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TMI Blog2020 (8) TMI 808X X X X Extracts X X X X X X X X Extracts X X X X ..... rking capital and has direct bearing on the profitability of the concerned. The grievance of the assessee is accordingly allowed. AO is directed to compute the working capital adjustment by considering the advances received from AE as part of the average trade payable. Computation of OP/OC of the assessee - plea of the assessee is that OP/OC should be computed as done by the assessee by considering the retirement provision written back as part of operating expenditure - HELD THAT:- The assessee s claim that for earlier AY its operating profit was considered after treating the provision for retirement benefit no longer required as part of operating expenses. This aspect was not verified either by the DRP/AO/TPO. Hence we deem it fit and appropriate to set aside the issue to TPO/AO for consideration of the claim of assessee with regard to past treatment of similar write back for computing its operating profit. The AO/TPO will afford opportunity of being heard to the assessee, before deciding the issue of determination of ALP in accordance with the directions contained in this order. TDS u/s 195 - Disallowance of Project Specific Costs u/s 40(a)(i) - AO held that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of working capital built in the profit margin. 3. On the facts and in the circumstances of the case the Dispute Resolution Panel is not justified in directing the TPO to adjust the profit margin of the assessee for the entire amount of advances received from AE on the ground that there is time value for money. 4. On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing the TPO/A0 to exclude the comparable M/s Infosys Ltd., M/s Persistent System Ltd., M/s KALS Information Systems Ltd. M/5 Sasken Communication Technologies Ltd. without considering the facts discussed by the TPO for selection of the comparables in the case of assesse and without appreciating the fact that these are qualifying all the qualitative and quantitative filters applied by the TPO. 5. On the facts and in the circumstances of the case, the Dispute Resolution Panel erred in directing the TPO/A0 to exclude the comparable M/s Tata Elxsi Ltd., without appreciating the fact that the selection of comparables in a case depends on assessee specific FAR analysis and this is functionally comparable company which qualifies all the qualitative and quantitative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned TPO has erred in considered Retirement provision written back as non-operating in nature. The other grounds of assessee s appeal in Assessee s appeal were not pressed. 4. The assessee is a company. It is a subsidiary of Infineon Technologies Asia Pacific P. Ltd. The assessee rendered Software Development Services (SWD services) and marketing support services. During the previous year relevant to AY 2010-11, the assessee rendered SWD services to its Associated Enterprise [AE]. As required under the provisions of section 92 of the Act, the assessee has to establish that the price received in the international transaction from the AE was at arm s length. The assessee in support of its claim that the price received was at arm s length filed a TP analysis in which the assessee adopted Transactional Net Margin Method (TNMM) as the most appropriate method for determination of ALP. The Profit Level Indicator (PLI) chosen for the purpose of comparing the assessee s profit margin with that of the comparable companies was Operating Profit to Operating Cost (OP/OC). The AO referred the question of determination of ALP to the Transfer Pricing Officer (TPO) as is required under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% 2 Infosys Ltd 45.01% 3 Kals information Systems Ltd.(seg) 38.27% 4 Larsen Toubro Infotech Ltd. 19.23% 5 Mindtree Ltd.(seg) 14.83% 6 Persistent Systems Solutions Ltd. 15.38% 7 Persistent Systems Ltd. 30.35% 8 R S Software (India) Ltd. 10.29% 9 Sasken Communication Technologies 17.36% 10 Tata Elxsi (seg) 21.88% 11 Thinksoft Global Services Ltd. 17.65% AVERAGE MARGIN 21.98% 7. The TPO computed the ALP and the suggested addition to the total income as follows:- 3.9.4 Computation of Arms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the directions of the DRP and have preferred the present appeals before the Tribunal. 10. As far as ground No.4 raised by the revenue is concerned, the ld. counsel for the assessee drew our attention to a decision of this Tribunal rendered in the case of CSG Systems International (I) P. Ltd. v. DCIT, ITA No.2026/Bang/2017, order dated 31.7.2016 (the Assessee in that case was also a SWD service provider such as the Assessee and the same comparables chosen in the case of the Assessee in this appeal was also chosen as comparable company by the TPO in that case) wherein the comparability of the aforesaid 4 companies with the SWD services company such as the assessee came up for consideration. The Tribunal excluded Infosys Ltd. from the list of comparables vide para 19 of its order on the ground that Infosys Ltd. was having a huge brand value and intangibles as well as bargaining power and the same cannot be compared with assessee who is providing only SWD services to its AE. Vide para 20 of the very same aforesaid order of the Tribunal, Persistent Systems Ltd. Sasken Communication Technologies Ltd. was excluded from the list of comparable companies on the ground that these compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal of the assessee is concerned, in ground No.3(b) the assessee has sought exclusion of Larsen Toubro Infotech Ltd. from the list of comparable companies. The Tribunal in the aforesaid decision in the case of CSG Systems International (I) P. Ltd. (supra) vide para 21 dealt with comparability of Larsen Toubro Infotech Ltd. with the software service provider such as the assessee and hold that this company has revenue from software services and products and segmental information was not available. In para 23 the Tribunal directed exclusion of Larsen Toubro Infotech Ltd. from the list of comparable companies. 