GIESECKE & DEVRIENT (INDIA) PVT. LTD.,GURGAON vs. ADDL. CIT, SPECIAL RANGE- 04, NEW DELHI

Representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules and have also perused the judicial decisions relied upon by both the sides.

G & D, the appellant, was incorporated in 2001 as a 100% subsidiary of G &D GmbH, with its corporate office located in Gurgaon. The appellant primarily deals in trading of Currency Verification and Processing Systems. G&D India imports these machines from its AEs for resale in India and as part of the related services, G&D also buys and

The international transactions reported by the appellant are as under:

In the transfer pricing study, TNMM was taken as the most appropriate method for benchmarking trading segment dealing with imports from AEs. The appellant reported NPM from distribution of smart cards at 5.26% and compared the same with three years weighted average working capital adjusted NPM of independent comparables at 0.28%.

The TPO was not satisfied with the selection of comparables and after analysing the comparables, two comparables were selected, namely, Idea Telesystems Ltd and Priya Ltd., with a working capital adjusted OP/ OR at 8.75% and accordingly, proposed a TP adjustment of Rs.3,72,23,538/-. We find that the TPO took combined figures of trading and service segments of the assessee rather than restricting to the figures of trading segment. This can be seen from the computation table wherein the operating revenue is taken at Rs.13,43,67,865/- and operating cost as Rs. 15,98,34,215/-, which matches with the total of trading and service segments.

Objections were raised before the DRP but the DRP did not give any relief with respect to the selection of comparables. However, the DRP gave partial relief with the direction that benchmarking should be undertaken in terms of earlier years.

In the meanwhile, the margin of comparables was rectified from 8.75% to 6.79% and thereafter, from 6.79% to 2.52% and, accordingly, adjustment was reduced from Rs. 3,72,23,538/- to Rs.2,88,52,420/-. While giving effect to the directions of the DRP, though the TPO made reference to the orders of A.Y 2009-10 and 2010-11, and noted that adjustment is to be restricted to the value of international transaction with AES. However, an adhoc adjustment of Rs. 88,86,545/- was sustained. It appears that the TPO once again erred in taking gross numbers of trading and service segments.

The same can be understood from the following chart:

Considering the facts discussed hereinabove, we are of the considered view that trading segment transaction should be taken into consideration wherein the appellant has shown margin of 5.26% which is more than the comparables margin of 2.52% and transaction can be safely considered at arm’s length price. We have been told that in A.Y

In our considered opinion, when segmental details are available and once segmental and allocation of costs are not disputed, then the TPO was not justified in using combined figures of trading and service segments. We, accordingly, direct the TPO to use trading segment only for determining ALP in this segment. We direct accordingly.

At the very outset, the learned counsel for the assessee stated that without prejudice to all the rights and contentions with respect to inclusion and exclusion of set of comparables and application of filters agitated before the lower authorities, his prayer is made for exclusion of the following two comparables included by the TPO:

Under this segment, the appellant has provided software development support services to its AEs with respect to smartcards business whereas under Competence Centre India Division at Gurgaon, the appellant has provided software development services to its AEs with respect to currency verification processing system business. The Development Centre India Division [DCI] is at Pune and Competition Centre India Division [CCI] is at Gurgaon. TNMM was selected as the most appropriate method for benchmarking taking NCP margin as the PLI and under DCI division, NCP margin of the assessee was at 12.62% whereas under CCI division, NCP margin was 12.02%.

The TPO retained 6 comparables out of 10 comparables selected by the assessee and introduced 8 new comparables and came to a final set of 14 comparables. The working capital adjusted OP/OC margin of the comparables was 20.71%. Accordingly, under DCI Division, adjustment of Rs.3,28,86,862/- was proposed and under CCI Division, adjustment of Rs.1,88,81,141/- was proposed.

Objections were raised before the DRP demonstrating the reasons for exclusion of Infosys Ltd and Larsen and Toubro Infotech Ltd as

Before us, the same reasons were given for exclusion of Infosys Limited and Larsen and Toubro Infotech Ltd which were given before the lower authorities.

The risk profile of the appellant shows that it operates at minimal risk as 100% services are provided to AES whereas Infosys Ltd operates as full-fledged risk-taking entrepreneur. Further, the appellant provides software development testing support and technical support services whereas Infosys Ltd provides end to end solutions, technical consultancy, design development, re-engineering maintenance etc. along with software products. Infosys Ltd lacks segmental details and bifurcation of expenditure for software development and product is not available. The scale of operation is completely different.

