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TMI Blog2021 (5) TMI 658X X X X Extracts X X X X X X X X Extracts X X X X ..... usly the GP ratio would be on lower side as compared to A.Y.2012-13. The Ld. CIT(A) has also held that the AO could not cite any comparable case from the same line of business to prove that assessee's profit margins is on lower side. Based on the facts narrated above, we note that ld CIT(A) has reached on right conclusion therefore we are constrained to agree with the findings of the ld CIT(A). Thus, this ground of appeal raised by the Revenue is dismissed. TDS u/s 195 - Disallowance u/s 40(a)(ia) - assessee company had purchased software called pacor clients software with hasp key note from Computer system and Networking (foreign supplier of the software) - HELD THAT:- CIT(A) held that impugned payment was not made for acquiring any copyright but copyrighted material and payment was for purchase of goods and not towards Royalty. Hence, the assessee was not having any liability to deduct tax u/s195 of the Act. Accordingly, ld CIT(A) deleted the addition correctly. - Decided against revenue. - ITA No.117/SRT/2017 - - - Dated:- 17-5-2021 - Shri Pawan Singh, JM And Dr. A. L. Saini, AM For the Assessee : Shri Deven Kapadia, AR For the Revenue : Ms Anupama Sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent years. The gross profit ratio for the year is 8.39% as against 9.44% and 33.28% in the preceding two previous years. The net profit ratio for the year is 0.61% as against 4.21% and 21.37 % for the immediately preceding two previous years. Both the GP and NP ratio shows negative growth. The assessee was asked to file explanatory note along with documentary evidence to justify the huge shortfall in GP and NP ratios as compared to the immediately preceding two years. In response, the assessee company has submitted explanation on the issue of fall in GP and NP ratio, which is reproduced below: As per the attached sheet, the operating profit of the assessee for AY 2014-15 was 8.39% as compared to the preceding year's operating profit of 9.44%. The main reason for decrease in the aforesaid profit was the drastic fall in revenues in AY 2014-15 compared to AY 2013-14 from ₹ 65 crores to ₹ 33 crores. Since most of the costs of the assessee are fixed costs, the economies of scale have worked against the assessee and hence the ratios have taken a beating. As can be seen from the annexure attached, the salary cost has risen by about 11.12% since some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n previous year related to AY 2013-14 there is a sizeable margin in sales and cost of material sold (Sales - Cost of Material - Increase/Decrease in inventory), however, during the year there is almost no difference in the sales price and cost of material sold. Chart is reproduced here in below: - A. Y. 2014-15 A. Y. 2013-14 Sales 27,76,87,344 58 , 77,61,373 Cost of Material consumed 28,77,48,609 51,83,00,739 Increase / Decrease in Inventory (-) 1,00,42,365 4,71,50,420 Profit 18,900 2,23,10,214 On perusal of above, the assessing officer was of the view that contention of the assessee is not correct that it has earned profit from its export activity. During the course of hearing, the assessee company was asked to explain why the cost of sale is higher than the actual sale consideration. 6. In this regard, the assessee, vide his submission dated 13.12.2016, has given following explanation: The busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the import parties and export parties are same, looking to the facts and figures, the possibility of connivance or collusion cannot be ruled out to deflate the profit. In view of the above discussion, the book result arrived by the assessee company was rejected within the meaning of section 145(3) of the Act. The assessing officer, therefore, estimated the GP on the basis of average GP shown by the assessee in the last three financial year, including the current year which comes at 17.03% (8.39 + 9.44 + 33.28/3). According, to the above formula, the GP for the year comes to ₹ 5,63,74,496/-. However, assessee company has shown GP at ₹ 2,77,73,460/- for the current year. The difference amount of ₹ 2,86,01,036/- (5,63,74,496 2,77,73,460) was added to the total income of the assessee company. 8. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has deleted the addition made by the Assessing Officer. Aggrieved, the Revenue is in appeal before us. 9. Learned DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be rejected. The Ld. CIT(A) has also discussed that the product - service mix in A.Y.2012-13 was 42:58 which was 86:14 in A.Y.2014-15, obviously the GP ratio would be on lower side as compared to A.Y.2012-13. The Ld. CIT(A) has also held that the AO could not cite any comparable case from the same line of business to prove that assessee's profit margins is on lower side. Based on the facts narrated above, we note that ld CIT(A) has reached on right conclusion therefore we are constrained to agree with the findings of the ld CIT(A). Thus, this ground of appeal raised by the Revenue is dismissed. 11. Now, we shall take ground no.2, which relates to deleting the disallowance of ₹ 9,12,600/- under section 40(a)(ia) of the Act. 12. Brief facts qua the issue are that on perusal of the submission of the assessee, it was noted by the assessing officer that during the year, assessee company had purchased software, called, pacor clients software with hasp key note from Computer system and Networking (foreign supplier of the software) for the consideration of ₹ 9,12,600/-. It was also noticed that assessee company has not deducted tax on such expenditure though i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emphasized by the Indian courts is that while characterizing the income, one should look at the predominant purpose for which the consideration is paid in a transaction. Thus, where the consideration is primarily for the purchase of the product and the use of such intellectual property is merely incidental to the purchase of the product, the payment would be characterized as purchase of a product and not as royalty. In view of this, the payment should be characterized as business income under the ITA. Even in a DTAA scenario, the payments made for purchase of a product, which embodies intellectual property in it, can't be regarded to have been made for the use of or the right to use any intellectual property and the amount would fall outside the above definition of royalty under the India-US DTAA and should be taxed as business income. 3.1 The sale of a CD ROM/Diskette containing software is not a license but it is a sale of a product which, of course, is a copyrighted product and the owner of the copyright by way of agreement puts the conditions and restrictions on the use of the product so that his copyrights in such copyrighted article or the work may not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide the scope of the definition of royalty' as provided in India - UAE DTAA. 14. The assessing officer, having gone through the above submissions, observed that assessee has placed heavy reliance on the decision of the Hon'ble Delhi High Court in the case of DIT v. M/s Nokia Networks OY [2012 (9) TMI 409 - DELHI HIGH COURT]. However, it is pertinent to mention here that the view of the Hon'ble Karnataka High Court is different on this issue. Further, the Hon'ble Jurisdictional High Court, on this issue, has not decided. In the light of the above facts, the impugned issue is debatable issue as different High Court have different view on this issue. In the absence of any decision of the Hon'ble Jurisdictional High Court in this matter, the argument of the assessee based of the decision of the Hon'ble Delhi High Court is not binding upon the assessing officer. In view of the above, the sum of ₹ 9,12,600/- was disallowed by invoking the provision of section 40(a)(ia) of the Act and added to the total income of the assessee. 15. Aggrieved by the order of the Assessing Officer, the assessee carried the matter in appeal before the ld. CTI(A) who has d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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