ADP PRIVATE LIMITED,HYDERABAD vs. DCIT., CIRCLE 1(1), HYDERABAD

The appellant-company has filed objections against the Draft Assessment Order before the DRP which were disposed of by the DRP vide Directions u/sec.144C(5) of the Income Tax Act, 1961 dated 26.06.2024 partly in favour of the appellant-company, thereby, resulting in deletion of TP margin adjustment. The Assessing Officer passed Final Assessment Order incorporating the Directions of the DRP vide order passed u/sec.143(3) r.w.s.144C(13) r.w.s.144B of the Income Tax Act, 1961, Dated 31.07.2024 wherein the Assessing Officer has made additions towards disallowance u/sec.40(a)(i) of the Income Tax Act, 1961 for non-deduction of tax at source towards payments made to ADP, Australia for rendering managerial services and TP adjustment towards notional interest on over-due receivables from AE. Further, the Assessing Officer also denied TDS credit to the extent of Rs.4,40,115/- and 4 ITA.No.975/Hyd./2024 charged interest u/sec.234A and 234C of the Income Tax Act, 1961.

Grounds of appeal Nos.1 and 2 of assessee’s appeal are general in nature and does not require specific adjudication and, therefore, grounds of appeal nos.1 and 2 of assessee’s appeal are dismissed.

CA, Sriram Seshadri, Learned Counsel for the Assessee, at the time of hearing, made a statement at Bar that, the assessee does not wish to press ground no.3 challenging the validity of the assessment order passed by the Assessing Officer u/sec.143(3) r.w.s.144C(13) r.w.s.144B in light of provisions of sec.153 of the Income Tax Act, 1961 and also the decision of Hon’ble Madras High Court in the case of CIT vs., Roca Bathroom Products P. Ltd., [2022] 445 ITR 537 (Mad.) and appellant had also filed letter dated 07.08.2025 and withdrawn grounds of appeal

MS. U. Minichandran, learned CIT-DR for the Revenue, on the other hand, supporting the order of the Assessing Officer and DRP submitted that, the services provided by ADP, Australia, are in the nature of managerial, technical or consultancy services as defined u/sec.9(1)(vii) of the Income Tax Act, 1961, as defined under the definition of “FTS” and, therefore, the assessee ought to have deduct TDS u/sec.195 of the Income Tax Act, 1961 for remittances to ADP, Australia for rendering services. Since the 11 ITA.No.975/Hyd./2024 appellant-company has failed to deduct TDS u/sec.195 of the Act and also failed to obtain Non-Deduction Certificate as required u/sec.195(2) of the Income Tax Act, 1961, the Assessing Officer has rightly disallowed payment made to ADP, Australia for rendering certain services u/sec.40(a)(i) of the Income Tax Act, 1961. The Learned CIT-DR further submitted that, if we go by the nature of services rendered by ADP, Australia to the appellant-company, they are in the nature of managerial and consultancy services, for which, the question of making available technology does not arise because, in the said services, the element of technology is not involved. However, the related skill and knowledge in providing the services is always made available to the services recipient because, these are services in the nature of consultancy and technical services. Therefore, the argument of the assessee that, unless the make-available clause is satisfied as per the Article-12(3) of India-Australia Treaty, the income of the Australian Tax Resident is not taxable in India and consequently, no disallowance can be made u/sec.40(a)(i) of the Income Tax Act, 1961 for non- 12 ITA.No.975/Hyd./2024 deduction of TDS u/sec.195 of the Income Tax Act, 1961, is devoid of merit and cannot be accepted.

