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Facts
The revenue appealed against the CIT(A)'s deletion of disallowance under Section 40(a)(i) for software payments to a foreign entity and for ALP adjustment on outstanding receivables. The revenue argued that the software payments were royalty and thus subject to TDS, and that the credit period for receivables should be benchmarked.
Held
The Tribunal held that software payments were not royalty, and following the decision of the High Court of Madras and Supreme Court, the disallowance was not justified. The Tribunal also held that the CIT(A)'s decision on benchmarking the ALP of outstanding receivables using the LIBOR rate was appropriate.
Key Issues
1. Whether software payments to a non-resident are subject to TDS as royalty under Section 40(a)(i). 2. Whether the ALP of outstanding receivables from an AE should be adjusted using a benchmark rate like LIBOR or SBI PLR.
Sections Cited
40(a)(i), 143(3), 144C(3), 144B, 195
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Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM & HON’BLE SHRI MANU KUMAR GIRI, JM
O R D E R Per BENCH: 1. Aforesaid appeals by revenue for Assessment Years (AYs) 2017- 18 & 2018-19 have identical facts and issues. First, we take up appeal for AY 2017-18 which arises out of an order passed by learned Commissioner of Income Tax (Appeals), Chennai-16 [CIT(A)] on 28-06- 2024 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) r.w.s. 144C(3) r.w.s 144B of the Act on 25-10-2021. The grounds raised
by the revenue read as under:-
1. The Id. CIT (A) erred in deleting the disallowance made by the AO of Rs.32,64,15,896/- u/s.40(a)(ia) of the Act by placing reliance on the order of Hon'ble Supreme Court in the case of M/s. Engineering Analysis Centre of Excellence Pvt. Ltd vs CIT. 1.1. The 1d. CIT (A) is erred in deleting the disallowance of deduction u/s 40(a)(i) of the Act by relying on the decision of the Hon'ble Madras Court in TCA Nos.549, 554, 555 & 558/2021 vide order dtd. 20.12.2021 in the assessee's own case, and upon the decision of Hon'ble Supreme Court in the case of M/s. Engineering Analysis Centre of Excellence Pvt Ltd vs CIT against which Review petition is pending in Hon'ble Supreme Court. 1.2. The Id. CIT (A) is erred in deleting the disallowance of deduction u/s 40(a)(i) without appreciating the decision of the ITAT in dated 23/12/2019, allowing the issue in favour of the revenue in assessee's own case. 1.3. The ld. CIT (A) is erred in deleting the disallowance of deduction u/s 40(a)(i) without appreciating without considering the decision of the Jurisdiction High Court in the case of the M/s Zylog Systems Ltd Vs ITO in TCA No. 2184 and 2185 of 2006 dated 23.04.2019, squarely applicable to the issue under consideration. 1.4. The Id. CIT (A) is erred in deleting the disallowance of deduction u/s 40(a)(i) without appreciating without considering the decision of the ITAT in dated 23/12/2019, allowing the issue in favour of the revenue in assessee's own case. The Id. CIT (A) erred in directing the Assessing Officer to adopt the average 2. LIBOR rate and recomputed the arm's length price accordingly. 2.1. The Id. CIT (A) erred in directing the Assessing Officer to adopt the average LIBOR rate and recomputed the arm's length price accordingly without appreciating the method adopted by the AO for arriving ALP viz. SBI PLR. As is evident, two issues fall for our consideration i.e., disallowance u/s 40(a)(i) and application of Arm’s Length interest rate.
The Ld. CIT-DR referred to the findings of Ld. AR whereas Ld. AR stated that the issue is squarely covered by earlier decisions of Tribunal. The Ld. AR also placed on record decision of Hon’ble High Court of Madras in TCA Nos.549 & ors. of 2021 dated 20-12-2021. Having heard rival submissions, the appeal is disposed-off as under.
