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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 ..... Whether on the fact and the circumstance of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance of Rs. 9,12,600/- u/s. 40(a)(ia) of the IT Act without appreciating the assessee is liable to deduct TDS of payment made to non-resident for purchase of software because same would constitute 'royalty' under section 9 of the Act? 3. On the facts and circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the assessing officer. 4. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of assessing office may be restored to the above extent." 3. Now, we shall take ground no.1 raised by Revenue which relates to deleting the addition of Gross Profit of Rs. 2,86,01,036/-. 4. Brief facts qua the issue are that during the assessment proceedings, the assessee was asked to furnish comparative chart of the Gross Profit ratio (GP ratio) and Net Profit ratio(NP ratio) for the last three years and the reasons for notable variation, if any in GP ratio and NP ratio for the year under consideration. In response, the assessee, vide his submission dated 09.05.2016 furnished the requisite details before the assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poor business conditions, increased competition and global slowdown due to which the business was very badly impacted resulting in drastic reduction in the turnover." 5.The above explanation of the assessee was not accepted by the assessing officer. The assessing officer noticed that the GP, for the year under consideration, has shown negative growth of 1.05% and NP has fall drastic 3.60% of the total turnover. On analyzing the above it appears to the assessing officer that there is huge increase in indirect expenses and direct expense. In the explanation so filed by the assessee does not justify the continuous fall of GP and NP for the last three previous years including the current year. On perusal of the audited financial statement, it is observed that there is fall in the total turnover of the assessee from 65.17 Crore to 33.12 Crore, however, manufacturing and operating cost is remained the same, in fact, there is rise around of Rs. 10.00 lakhs which can be seen from the following chart: A.Y. 2014-15 A.Y. 2013-14 Sales and Other operating income 33,12,06,153 65,17,96,563 Mfg. and Operational Expenses 2,57,26,449 2,47,95,784 Another discrepancy, that the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export with the foreign parties, the assessing officer stated that assessee has grossly failed to submit the copy of agreement with those parties to prove the genuiness of transaction/arrangement, value addition if any made by it, working of actual amount billed to those parties for the services rendered against each import/export and income earned from those transactions. In other words, the AO noticed that the reply submitted by assessee is very general in nature. Further, during the course of assessment proceedings, assessee has also not provided whether such arrangement with foreign parties is legal under the import and export policy where assessee is filing wrong declaration in respect of valuation of goods exported under self-declaration scheme. Furthermore, assessee has also not provided any evidence in respect of its relation with those parties from whom it is importing and exporting without any value addition or proper value addition, if any and under such circumstance, when 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accepted that there was overall fall in total turnover from Rs. 65.17 crores in A.Y.2013-14 to Rs. 33.12 crores in A.Y.2014-15. The AO has failed to point out any serious defect in maintenance of books of accounts except comparing Gross Profit Ratio of preceding years and making fall in GP ratio as main basis for rejection of books results. The Ld. CIT(A) has also held that there was no change in method of accounting and it is settled law that AO cannot doubt the genuineness of books of accounts merely because there has been reduction in Gross Profit Ratio in comparison to earlier years. The Ld. CIT(A) has relied upon the decision of Hon`ble Gujarat High Court in the case of CIT Vs. Vikram Plastics & Others (239 ITR 161) (Guj.), wherein it was held that if there was no discrepancy or defect pointed out in the books of accounts and if there is no material brought on record that purchases and expenses were inflated or sales suppressed then books of accounts 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss, copyright, literary or scientific work or the use of the right in a patent, invention, model, design, secret formula or process or trademark or similar property are transferred, it cannot be regarded as royalty. It is evident that where the consideration paid is for the purchase of a product, as envisaged in category (2) described above, and not for the transfer of the intellectual property per se, it may not be regarded as royalty. For example, the purchase of a book by a customer does not tantamount to the purchase of the copyright in the book, even though the publisher publishes the book by purchasing the copyright. Drawing a parallel from this example, purchase of a shrink-wrap product by an Indian company from a foreign company should not be regarded as purchase of a copyright but only a purchase of a copyrighted article and thus the payment therefor should not be regarded as royalty. An important aspect that has been 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty within the meaning of Article 12(3) of the Double Taxation Avoidance Agreement between India and the United States of America - Decided against Revenue," This settled situation has been upheld in numerous decisions of the Tribunal and High Courts viz. * [2014] 43 taxmann.com 16 (Hyderabad - Trib.) Assistant Director of Income-tax (International Taxation) -I, Hyderabad vs. Bartronics India Ltd. * Mumbai IT AT - M/s. Galatea Ltd. Vs. DCIT International Taxation * Director of Income-tax vs. Nokia Networks OY in the present case, the assessee could not be said to have paid the consideration for use of or the right to use copyright but had simply purchased the copyrighted work embedded in the CD-ROM or any other media which could be said to be sale of 'goods' by the owner. The Consideration Clauses to the India - UAE DTAA could not be said to be royalty and the same would be outside 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 Net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of agreement puts the conditions and restrictions on the use of the product so that his copyright in such copyrighted article or the work cannot be infringed. There is apparently a distinction between acquisition of a "copyright right" and "copyrighted article". The Id. CIT(A) has relied upon the decision of Hon'ble Supreme Court in the case of Tata Consultancy Service Vs. State of Andhra Pradesh 271 ITR 401 (SC), wherein it was held that software, which is incorporated on a media, would be goods and therefore liable to sales tax. The Ld. CIT(A) has also placed reliance on the following judgments: 1) CIT Vs. Creative Infocity Ltd (2017) 82 taxmann.com 356 (Guj.) 2) DCIT Vs. Atmel R 8s D India (P) Ltd (2016) 74 taxman.com 106 (Chennai) 3) DCIT Vs. Western Union Financial Services Inc (2016) 156 ITD 882 (Del) 4) Datamine Intemation Ltd Vs. Addl. CIT (2016) 158 ITD (Del) 18. We note that Hon`ble Supreme Court in the case of Engineering Analysis Centre of Excellence Pvt.Limited Vs.CIT, Civil Appeal No.8733-8734 of 2018, dated 02.03.2021 upheld the same view. In view of the above decisions and also the fact that the ld.CIT(A) held that impugned payment was not made for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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