16. In ground No.3(c), the assessee seeks inclusion of 2 companies, but at the time of hearing the ld. counsel for the assessee pressed for exclusion of Akshay Software Technologies Ltd. alone. This Tribunal in the case of Inteva Products India Automative P. Ltd. (supra) vide paras 25 to 28 remanded the issue with regard to exclusion of this company from list of comparable companies. Following are the relevant observations:- 25. The assessee is seeking inclusion of another company viz. Akshay Software Technology Ltd. which was rejected by the TPO. 26. The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial year ending. The law by now is settled that if from the available data in the public domain it is possible to compute OP/OC of this company by culling out the data of the previous year of the assessee; then the company should be regarded as a comparable. The AO/TPO can exercise powers u/s. 133(6) of the Act to get the required details. The ld. counsel for the assessee has submitted that he will make the necessary details available to the AO. Hence the comparability of this company is set aside to the AO/TPO for fresh consideration on the basis of the available data of the company comparable with the previous year of the assessee. 19. Regarding ground No.10 raised by the revenue relating erroneous working capital adjustment by not considering the advances received from AEs while computing the average trade payables. In view of the decision of the tribunal rendered in the case of CGI Information Systems Management Consultants (P) Ltd. IT(TP)A.No.346/Bang/2015 order dated 26.10.2016 the TPO is directed to consider the advance received from AE as trade payable and considered for working capital adjustment. It was held in the said decision that advances received from AE par ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without any mark up, and therefore no tax is required to be deducted on the same. Further, the learned AO has erred in not placing reliance on the ruling of Honorable Income-tax Appellate Tribunal in the company's own case for the assessment years 2000-01 and 2001-02 (ITA Nos. 467 and 468/Bang/2002) wherein the Tribunal has held that the company is not required to withhold taxes at source on payments made to the non-resident company towards purchase of shrinkwrapped / off-the-shelf software. The learned AO erred in holding that sale of software is to be construed as 'royalty' as per Explanation (2) of clause (vi) of section 9 of the Act and as per the provisions of the Double Taxation Avoidance Agreement (`DTAA'). 22. The facts are that the assessee is a company is engaged in the business of software development services of electronic integrated circuits and support services to Infineon Singapore. For the assessment year 2010- 11, the assessee filed the return of income on 8th October, 2010 declaring a total income of ₹ 78,696,350/-. During the course of assessment proceedings, the AO has requested the assessee company to provide informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matograph films or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience. It was the plea of the Assessee that in view of the above definition, the consideration paid by the assessee to Infineon Germany is not in the nature of royalty as the assessee does not receive the right to use the copyright. Hence, the payment towards GLM charges is not liable for deduction of tax at source. 23. The AO held that the assessee is liable to deduct tax at source as there are plethora of judicial precedents supporting the fact that TDS compliance is mandatory even if the expenditure is incurred by the way of reimbursements and that the payment made for right to use computer software was in the nature of royalty and hence chargeable to tax in India in the hands of the recipient non-resident. The AO placed reliance on decision of the Hon ble Karnataka High Court in the case of CIT (IT) v. Samsung Electronics India (P.) Ltd. 345 ITR 494 (Karnatak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 9(1 (vi) of the Act to clarify that payments for, inter alia. License to use computer software would qualify as royalty. During the FY 10-11, the assessee did not have the benefit of clarification brought by the respective amendment. As such, for the FY 2010-11, in light of the provisions of section 9(1)(vi) of the Act read with judicial guidance on the taxation of computer software payments, tax was not required to be deducted at source. Given the practice in prior assessment years, the assessee was of the bona fide view that the payment of software license fee was not subject to tax deduction at source under section1941/195 of the Act. Liability to deduct tax at source cannot be fastened on the assessee on the basis of retrospective amendment to the Act (Finance Act 2012 amendment the definition of royalty with retrospective effect from 01.04.1976) or a subsequent ruling of a court (the Karnataka HC in CIT v Samsung Electronics Co. Ltd. (16 taxmann.com 141) was passed on October 15,2011). Courts have consistently upheld this principle as seen in: ITO v. Clear Water Technology Services (P.) Ltd. (52 taxmann.com 115) Kerala Vision Ltd. v. ACIT (46 taxmann.com 50) ..... 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