IBM INDIA PRIVATE LIMITED,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘A’ BENCH : BANGALORE

BEFORE SHRI. CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER

IT(TP)A No. 399/Bang/2023 Assessment Year : 2013-14

M/s. IBM India Pvt. Ltd., The Deputy No. 12, Subramanya Commissioner of Arcade, Income Tax, Bannerghatta Road, Vs. Circle 3 (1)(1), Bangalore – 560 029. Bangalore. PAN: AAACI4403L APPELLANT RESPONDENT

Assessee by : Shri Ajay Roti, CA Revenue by : Shri D.K. Mishra, CIT DR

Date of Hearing : 24-07-2023 Date of Pronouncement : 27-07-2023

ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against order dated 28.02.2023 passed by the Ld.DCIT, Circle – 3(1)(1), Bangalore for A.Y. 2013-14 on following grounds of appeal:

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Page 5 IT(TP)A No. 399/Bang/2023 passed on 08.01.2018 by assessing the total taxable income at Rs. 3948,07,42,836/- by making the following additions / disallowances: Sl. Addition / Disallowance Amount (INR) No. 1 Disallowance u/s 10AA 303,16,58,824/- Payments made to AE and applicability of TDS 2 981,37,37,374/- and disallowance 3 TP adjustment 767,74,32,226 4 Disallowance u/s 14A 78,54,075/- Disallowance of additional depreciation claimed 5 24,44,33,932/- on intangible asset of license Disallowance of amount disallowed under 6 section 40(a) in return of income, being 345,65,64,364 disallowed under section 37 Disallowance of claim made u/s 40(a) on deduction on tax pertaining to AY 2012-13, as 7 359,66,16,945/- the same was disallowed u/s 37 in DAO for AY 2012-13 2.3 Aggrieved by the final assessment order, the assessee preferred an appeal before this Tribunal. 2.4 This Tribunal vide order dated 31.07.2020 in IT (TP) A No. 725/Bang/2018 remanded certain issues to the DRP for fresh consideration. The DRP remitted the issues to Ld.AO for necessary verification. i) Disallowance of Rs.24,60,33,070/- towards depreciation on leased assets. ii) Disallowance of Rs.24,44,33,932/- towards depreciation on computer software. iii) Further, the Hon'ble ITAT has directed the AO to delete the disallowance u/s 14A of the Act amounting to Rs.78,54,075/-.

Page 6 IT(TP)A No. 399/Bang/2023 2.5 Following the directions, a letter was issued to the assessee on 21.01.2022 to furnish the relevant details along with supporting documents. 2.6 In response, the assessee furnished the reply on 01.02.2022. Various details were furnished by the assessee and the assessment was concluded accepting the claim of depreciation on computer software, depreciation on leased assets, and disallowance u/s. 14A was also deleted. 2.7 In respect of the disallowance u/s. 10AA, the payments made to AEs for which TDS was not deducted by assessee were disallowed and there was further disallowance made u/s. 40a and section 37 of the Act, against which the assessee filed objections before the DRP. 2.7.1 The DRP by following the observations of the Ld.AO upheld the disallowances made. On receipt of the DRP directions, the Ld.AO passed the impugned order by making an addition in the hands of the assessee at Rs. 727,33,46,320/-. Aggrieved by the order of the Ld.AO, assessee is in appeal before this Tribunal. 3. At the outset, the Ld.AR submitted that Ground no. 1 is general in nature and do not require any adjudication. 4. Ground no. 2 – Denial of relief of tax holiday u/s. 10AA of the act. 4.1 The Ld.AR submitted that the Ld.AO and the DRP denied relief u/s. 10AA of the act amounting to Rs.36,14,319/- by concluding that the requirements of section 10AA are not fulfilled in respect of amounts that has not been brought back into India in convertible foreign exchange.

