogy E-Business Software India Pvt. Ltd., ITA No.1054/Bang/2011 Bangalore ITAT. The decisions rendered by the Tribunal are later in point of time to the Transfer Pricing Study undertaken by the Assessee. The Assessee is entitled to take note of the subsequent judicial pronouncement and seek to exclude a company which is functionally not comparable with that of the Assessee. As held by the Special Bench in the case of Quark Systems (supra), there cannot be any tax liability on the basis of admission and the determination of tax liability has to be in accordance with law. In the light of the aforesaid judicial pronouncement, we are of the view that the additional ground of appeal deserves to be admitted for adjudication. Accordingly, the additional ground is admitted for adjudication. 11. We will proceed to consider the comparability of companies chosen by the TPO and listed in para-5 of this order. 12. As far as comparable companies listed at Sl.No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contention that this company has revenue from software product and observed that in the absence of segmental details, Avani Cincom cannot be considered as comparable to the assessee who was rendering software development services only and it was held as follows:- "7.8 Avani Cincom Technologies Ltd. ('Avani Cincom'): Here in this case also the segmental details of operating income of IT services and sale of software products have not been provided so as to see whether the profit ratio of this company can be taken into consideration for comparing the case that of assessee. In absence of any kind of details provided by the TPO, we are unable to persuade ourselves to include it as comparable party. Learned CIT DR has provided a copy of profit loss account which shows that mainly its earning is from software exports, however, the details of percentage of export of products or services have not been given. We, therefore, reject this company also from taking into consideration for comparability analysis." It was also highlighted that the margin of this company at 52.59% which represents abnormal circumstances and profits. The following figures were placed before us:- Particulars FYs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to the decision of the Mumbai Bench of the Tribunal in the case of Teva Pharma Private Ltd. v. Addl. CIT - ITA No.6623/Mum/2011 (for AY 2007-08) in which the comparability of this company for clinical trial research segment. The relevant extract of discussion regarding this company is as follows: "The learned D.R. however drew our attention to page- 389 of the paper book which is an extract from the Directors report which reads as follows: 'The Company has developed a de novo drug design tool "CELSUITE" to drug discovery in, finding the lead molecules for drug discovery and protected the IPR by filing under the copy if sic (of) right/patent act. (Apprised and funded by Department of Science and Technology New Delhi) based on our insilico expertise (applying bioinformatics tools). The Company has developed a molecule to treat Leucoderma and multiple cancer and protected the IPR by filing the patent. The patent details have been discussed with Patent officials and the response is very favorable. The cloning and purification under wet lab procedures are under progress with our collaborative Institute, Department of Microbiology, Osmania University, Hyderabad. In the industrial b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/s.133(6) of the Act in which it has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant extract are as follows: "16. Another issue relating to selection of comparables by the TPO is regarding inclusion of Kals Information System Ltd. The assessee has objected to its inclusion on the basis that functionally the company is not comparable. With reference to pages 185-186 of the Paper Book, it is explained that the said company is engaged in development of software products and services and is not comparable to software development services provided by the assessee. The appellant has submitted an extract on pages 185-186 of the Paper Book from the website of the company to establish that it is engaged in providing of I T enabled services and that the said company is into development of software products, etc. All these aspects have not been factually rebutted and, in our view, the said concern is liable to be excluded from the final set of comparables, and thus on this aspect, assessee succeeds." Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable. 47. We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ining TNMM margin." 49. Besides the above, it was pointed out that this company has related party transactions which is more than the permitted level and therefore should not be taken for comparability purposes. The submission of the ld. counsel for the assessee was that if the above company should not be considered as comparable. The ld. DR, on the other hand, relied on the order of the TPO. 50. We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessees engaged in software development services business. Accepting the argument of the ld. counsel for the assessee, we hold that the aforesaid company should be excluded as comparables." 13. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies are also to be excluded." 15. