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TMI Blog2024 (7) TMI 840X X X X Extracts X X X X X X X X Extracts X X X X ..... ng interest has been consistently applied in previous and subsequent financial years without challenge, underscoring its reliability and appropriateness. CIT(A) has thoroughly addressed and resolved the issues raised, aligning with the principles of fair benchmarking and appropriate risk adjustments - we uphold the Ld.CIT(A)'s order, thereby dismissing the TPO s adjustment - Decided in favour of assessee. Non-deduction of withholding tax u/s 195 - disallowance of Product Certification Expenses paid to non-resident - non-genuineness of the expenditure - HELD THAT:- We conclude that the services rendered for product certification, which include evaluating technical quality and issuing certificates, do not fall under the definition of Fees for Technical Services as per Section 9(1)(vii) of the Act. This view is consistent with the CIT(A) s findings and supported by the judgments cited by the AR, particularly the Hon ble Supreme Court decision in CIT Vs. Kotak Securities Ltd.[ 2016 (3) TMI 1026 - SUPREME COURT] which clarified that routine services not involving technical knowledge do not constitute technical services and it is mere in the nature of facility offered or available. U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Member For the Assessee : Shri Dhinal Shah, AR For the Revenue : Shri Atul Pandey, Sr.DR ORDER PER SHRI MAKARAND V. MAHADEOKAR, AM: This appeal is filed by the Revenue as against the order passed by the Ld.Commissioner of Income-tax(Appeals)-10, Ahmedabad [hereinafter referred to as the Ld.CIT(A) ], dated 04/09/2019, arising out of the assessment order passed by the Assessing Officer (AO) under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) dated 25/03/2015 relevant to the Assessment Year (AY) 2011-12. Facts of the case: 2. The assessee is an Indian company incorporated in the state of Gujarat in the year 1999. The Assessee is primarily engaged in the business of development of software product and providing IT Solutions. Majorly, Assessee deals in business areas, namely Cyberoam, Crestel and 24Online, 24Online. Cyberoam business of the Assessee has been demerged into another company called Cyberoam Technologies Private Limited with effect from AY 2012-13. The name of Cyberoam Technologies Private Limited as on date has been changed to Sophos Technologies Private Limited. Now, the assessee-company is merged with Sterlite Technologies Ltd. 2.1. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterprise (AE). During the year under consideration, the Assessee received interest on loan lent to AE in Bahrain, Elitecore Technologies Middle East Co. WLL. The Assessee charged interest at a rate equivalent to Prime Lending Rate of Central Bank of Bahrain as was prevalent on the date loan was provided i.e 4th January 2010. The effective rate of interest charged by the Assessee was 2.25% p.a. However, the TPO proposed to benchmark the loan transaction by taking the loan data on deals entered into by various financial institutions during the period 1st April 2010 to 31st March 2011 from borrowing corporations. Since, the TPO could not identify sufficient loan transactions in the country of Bahrain or the Middle East Asia geographical region, he adopted the loan transactions in US and Europe regions. Based on the said search, the average spread charged over LIBOR was taken as 338.93 basis points. The prevailing LIBOR rate was 0.53%. The TPO increased this spread by 100 basis points on account of country and foreign exchange risk and an additional 50 basis points towards country risk as the sovereign country rating of Bahrain was worse than USA. Accordingly, TPO computed the rate at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the Assessee's AE. (iii) That, adding spreads for country and foreign exchange risks, as proposed by the TPO, constitutes duplicative adjustments, considering these factors are inherently reflected in the Prime Lending Rate adopted by the Assessee. (iv) That, the CUP method, as per Rule 10B, necessitates adjustments only if they have a material impact on the price. The Prime Lending Rate's comprehensiveness negates the necessity for further adjustments. (v) That, the Assessee s method of calculating interest has been consistently applied in previous and subsequent financial years without challenge, underscoring its reliability and appropriateness. (vi) That, the Ld.CIT(A) has thoroughly addressed and resolved the issues raised, aligning with the principles of fair benchmarking and appropriate risk adjustments. 7.1. Based on the above findings, we uphold the Ld.CIT(A)'s order, thereby dismissing the TPO s adjustment of Rs. 2,26,243/-. Thus, Ground Nos. 1 and 2 of Revenue s appeal are dismissed. On Ground No.3 8. This ground relates to disallowance of Product Certification Expenses of Rs. 60,57,180/- paid to non-resident on account of non-deduction of withholding tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertificates. 8.5. In respect of tax deduction on the payments made to above mentioned parties, it was submitted that the services relate to certifying/ registering the product. The services have been availed from parties outside India viz. USA, UK, Korea and China. Hence, as per Section 90(2) of the Act, applying beneficial provisions of the tax treaty, it is submitted that the services rendered to ETPL are not technical nature and hence, the payments made are not covered within the definition of Fees for Technical Services as provided under the respective treaties. Further, in absence of fixed place of business of such parties in India, the payment made to them is not chargeable to tax in India even as business income. 8.6. Further, in relation to the payments made to ISCA labs, separate proceedings under section 201 of the Act had been initiated wherein the payments were held to be taxable. However, the Commissioner of Income-tax (Appeals) accepted the contentions of ETPL and held that such payments are neither taxable under the treaty nor taxable under the provisions of the Act. Copy of the said order was also submitted to the AO. Therefore, the company was not liable to deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eness and necessity of the expenses, including certificates, invoices, and agreements. 