Page 7 IT(TP)A No. 399/Bang/2023 4.2 The Ld.AR placed reliance on the decision of Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2006-07 in IT(TP)A No. 2588/Bang/2019 wherein it was held as under: “10.7 The assessee has produced letter of RBI dated 28/02/2014, the Competent Authority, mentioned u/s. 10B(3) of the Act. In the said letter, it is been clearly stated that the assessee is granted post facto extension. The assessee company has subsequently also realized the said amount. The assessee has obtained post facto approval from RBI coupled with the fact that it has also realized the said amounts, it entitled to the deduction u/s. 10A/10B of the Act on the said amounts. Accordingly, this ground raised by assessee stands allowed. Emphasis applied” 4.3 The Ld.AR submitted that in response to the letter filed by the assessee before the RBI on 30.07.2012, the RBI granted permission to hold and maintain the Foreign Currency Account in its own name for a period of one year from 24.08.2012. It is submitted that the RBI vide its letter dated 04.01.2013, clarified that the lapse on part of the company in not obtaining renewal of permission of RBI to maintain the Foreign Currency Account was condoned from the last renewal given by RBI. Copy of the letters from RBI dated 24.08.2012 and 04.01.2013 are placed at pages 532 & 533 of paper book 2. 4.4 The Ld.AR submitted that, subsequently, realization of sale proceeds of the assessee was audited by an independent auditor (Deloitte Haskins and Sells) appointed by the authorized dealer and a report was furnished to the RBI, wherein the auditors

Page 8 IT(TP)A No. 399/Bang/2023 concluded that, no variances were observed in the Foreign Currency Account maintained by the assessee. 4.4.1 Accordingly, the RBI vide its letter dated 28.02.2014, restored the Foreign Currency Account facility to the company. Copy of the letter dated 28.02.2014 restoring the FCA facility by RBI is placed at page 528 of paper book 2. The Ld.AR submitted that the RBI condoned the lapse on the part of the assessee in not obtaining the renewal of permission to maintain the Foreign Currency Account placed as Annexure 3 at page 528 of paper book 2. 4.5 The Ld.AR thus submitted that, the Ld.AO and the DRP erred in concluding that the requirements of section 10AA are not fulfilled in respect of the amounts that has not been brought back into India in convertible foreign exchange, even though condonation was granted by the RBI in relation to the account maintained outside India. 4.6 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. However, he submitted that the issues may be remanded to the Ld.AO for verification. We have perused the submissions advanced by both sides in the light of records placed before us. 4.7 Based on the submissions of both sides and the observation of this Tribunal in assessee’s own case for A.Y. 2006-07, we direct the Ld.AO to verify the RBI approval restoring the FCA facility to the assessee and to consider the claim in accordance with law. Accordingly, ground no. 2 raised by assessee stands allowed for statistical purposes.

Page 9 IT(TP)A No. 399/Bang/2023 5. Ground no. 3 Disallowance u/s. 40(a) of the Act in respect of payments made to non-resident Associated Enterprises (‘AEs’) and Non-AEs. The Ld.AR submitted that, the Ld.AO and DRP disallowed a sum of Rs.707,25,57,679/- on account of payments made to non- resident AEs and Non-AEs, without deduction of taxes. The breakup of the disallowance is provided as under: Sl. Particulars Amount in INR No. 1 Payments made to IBM Singapore, treated 460,49,70,453 as Royalty 2 Outbound assignee related payments 240,54,71,743 3 Payments towards business profits of 5,42,31,732 entities not having PE in India 4 Payments to IBM Phillippines 78,83,751 Total 707,25,57,679 A. Payment made to IBM Singapore being disallowed: 5.1 The Ld.AR submitted that the disallowance of Rs.460,49,70,453/- pertains to payments to IBM Singapore Pte Ltd (‘IBM Singapore’), a foreign company located in Singapore for purchase of off-the-shelf copies of shrink-wrapped computer software, for which assessee the non-exclusive distributor, for onward sale to Indian end-users under a ‘Remarketer Agreement’. The Ld.AR relied on the decision of Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT reported in (2021) 432 ITR 471 wherein Hon’ble Court. 5.2 It is submitted that, the Remarketer Agreement with IBM Singapore has been examined in detail and Hon’ble Supreme Court reviewed the taxability of the transaction and held that

