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Income Tax Appellate Tribunal, PUNE BENCH “C”, PUNE – VIRTUAL COURT
Before: SHRI R.S. SYAL & SHRI S.S. VISWANETHRA RAVI
आदेश / ORDER
PER R.S.SYAL, VP : These two cross appeals - one by the assessee and other by
the Revenue – emanate from the order dated 29-12-2016 passed
by the ld. CIT(A) in relation to the assessment year 2012-13.
2 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
The first issue raised by the assessee in its appeal is against
the confirmation of disallowance of leased line charges (link
service cost) on account of non-deduction of tax at source. First
ground of the Revenue’s appeal is also interconnected with the
same.
Briefly stated, the facts of the case are that the assessee is an
Indian Private limited company engaged in providing Software
Solution services to Barclays group worldwide. It has one
undertaking approved as a 100% Export Oriented unit eligible for
deduction u/s.10B of the Income-tax Act, 1961 (hereinafter also
called `the Act’); another unit within the area of Special
Economic Zone (SEZ) entitled to deduction u/s.10AA of the Act;
and still another unit in Domestic Tariff Area (DTA) in Mumbai.
During the course of assessment proceedings, the Assessing
Officer (AO) observed that the assessee paid a sum of
Rs.2,41,82,749/- as leased line charges to various vendors in
India, which were claimed as deduction. On being called upon to
explain as to why no deduction of tax at source was made in terms
of section 194J of the Act, it was submitted that the amount paid
was not in the nature of fees for Professional or technical services
or royalty etc. in the hands of recipient warranting any deduction
3 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
of tax at source. The AO found that the assessee was engaged in
software development and production of software products.
Internet with high bandwidth was required for such work. A
dedicated lease line for internet service was taken from supplier.
The payment was held by the AO to be in the nature of fees for
technical services requiring deduction of tax at source u/s 194J of
the Act. Having not done so, the AO invoked section 40(a)(ia) of
the Act. He noticed that out of such sum of Rs.2.41 crore, an
amount of Rs.55,46,411/- was incurred against SEZ unit. The AO
opined that the enhanced claim of deduction u/s.10AA due to
disallowance u/s 40(a)(ia) on this count will not be available to
the assessee despite the judgment of Hon’ble Bombay High Court
in the case of CIT Vs. Gem Plus Jewellery India Ltd. (2011) 330
ITR 175 (Bom.). The ld. CIT(A) approved the stand of the AO, in
principle, by holding the amount paid by the assessee was in the
nature of `Royalty’ under the terms of Explanation 6 to section
9(1)(vi) of the Act, inserted by the Finance Act, 2012 w.r.e.f. 01-
06-1976. That is how, he held that the assessee was obliged to
deduct tax at source on payment of Rs.2.41 crore. He, however,
held that the disallowance of the leased line charges for a sum of
Rs.55,46,411/-, pertaining to the SEZ unit of the assessee, would
4 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
make the assessee eligible for deduction u/s.10AA at the
enhanced income. Whereas, the assessee is aggrieved by the
sustenance of disallowance u/s.40(a)(ia) to the tune of Rs.2.41
crore, the Revenue has challenged the succour provided by the ld.
CIT(A) in allowing deduction u/s.10AA at the enhanced profit
because of the disallowance of Rs.55.46 lakh pertaining to the
eligible unit.
We have heard the rival submissions through Virtual Court
and meticulously scanned the relevant material on record. The
moot question is if the assessee was liable to deduct tax at source
on the amount of leased line charges paid by it to various vendors
in India so as to warrant disallowance u/s 40(a)(ia) of the Act?
The AO has invoked this provision in the hue of section 194J of
the Act. Section 194J requires deduction of tax at source, inter
alia, on `royalty’. Explanation to section 194J states through
clause (ba) that “royalty” shall have the same meaning as in
Explanation 2 to clause (vi) of sub-section (1) of section 9.
Explanation 2 to section 9(1)(vi) defines the term “Royalty” to
mean consideration for certain things as set out in clauses (i) to
(vi). Clauses (i) to (iii) of Explanation 2 refer to the term
`process’. Explanation 6 to section 9(1)(vi) inserted by the
5 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
Finance Act, 2012, clarifies the ambit of the expression `process’
as used in Explanation 2 to section 9(1)(vi). Thus Explanations 5
and 6, in the present context, are just extensions of the
Explanation 2 to section 9(1)(vi), which take us to section 194J of
the Act.