We have heard both the parties, perused the material on record and the orders of the authorities below. The appellant-company had entered into a service agreement with one of it’s group entities, Automatic Data Processing Limited, Australia [in short “ADP Australia”], Dated 01.04.2014, pursuant to which, the appellant- company receives certain services in the nature of marketing support, implementation and administration support. The appellant-company had made payment towards the support services to ADP Australia without deducting taxes at source, as the provisions of Section 195 of the Act, which provides for an obligation to deduct taxes on payment of any sum to a non-resident or foreign company only where the sum is chargeable to tax under the provisions of the Act read with the applicable tax treaty. The appellant-company did not deduct taxes u/sec.195 of the Income Tax Act, 1961 on the ground that, the said receipt was not taxable in India in the hands of ADP-Australia. The 13 ITA.No.975/Hyd./2024 Assessing Officer disallowed payment made to ADP- Australia for not withholding taxes under section 40(a)(i) of the Act on the ground that, payment made to ADP-Australia is in the nature of Fees for Technical Services [in short “FTS”] as defined u/sec. 9(1)(vii) of the Act. The Assessing Officer further observed that, assessee itself has made application before the 'Authority for Advance Rulings' for seeking clarification on applicability of TDS provisions in terms of sec.195 of the Act on payments made to ADP- Australia and the same has been subsequently withdrawn by the appellant-company without assigning any reasons. The Assessing Officer further noted that, if at all payment made to ADP-Australia does not come under FTS and provisions of sec.195 of the Act, then, the appellant- company would have applied for non-deduction Certificate in terms of sec.195(2) of the Income Tax Act, 1961. Since, the payment made to ADP-Australia are in the nature of FTS as defined u/sec.9(1)(vii) of the Act and further, the appellant-company has made payment without deducting tax at source as required u/sec.195 of the Act, the 14 ITA.No.975/Hyd./2024 Assessing Officer disallowed the entire payment u/sec.40(a)(i) of the Income Tax Act, 1961.

We have given our thoughtful consideration to the reasons given by the Assessing Officer to disallow payment made to ADP-Australia for rendering business support services in terms of agreement dated 01.04.2014 and in light of various arguments of the Counsel for the Assessee, but, we ourselves do not subscribe to the reasons given by the learned Assessing Officer and the DRP for the simple reason that, in order to invoke provisions of sec.40(a)(i) of the Act to any payment made to a non-resident without deducting tax at source u/sec.195, first of all, one needs to understand, whether such payment is a simple payment for business support services falls under the category of ‘business profits’ or the payment made to technical services which falls under the definition of “FTS” as defined u/sec.9(1)(vii) of the Act. The term “FTS” has been defined u/sec.9(1)(vii) and as per the said provisions, fees for technical services means, “any consideration, [including any lump sum consideration] for the rendering of any 15 ITA.No.975/Hyd./2024 managerial, technical or consultancy services" [including the provision of services of technical or other personnel], but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the Head “Salaries”. The term “FTS” includes managerial, technical and consultancy services. If any amount paid by a resident to a non-resident falls under the definition of “FTS” as defined u/sec.9(1)(vii) of the Act, then, said payment comes under the purview of ‘Income received’ or ‘Deemed to be received’ in India or ‘Income accrued’ or ‘deemed to be accrued in India of a non- resident’. If payment made by a resident to a non-resident does not come under the definition of “FTS” as per sec.9(1)(vii) of the Act and further it is a business profit, then, said payments come under the provisions of sec.9(1)(i) of the Act, which means, said payment is taxable in India only in a case where the non-resident provides services having Permanent Establishment [in short “PE”] in India. Therefore, it is necessary for us to examine the payment 16 ITA.No.975/Hyd./2024 made by the appellant-company to ADP-Australia for receiving business support services in terms of agreement between the parties and in light of provisions of sec.9(1)(vii) read with Tax Treaty between India and Australia.

