R.S. Syal, Accountant Member - This appeal by the assessee is directed against the order passed by the Assessing Officer on 21.1.2014 u/s 143(3) r.w.s 144C of the Income-tax Act, 1961 (hereinafter also called 'the Act') in relation to the assessment year 2009-10.
2.1. The first issue is a challenge to the addition on account of Transfer Pricing Adjustment amounting to Rs. 8,56,01,801/- in the 'Software development services' segment. Briefly stated the facts of the case are that the assessee was incorporated in India in 2005 and is engaged in the business of development of systems and applications software. It is a subsidiary of Hughes Systique Maurities Pvt. Ltd. Four international transactions were reported by the assessee, viz., Receipts on account of software development services, Payment on account of marketing support services, Payment for services availed and Miscellaneous income. The Transfer Pricing Officer (TPO) accepted the last two transactions at ALP. First international transaction of receipts on account of software development services amounted to Rs. 52,42,68,870/-. In its Transfer pricing study report, the assessee benchmarked this transaction by selecting Comparable Uncontrolled Price (CUP) method as the most appropriate method and a corroborative internal Transactional Net Margin Method (TNMM). The TPO observed that the assessee provided software engineering services in the telecom sector and it was an essential Software Development Centre of its US holding company. Following the view taken by him in the immediately preceding year, the TPO held that the use of CUP method as the most appropriate method and a corroborative internal TNMM were not capable of acceptance. For rejecting such methods, he observed that the CUP method can be used only if there are potentials to lead to the correct results. The assessee had international transactions with its four AEs under this segment. He noticed that the assessee supplied details of transactions with only one of such four entities, namely, M/s Hughes Network Systems Inc. and it failed to submit any data as regards the transactions with the other three AEs. It was further noticed by him that the assessee tried to demonstrate that the payments received from M/s Hughes Network Ltd. was more than what that A.E claimed to have paid to its unrelated parties for the same work, but the nature of services provided by the unrelated parties to the AE were not brought on record. In view of these reasons, the TPO held that the CUP method could not be applied. As regards the application of internal TNMM, the TPO noticed that there were no separate accounts maintained in respect of transactions with AEs and non-AEs. It was seen that the assessee allocated cost between A.E. and non-A.E segments in such a manner as to boost the profitability of the A.E segment so as to claim that it had earned more profit form the international transactions vis-à-vis the transactions with non-AEs. He, therefore, refused to rely on the segmental results provided by the assessee for doing an internal TNMM analysis. The TPO carried out a fresh search and selected certain companies as comparable for applying external TNMM for benchmarking the assessee's international transactions under this segment. The companies chosen by him as comparable were confronted to the assessee. After entertaining objections from the assessee, he shortlisted sixteen companies as comparable. A list of such companies has been drawn on page 46 of the TPO's order. By applying the Profit Level Indicator (PLI) of Operating Profit / Operating Costs, the TPO determined arithmetic mean of such PLI of the sixteen comparable companies at 21.17%. This profit rate was applied to the total Operating costs incurred by the assessee under this segment at Rs. 50.33 crore to work out the ALP at Rs. 60.98 crore. Since, the assessee had received only a sum of Rs. 52.42 crore, the TPO proposed Transfer Pricing Adjustment amounting to Rs. 8.56 crore. The assessee failed to convince the Dispute Resolution Panel (DRP) on its line of reasoning. Resultantly, the A.O made an addition on account of Transfer Pricing Adjustment under this segment for a sum of Rs. 8.56 crore. The assessee is aggrieved against this addition.