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP. 16. As far as comparable companies listed at Sl.No.16 of the final list of comparable companies chosen by the TPO viz., M/S.Megasoft Limited is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. Vs. DCIT IT (TP) No.1086/Bang/2011 for AY 07-08 held that the aforesaid companies are not comparable companies in the case of software development services provider. The nature of services rendered by the Assessee in this appeal and the Assessee in the case of First Advantage Offshore Services Pvt.Ltd.(supra) are one and the same. This fact would be clear from the fact that the very same 26 companies were chosen as comparable in the case of the Assessee as well as in the case of First Advantage Offshore Services Pvt.Ltd.(supra). In coming to the aforesaid conclusion, the Tribunal in the case of First Advantage Offshore Services Pvt.Ltd.(supra) followed the decision rendered in the case of Trilogy E-Business Softwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparable satisfied TPO's filter of more than 75% of revenues from software development services. The basis on which the TPO arrived at the PLI of 60.23% is given at page-115 and 116 of the order of the TPO. It is clear from the perusal of the same that the TPO has proceeded to determine the PLI at the entity level and not on the basis of segmental data. 25. In the order of the TPO, operating margin was computed for this company at 60.23%. It is the complaint of the assessee that the operating margins have been computed at entity level combining software services and software product segments. It was submitted that the product segment of Megasoft is substantially different from its software service segment. The product segment has employee cost of 27.65% whereas the software service segment has employee cost of 50%. Similarly, the profit margin on cost in product segment is 117.95% and in case of software service segment it is 23.11%. Both the segments are substantially different and therefore comparison at entity level is without basis and would vitiate the comparability (submissions on page 381 to 383 of the PB-I). It was further submitted that Megasoft Limited has provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant in the software development segment. 12.2 Before us, the assessee contended that this company is not functionally comparable to the assessee and in this context has cited various portions of the Annual Report of this company to this effect which is as under :- (i) The company has an Intellectual Property (IP) Cell to guide its employees to leverage the power of IP for their growth. In 2008, this company generated over 102 invention disclosures and filed an aggregate 10 patents in India and the USA. Till date this company has filed an aggregate of 119 patent applications (pending) in India and USA out of which 2 have been granted in the US. (ii) This company has substantial revenues from software products and the break-up of the software product revenues is not available. (iii) This company has incurred huge research and development expenditure to the tune of approximately Rs. 200 Crores. (iv) This company has a revenue sharing agreement towards acquisition of IPR in AUTOLAY, a commercial software product used in designing high performance structural systems. (v) The assessee also placed reliance on the following judicial decisions :- (a) ITAT, Delhi Bench decision in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts. 13.3. Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables. 13.4.1 We have heard both parties and carefully perused and considered the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison. 13.4.2 We also find that this company owns intellectual property in the form of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lopment service provider and therefore it is not functionally comparable. In this context the relevant portion of this order is extracted and reproduced below :- " .... Tata Elxsi is engaged in development of niche product and development services which is entirely different from the assessee company. We agree with the contention of the learned Authorised Representative that the nature of product developed and services provided by this company are different from the assessee as have been narrated in para 6.6 above. Even the segmental details for revenue sales have not been provided by the TPO so as to consider it as a comparable party for comparing the profit ratio from product and services. Thus, on these facts, we are unable to treat this company as fit for comparability analysis for determining the arm's length price for the assessee, hence, should be excluded from the list of comparable portion." As can be seen from the extracts of the Annual Report of this company produced before us, the facts pertaining to Tata Elxsi have not changed from Assessment Year 2007-08 to Assessment Year 2008-09. We, therefore, hold that this company is not to be considered for inclusion in the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any's functional profile. It is also submitted by the learned Authorised Representative that KPO services are not comparable to software development services and therefore companies rendering KPO services ought not to be considered as comparable to software development companies and relied on the decision of the co-ordinate bench in the case of Capital IQ Information Systems (India) (P) Ltd. in ITA No.1961(Hyd)/2011 dt.23.11.2012 and prayed that in view of the above reasons, this company i.e. e-Zest Solutions Ltd., ought to be omitted from the list of comparables. 