Page 10 IT(TP)A No. 399/Bang/2023 payments made by assessee to IBM Singapore for purchase of software cannot be considered as royalty and accordingly are not taxable in India. It is submitted that Hon’ble Supreme Court further held that if a transaction is not taxable, the question of deduction of tax at source u/s. 195 does not arise. The relevant extract of the judgment has been produced below. “169. Our answer to the question posed before us, is that the amounts paid by resident Indian end- users/distributors to non-resident computer software manufacturers/suppliers, as consideration for the resale/use of the computer software through EULAs/distribution agreements, is not the payment of royalty for the use of copyright in the computer software, and that the same does not give rise to any income taxable in India, as a result of which the persons referred to in section 195 of the Income Tax Act were not liable to deduct any TDS under section 195 of the Income Tax Act. The answer to this question will apply to all four categories of cases enumerated by us in paragraph 4 of this judgment. Emphasis applied” 5.3 The Hon’ble Supreme Court in case of Engineering Analysis Centre of Excellence Pvt. Ltd. vs. CIT (supra) held that the provisions of deduction of tax u/s. 195 of the Act shall apply only when the income is chargeable to tax after considering the provisions of the act and the respective Double Taxation Avoidance Agreement (‘DTAA’), and that the payment to IBM Singapore is not chargeable to tax in India. 5.4 The Ld.AR also relied on the decision of Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2010-11 deleted the adjustment pertaining to the disallowance of payments made to IBM Singapore for purchase of royalty. The copy of the order is enclosed at page nos. 364 – 408A of paper book 2. The relevant extract of the order has been produced below.

Page 11 IT(TP)A No. 399/Bang/2023 “7.4 We heard ld D.R and perused the record. The Hon’ble Supreme Court has held in the assessee’s own case (referred supra) that the payments made for purchase of shrink wrapped software are not royalty within the meaning of India – Singapore DTAA. We noticed that the Ld DRP has confirmed the disallowance by following the decision rendered by Hon’ble Karnataka High Court in the case of Samsung Electronics (supra), which has been overruled by Hon’ble Supreme Court in the case of Engineering Analysis Centre of Excellence (supra). Accordingly, we direct the AO to delete the disallowance of Rs.278.68 crores. Emphasis applied” 5.5 The Ld.AR thus submitted that, the payments to IBM Singapore amounting to Rs.460,49,70,453/- is not chargeable to tax and the provisions of section 195 of the act are not applicable. 5.6 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. However, he submitted that the issues may be remanded to the Ld.AO for verification. We have perused the submissions advanced by both sides in the light of records placed before us. 5.7 Based on the above discussion and the submissions of both sides, we direct the Ld.AO to consider the claim as per the observations of the Hon’ble Supreme Court and Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2010-11 in accordance with law. B. Disallowance of outbound assignee related payments 5.8 The Ld.AR submitted that the authorities below disallowed Rs.240,54,71,743/- pertaining to outbound assignee related payments without taking into consideration of our submissions. He submitted that the revenue concluded that the seconded employees continue to be on the payroll and that all expenses

Page 12 IT(TP)A No. 399/Bang/2023 related to outbound assignees are charged to the profit and loss account of the assessee. 5.9 The Ld.AR submitted that the assessee has not claimed any deduction on account of the said payments while computing the total income for the subject Assessment Year and that such payments have not been part of the profit and loss account. It is submitted that the said payment does not represent the expenditure in the books of accounts of the assessee in arriving at the taxable income. It is thus submitted that as no deduction was claimed by the assessee on the said payment, there should not be any disallowance of the same. 5.10 The Ld.DR relied on the orders passed by the authorities below. However he submitted that the submissions of the Ld.AR needs verification. We have perused the submissions advanced by both sides in the light of records placed before us. 5.11 Based on the above discussion, we direct the Ld.AO to verify the submissions of the assessee and consider the claim in accordance with law. C. Disallowance of payments towards business profits of entities not having PE in India. 5.12 The Ld.AR submitted that assessee had filed voluminous submissions with regard to the payments made to entities who do not have a PE in India. It is submitted that, the payments are made to these entities towards legal and relocation charges, which do not attract provisions of the TDS as per the Double Taxation Avoidance Agreement.