2.2 We have heard the rival submissions and perused the relevant material on record. It is clear from para 4.2 of the TPO's order that he rejected the application of CUP method as the most appropriate method and a corroborative internal TNMM by relying on the view taken by him in the preceding year. It is noticed that his order for such earlier year came up for consideration before the tribunal. The tribunal has passed a common order on 5.7.2013 (Hughes Systique India (P.) Ltd. v. Asstt. CIT [2013] 36 taxmann.com 41 (Delhi-Trib) not only for the immediately preceding assessment year 2008-09 but also assessment year 2007-08. It can be seen that in both the years, the assessee benchmarked its international transactions under the 'Software development services' segment by applying CUP method as the most appropriate method and internal TNMM as the corroborative method, as the position is obtaining for the instant year. The TPO disregarded the benchmarking analysis done by the assessee and proceeded to determine ALP of the international transactions by applying external TNMM. The Tribunal examined the correctness of the TPO's approach in the light of detailed submissions advanced on behalf of the rival parities. Vide para 14 of its order, the co-ordinate Bench accepted the assessee's contention that the applicability of internal CUP method was not properly dealt with by the DRP and TPO. Eventually, the Tribunal restored the matter to the TPO with a direction : 'to decide this issue afresh after giving the assessee an opportunity of being heard and give proper reason if the CUP method is proposed to be not considered'. The crux and the admitted inference of the view taken by the Tribunal in assessee's own case for the immediately preceding two assessment years is that firstly, the internal CUP should be applied and if, for any reasons the CUP method cannot be applied, then TNMM should be resorted to. The ld. AR contended that the TPO in his order for the assessment year 2010-11 has accepted the assessee's approach of benchmarking the international transactions under this segment in the fashion similar to what has been done for the instant year. It was, therefore, contended that the assessee's benchmarking done in the TP study report for the current year be accepted as correct and the resultant addition be deleted.
2.3 It is apparent from the order passed by the TPO for the instant year that he relied on the view taken by him for the immediately preceding assessment year. It is further noticeable that the appeals for not only the immediately preceding assessment year but also a year earlier, have been decided by the Tribunal, in which specific directions have been given as noted above. On one hand, we have the benefit of an order passed by the Tribunal in assessee's own case for the immediately preceding assessment year, which also forms the basis for the addition made in the instant year, and on the other hand, there is an order passed by the TPO culminating into the assessment order for a succeeding year, whose facts may be different and which itself may be amenable to rectification or reassessment or revision. There is hardly any need to accentuate that in such circumstances, the view taken by the Tribunal in assessee's own case should prevail over any other thing. We, therefore, set aside the impugned order and remit the matter to the file of AO/TPO for fresh determination of ALP under this segment in consonance with the directions given by the Tribunal for the immediately preceding two assessment years.
2.4 At this stage, we consider it important to clarify that the CUP method can be used only if the products or services of the assessee are comparable to those of the other uncontrolled transaction. Thus, it follows that it is of utmost importance to first precisely determine the nature of services offered by the assessee to its AEs in order to make an effective comparison with the services rendered by it to the non-AEs. Unless the nature of services rendered by the assessee to its AEs and non-AEs is accurately ascertained, there can be no question of making a meaningful comparison. Coming back to the TPO's order, it is observed that the assessee had international transactions with four of its A.Es under this segment. The details of transactions with only one A.E, namely, Hughes Network Systems Inc., were made available to the TPO in the shape of Agreement etc. No other details or copies of the Agreements for the transactions with the remaining three A.Es were provided to the TPO, enabling him to carry out an analysis of the functions performed by the assessee for making a logical comparison with the uncontrolled transactions undertaken by it. As, while following the tribunal order for the preceding years, we are restoring the matter to the file of A.O. with a direction to first consider the applicability of CUP method, the assessee is directed to provide all necessary details to the TPO facilitating him to make a meaningful comparison of the services rendered by it to the AEs and non-AEs. Such details of the transactions to the TPO may be in the form of Agreements with the remaining three A.Es as well, copies of invoices and other relevant details, as the TPO may deem necessary. Only if the CUP method is found to be inapplicable by the TPO due to one reason or the other, including not providing of the necessary details of the international transactions with the other three AEs or the details of services provided by the assessee to non-AEs, that the TPO will switch over to the TNMM for benchmarking international transactions under this segment. In the final analysis, we set aside the impugned order on this score and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transactions under this segment as discussed above.
3.1 Next issue raised through ground No. 4 is against the making of an addition on account of Transfer pricing adjustment amounting to Rs. 9,13,17,896/- in respect of international transaction in the nature of 'Marketing support services'.
3.2 Having considered the rival submissions and perused the relevant material on record, it is noticed that the Tribunal for the immediately preceding two assessment years restored the matter to the file of AO/TPO for a fresh determination of ALP under this segment as well. The directions given by the tribunal, as discussed above, were admittedly common to both the segments, namely, Software development services segment and Marketing support services. The view canvassed by the TPO in making the addition for the instant year under this segment again traces its origin to the preceding year. Without going into the further details and respectfully following the precedent, we are of the considered opinion that the ends of justice would meet adequately, if the impugned order on this score is also set aside and the matter is sent back to the AO/TPO for a fresh determination of the ALP under this segment in consonance with the directions given by the Tribunal. We order accordingly.