The appellant’s income is at Rs. 252 crores whereas that of Infosys is Rs. 36,765 crores. The appellant does not own intangibles or Goodwill

The risk profile is the same as that of Infosys Ltd. The appellant operates at minimal risks as 100% services are provided to AEs whereas Larsen and Toubro Infotech Ltd operates as a full-fledged risk-taking entrepreneur. Similarly, the software development segment of the appellant is being compared whereas segmental details in the case of Larsen and Toubro Infotech Ltd with bifurcation of expenditure for software development and product engineering are not available. In this case also, Larsen and Toubro Ltd owns software of 132 crores. The most alarming fact is that Larsen and Toubro Infotech Ltd has un-allocable expenditure of Rs. 225.73 crores.

For this very reason, the coordinate bench in the case of Pitney Bowes Software India Ltd 192TTJ778 has excluded Larsen and Toubro Infotech Ltd from the final set of comparables on account of major unallocable expenses observing that in the absence of availability of nature of expenses and proper allocation case, Larsen and Toubro Infotech Ltd deserves to be rejected. Respectfully following the findings of the coordinate bench [supra], we direct for exclusion of Larsen and Toubro Infotech Ltd from the final set of comparables. Accordingly, Ground Nos 17 to 22 are allowed.

The Assessing Officer has disallowed these expenses u/s 40(a)(i)of the Act on account of non-deduction of tax at source on reimbursement. The total disallowance was made at Rs.17,76,704/-.

When objections were raised before the DRP, the DRP directed for deletion of Rs. 4,22,386/- pertaining to training expenses and Rs. 3,21,873/- pertaining to recovery of expenses. However, balance disallowance of Rs.10,32,445/- was sustained.

Before us, the learned counsel for the assessee pointed out that the same pertains to pension of the Managing Director, purchase of office merchandise like calendar etc., recovery of damages to apartments etc. It is the say of the learned counsel that these are nothing but pure reimbursements and the facts of the decision of the Hon’ble Delhi High Court in the case of Centrica India Offshore Pvt Ltd 364 ITR 336 are clearly distinguishable. The learned counsel pointed out that on identical set of facts, the coordinate bench in A.Y 2011-12 has allowed the expenditure.

Per contra, the ld. DR strongly supported the findings of the lower authorities.

We find that some additional evidences were furnished before the DRP. Though the DRP has noted the additional evidences, yet followed the decision of the Hon'ble Jurisdictional High Court in the case of Centrica India Offshore Pvt Ltd [supra[. We find that the coordinate bench in A.Y 2011–12 has allowed claim of appellant observing that payment of training expenses, purchase of materials, reimbursement of training expenses and pension are not liable to the provisions of TDS.

Since, in the present case also the assessee has claimed that Rs.10,32,445/- pertains to pension of the Managing Director, this needs to be re-verified by the Assessing Officer. We, accordingly, direct the assessee to furnish necessary evidence relating to pension and the Assessing Officer is directed to examine the same and decide the issue in the light of the findings given by the Tribunal in assessee’s own case in A.Y 2011–12. Accordingly, grounds Nos 29 to 38 are treated as allowed for the statistical purposes.

Facts on record show that the assessee entered into a lease deed with E-Lights Techno Park Pvt Ltd for office premises in Chennai and paid following deposits to the lessor:

For some reason, the assessee could not take possession of the office premises and the lessor did not repay the said security deposits.

The Assessing Officer disallowed the claim of write-off by holding that the same has to be considered in terms of section 36(1)(vii) read with section 36(2) of the Act, meaning thereby that the Assessing Officer treated the same as bad debts.

Before the DRP, the assessee furnished additional evidences and alternative claim was also made by stating that the amount written off should be considered as loss incidental to the business of the assessee.

The DRP did not accept the claim of the assessee. 33. Before us, the learned counsel reiterated what has been stated before the lower authorities and the ld. DR supported the findings of the Assessing Officer. We find that the assessee has furnished additional evidences before the DRP. We are of the considered view that such additional evidences should have been examined thoroughly. We,

Vide application dated 11.09.2019, the assessee has raised the following additional grounds of appeal:

The ld. counsel vehemently stated that the additional grounds raise a purely legal issue and, therefore, as per the ratio laiddown by the Hon’ble Supreme Court in the case of NTPC 229 ITR 383, the same deserves to be admitted and adjudicated.