9. After considering the submissions, evidence, and judicial precedents, we conclude that the services rendered for product certification, which include evaluating technical quality and issuing certificates, do not fall under the definition of Fees for Technical Services as per Section 9(1)(vii) of the Act. This view is consistent with the Ld.CIT(A) s findings and supported by the judgments cited by the Ld.AR, particularly the Hon ble Supreme Court decision in CIT Vs. Kotak Securities Ltd. (supra), which clarified that routine services not involving technical knowledge do not constitute technical services and it is mere in the nature of facility offered or available. For the sake of clarity, we produce relevant part of the judgment 8. A reading of the very elaborate order of the Assessing Officer containing a lengthy discourse on the services made available by the Stock Exchange would go to show that apart from facilities of a faceless screen based transaction, a constant upgradation of the services made available and surveillance of the essential parameters connected with the trade including tho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated in Annexure-2 of the reply filed before the Assessing Officer, which is not in dispute, has been explained in the following manner: - Quality System Audits : Quality System Audits are conducted by TUV Auditors. A Quality System Audit is conducted at the Clients site where the TUV Auditor evaluates the Clients Quality System (or Environmental System) against a prescribed International Standard (ISO 9001/2, ISO 14001, QS 9000, etc.). The Auditor only assesses whether or not the clients manufacturing practices meet the International Requirements or not. The Auditor is not permitted to provide any technical assistance or advice to the company. Based on his findings, the auditor prepares a report stating compliance for the Certification Body in Munich. The Certification body issues the Certificate after reviewing the report for compliance. Audits are carried out in various stages. Pre-assessment Audit A Pre-assessment audit is conducted to evaluate the feasibility of a successful certification audit. The company is informed whether or not they are ready for a Certification audit. Certification Audit The certification audit is conducted to assess the clients' conformity to an In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fees for technical services' in the following manner :- ARTICLE 12 - Royalties and Fees for Technical Services (1) x x x x (2) x x x x (3) The term royalties as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph 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. (4) The term fees for technical services as used in this article means payments of any amount in consideration for the services of managerial, technical or consultancy nature, including the provision of services by technical or other personnel, but does not include payments for services mentioned in Article 15 of this Agreement. (5) The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time of evaluation but certainly it cannot be termed as pure consultancy services as in the audit work the auditor has to only evaluate the quality system and environmental system. 10.3 Now, coming to the print out of the website of the assessee, provided by the Learned Senior DR, it is seen that the first kind of services mentioned therein, relates purely to audit work of ISO certification. Besides this, there are host of other services mentioned, which upto some extent can be considered to be in the nature of consultancy services. However, whether the assessee has been carrying out other services as mentioned therein besides audit for certification of ISO, is not borne out from the records as the same has neither been examined by the Assessing Officer nor by the CIT(A). Both the authorities have simply observed that even the audit work and certification work comes within the realm of FTS. From the print out of the website, it is also not very clear as to whether these kind of services were also rendered in the year 1997-1998. On the contrary in the IAF guidance note provided by the learned AR, it has been clearly prohibited that the auditor will not give any prescriptive adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the same made by the Appellant and the activation by the end user. As the sales is made / recorded by the Appellant, it is required to make the provision of royalty expenses. However the same is not immediately payable to the third party vendor as the end user has not activated the software. The Appellant during the course of proceedings has submitted that Hon'ble Ahmedabad ITAT in case of Saira Asia Interior Private Limited vs ITO [2017] [ 79 Taxmann.com 460 ] has held that withholding tax liability under the Act is an indirect liability and is wholly dependent on the existence of tax liability in the hands of the payee / recipient of income. When income embedded in a payment is not taxable under the Act, the tax withholding liability does not get triggered at all. The withholding tax provision cannot be applied in vacuum and it should be read in conjunction with the charging provisions under the Act, read with the provisions of the tax treaty. Under the provisions of the tax treaty, taxability of royalty is dependent on payment by a taxpayer and receipt of the same by the Non-resident payee. Furthermore, the term royalties means payments of any kind received . Thus, unless ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recording sales and subsequently making provisions for royalty expenses due upon activation by the end user. The royalty becomes payable only when the end user activates the software, creating a legitimate time gap between the recording of sales and the actual payment. 12.5. We agree with the Ld.CIT(A) that the withholding tax liability under Section 195(2) of the Act does not arise until the royalty payment is actually due and payable. The income embedded in the payment must be taxable under the Act for the withholding tax provisions to apply. In this case, since the royalty is not immediately payable, the withholding tax liability does not get triggered. 12.6. We acknowledge the relevance of the judicial pronouncements relied upon by the Ld.CIT(A) and the assessee. The principles laid down in the cases of Saira Asia Interior Private Limited and Sophos Technologies Pvt. Ltd. support the view that the withholding tax liability is dependent on the actual receipt of payment by the non-resident payee and not merely on the provision made for such expenses. 12.7. Based on the above findings, we uphold the Ld.CIT(A)'s decision to delete the disallowance of the provision for royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X
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