4.1 Ground No. 5 is against the addition of Rs. 18,98,367/- on account of excess claim of depreciation. The facts apropos this ground are that the assessee claimed depreciation on computer UPS and other peripherals @ 60%, which was reduced by the Assessing Officer to 15%.
4.2 After considering the rival submissions and perusing the relevant material on record, we find that this issue is no more res integra in view of the direct decision of the Hon'ble jurisdictional High Court in the case of CIT v. BSES Rajdhani Powers Ltd.[IT Appeal No. 1266 of 2010] and a Special Bench order in the case of Dy. CIT v. Datacraft India Ltd. [2010] 40 SOT 295 (Mum.). In these decisions, it has been held that UPS and other computer peripherals are eligible for depreciation @ 60%. The ld. AR contended that the Tribunal has also taken similar view in assessee's own case for the earlier years. In view of the foregoing discussion, we are of the considered opinion that the assessee deserves to succeed on this issue. We order accordingly. This ground is allowed.
5.1 The last effective ground is against the addition of Rs. 19,81,010/-made u/s 40(a)(i) [sic. 40(a)(ia)] of the Act. The factual matrix of this ground is that the assessee paid Management fees of Rs. 19,81,010/- to M/s Hughes Systique Corporation. Since no deduction of tax at source was made by the assessee from such payment to the foreign AE, the Assessing Officer came to hold that the disallowance was called for in terms of sec. 40(a)(i). The view taken by the Assessing Officer was echod by the DRP. The assessee is aggrieved against such addition.
5.2 We have heard the rival submissions and perused the relevant material on record. It is noticed that the AO has made disallowance u/s 40(a)(i) of the Act, which section provides that notwithstanding anything to the contrary in sections 30 to 38, the amount of any interest, royalty, fees for technical services or other sum chargeable under this Act, which is payable - (A) outside India; or (B) in India to a non-resident, not being a company or to a foreign company- , shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession", if, tax is deductible at source under Chapter XVII-B on it and such tax has not been deducted or, after deduction, has not been paid during the previous year, or in the subsequent year before the expiry of the time prescribed under sub-section (1) of section 139 of the Act. The assessee has made payment its AE, which is a person outside India. Material provision for deduction of tax at source in such cases is contained in section 195, the relevant part of which provides that any person responsible for paying to a non-resident, not being a company, or to a foreign company, ……. any other sum chargeable under the provisions of this Act …shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, shall deduct income-tax thereon at the rates in force. On a conjoint reading of these two provisions as are applicable to the present case, it is manifest that in order to make a disallowance by invoking section 40(a)(i), it is sine qua non that apart from other things, the amount which is paid to the person outside India should be the one on which tax is deductible at source and such tax has not been deducted or not paid after deduction. Thus, it clearly emerges that unless the amount paid by the assessee in India is not chargeable to tax in the hands of the resident of other country, there can be no question of invoking section 195 and consequently section 40(a)(i) of the Act.
5.3 Now let us examine whether the provisions of section 195 are attracted on such payment or, in other words, whether such amount is chargeable to tax in the hands of the foreign AE. Before reaching any conclusion in this regard, it is paramount to notice the nature of services rendered by the foreign AE, for which the assessee made the said payment. It is observed from para 4.1 of the assessment order that the assessee paid this amount as 'Management fees' to its foreign A.E. Para 4.4 of the assessment order further elaborates the fact that this amount was paid as 'Management fees'. Page 398 of the paper book is an Addendum to the Master agreement, pursuant to which, the amount was paid by the assessee. For the sake of ready reference, its relevant part given in Article 7.A.(iii), is reproduced here as under : —
"As consideration for the provision of payroll and related services by HSC to HSIPL for HSIPL seconded employees to HSC, HSIPL will pay HSC at actual cost incurred by HSC (supported by invoices) plus 2.5% of such actual cost incurred."