14.3 Per contra, the learned Departmental Representative supported the inclusion of this company in the list of comparables by the TPO. 14.4 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the list of comparables only on the basis of the statement made by the company in its reply to the notice under section 133(6) of the Act. It appears that the TPO has not examined the services rendered by the company to give a finding whether the services performed by this company are similar to the software developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions and perused and carefully considered the material on record. It is seen from the material on record that the company is engaged in product development and earns revenue from sale of licenses and subscription. However, the segmental profit and loss accounts for software development services and product development are not given separately. Further, as pointed out by the learned Authorised Representative, the Pune Bench of the Tribunal in the case of E-Gain Communications Pvt. Ltd. (supra) has directed that since the income of this company includes income from sale of licenses, it ought to be rejected as a comparable for software development services. In the case on hand, the assessee is rendering software development services. In this factual view of the matter and following the afore cited decision of the Pune Tribunal (supra), we direct that this company be omitted from the list of comparables for the period under consideration in the case on hand." "17. Persistent Systems Ltd. 17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in softwar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details / information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. 18. Quintegra Solutions Ltd. 18.1 This case was selected by the TPO as a comparable. Before the TPO, the assessee objected to the inclusion of this company in the set of comparables on the ground that this company is functionally different and also that there were peculiar economic circumstances in the form of acquisitions made during the year. The TPO rejected the assessee's objections holding that this company qualifies all the filters applied by the TPO. On the issue of acquisitions, the TPO r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in the case on hand and therefore ought to be excluded from the list of comparables for the period under consideration. 18.2 Per contra, the learned Departmental Representative supported the action of the TPO in including this company in the set of comparables to the assessee for the period under consideration. 18.3.1 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details brought on record that this company i.e.Quintegra Solutions Ltd. is engaged in product engineering services and is not purely a software development service provider as is the assessee in the case on hand. It is also seen that this company is also engaged in proprietary software products and has substantial R&D activity which has resulted in creation of its IPRs. Having applied for trade mark registration of its products, it evidences the fact that this company owns intangible assets. The co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd. (ITA No.227/Bang/2010 dt.9.11.2012) has held that if a company possesses or owns intangibles or IPRs, then it cannot be considered as a comparable company to one that does not ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment is engaged in the development of software which can be considered as comparable to the assessee company. The said concern is engaged in two segments namely application software segment and Training. As per the TPO, the application software segment is functionally comparable to the assessee as the said concern is engaged in software services. The stand of the assessee is that a perusal of the Annual Report of the said concern for F.Y. 2006-07 reveals that the application software segment is engaged in the business of sale of software products and software services. The assessee pointed out this to the TPO in its written submissions, copy of which is placed in the Paper book at page 420.3 to 420.4. The assessee further pointed out that there was no bifurcation available between the business of sale of software products and the business of software services, and therefore, it was not appropriate to adopt the application software segment of the said concern for the purposes of comparability with the assessee's IT-Services Segment. The TPO however, noticed that though the application software segment of the said concern may be engaged in selling of some of the software products wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said concern is not comparable to the assessee's segment of IT services. 