Page 13 IT(TP)A No. 399/Bang/2023 5.13 It is the submission of the Ld.AR that the payments made by assessee to the entities amounts to profits of such entities and as they do not have a PE in India, such amount cannot be deemed to have been accrued in India in order to be taxable under the Income Tax Act. He thus prayed for the issue to be verified by the Ld.AO/TPO. 5.14 The Ld.DR on the contrary relied on the orders passed by the authorities below did not object for the issue to be verified. We have perused the submissions advanced by both sides in the light of records placed before us. 5.15 We note that the evidences filed by the assessee has not been considered by the authorities while giving effect to the Tribunal’s order. In the interest of justice, we remand this issue to the Ld.AO to verify all the necessary evidences and to consider the claim of assessee in accordance with law. D. Disallowance of payments made to IBM Philippines 5.16 The Ld.AR submitted that the Ld.AO has not considered the submissions with regard to the payments made by assessee to IBM, Philippines. He submitted that assessee had rendered certain payroll related services in the course of issue of salary related TDS forms, viz., Form 16 and Form 24 with respect to the employees of P&G India. Such service were outsourced by IBM India to IBM Philippines. 5.17 He submitted that the services rendered by IBM Philippines are restricted to payroll related processing services and do not qualify as Fees for Technical Services (‘FTS’) u/s. 9(vii) of the act since it cannot be regarded as ‘managerial’, ‘consultancy’ or ‘technical’ in nature, accordingly, in the absence of a business

Page 14 IT(TP)A No. 399/Bang/2023 connection in India, the said amount is not liable to tax under the provisions of the Act. 5.18 Reliance was placed on the decision of Hon’ble jurisdictional High Court in case of IBM India in the 201 proceedings in ITA No. 218 of 2014 c/w ITA No. 220 of 2014, ITA No. 222 of 2014 and ITA No. 224 of 2014 vide order dated 16.01.2023 placed as Annexure – 13 to the compilation filed in the paper book. 5.19 On the contrary, the Ld.DR placed reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 5.20 We note that various details filed by assessee has not been considered by the Ld.AO before making such disallowance. The invoices and form 15CB in respect of the payments made are to be considered and looked into in respect of this issue. We direct the Ld.AO to verify all these details and consider the claim of assessee in accordance with law. Accordingly, ground no. 3 raised by assessee stands allowed for statistical purposes. 6. Ground no. 4 – Disallowance of amounts u/s. 37(1) which have been disallowed suo moto by the assessee u/s. 40(a) of the act. 6.1 The Ld.AR submitted that the Ld.AO verified the details and had granted the relief to the extent of payment on which taxes were withheld in the subsequent years amounting to Rs.339,94,42,623/- as against the year end provisions that was disallowed in the original final assessment order. The Ld.AR has provided the summary as under:

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6.2 He submitted that the balance amount of Rs.19,71,74,322/- are reversed in the immediately next assessment year for which the assessee had provided the screenshots of the subsequent reversal of the provisions in the next year ending March 31, 2012. The Ld.AR referring to the remand report furnished as Annexure – 15 to the compilation, submitted that, the screenshots have been looked into by the Ld.AO in the remand order dated 31.05.2022, however has not granted relief. 6.3 He submitted that the reversal of the entries made by the assessee are to be reverified and needs to be considered. 6.4 The Ld.DR also agreed for the issue to be remanded to the Ld.AO for necessary verification. We have perused the submissions advanced by both sides in the light of records placed before us. 6.5 We note that the reversal of the entries needs to be reversed by the Ld.AO and in the event if it is found that the amount has been immediately reversed on the next Financial Year, benefit shall be granted to the assessee. Accordingly, this ground raised by assessee stands allowed for statistical purposes. 7. Ground no. 5 is consequential in nature.

Page 16 IT(TP)A No. 399/Bang/2023 8. Ground no. 6 is general in nature and therefore do not require any adjudication. In the result, the appeal filed by the assessee stands allowed for statistical purposes. Order pronounced in the open court on 27th July, 2023.

Sd/- Sd/- (CHANDRA POOJARI) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 27th July, 2023. /MS / Copy to: 1. Appellant 4. DRP-1, Bangalore 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, ITAT, Bangalore