5.4 The further elaboration of such 'Payroll services' is available in Annexure - B(1) on page 400 of the paper book, which reads as under :—
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"for processing and arranging a work permit for the HSIPL seconded employees to HSC to be based at USA and performing services there from; |
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For processing of payroll for the HSIPL seconded employees to HSC to be based at USA as per USA laws; |
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For crediting monthly salaries through money transfer to the HSIPL seconded employee's bank accounts. |
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For crediting any additional amount which the HSIPL seconded employee's may receive from HSIPL as any performance incentive through money transfer to the HSIPL seconded employee's bank accounts. |
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To fulfill their obligations under USA Law, HSC may issue an employment offer letter to the HSIPL seconded employee with salary details." |
5.5 A bare perusal of the nature of 'Payroll and related services' brings out that these were rendered by the AE in USA in respect of the assessee's employees sent there on secondment basis. The specific nature of such services as set out above, makes it evident that these were for Processing and arranging work permits for the assessee's seconded employees; Processing of payroll of such seconded employees; and Crediting of monthly salaries through money transfer to the accounts of the seconded employees' bank accounts etc. From the above discussion, it is evident that the assessee made payment to its AE on account of 'Managerial services' as has also been acknowledged by the AO in the assessment order.
5.6 Now the question arises as to whether any payment for such Managerial services is chargeable to tax in India in the hands of the foreign AE. The AO has considered such payment as 'Fees for technical services' in terms of Explanation 2 to sec. 9(1)(vii) of the Act. This definition divulges that it is a consideration for rendering of managerial, technical or consultancy services with some exclusions. Since the assessee has paid for payroll services, which are nothing but 'Managerial services', we hold that the amount is covered within the meaning of 'Fees for technical services' as per Expl. 2 to section 9(1)(vii) of the Act. The ld. AR was also fair enough to concede this position.
5.7 At this juncture, it is relevant to note the prescription of section 90(2) of the Act, the relevant part of which reads as under : —
"90. Agreement with foreign countries.—
(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee."
5.8 On going through the mandate of the above provision, it transpires that where the Central Government has entered into a Double Taxation Avoidance Agreement with the Government of any other country for granting of relief in respect of income on which tax is payable both in India as well as the other country or for the purposes of avoidance of double taxation of income under this Act or under the corresponding law in force in that other country, then the assessee to whom such agreement applies, shall be entitled to be governed by the provisions of the Double Taxation Avoidance Agreement (DTAA) or the provisions of the Act, whichever course is more beneficial to it.
5.9 A plain reading of the above provision points out two things. First thing is that there should be a DTAA entered into between two countries 'for granting relief of tax' and the second thing is the description of the nature of relief, being, 'the provisions of this Act shall apply to the extent they are more beneficial to that assessee'. On a harmonious reading of the provision in entirety, it follows that when a DTAA has been entered into between India and another country for granting a relief of tax, then the provisions of this Act or the DTAA, whichever are more beneficial to the assessee, shall apply. Ordinarily, an assessee is subjected to tax in India as per the provisions of the Act. If, however, the provisions of the DTAA are applicable and found to be more beneficial to the assessee vis-à-vis the Indian tax provisions, then going by section 90(2), such provisions of the DTAA shall override the corresponding provisions of the Act. To state simply, if a particular income falls under the Indian tax net, the same shall be chargeable to tax in the hands of the assessee as per the Act, unless it is shown that the provisions of the applicable DTAA provide for non-taxability of such income or taxability at a lower rate. In such a situation, the beneficial provision as contained in the DTAA shall prevail over the provision under the Act. It is discernible that the legislature has given an option to the assessee to be governed by the provisions, either of the Act or of the DTAA, whichever are more beneficial to it. The corollary that follows is that one needs to firstly, examine as to whether a particular sum is chargeable to tax under the Act or not. If it is chargeable under the Act, then it needs to be examined if such income is also taxable as per DTAA. If the income is equally chargeable to tax - both under the Income-tax Act as well as DTAA- , then the assessee cannot escape tax on it. If however such income is not chargeable to tax in India under the Act, then the matter ends there. There is no need to consider the provisions of the DTAA as to whether any charge is attracted there on such income. If such income is chargeable to tax in India under the Act, but the provisions of DTAA exempt it, then again there can be no question of taxability of such sum due to the mandate of section 90(2) . The essence is that an assessee, to whom the DTAA applies, has been given option to be governed by the Act or the DTAA, whichever is more beneficial to it.
5.10 The Hon'ble Supreme Court in CIT v. P.V.A.L.Kulandagan Chettiar [2004] 267 ITR 654/137 Taxman 460 has held that where the tax liability is imposed by the Act, the DTAA may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. Similar view has been expressed by the Mumbai Bench of the Tribunal in Dy. DIT v. Safmarine Container Lines N.V. [2009] 120 ITD 71. In view of the above discussion, it becomes palpable that the statute by means of section 90(2) of the Act, has itself conferred an option to an assessee to be ruled either by the Act or the DTAA, whichever is more beneficial to him.