20. With regard to the inclusion of Helios & Matheson Information Technology Ltd., the assessee has raised similar arguments as in the case of KALS Information Solutions Ltd. (Seg). We have perused the relevant para of the order of the TPO i.e., 6.3.21, in terms of which the said concern has been included as a comparable concern. The assessee pointed out that as in the case of KALS Information Solutions Ltd. (Seg), in the instant case also for A.Y. 2006-07 the said concern was found functionally incomparable by the assessee in its Transfer pricing study and the said position was not disturbed by the TPO. The relevant portion of the Transfer pricing study, placed at page 432 of the Paper book has been pointed out in support. Considered in the aforesaid light, on the basis of the discussion in relation to KALS Information Solutions Ltd. (Seg), in the instant case also we find that the said concern is liable to be excluded from the list of comparables." 23. Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid company from the final list of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd. 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:- "Size criteria in terms of Sales, Assets or Number of Employees: The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability." 12. The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs. 1,000 crore company cannot be compared with the transaction entered into by a Rs. 10 crore company. The two most obvious reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs. 1.00 crore to 200 crores have to be taken as a particular range and the assessee being in that range having turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study." 15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: 1. M/s Kodiak Networks (India) Private Limited Vs. ACIT (ITA No.1413/Bang/2010) 2. M/s Genesis Microchip (I) Private Limited Vs. DCIT (ITA No.1254/Bang/20l0). 3. Electronic for Imaging India Private Limited (ITA No. 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod referred to in subsection (1) shall be applied, for determination of arm's length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices: Provided further that if the variation between the arm's length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm's length price. (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aracteristics of the property transferred or services provided in either transaction; (b) the functions performed, taking into account assets employed or to be employed and the risks assumed, by the respective parties to the transactions; (c) the contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or implicitly how the responsibilities, risks and benefits are to be divided between the respective parties to the transactions; (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. (3) An uncontrolled transaction shall be comparable to an international transaction if- (i) none of the differences, if any, between the transactions being compared, or between the enterprises entering into such transactions are likely to materially affect the price or cost charged or paid in, or the profit arising from, such transactions in the ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra), we hold that the aforesaid companies should be excluded from the list of comparable companies. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable. 28. The AO/TPO is directed to compute the arithmetic mean of the profit margins of the remaining comparable companies after excluding the companies from the final list of 26 comparable companies chosen by the TPO and compare the same with the profit margin of the Assessee in accordance with the provisions of Sec.92C of the Act. 29. No other arguments were raised on the other issues raised in the concise grounds of appeal No.1 to 6 and therefore the issue with regard to determination of ALP of the international transaction of providing software development services to the AE by the Assessee is decided as set out in the earlier paragraphs. 30. Concise Ground No.7 & 8 raised by the Assessee project the grievance of the Assessee regarding the action of the learned Assessing Officer and Honorable Dispute Resolution Panel in excluding while computing deduction u/s.10A of the Act telecommunication charges, consultancy charges, repairs and maintenance and certain other expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs. 28,65,514/. The Assessee did not deduct tax at source on the aforesaid sum at the time of credit to the account of the payee in the books of accounts of the Assessee. According to the AO as per the provisions of Sec.195 of the Act, any person responsible for paying to a non-resident any interest chargeable under the provisions of this Act shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force. Since the Assessee had not deducted tax at source on the sum credited to the account of the non-resident payee, the AO was of the view that as per the provisions of Sec.40(a)(i) of the Act, the amount on which tax has not been deducted in accordance with the provisions of Sec.195 of the Act and which is claimed as a deduction while computing total income, should be disallowed. Sec.40(a)(i) of the Act provides as follows: "Sec.40: Amounts not deductible. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ..." 36. The Assessee pointed out that as per Article 11 interest income is taxable both in India and Singapore. Under Article 11(1) above interest income is taxable in Singapore in the hands of Broadcom Singapore Pte.Lte. only on receipt basis because the relevant article refers to "Interest arising in a contracting State and Paid to a resident of the other contracting state". Article 11(2) under which India has a right to tax the same interest income refers to "Such Interest" and therefore even in India interest income is chargeable to tax only on receipt basis. Since interest was payable and not paid, there was no accrual of income chargeable to tax in the hands of the non-resident and therefore there was no obligation to deduct tax at source. The Assessee thus submitted that there was no obligation to deduct tax at source on the part of the Assessee and therefore the provisions of Sec.40(a)(i) could not be invoked to make disallowance. 