Section 90(2) of the Income Tax Act, 1961 provides – “Where the Government has entered into Tax Treaty with any other Country, the provisions of the Act or the Tax Treaty whichever is beneficial to the taxpayer would apply.” Since, ADP-Australia is a tax resident of Australia, the appellant has entitled to avail benefits of India-Australia Treaty. As per India-Australia Treaty [DTAA], Article-7 deals with ‘business profits’. As per Article-7 of the India-Australia Treaty, a non-resident enterprise, can be taxed in India only if such an enterprise carries on business through the PE in India. In the present case, ADP-Australia is a tax resident of Australia and carries on it’s business operations outside India and does not have PE in India. The Assessing Officer has not brought anything on record to suggest that, ADP- Australia has a PE in India and hence, payment made to ADP-Australia falls under Article-7 of India-Australia Treaty 17 ITA.No.975/Hyd./2024 and as per Article-7, it cannot be taxed in India, in absence of PE in India.

Having said so, let us come back to Article-12(3) of India-Australia Tax Treaty which deals with the term ‘Royalty’. As per Article-12(3) of India-Australia Treaty which deals with taxability of FTS, defined the term ‘Royalties’ means payments or credits, whether periodical or not, and however described or computed, to the extent to which they are made as consideration for, for the rendering of any services [including those of technical or other personnel], which make available technical knowledge, experience, skill, know-how or processes or consist of the development and transfer of a technical plan or design etc. In order to tax a particular receipt as ‘Royalty’ under the India-Australia Treaty by applying Clause-(g) of Article-12(3), such service should make available to the recipient, technical knowledge, experience, skill, know-how or processes which enables the recipient to apply the technology contained therein. The ‘make available’ clause has been interpreted by various Courts and Tribunals. The Hon’ble Delhi High Court in the 18 ITA.No.975/Hyd./2024 case of Guy Carpenter & Co. Ltd., 346 ITR 504 (Del.) and Hon’ble High Court of Karnataka in the case of De Beers India Minerals (P) Ltd., 346 ITR 467 (Kar.), held that, “mere rendering of technical services is not sufficient and that the service provider must transmit technical knowledge, skill, etc., in such a way that, the recipient is enabled to apply the technology independently in future without recourse or assistance of the service provider”. In other words, as per the ratio laid down by the various Courts and Tribunals, in order to treat any particular receipt as ‘Royalty’ within the ambit of Article-12(3) of India-Australia Treaty, it is not only rendering services, but, the service provider must transmit technical knowledge, skill, etc., to the recipient of services to enable it to apply the technology independently in future without the help of the service provider. In the present case, from the nature of service described in the support services agreement, it would be evident that there was no technical knowledge, expertise, skill, knowhow or processes made available to the appellant-company by ADP-Australia. It may also relevant to note that, these services are provided by 19 ITA.No.975/Hyd./2024 ADP-Australia year-after-year on a continuous basis, which shows that, the appellant-company cannot perform these services on its own without recourse to ADP-Australia. Further, we note that, the Revenue has not demonstrated how ADP-Australia had made available technical knowledge or know-how to the appellant-company.

In this connection, it is relevant to refer to the decision of ITAT, Pune Benches, Pune in the case of Sandvik Australia Pty. Ltd. reported in 141 ITD 598 wherein it was held that, “unless and until the services are not made available, the same cannot be taxable in India under the ambit of Article 12(3)(g) of the India-Australia Treaty”. Therefore, we are of the considered view that, support services fee paid by the appellant-company to ADP-Australia is neither taxable under the provisions of the of the Income Tax Act nor under the provisions of the India-Australia Treaty. Although, the Assessing Officer and the learned CIT(A) did not brought on record any evidence to prove that, the said services fall within the ambit of FTS as defined u/sec.9(1)(vii) of the Income Tax Act, 1961, but, disallowed 20 ITA.No.975/Hyd./2024 the said payments for non-deduction of TDS u/sec.195 of the of the Income Tax Act, 1961 only on the ground that, if at all the assessee claims that, the said payment does not fall under the purview of FTS, then, the assessee would have apply for ‘No-Deduction-Certificate’ u/sec.195(2) of the Income Tax Act, 1961. In our considered view, the learned Assessing Officer and the learned CIT(A) are completely erred in interpreting the provisions of sec.195(2) of the Act in a manner that, in each and every case, where the payment is made by a resident to a non-resident, it is required to go for obtaining No-Deduction-Certificate because, as per the provisions of sec.195(2) of the Act, the payer of sum to a non-resident is required to obtain No- Deduction-Certificate only in a case where the such payment to a non-resident is chargeable to tax under the provisions of the Income Tax Act, 1961 read with applicable Tax Treaty. Therefore, we of the considered view that, the Assessing Officer and the learned CIT(A) are erred in disallowing the amount paid by the appellant-company to ADP-Australia for receiving business support services 21 ITA.No.975/Hyd./2024 u/sec.40(a)(i) of the Income Tax Act, 1961, for not withholding tax at source u/sec.195 of the Income Tax Act, 1961.