The ld. DR strongly opposed to the admission of additional grounds. The ld. DR vehemently stated that this issue was never taken before the assessing officer nor before the DRP and it is nothing but a malafide attempt to distort the appellate proceedings. It is the say of the ld. DR that the issues raised vide additional grounds are not only legal issues but also need verification of facts. The ld. DR further stated that the lower authorities have followed due process of law and there

We have given thoughtful consideration to the rival contentions. We have carefully perused the additional grounds. A similar grievance was raised by way of additional ground of appeal in the case of Maruti Suzuki India Ltd 961/DEL/2014 and the Tribunal, vide interim order dated 31.10. 2019, admitted the additional ground for adjudication. The revenue approached the Hon’ble High Court of Delhi by way of writ petition and the Hon’ble High Court of Delhi in WP(C) 1324/2019, order dated 16.12.2019 was pleased to dismiss the writ petition of the revenue.

The relevant findings of the Hon’ble High Court read as under:

In light of the above, the additional ground is admitted for adjudication.

Representatives were heard at length. The relevant articles of Double Taxation Avoidance Act [DTAA], accordingly, perused.

The aforementioned additional grounds of appeal raise a purely legal issue and the issue needs to be adjudicated as to whether the Dividend Distribution Tax [DDT] levied in terms of section 115-0 of the Act should be restricted to the rate of tax on dividends as provided in the applicable DTAA governing non-resident shareholders.

In other words, what needs to be examined is the interplay between Section 115-0 of the Act on one hand, and Article 10 of DTAA governing taxation of dividend on the other.

Section 115-0 contained in chapter XVII-D of the Act reads as under:

The genesis of charge for levy of additional Income Tax u/s 115-0 on the profits declared/distributed and paid by a corporate assessee by way of dividend can be traced to the charging provisions of Section 4 of the Act which provides as under:

It can be seen from the above that this section provides for charge of tax, including additional Income tax on the total income of every person.

Section 2(24) defines “Income” which includes:

Tax has been defined in section 2(43) as under:

A perusal of the above shows that the term “Tax” would cover additional Income Tax levied u/s 115-0 of the Act.

The first critical issue, which needs to be decided, is as to whether the DDT is tax on the company or the shareholder since the admissible surplus stands reduced to the extent of DDT. We are aware of the decision of the Hon’ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited 328 ITR 81 though the same was rendered in the context of section 14A r.w.s 115-0 of the Act. The relevant findings of the Hon’ble Bombay High Court read as under:

Thus, it can be stated that the Hon’ble Bombay High Court has unequivocally held that DDT is tax ‘on the company’ and not ‘on the shareholder’.

There is no dispute that the liability is on the payer company to pay DDT, but, at the same time, we must not lose sight of the fact that additional Income tax is part of tax as defined in Section 2(43) of the Act and levy of additional Income tax u/s 115-0 has its genesis in charging provision of Section 4 of the Act. We must also remember that this additional Income tax [DDT] levied u/s 115-0 is a tax on income and definition of “Income” includes dividend.

As per the Income Tax Rules, relevant details regarding payment of DDT have to be provided in the Income Tax return form and have to be disclosed in the Tax Audit Return [Form 3CD]. Further, the Income tax assessment order read with the Income tax computation form quantifies DDT liability. It would not be out of place to mention that the Act does not provide for a separate adjudication/passing of separate order with regard to adjudication of liability of DDT. Section 115-Q merely provides for the consequences of non-payment of DDT, but there is no separate/specific provision in the Act for collection and recovery of DDT in default.

At this stage, it is important to examine the legislative history of section 115-0 of the act. The Memorandum to the Finance Bill, 1997 discusses the erstwhile system of collecting Income tax on profits distributed by the companies and relevant extract is reproduced as under:

Memorandum to the Finance Bill 2003 reiterates that it is easier to collect Income Tax from a single point, [that is, from the company distributing the dividends] rather than compel the companies to compute income tax deductible from the dividend income in the hands of the shareholders.

Memorandum to Finance Bill 1997 and 2003 clearly establish that levy of tax on the company was driven by administrative considerations rather than legal necessity and further emphasis on the fact that levy is for all intents and purposes, a charge on dividends. Even if we go by economical considerations, the burden of DDT falls on the shareholders rather than on the company, as the amount of distributed profits available for shareholders stands reduced to the extent of DDT levied.

