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TMI Blog2022 (1) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, we set aside the orders passed by Ld CIT(A) on this issue in all the three years under consideration and direct the AO to delete the disallowance made u/s. 40(a)(i). TP adjustment - transfer pricing adjustment in respect of transactions relating to provision of software services - HELD THAT:- We notice that the co-ordinate bench has directed exclusion of Infosys Ltd., Larsen and Toubro Infotech Ltd. and Persistent Systems Ltd. in the case of SAP Labs India P Ltd [ 2021 (7) TMI 1301 - ITAT BANGALORE] wherein it has followed the decision rendered by another co-ordinate bench in the case of NXP India P Ltd. [ 2020 (5) TMI 86 - ITAT BANGALORE] . Negative working capital - It is the contention of the assessee that the negative working capital should be ignored, since the assessee is a risk free enterprise - A.R placed his reliance on the decision rendered in the case of ACIT vs. e4e Business Solutions India P Ltd. [ 2020 (12) TMI 1255 - ITAT BANGALORE] wherein it has been held that the negative working capital should be ignored, since it artificially increases Arms Length Price. Accordingly, we restore this issue to the file of TPO with the direction to follow the principles l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause which provides for deduction of TDS also. Accordingly, the Ld CIT(A) confirmed the addition made by the AO u/s. 40(a)(i) in all the three years under consideration. 5. The Ld A.R submitted that the foreign agents are marketing Technotree's products in foreign countries by arranging meetings with customers and other potential clients. They also provide administrative assistance which included procuring Visa, lodging, boarding, travel and other logistics requirements. The Ld A.R submitted that these services will not fall under the category of Fee for technical services. He submitted that the income did not accrue in India in the hands of these foreign agents and hence there is no requirement of deducting tax at source from the payments made to them. He submitted that identical payments made by the assessee in the year relevant to AY 2013-14 were disallowed by the AO. However, the Tribunal deleted the disallowance and the order passed by the Tribunal has since been upheld by the Hon'ble jurisdictional Karnataka High Court, vide its order dated 07-06-2021 passed in ITA No. 834/2018. He further submitted that the Tribunal has examined similar types of payments made in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ministrative assistance including procuring Visa, lodging, boarding, travel and other logistical requirements, arranging meetings with customers and other potential clients at all the levels (B) Assessment Year : 2014-15 and 2015-16:- (a) SAEI IT Consulting Limited:- Recommending potential clients in Middle east and South Africa, Providing region specific support services like Visa Assistance and work permits, arranging meetings etc. (b) Tramlee Enterprises:- Providing region specific marketing information, to arrange meetings with clients, Providing region specific support services like Visa Assistance and work permits 10. On a perusal of above said services, we notice that the foreign agents have been mainly providing marketing support services and other services provided by them are incidental to the main marketing support services. In our view these services would not fall under the category of "managerial, technical or consultancy services contemplated in Explanation 2 to sec. 9(1)(vii) of the Act. In this view of the matter, the payments made to the foreign agents for providing above said services, in our view, would not fall under the category of Fee for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. (See Commissioner of Income-tax, Punjab v. R.D. Aggarwal & Co. & Anr.(1) and M/s. Carborandum Co. v. C.I.T., Madras(2) which are decided on the basis of section 42 of the Indian Income-tax Act, 1922, which corresponds to section 9(1)(i) of the Act.) 13. In the instant case the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on aggregating to ₹ 4,18,21,648/- in foreign currency, to non-resident/foreign parties, without deducting tax at source under section 195 of the Act on such payments. The assessee contended that these payments were made to non-residents operating overseas; who do not have any presence in India and therefore there was no requirement to deduct tax at source on such payments. The AO, however, was of the view that, since the services were rendered in relation to the assessee's business carried out in India from undertakings eligible for deduction under section 10A of the Act, it is liable to be taxed in India and therefore held that the assessee was under obligation to deduct tax at source on such payments. As the assessee had not deducted tax at source on the said commission payments to non-residents, the AO invoked the provisions under section 40(a)(i) of the Act and disallowed these expenses claimed. On appeal, the CIT(A) upheld the order of the AO on this issue. 