5.11 Coming back to the facts of the case under consideration and having seen that consideration for 'Managerial services' is chargeable to tax in India as per Expl.2 to section 9(1)(vii), let us examine if the Double Taxation Avoidance Agreement between India and USA (hereinafter referred to as 'the DTAA') helps the assessee, as has been contended. In this regard, it is pertinent to note that whereas sub-section (vii) of section 9(1) deals with 'Fees for technical services' under the Act, its parallel is Article 12 of the DTAA which deals with 'Fees for included services', which term has been defined in para 4 of Article 12 as under : —
'4. For purposes of this Article, 'fees for included services' means payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services :
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are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or |
(b) |
make available technical knowledge, experience, skill, know- how, or processes, or consist of the development and transfer of a technical plan or technical design.' |
5.12 It is axiomatic that sub-para (a) of para 4 of Article 12 has no application to the case as the nature of services provided by the foreign AE are admittedly those of managerial nature and are not ancillary and subsidiary to the application or enjoyment of the right, property or information for which any royalty is payable.
5.13 Now coming to sub-para (b) of para 4 of Article 12, it can be seen that these are to 'make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design.' The above services, on a broader perspective, can be designated as technical or consultancy services. In sharp contrast to Explanation 2 to sec. 9(1)(vii), the managerial services are absent as per Article 12(4) of the DTAA. As admittedly, the AO has categorized the nature of services provided by the AE as 'Managerial' and on appreciation of the details of the nature of such services above, we have also found them to be of 'Managerial' nature, it is apparent that these are not covered within the ambit of Article 12 of the DTAA.
5.14 There is another aspect of the matter. Even if it is presumed for the sake of an argument that the amount paid to the foreign AE is a consideration for the services as referred to in para 4 of Article 12, still it cannot be included within the ambit of this Article. It is so for the reason that in order to rope any amount within the purview of Fees for included services (FIS) as per Article 12(4)(b) of the DTAA, it is essential that the payment should be to 'make available' technical knowledge, experience, skill, know-how or processes, or consist of the development and transfer of a technical plan or technical design. On the contrary, there is no such requirement of 'making available' any managerial, technical or consultancy services' in section 9(1)(vii) of the Act. Simple rendition of such services is sufficient. Scope of the expression 'make available' has been dealt with by the Hon'ble Karnataka High Court in CIT v. De Beers India Minerals (P.) Ltd. [2012] 346 ITR 467/208 Taxman 406/21 taxmann.com 214, in which it has been held that it means providing technology to the payer so that he may independently use it in future without the involvement of service provider. It was further noticed that unless the service provider makes available his technical knowledge, experience, skill, know-how or process to the recipient of the technical service, the liability to tax is not attracted.
5.15 Coming back to the facts of the extant case, it is clear that the foreign AE rendered services in USA, which were consumed there itself. By rendering such services, nothing was made available to the assessee for use in future. As the foreign AE has not made available any technical knowledge, experience, skill etc. to the assessee for use in present or in future, in our considered opinion, the consideration for such services cannot be brought within the ambit of 'making available' of anything to the assessee, so as to considered as 'Fees for included services'.
5.16 As it is not the case of the AO that either the foreign AE carried on business in India through a permanent establishment or such payment was attributable to any permanent establishment, obviously the operation of Article 7, dealing with 'Business profits', has to be ruled out. Once the amount does not fall within the four corners of Article 12 of the DTAA and further Article 7 has no application for the reasons discussed, the natural corollary which follows is that the amount is not chargeable to tax in the hands of the foreign AE as per the DTAA.
5.17 We have noticed above that the provisions of the DTAA or the Act, whichever are more beneficial to the assessee, are to be applied.
Albeit the amount is chargeable to tax as per section 9(1)(vii) of the Act in the hands of the foreign AE on standalone basis, but going by Article 12(4) of the DTAA, it is clear that the payment cannot be considered as 'Fees for included services' so as to be charged to tax in the hands of foreign A.E. Once the amount is not chargeable to tax in India as per Article 12 of the DTAA, there can be no question of imposing any liability on the payer assessee to make deduction of tax at source. Ex consequenti, the provisions of sec. 40(a)(i) cannot be invoked. The impugned order is, therefore, reversed to this extent and the disallowance made u/s 40(a)(i) is directed to be deleted. This ground is allowed.
6. In the result, the appeal is partly allowed.