As mentioned elsewhere, section 4 provides for charge of Income tax and Section 5 provides that total income of resident includes all income which is :

In the case of non-resident, total income includes all income from whatever source derived,

The provisions of section 4 and 5 of the Act are expressly made “subject to the provisions of this Act” which would include section 90 of the Act. Section 90(2) of the Act provides “Where the central government has entered into an agreement with the government of any country outside India or specified territory outside India” as the case maybe, under sub-section (1) for granting relief of tax or as the case

The Hon’ble Andhra Pradesh High Court in the case of Visakhapatnam Port Trust 144 ITR 146 held that provisions of sections 4 and 5 of the Act are made subject of the provisions of the Act which means that they are subject to provisions of section 90 of the Act by necessary implication they are subject to terms of DTAA, if any, entered into by the Government of India.

The Hon’ble High Court of Calcutta in the case of CIT Vs. Devi Ashmore India Ltd 190 ITR 626, while dealing with the correctness of Circular number 333 dated 2nd April, 1982 137 ITR statute 1 held that:

The Hon’ble Calcutta High Court in the case had expressly approved the correctness of CBDT Circular No. 333 dated 02.04.1982 on

Observations of the Hon’ble Supreme Court in the case of Union of India and Another Vs Azadi Bachao Andolan 263 ITR 706 is most relevant, the findings of which read as under:

We have already discussed the Memorandum to the Finance Bill 1997 and 2003. It would be very pertinent to discuss the Memorandum to the Finance Bill, 2020 by which section 115-0 is removed. In this Finance Bill, it has been specifically mentioned for removal of DDT and moving to classical system of taxing dividend in the hands of shareholders. It has been mentioned in this bill that incidence of tax is on the payer company and not on the recipient where it should normally be as the dividend is income in the hands of the shareholders and not in the hands of the company. The incidence of tax should therefore, be on the recipient.

Moreover, the present provisions levy tax at a flat rate on the distributed profits across the board irrespective of marginal rate at which recipient is otherwise taxed the provisions are hence considered iniquitous and regressive. The present system of taxation of dividend in the hands of the company was re-introduced by the Finance Act 2003 since it was easier to collect tax at a single point and new system was leading to increase in compliance burden. In view of the above, it is

A conjoint reading of the Memorandum to Finance Bill 1997, 2003 and 2020 would show that levy of DDT was merely for administrative conveniences and withdrawal of DDT is keeping in mind that revenue was across-the-board, irrespective of marginal rate, at which recipient is otherwise taxed.

To recapitulate, the DDT is levy on the dividend distributed by the payer company, being an additional tax is covered by the definition of ‘Tax’ as defined u/s 2(43) of the Act which is covered by the charging section 4 of the Act and charging section itself is subject to the provisions of the Act which would include section 90 of the Act.

In our humble opinion, the liability to DDT under the Act which falls on the company may not be relevant when considering applicability of rates of dividend tax set out in the tax treaties. The generally accepted principles relating to interpretation of treaties in the light of

In light of the above, let us now consider the India Germany DTAA, which is under consideration in the present additional ground of appeal.

The date of this notification is very relevant, which is, 29.11.1996 whereas, as mentioned elsewhere, section 115-O was inserted in the Act by Finance Bill, 1997 which means that the DTAA between India and Germany is pre dated to the amendment. Clause (2) of the aforesaid

The Hon'ble Jurisdictional High Court at Delhi in the case of New Skies Satellites 382 ITR 114 had an occasion to consider the amendment to the Act vis a vis the international treaty and the Hon'ble High Court held as under:

In light of the aforesaid decision, we are of the considered view that tax rates specified in DTAA in respect of dividend must prevail over DDT.

Article 10.4 above specifies that clause 1 and 2 will not be applicable if beneficial owner of dividend carries on business in other contracting state of which the company paying dividend is a resident through PE situated therein. Though supporting documents have been filed before us, but these documents need verification from primary officer, that is, the Assessing Officer. We, therefore, deem it fit to restore this issue for limited purpose of verification in the light of the aforesaid Articles of DTAA.

Considering the above in totality, in our considered opinion, the DDT levied by the appellant should not exceed the rate specified in Article 10 in India Germany DTAA.

The additional ground is, accordingly, allowed on principle, though subject to verification as directed hereinabove.

In the result, appeal of the assessee in ITA No. 7075/DEL/2017 including the additional ground is allowed in part for statistical purposes.