The Finance Act, 2012 has inserted Explanations 4, 5 and 6
to section 9(1)(vi) w.r.e.f. 01-06-1976 defining “income by way
of Royalty”. Explanation 6 states that the expression `Process’
includes and shall be deemed to have always included
“transmission by satellite (including up-linking, amplification,
conversion for down-linking of any signal), cable, optic fibre or
by any other similar technology, whether or not such process is
secret”. Thus, with the insertion of Explanation 6 clarifying the
scope of the expression “Process” as used in Explanation 2 to
section 9(1)(vi), it becomes palpable that if any charge is paid for
transmission by cable, optic fibre or by any other similar
technology, it will get covered within the definition of “income by
way of Royalty”. Expression 5 further clarifies that the
possession or control of the property with the payer is no more
relevant.
6 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
Leased line is a dedicated communication channel that
easily interconnects two or more sites ensuring uninterrupted data
flow from one point to another. It is a dedicated, fixed-bandwidth
data connection, which allows users to have a reliable, high-
quality internet connection. As per the assessee’s submission
before the ld. CIT(A), as captured on page 9 of the impugned
order, it: `entered into an arrangement with third party vendors for
providing Digital Subscriber Line facility i.e. broadband
communication technology used for connecting to the internet,
Ethernet leased line ….. These facilities enables the Appellant to
access a standard communication line for highly secured
communication. …it is a dedicated line provided to the
Appellant…’. Thus the assessee paid for securing a dedicated line
for flow of its data, which is nothing but leased line charges.
When we consider Explanations 5 and 6 read with Explanation 2
to section 9(1)(vi), it becomes graphically clear that the leased
line charges paid for transmission by any technology, get covered
within the definition of “Royalty” by the Finance Act 2012
w.r.e.f. 01-06-1976 covering the assessment year under
consideration.
7 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
We have noted above that the assessee is an Indian company
and it made payment of leased line charges to various vendors in
India, as has also been noted by the AO by reproducing reply of
the assessee in para 7.1 of his order. In view of the fact that a
resident paid leased line charges to another resident, the matter
ends by examining the ambit of the term “Royalty” under the Act
itself and there is no need to examine various DTAAs which have
been looked into by the Tribunal in certain decisions for holding
that leased line charges are not `royalty’ in the light of the
definition of the term “Royalty” as used in the respective DTAAs.
Having held that the payment of leased line charges
amounting to Rs.2.41 crore amounted to “Royalty” and the same
is covered u/s.194J, the next point requiring consideration is as to
whether the assessee could have legally deducted tax at source
from the payments made during the F.Y. 2011-12 corresponding
to the A.Y. 2012-13 under consideration?
At this juncture, we want to record that taxability of leased
line charges in the hands of the payee is one aspect and deduction
of tax at source there from by the payer is another. There is no
doubt that the retrospective amendment by insertion of
8 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
Explanations 4 to 6 to section 9(1)(vi) made by the Finance Act
2012 albeit with retrospective effect form 01-06-1976 have
rendered the amount chargeable to tax as `royalty’ in the hands of
the recipient. But the position regarding deduction of tax at
source by the payer is little different. TDS contemplates making
deduction before making the payment. Once an amount is paid as
per the law prevailing at the relevant time not requiring any
deduction of tax at source, any later retrospective amendment
covering the amount under a specific taxing provision cannot
bring the hands of clock back so as to require the payer to deduct
tax at source. Liability to deduct tax at source can be fastened
only under the law prevailing at the time of payment. If no
liability exists at the time of payment, any subsequent
retrospective amendment cannot be enforced against the payer.
Once there is no liability to deduct tax at source at the material
time, the fortiori is that there can be no question of disallowance
u/s 40(a)(ia) of the Act.
Reverting back to the factual panorama, it is obvious that
the Finance Bill, 2012 became the Finance Act, 2012 somewhere
after the close of the F.Y. 2011-12. As opposed to that, the
Financial year corresponding to the A.Y. under consideration
9 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
came to an end before that. Ergo, it is overt that when the
payment of leased line charges was made, no existing provision at
that time made the assessee clearly liable to deduct tax at source.
Since the leased line charges got the final dressing up as
`Royalty’ u/s 9(1)(vi) of the Act after the close of the relevant
Financial year, we have no hesitation in holding that - even
though the amount became chargeable to tax as royalty in the
hands of the recipient under the Act for the year under
consideration - but the same did not fasten an obligation to
deduct tax at source as the assessee could not have activated its
sixth sense to ascertain beforehand that an obligation to deduct
tax at source was in offing. As the scope of “Royalty” came to be
expanded after the close of the financial year when the assessee
had already paid lease line charges, we hold that the same could
not have triggered deduction of tax at source so as to warrant any
disallowance u/s.40(a)(ia) of the Act. Thus, ground No.1 by the
assessee is allowed.
In view of our decision in allowing deduction of Rs.2.41
crore in entirety, there can be no question of making any separate
disallowance in respect of 10AA unit. The finding rendered by the
ld. CIT(A) in sustaining the disallowance and simultaneously
10 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
allowing deduction u/s 10AA at the resultant enhanced income
has, thus, become academic. Thus, the ground of the assessee is
allowed and that of Revenue is dismissed as infructuous.