10.3.1 Before us, the learned AR for the assessee reiterated the submissions put forth before the authorities below. It is submitted that the only reason for disallowance of these expenses incurred on commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that since the services were rendered in relation to the business of the assessee in India, the payments for such services rendered are liable for deduction of tax at source thereon and since TDS was not done thereon, the payments are liable for disallowance under section 40(a)(i) of the Act. 10.5.2 Section 195 of the Act deals with the deduction of tax at source from out of the payments made to non-residents. Under Section 195 of the Act, an obligation is cast on a person making payment to a non-resident of any sum, which is chargeable to tax under the provisions of the Act, to deduct tax at the time of payment of such sum or at the time of credit thereof to the account of the payee, whichever is earlier. In terms of the aforesaid provision, tax is required to be withheld in respect of payments to non-residents only if such payment is chargeable to tax in India. The Hon'ble Apex Court in the case of GE India Technology Centre (P) Ltd., Vs. CIT (327 ITR 456) (SC), explaining its earlier decision rendered in the case of Transmission Corporation of AP Vs. CIT (239 ITR 587) (SC), held that only if the income is chargeable to tax in India in the hands of the non-resident recipien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n (supra) is only to define and clarify the opening words of Section 195(1) of the Act which reads : "any person responsible for paying to non-resident." Therefore, it only defines the person responsible for paying to non-resident and not the payee i.e., the non-resident to whom the payment is being made. 10.5.5 It is, therefore, imperative to first analyze whether the commission paid by the assessee to the non-resident commission agents are chargeable to tax in India. If the answer to the said question is in the affirmative, only then the provisions relating to the withholding of tax under section 195 of the Act shall be applicable/attracted. As per Section 5(2) of the Act, a non-resident is liable to be taxed in India in respect of: (a) income received or is deemed to be received in India in such year by or on behalf of such person; or (b) income accrues or arises or is deemed to accrue or arise in India during such year. Section 5(2) of the Act, the charging section for taxing non-resident income, provides for two conditions (supra). The first condition of receipt of income in India is not applicable to the case on hand, as the non-resident agents have not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is acting in the ordinary course of his business." "Explanation 2A.--For the removal of doubts, it is hereby clarified that the significant economic presence of a non-resident in India shall constitute "business connection" in India and "significant economic presence" for this purpose, shall mean-- (a) transaction in respect of any goods, services or property carried out by a nonresident in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or (b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means." "Explanation 3.--Where a business is carried on in India through a person referred to in clause (a) or clause (b) or clause (c) of Explanation 2, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India." From a plain reading of these explanations, it is clear that it is applicable only if the non ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to foreign agents are mainly towards marketing services only. Other services rendered by them are in the nature of support services only, which are incidental to the main marketing support services. Hence we hold that these services do not fall under the category of Fee for technical services. Following the decision rendered by the co-ordinate bench in the assessee's own case AY 2010-11 and 2011-12 and also the decision rendered by Hon'ble High Court of Karnataka in AY 2013-14 in assessee's own case, we hold that no income chargeable in India has accrued in the hands of the foreign agents. Accordingly, we hold that the assessee is not liable to deduct tax at source from the payments made to the foreign agents. Accordingly, we set aside the orders passed by Ld CIT(A) on this issue in all the three years under consideration and direct the AO to delete the disallowance made u/s. 40(a)(i) of the Act. 14. We shall now take up another issue urged in assessment year 2012-13, i.e., the addition made on account of transfer pricing adjustment. At the time of hearing, the Ld A.R pressed only ground no. 6 & 7 urged in respect of transfer pricing adjustment. The assessee had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion rendered in the above said case also pertains to AY 2012-13 and accordingly prayed for exclusion of above said three companies. 