In this view of the matter and considering the facts and circumstances of the case, we are of the considered view that, payment made by the appellant- company to ADP-Australia in terms of business support services agreement for receiving business services cannot be treated as FTS as per sec.9(1)(vii) of the Income Tax Act, 1961. Even assuming for a moment, the said payment falls under the definition of “FTS”, still the said payment cannot be taxed in view of application of provisions of sec.90(2) of the Income Tax Act, 1961 because, ADP-Australia is a tax resident of Australia and have the benefit of provisions of the Income Tax Act or Treaty, whichever is beneficial to the taxpayer. Since the Article-12(3) of India-Australia Tax Treaty covers payment within the ambit of ‘Royalty’ only in cases where such payment comes with make-available clause and in the present case, there is no evidence with the Assessing Officer to allege that, payment made by the 22 ITA.No.975/Hyd./2024 appellant-company for rendering services make-available technology or skill etc., to the appellant-company, in our considered view, the said payment cannot be disallowed u/sec.40(a)(i) of the Income Tax Act, 1961 for non-deduction of TDS u/sec.195 of the Income Tax Act, 1961. The Assessing Officer without appreciating the relevant facts, has simply disallowed the payment made to ADP-Australia u/sec.40(a)(i) of the Income Tax Act, 1961 and the learned DRP without appreciating the relevant facts, has simply sustained the additions made by the Assessing Officer. Thus, we direct the Assessing Officer to delete the addition made towards payment of business support services to ADP-Australia u/sec.40(a)(i) of the Income Tax Act, 1961.

The next issue that came-up for consideration from ground nos.5 to 13 of assessee’s appeal is upward adjustment towards notional interest on overdue receivables from AE. The TPO proposed an upward adjustment relating to interest on outstanding receivables amounting to Rs.7,21,921/- on trade receivables from AE on the ground that, receivable from AEs are beyond the credit period 23 ITA.No.975/Hyd./2024 allowed, for which, appropriate compensation ought to have been received by the appellant-company. Therefore, computed notional interest by applying SBI-PLR rate and imputed interest of Rs.7,21,921/-. The learned DRP upheld the order of the TPO.

CA, Sriram Seshadri, Learned Counsel for the Assessee submitted that, the appellant has not charged interest on receivable from third party. Further, there are receivable from third party at the end of the year which is more than the amount receivable from AE. Since the appellant-company is not charging any interest from third party receivables, it has not charged interest from AE also. In this regard, he relied upon the decision of Hon’ble Bombay High Court in the case of Indo-American Jewellery Limited 44 taxmann.com 310. Learned Counsel for the Assessee further submits that, while computing interest on overdue receivables, the TPO has computed the interest on only receivable from AE, but, ignored the overdue payables to the AE. If netting is allowed on overdue receivables to overdue payables, then, there is no question of imputing 24 ITA.No.975/Hyd./2024 interest on overdue receivables. In this regard, he relied upon the decision of ITAT, Hyderabad in the case of Microchip Technology (India) (P.) Ltd., 168 taxmann.com 38. Learned Counsel for the Assessee further submits that, the appellant company is a debt free company and does not pay any interest on borrowings. Therefore, imputing interest on overdue receivables is not warranted when the appellant- company has carried-out an entity level TNMM to calculate ALP of international transactions, particularly, when the working capital adjustment have already been made by the appellant-company. In this regard, he relied upon the decisions of Hon’ble Delhi High Court in the case of Bechtel India Pvt. Ltd., 66 taxmann.com 6 and Kusum Healthcare Pvt. Lted., 398 ITR 66 (Del.). Learned Counsel for the Assessee, in the alternative, submitted that, if at all, interest needs to be computed on overdue receivables, then, LIBOR plus appropriate basis points should be adopted as against SBI PLR rate adopted by the TPO.