Ground No.2 of the assessee’s appeal is against the
disallowance of expenditure on purchase of RSA tokens
amounting to Rs.25,00,344/-.
The factual matrix of this ground is that the assessee
purchased RSA tokens worth Rs.25.00 lakh and claimed the same
as repair expenses in entirety. The AO did not allow the
deduction despite the assessee’s contention that the RSA tokens
were used in rendering services to its Associated Enterprise and
were charged at a mark up at 15% along with other costs incurred
by it in rendering services. The AO treated the same as capital
expenditure. After allowing deduction towards depreciation
allowance, the AO made an addition of Rs.22,07,044/-. No relief
was allowed by the ld. CIT(A).
Having heard both the sides in the backdrop of the relevant
material on record, it is seen that the assessee was getting
remunerated by its AE at cost plus 15%. The assessee
specifically stated before the AO that the cost of RSA tokens was
11 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
repaid by its AE with 15% mark up and such amount was
considered as part of income of the year under consideration.
Once the amount of expenditure, debited to the Profit and loss
account, gets specifically credited to the Profit and loss account
with a certain mark-up, there can be no question of disallowing
the expenditure so charged while continuing to treat the amount
credited as income. Notwithstanding that, the ld. AR has placed
on record a copy of the order passed by the Tribunal in the case of
Amdocs Development Centre India Pvt. Ltd. Vs. JCIT (ITA
No.69/PUN/2018) dealing with the similar issue. Vide order
dated 27-11-2018, the Tribunal has held that RSA tokens are in
the nature of revenue expenditure and hence deductible. We,
therefore, order to delete the disallowance of Rs.22.07 lakh
sustained in the first appeal.
Having found that first ground of Revenue’s appeal has
become infructuous because of our decision on Ground No.1 of
the assessee’s appeal, the only other issue which survives in the
Revenue’s appeal is against the inclusion of Infosys Technologies
Ltd. in the determination of the Arm’s Length Price of the
international transaction.
12 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
Briefly stated, the facts of the case are that the assessee
declared an international transaction of “Provision of software
services” to Barclays Bank Plc. with transacted value of
Rs.580.43 crore. It benchmarked the international transaction
under the Transactional Net Margin Method (TNMM). Certain
companies were chosen as comparable to demonstrate that the
assessee’s margin was at the ALP. The TPO made certain
inclusions in/exclusions from the list of comparables, which led to
the transfer pricing adjustment. The ld. CIT(A) directed, inter
alia, to exclude Infosys Technologies Ltd. from the list of
comparables, against which the Revenue has come up in appeal
before the Tribunal.
Having heard the rival submissions and gone through the
relevant material on record, it is seen that the international
transaction is that of `Provision of software services’ for which
the assessee was compensated at cost plus 15%. The assessee is
acting as a captive unit to its AE for rendering software services.
In contrast, the Infosys Technologies Ltd. is a giant company
rendering on-shore and off-shore services at a very high scale.
This company was also included by the TPO in his order for the
immediately preceding assessment year 2010-11, which the ld.
13 ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
CIT(A) directed to exclude. Though the Revenue preferred
appeal against the order passed by the ld. CIT(A) for such earlier
year but chose not to assail the exclusion of Infosys Technologies
Ltd. It is further seen that the Hon’ble Delhi High Court in CIT
Vs. Agnity India Technologies Pvt. Ltd. (2013) 219 Taxman 26
(Delhi) has ordered to exclude Infosys from the list of
comparables of Agnity India Technologies Pvt. Ltd., a captive
service provider, like the assessee under consideration. In view
of the foregoing discussion, we are satisfied that the ld. CIT(A)
was justified in excluding this company from the list of
comparables.
The ld. AR stated that the assessee has raised additional
grounds of appeal for inclusion/exclusion of various companies
because of abundant caution. Such grounds were also stated to be
not adjudicated by the ld. CIT(A) as relief was allowed on the
exclusion of Infosys. The ld. AR stated that if the Departmental
ground challenging the exclusion of Infosys is dismissed, then the
additional grounds raised by it would lose its significance.
ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
In view of our decision upholding the exclusion of Infosys
Technologies Ltd., these additional grounds raised by the assessee
are dismissed as having become academic in nature.
In the result, the appeal of the Revenue is dismissed and that
of the assessee is allowed.
Order pronounced in the Open Court on 12th January, 2021.
Sd/- Sd/- ( S.S.VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 12th January, 2021 सतीश आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. 3. The CIT(A)-13, Pune 4. The Pr.CIT-V, Pune िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “सी” / 5. DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
ITA Nos.601 & 700/PUN/2017 Barclays Global Service Centre Private Limited
Date 1. Draft dictated on 12-01-2021 Sr.PS 2. Draft placed before author 12-01-2021 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.
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