37. The DRP did not consider the submissions and merely observed that the Assessee did not furnish any detail or explanation to substantiate its argument and confirmed the order of the AO. 38. Before us, the learned counsel for the Assessee po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal LLC Vs. DDIT ITA Nos. 1600, 1601 & 1656/Del/2011 order dated 8.6.2012; (ii) DCIT Vs. Uhde Gmbh 54 TTJ Mumbai 355; (iii) CSC Technology Singapore Pte.Lte VS. ADIT (2012) 50 SOT 399 (ITAT) |(Del); (iv) Booz Allen and Hamilton India Ltd and Co.Kg. Vs. ADIT (2013) 56 SOT 96 (Mumbai)(ITAT). The learned counsel for the Assessee therefore submitted that interest for the months August, 2006 to March, 2007 admitted were not paid to the non-resident and therefore the same cannot be brought to tax in India. Since the obligation to deduct tax is linked to chargeability to tax in the hands of the non-resident as held in the case of Eli Lilly & Co. 312 ITR 225 (SC), it was submitted by him that there was no obligation to deduct tax at source and consequently no disallowance could be made u/s.40(a)(i) of the Act. 42. The learned DR submitted that none of the decisions on which reliance was placed by the learned counsel for the Assessee are in the context of obligation to deduct tax at source u/s.195 of the Act. He pointed out that all the cases relate to taxation of interest income in the hands of the non-resident and the year in which interest income is to be taxed in the hands of the non-r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the fact that interest income is chargeable to tax in India. The Assessee claims that the point of accrual of income and taxation of income in the hands of the non-resident is only when the payment is received by the nonresident and that will also decide the point of time at which tax deductible at source has to be deducted. The obligation of the Assessee to deduct tax at source is laid down by Sec.195 of the Act. Sec.195 (1) of the Act reads thus: "(1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest referred to in section 194LB or section 194LC or 194LD or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct incometax thereon at the rates in force:" 45. A reading of the aforesaid provisions shows that the first part talks about the chargeability to tax of interest income or any other sum. The second part talks about the point of time at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act and a further sum of Rs. 53,579 in respect of payments for professional services rendered u/s. 194J of the Act. In respect of the aforesaid two items for which tax was not deducted at source and paid by the assessee, the amount to be disallowed u/s. 40(a)(ia) is on sums of Rs. 12,932 and Rs. 9,55,062 respectively, which is arrived at as follows:- Particulars Amount Amount of TDS not deducted u/s. 194C of the Act - as per Form 3CD 2,534 Amount to be disallowed (TDS not deducted *100/2.244) - (A) 1,12,923 Amount disallowed in the STI 1,12,923 Amount of TDS not deducted u/s. 194J of the Act - As per Form 3CD - (B) 53,579 Amount to be disallowed (TDS not deducted * 100/5.61) 9,55,062 Amount disallowed in the STI 9,55,062 The AO grossed up the TDS amount u/s. 194J at the rate of 10% - (C) [{(B) * 100}/10] 5,35,790 The AO subtracted such an amount from the amount disallowed for non-deduction u/s. 194C - (D) [ (C) - (A)] 4,22,867 Amount disallowed by the AO in the final assessment order 4,22,867 48. The assessee filed gross return of income declaring Gross Total Income (GTI) of Rs. 3,18,87,823. The entire GTI was claimed as deduction u/s. 10A of the Act a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action of providing relief under section 10A of the Act on the profits of business in returned income instead of assessed profits (i.e., after adjustments are made to the profit on account of short and non-deduction of TDS)." 52. The prayer of the assessee is that in the event of disallowance u/s. 40(a)(ia) being sustained, then the same would go to increase the profits of the business in respect of which the assessee is entitled to deduction u/s. 10A of the Act and that the assessee should be allowed deduction u/s. 10A of the Act on such enhanced profits. In support of the claim of assessee as aforesaid, reliance is placed on the decision of the Hon'ble Gujarat High court in the case of ITO v. Keval Construction, 354 ITR 13 (Guj). In the aforesaid decision, the Hon'ble Gujarat High Court was dealing with a case, where the assessee claimed deduction u/s. 80IB(10) of the Act in respect of profits derived from the business of developing housing projects. In the course of assessment, certain expenses claimed as deduction while computing profits on developing housing projects were disallowed invoking the provisions of section 40(a)(ia) of the Act. The assessee claimed deduction on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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