Disallowance u/s 40(a)(i) 3.1 The assessee paid software service charges of Rs.32.64 Crores to a foreign entity i.e., Saipem, Italy but did not deduct tax at source on the ground that such software payments do not require withholding tax u/s 195. It was submitted that the relevant agreement provide for limited right to use copyrighted article and therefore, no TDS would be required considering the decision of Hon’ble Apex Court in the case of Engineering Analysis Centre of Excellence (432 ITR 471). However rejecting the same, Ld. AO held that the same would be royalty and accordingly, made disallowance u/s 40(a)(i). 3.2 During appellate proceedings, the assessee stated that the issue stood squarely covered in its favor by the decision of Tribunal in various other years. Concurring with the same, Ld. CIT(A) observed that identical issue stood covered in assessee’s favor by the decision of this Tribunal for AYs 2009-10 to 2015-16 in to 1868/Mds/2017 dated 23-10-2017. The appeals of the department against the same stood dismissed by Hon’ble High Court of Madras on 20-12-2021 in TCA Nos. 549, 554, 555 and 558 of 2021. Therefore, the disallowance was deleted against which the revenue is in further appeal before us. 3.3 The Ld. CIT-DR referred to the order of Tribunal in assessee’s own case dated 23-12-2019 for AY 2014-15 wherein the bench, following the decision of Hon'ble High Court of Madras in the case of M/s. Zylog Systems Ltd vs ITO in TCA No. 2184 & 2185/2006, dated 23-04-2019, decided the issue in favour of the revenue. 3.4 Upon perusal of order of Hon’ble High Court of Madras in TCA Nos. 549, 554, 555 & 558/2021 dated 20-12-2021, we find that the substantial question of law as raised by the revenue has been answered against the revenue. The Hon’ble Court has referred to its earlier decision in TCA Nos.150 of 2015 dated 03-09-2021 which has followed the decision of Hon’ble Supreme Court in the case of M/s. Engineering Analysis Centre of Excellence P. Ltd vs. CIT (2021 SCC Online SC 159). It has finally been held in assessee’s case that the assessee is not liable to deduct tax at source on payments made to non-resident towards software support charges and consequently, expenses could not be disallowed u/s. 40(a)(i) of the Act. In subsequent decision for AY 2016- 17 dated 28-06-2023 Tribunal has followed the same. Therefore, facts being pari-materia the same, respectfully following the decision of Hon’ble High Court of Madras, we dismiss this ground as raised by the revenue. 3.5 This is the sole issue in revenue’s appeal for AY 2018-19. The adjudication of Ld. CIT(A) is on similar lines. Therefore, taking the same view, the appeal for AY 2018-19 stands dismissed.
ALP adjustment of Outstanding receivables 4.1 The assessee had outstanding trade receivables from its AE for Rs.41.67 Crores. The Ld. TPO proposed to benchmark the same. The assessee stated that the said transaction would not be an international transaction. However, rejecting the same, Ld. TPO allowed credit period of 30 days and benchmarked the transaction by applying SBI PLR of 14%. The same resulted in to upward adjustment of Rs.71.98 Lacs. The Ld. CIT(A), substantially confirming the stand of Ld. TPO, held that average LIBOR rate would be the most appropriate rate of interest in the international market. Reliance was placed on the decision of this Tribunal in Plintron Global Technology Solutions (102 Taxmann.com 684) to arrive at such a conclusion. Aggrieved, the revenue is in further appeal before us. 4.2 We find that the adjudication of Ld. CIT(A) is in accordance with cited decision of this Tribunal. In this decision, the bench held that while working out deemed notional interest on delay in repatriation of overdue receivables from foreign AEs, LIBOR rate will be most appropriate. Therefore, the adjudication of Ld. CIT(A) could not be faulted with. We order so. The corresponding grounds stand dismissed. Conclusion 5. Both the appeals stand dismissed. Order pronounced on 15th January, 2025.