MS. U. Minichandran, learned CIT-DR for the Revenue, on the other hand, supporting the order of the 25 ITA.No.975/Hyd./2024 TPO and DRP submitted that, the outstanding receivable from AE in international transactions and the same needs to be benchmarked with third party comparables. Therefore, the argument of the Learned Counsel for the Assessee that, it has not charged any interest on overdue receivables from third party and consequently, the question of imputing interest on overdue receivable from AE is factually incorrect. Further, the question of netting of overdue receivable against the overdue payables arise only if such payables and receivables are from very same AE. In the present case, the assessee could not file relevant details to explain the fact with regard to the receivables and payables from same AE. Therefore, the argument of the assessee cannot be accepted. Finally, the argument of the assessee that, it is a debt free company, also, does not make any difference when it comes to benchmarking international transactions. The TPO and DRP after considering the relevant facts, has rightly benchmarked interest on overdue receivable from AE by applying SBI-PLR rate and thus, the order of the Assessing Officer should be upheld.

The Learned Counsel for the Assessee had also canvased one more proposition in light of certain judicial precedents including decision of Hon’ble Delhi High Court in the case of Bechtel India Pvt. Ltd., (supra) and argued that, since the appellant-company is a debt free company and has not incurred any significant interest cost and as such, the question of imputing interest on overdue receivable from AE does not arise. We once again cannot appreciate the argument of the Counsel for the Assessee that, once any transactions falls under the definition of “International transactions” the same needs to be benchmarked with reference to third party transactions. Whether the appellant is a debt free company and incurs any interest cost does not change the legal position or the nature of transactions. In 29 ITA.No.975/Hyd./2024 the present case, it is undisputedly clear that, overdue receivable from AE is an international transactions and the same needs to be benchmarked. Therefore, in our considered view, the proposition canvassed by the Learned Counsel for the Assessee does not hold good and thus, rejected. Finally, Learned Counsel for the Assessee has made an alternative argument and submitted that, since the assessee has benchmarked international transactions by aggregating all transactions at entity level by adopting TNMM, the question of benchmarking overdue receivable separately is incorrect. We once again unable to accept the arguments of the Learned Counsel for the Assessee for the simple reason that, aggregation approach for benchmarking international transactions comes into play only in a case where the number of international transactions are closely interlinked or interconnected with each other. In the present case, the assessee has failed to prove with relevant evidence the interconnections between the receivables and other international transactions. Therefore, in our considered view, the proposition canvassed by the assessee in light of 30 ITA.No.975/Hyd./2024 certain judicial precedents including the decision of Hon’ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd., (supra), cannot be accepted.

In so far as the rate of interest, in our considered view, since the receivables from AE is denominated in foreign currency and also receivable from outside India, the internationally accepted rate of interest is appropriate for benchmarking interest on receivables on overdue receivables from AE. Since LIBOR is the internationally accepted rate of interest for benchmarking, in our considered view, LIBOR plus 200 basis points should be adopted for imputing interest on overdue receivables. Therefore, we direct the Assessing Officer to compute interest on overdue receivables by applying LIBOR plus 200 basis points instead of SBI-PLR rate. Accordingly, these grounds of appeal nos.5 to 13 of the assessee are partly allowed.

In the result, appeal of the Assessee is partly allowed.