17. On the contrary, the Ld D.R submitted that assessee seeks exclusion of above said three companies mainly for the reason that their profit margin is high. He submitted that other comparable companies like Mindtree Ltd. R S software (India) Ltd. have not been sought for exclusion, though they also have brand value and further they fall under the category of companies like Infosys Ltd., Larseh & Toubro Infotech Ltd. He further submitted that the Persistent Systems Ltd. was directed to be excluded only on the reasoning that there was amalgamation of some company during the year. However, the merged company was also in the same line of business and hence the said reasoning should fail. 18. We heard rival contentions and perused the record. We notice that the co-ordinate bench has directed exclusion of Infosys Ltd., Larsen and Toubro Infotech Ltd. and Persistent Systems Ltd. in the case of SAP Labs India P Ltd. (supra), wherein it has followed the decision rendered by another co-ordinate bench in the case of NXP India P Ltd. vs. DCIT (ITA No. 692/B/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nlike a typical IT services project, where requirements are fixed while time and money are variable, a software product development project starts with fixed time and money, thus leaving requirements as the only variable. Essentially, the product development team's task is to produce the best set of requirements within a fixed time and budget. Persistent Systems has emerged as a leader in the OPD segment - a segment which is fast growing. OPD and outsourced IT services: the difference. How is OPD different from outsourced IT services is an oft asked question. In IT services, projects start with well- defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for the project. After completion, the project goes into maintenance mode. In product development, requirements are less clearly defined. Instead, most product developers are given ship-dates for the product that are typically determined by external factors. Once the ship-dates are identified, the budgets for the product are frozen. In product development projects, all requirements can never be completely fulfilled in a particular version. As a result, most product compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore the Tribunal in the case of NXP Semi Conductors India Pvt. Ltd. v. DCIT in IT(TP)A No. 1634/Bang/2014 - order dated 27.07.2015, wherein it was held as under:- "10.4.1 We have heard both parties and perused and carefully considered the material on record; including the judicial decisions cited and placed reliance upon. We find that a coordinate bench of the Tribunal in the case of Cisco Systems Services B.V., India Branch (supra), for Assessment Year 2009-10 had held that this company be excluded from the final set of comparables on the ground that it is functionally dis-similar and different from a purely software service provider and at para 20 of the order has held as under:- "20. We have perused the orders and heard the contentions. There is no dispute that the M/s. Cisco Systems India (P) Ltd. (supra) is an affiliate of the assessee company and engaged in similar business like that of the assessee namely rendering software services development etc. Though the said company was having other business also, with regard to its software development segment, this Tribunal held Bodhtree Consulting Ltd., Infosys Ltd., Kals Information Systems Ltd. and Tata Elxsi Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para 5.2 thereof, that Infosys Technologies Ltd. being a giant company and market leader assuming all risks leading to higher profits cannot be considered as comparable to captive service providers assuming limited risk; (iii) the company has generated several inventions and filed for many patents in India and USA; (iv) the company has substantial revenues from software products and the break up of such revenues is not available; (v) the company has incurred huge expenditure for research and development; (vi) the company has made arrangements towards acquisition of IPRs in 'AUTOLAY', a commercial application product used in designing high performance structural systems. In view of the above reasons, the learned Authorised Representative pleaded that, this company i.e. Infosys Technologies Ltd., be excluded form the list of comparable companies. 11.3 Per contra, opposing the contentions of the assessee, the learned Departmental Representative submitted that comparability cannot be decided merely on the basis of scale of operations and the brand attributable profit margins of this company have not been extraordinary. In view of this, the learned Departmental Represe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rore as a capital expenditure and ₹ 655 crore as a revenue expenditure for the year ended 31st March, 2012. Therefore, it cannot be said to be a comparable. We, therefore, direct the TPO to exclude Infosys Limited from the list of comparables." 19. We notice that the co-ordinate benches are consistently holding that the above said three companies are not comparable to a small company like that of assessee. Accordingly, following the above said decision of co-ordinate bench, we direct exclusion of these three companies. 20. The next issue relates to negative working capital. It is the contention of the assessee that the negative working capital should be ignored, since the assessee is a risk free enterprise. In this regard, the Ld A.R placed his reliance on the decision rendered by the co-ordinate bench in the case of ACIT vs. e4e Business Solutions India P Ltd. (ITA No. 2900/Bang/2018 dated 08-12-2020, wherein it has been held that the negative working capital should be ignored, since it artificially increases Arms Length Price. Accordingly, we restore this issue to the file of TPO with the direction to follow the principles laid down in the case of e4e Business soluti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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